Centralization & Decentralization
Decentralization
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.
Definitions
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.
Factors Determining Degree of Decentralization
The basic questions that arise while designing the organization structure is: how much to decentralize the authority? What to decentralize? Is it necessary to decentralize? Following factors affect the level of decentralization in an organization:
i. .Size of Organization
Decentralization depends on the size of the organization. The larger the size of an organization, the more urgent is the need for decentralization. In a large organization more decisions are to be made at more places. In such cases. It becomes difficult to coordinate them.
ii. Significance of the decision
The decisions that involve heavy cost of investment or reputations, competitive strength, or employee morale and motivation are not decentralized. The top management would like to keep such decision- making power with it. Thus, the decision to have a new plant or not would be taken at the top. The decisions which are not costly are mostly dispersed. For instance, the decision to repair the plant or purchase items of day-to-day necessity is decentralized at the lower levels.
iii. History of the Organization
Decentralization of authority depends on the way the organization has been built up over the period of time. Normally, those organization which expand from within or expand under the direction of the owner-founder show a marked tendency to keep authority centralized. This is the reason why organizations belonging to many industrial houses have been designed on centralized basis. On the other hand, organizations that represent amalgamations and consolidations are likely to show a definite tendency to retain decentralized authority specially if the acquired unit Is operating profitably.
iv. Management Philosophy
The management philosophy of top-level managers has considerable influence on the extent to which authority is decentralized. In many cases, top managers may see decentralization as a way of organizational life that takes advantage of the Innate desire of people to create, to be free, or to have status. They may find it a means to harness the desired freedom to economic efficiency. On the other hand, many top managers may keep authority with them not merely to gratify a desire for their status or power but because they simply cannot give up activities and authorities they enjoyed before they reached the top or before the organization expanded from a small one.
v. Technological developments
The new technology for a specific product may demand a good deal of decentralization for those concerned with its production.
vi. Geographical dispersion of activities
The territorial dispersion of the activities may make decentralization desirable as decisions will be taken by those closer to the scene of action. Thus physical separation of plants may call for some decentralized decision making.
vii. Availability of Managers
Availability of managers directly affects the degree of decentralization because exercise of authority requires-competence on the part of those who exercise authority. If better quality managers are available, there is more chance for decentralization because, these managers can handle the problems of decentralized units effectively and also such managers have higher need for degree of autonomy which is possible in decentralized structures only. Moreover, decentralization also works as training ground for managers which increases the ability of good managers.
viii. Control Techniques
Development and use of control techniques affect the degree of decentralization by ensuring whether the performance at various levels and points of the organization is in line with planning. Higher the degree of development and- use of control techniques, better Is the prospect for decentralization.
ix. Rate of Change in Organization
The rate of change in the organization also affects the degree to which authority may be decentralized. If the business of the organization is fast developing and it is facing the problems of expansion, there is more chance that authority will be decentralized.
x. Environment Influences
In addition to the internal factors prevailing in an organization, there are some external factors also which determine the degree of decentralization. The examples are Government control and regulation, tax policies, trade unionism, nature of competition, etc.
Excessive centralization of economic power enjoyed by a company may invite government regulation and control. To avoid this, the company may be split into smaller units with decentralized structure.
Again, governmental regulations also control the degree of decentralization possible. In a particular situation, the prices of a commodity may be regulated by the Government. The sales manager cannot, therefore, be given the authority to fix the prices.
Labour legislation too places a restriction on the extent of decentralization. For instance, a subordinate manager cannot freely determine the hours of work and the amount of wages. In case of a dispute between management and workers on a particular issue, the local manager may not be in a position to negotiate with the local union leaders, as the settlement arrived at may affect other units of the company.
Merits
i. Reduced workloads for top executives. Top executives can focus more on the executive level work like planning and decision making if the lower level employees take all the responsibilities on their own.
ii. Executive development
Decentralization gives power and initiative and responsibility to a number of executives. This provides a spur to the development of executives in the organization.
iii. Effective supervision and control. Since concerned managers enjoy full authority to make changes in work assignment, to take disciplinary actions, to change production schedules or to recommend promotions, they are in a position to supervise the subordinates’ activities.
iv. Facility for growth and diversification. Decentralization diminishes the weight of the CEOs with settling on routine choices. They can undoubtedly commit the time accessible for critical exercises, for example, the diversification of products, activities and markets etc. , raising vital fund, getting licenses and taking care of vital issues of the business concern, while less essential and routine might be left to the centre and supervisory dimensions.
