Centralization and Decentralization of Authority

Centralization means that the authority for most decisions is concentrated at the
top of the managerial hierarchy and decentralization requires such authority to be
dispersed by extension and delegation through all levels of management. There
are advantages as well as disadvantages of both types of structures and the
organizational structure determines the degree of centralization or decentralization.
A pure form of centralization is not practical, except in small companies, and pure
form of decentralization almost never exists. As organizations grow bigger by
expansion, mergers or acquisitions, decentralization becomes both necessary as
well as practical. If an automobile manufacturing company acquires a company
which makes refrigerators, then decentralization would be the natural outcome
since policies and decisions in these two areas may not be similar. The important
question is not whether there should be decentralization, but decentralization to
what degree? In addition to decentralization being logistically superior in most
situations, it is also advocated by many behavioural scientists as being more
democratic. Secondly, if all decisions are made at the top, then the lower
organizational members end up only as workers and not as innovators or thinkers,
and it inhibits the growth and development of personnel. On the other hand,
decentralization tends to create a climate whereby taking additional responsibilities
and challenges enable, the organizational members to receive executive training
for growth and development.
Factors Determining the Need for Centralization and Decentralization
The following factors determine the need of centralization and decentralization in a
business organization:
1. Mission, goals and objectives of the organization: Certain types of
organizations such as universities and hospitals have a democratic powersharing
structure and hence a decentralized form. On the other hand, the
goals and purposes of small businesses such as a restaurant and small-scale
industries would require a more centralised structure.
2. Size and complexity of the organization: Large organizations with diverse
product line and conglomerates with companies involved in different fields
would find decentralization to be more effective due to limitations in
managerial expertise as well as increased executive workload in centralised
large organizations.
3. Locations of target market: If the customers of an organization are located
far apart geographically, then decentralization would be more appropriate
since in such a case, the appropriate management resources would be placed
close to the customers, allowing quicker decisions and faster customer
service.
4. Competency of top level management: If the top-level managers are
more knowledgeable and highly experienced as compared to lower-level
Staffing
NOTES
Self-Instructional
104 Material
subordinates, then the tendency of the organizations is towards consolidation
of decision-making power at the central management level.
5. Competency of subordinates: The prerequisite of effective
decentralization is the availability of trained, experienced and knowledgeable
subordinates who can be entrusted to evaluate the situation objectively and
make necessary decisions. If subordinates are not sufficiently trained in this
area, then decentralization is not advisable.