Centralization and Decentralization – Meaning, Definitions, Merits and Demerits – BBA/MBA Notes

Posted on Jun 3 2020 - 11:17pm by admin

Centralization and Decentralization

Meaning, Definitions, Merits and Demerits

Centralization and Decentralization


In some organizations, top managers make all the decisions. Lower-level managers merely carry out top management’s directives. At the other extreme, there are organizations in which decision making is pushed down to the managers who are closest to the action. The former organizations are highly centralized, the latter are decentralized. The term centralization refers to the degree to which decision making us concentrated at a single point in the organization. The concept includes only formal authority- that is, the rights inherent in one’s position. Typically, it’s said that if top management makes the organization’s key decisions with little or no input from lower-level personnel, then the organization is centralized. In contrast, the more that lower-level personnel provide input or are actually given the discretion to make decisions, the more decentralization there is.

According to Allen
Centralization is the systematic and consistent reservation of authority at central points within an organization.

i. Centralization provides opportunity for personal leadership.
ii. It facilitates integration of efforts.
iii. Quick decisions are possible; hence emergencies can be handled very easily.
iv. It makes communication and control easier in the organization.
v. It helps in reducing wastage of efforts by avoiding duplication.
vi. There is uniformity in actions throughout the organisation and, thus coordination can be achieved easily.

Centralization is quite suitable for smaller organisations, organizations producing single or homogeneous products, and operating in limited geographical areas. However, when organizations grow in size and diversity, the benefits of centralization turn into limitations which effect the operational efficiency of the organisations. In such organisations, decision making becomes quite complex but at the same time, faster decision making is required. This is not possible in centralization. Therefore, its alternative, that is decentralization, is preferable.


In modern terms decentralization is treated as ‘more freedom’ or ‘less authorization’. It is taken as both a managerial philosophy and techniques. Decentralization is the result of delegation.
It can also be said that decentralization suggests taking a greater number of decisions at lower levels without the prior permission of the higher level authorities.


According to Allen
Decentralization applies to the systematic delegation of authority in an organization wide context.

According to Koontz and O’Donnell
Decentralization of authority is fundamental phase of delegation.

Thus, centralization refers to the reservation of authority at the top level of the organization and decentralization refers to systematic delegation of authority in the organization. However, there can neither be absolute centralization nor there can be absolute decentralization. The concepts of centralization and decentralization are two extreme points in the matter of distribution of authority in the organization. In between these two extremes points, there may be continuum of authority distribution.

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