v. Source of motivation.
vi. Employee satisfaction and high morale. Decentralization helps improvement of managerial ability which leads to an increase in their morale and this results in a higher productivity.
vii. Improved communication
Decentralization also minimizes the delay in communicating information. The wider span of management under decentralization leads to fewer hierarchical level. This makes the communication system more efficient as intimate relationships develop between superiors and subordinates.
viii. Reduced complexity
ix. Speedy decision and actions. Decentralization brings decision making process closer to the scene of action. This leads to quicker decision-making of lower level since decisions do not have to be referred up through the hierarchy.
x. More flexibility
A decentralized organization is more flexible as managers at different levels can change policies according to changes in environment.
Demerits
i. Difficulties of overall control
Too much of decentralization may result in loss of control from the hands of top management. Different units of the organization may start working as autonomous units working in their own interest in contrast of the overall interest of the organization.
ii. Difficulties in coordination
Decentralization of authority creates problems of co-ordination as authority lies dispersed widely throughout the organisation.
iii. Increased administrative costs
Decentralization increases the administration expenses because it requires the employment of trained personnel to accept authority. Moreover, there is a duplication of management functions in various departments/units resulting in increased cost.
iv. Problem during emergency
In a situation of emergency, decentralized administration is ineffective. It is costly and time consuming to control an emergency situation which affects a vital business area under a decentralized plan.
v. Uncertain outcomes
Decentralization may bring about inconsistencies in the company. Uniform procedures may not be followed for the same type of work in various organizations and divisions which results in uncertain outcomes.
vi. Possibility of conflict
Decentralization puts more pressure on divisional heads to realize profits at any cost. Often in meeting their new profit plans, bring conflicts among managers.
vii. Lack of uniformity
Under decentralization, it is not possible* to follow uniform policies and standardized procedures. Each manager will work and frame policies according to his talent. In a highly decentralized organization, uniform policies may not be followed by all the organizational units. Every unit formulates its own policies.
viii. Need for capable executives
Decentralization becomes useless when there are no qualified and competent personnel. If managers are not competent and skilled to make decisions, it will affect efficiency of the organization.
Difference between Centralization & Decentralization
| Centralization | Decentralization |
| Reservation of authority at the top level of the organization. | Systematic delegation of authority in the organization. |
| Flow of information is vertical. | Flow of information is open and free. |
| Centralization is ideal for small-sized organization. | Decentralization is ideal for large-sized organizations |
| Decision making is comparatively slow. | Decision making is significantly faster. |
| In centralization only few people are involved in the decision-making process. | In decentralization, a higher number of people from each level are involved in the decision-making process. |
| Only one group is carrying the burden. | The burden is shared among levels. |
| Relatively stable as decisions are made by a central authority sharing a common ideology. | Prone to instability due to multiple conflicting decisions. |
Difference between Delegation & Decentralization
| Delegation |
Decentralization |
| Delegation is an act or a process of delegating authority to subordinates. | Decentralization is the end result of systematic delegation to the lowest level. It is the functional phase of delegation. |
| It is relationship between two individuals – the superior and the subordinate. | It is relationship between the top management and various departments and divisions.
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| Delegation process ends when one superior delegate to his subordinate. | Decentralization process ends when delegation is made at all levels in the organization. |
| It is a must for an organization. It is an essential process. Without delegation organization cannot be created. | It is optical. One may or may not prefer this opinion. There may be centralized delegation. |
| Only authority (the decision-making rights)- but not responsibility- is delegated. | Authority and responsibility both are delegated. |
| Only decision-making rights are dispersed. | Here, several types of dispersions take place like geographical, administrative, and functional. |
| It is an individual aspect as only individual are involved. | It is a departmental aspect as departments and divisions are involved. |
| It is very flexible. Amount of authority can be changed easily as only two individuals are involved. | Here, entire organization is involved, and therefore, major changes cannot be made easily. It is comparatively inflexible. |
| Control is exercised by the superior (delegator). | Control is also delegated. |
| It does not provide a complete freedom. | A complete freedom is given. Autonomous units are created. |
| Delegation concerns with dispersion of authority from the superior to the subordinate. | Decentralization concerns with dispersion of authority to the ultimate level of organization. |
| It is a technique of management. | It is managerial philosophy. |