MANAGEMENT THEORY & PRACTICE (8506)

ASSIGNMENT NO. 2

0) Topic: Centralization

Submitted By: Adiba Batool

Roll No: cc516638
Semester: Autumn, 2020 Level: M.COM
Course: MANAGEMENT THEORY & PRACTICE (8506)

Submitted to: Muhammad Yousaf Bhatti

ALLAMA IQBAL OPEN UNIVERSITY

ISLAMABAD
(DEPARTMENT OF BUSINESS ADMINISTRATION)

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TABLE OF CONTENTS:

1. Title page

2. An abstracts:

3. Introduction:

4. Detailed arguments with supporting data:

5. Practical study of Organization:

6. Conclusion:

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2. An abstracts:

Centralization refers to the process in which activities involving planning and decision-

making within an organization. Depending on a company's goals and the industry are

concentrated to a specific leader.

Under centralization, the important and key decisions are taken by the top management and the

other levels are into implementations as per the directions of top level. For example, in a

business concern, the father & son being the owners decide about the important matters and all

the rest of functions like product, finance, marketing, personnel, are carried out by the

department heads and they have to act as per instruction and orders of the two people. Therefore

in this case, decision making power remain in the hands of father & son.

On the other hand, Decentralization is a systematic delegation of authority at all management

and in all of the organization. In a decentralization concern, authority in retained by the top

management for taking major decisions and framing policies concerning the whole concern. Rest

of the authority may be delegated to the middle level and lower level of management.

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3. Introduction:

Definition: Centralization refers to that organizational structure where decision-making power is

confined to the top management, and the subordinates need to follow the instructions of their

seniors. Centralization of authority is essential for the small-scale organizations which lack

resources and finance.

Example: A person running a departmental store appoints a manager, a cleaning staff, a

salesperson and a helper. The owner delegates the work among the staff according to their skills

and positions.

However, he retains the decision making authority related to display, discounts, offers, stock,

orders, workers’ salary, leaves and increment with him. He also keeps firm control over the

routine activities of the staff and instructs them from time to time.

This type of organization has a decentralized structure where the owner is the decision-maker,

and the staff has to follow his instructions.

Content: Centralization

1. Factors

2. Advantages

3. Disadvantages

4. Conclusion

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Factors Determining Centralization of Authority

In small organizations, the owner or the top management is responsible for making all the

business decision solely. Whereas, the delegation of work among the subordinates takes place;

therefore, centralization persists in these business units.

The following factors result in the centralization of the organization:

 Nature of Organization: When the organization is generally a sole proprietorship or

partnership entity with less number of employees to be managed, it can have a centralized

system.

 Size of the Organization: The organization which are small in size and operating on a

small scale can be efficiently managed by the top management hence following a

centralized system.

 Nature of Task: The organizations engaged in business operations which does not

require much expertise or specialization, can be managed through centralization.

 Delegation Ability: The capability of the management to delegate the responsibilities to

the subordinates while keeping the charge in their hand is another factor determining the

organizational structure.

 Employee’s Efficiency: If the employees lack skills and efficiency to take up the

responsibility and accountability of the work to be performed, the management will go for

centralization of the organization.

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4. Detailed arguments with supporting data:

What is Centralization?

Centralization refers to the process in which activities involving planning and decision-making

within an organization are concentrated to a specific leader or location. In a centralized

organization, the decision-making powers are retained in the head office, and all other offices

receive commands from the main office. The executives and specialists who make critical

decisions are based in the head office.

Similarly, in a centralized government structure, the decision-making authority is concentrated at

the top, and all other lower levels follow the directions coming from the top of the organization

structure.

Advantages of Centralization

An effective centralization offers the following advantages:

1. A clear chain of command

A centralized organization benefits from a clear chain of command because every person within

the organization knows who to report to. Junior employees know who to approach whenever

they have concerns about the organization. On the other hand, senior executives follow a clear

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plan of delegating authority to employees who excel in specific functions. The executives also

gain the confidence that when they delegate responsibilities to mid-level managers and other

employees, there will be no overlap. A clear chain of command is beneficial when the

organization needs to execute decisions quickly and in a unified manner.

2. Focused vision

When an organization follows a centralized management structure, it can focus on the fulfillment

of its vision with ease. There are clear lines of communication and the senior executive can

communicate the organization’s vision to employees and guide them toward the achievement of

the vision. In the absence of centralized management, there will be inconsistencies in relaying

the message to employees because there are no clear lines of authority. Directing the

organization’s vision from the top allows for a smooth implementation of its visions and

strategies. The organization’s stakeholders such as customers, suppliers, and communities also

receive a uniform message.

3. Reduced costs

A centralized organization adheres to standard procedures and methods that guide the

organization, which helps reduce office and administrative costs. The main decision-makers are

housed at the company’s head office or headquarters, and therefore, there is no need for

deploying more departments and equipment to other branches. Also, the organization does not

need to incur extra costs to hire specialists for its branches since critical decisions are made at the

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head office and then communicated to the branches. The clear chain of command reduces

duplication of responsibilities that may result in additional costs to the organization.

4. Quick implementation of decisions

In a centralized organization, decisions are made by a small group of people and then

communicated to the lower-level managers. The involvement of only a few people makes the

decision-making process more efficient since they can discuss the details of each decision in one

meeting. The decisions are then communicated to the lower levels of the organization for

implementation. If lower-level managers are involved in the decision-making process, the

process will take longer and conflicts will arise. That will make the implementation process

lengthy and complicated because some managers may object to the decisions if their input is

ignored.

5. Improved quality of work

The standardized procedures and better supervision in a centralized organization result in

improved quality of work. There are supervisors in each department who ensure that the outputs

are uniform and of high quality. The use of advanced equipment reduces potential wastage from

manual work and also helps guarantee high-quality work. Standardization of work also reduces

the replication of tasks that may result in highlabor costs.

Disadvantages of Centralization
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The following are the disadvantages of centralization:

1. Bureaucratic leadership

Centralized management resembles a dictatorial form of leadership where employees are only

expected to deliver results according to what the top executives assign them. Employees are

unable to contribute to the decision-making process of the organization, and they are merely

implementers of decisions made at a higher level. When the employees face difficulties in

implementing some of the decisions, the executives will not understand because they are only

decision-makers and not implementers of the decisions. The result of such actions is a decline in

performance because the employees lack the motivation to implement decisions taken by top-

level managers without the input of lower-level employees.

2. Remote control

The organization’s executives are under tremendous pressure to formulate decisions for the

organization, and they lack control over the implementation process. The failure of executives to

decentralize the decision-making process adds a lot of work to their desks. The executives suffer

from a lack of time to supervise the implementation of the decisions. This leads to reluctance on

the part of employees. Therefore, the executives may end up making too many decisions that are

either poorly implemented or ignored by the employees.

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3. Delays in work

Centralization results in delays in work as records are sent to and from the head office.

Employees rely on the information communicated to them from the top, and there will be a loss

in man-hours if there are delays in relaying the records. This means that the employees will be

less productive if they need to wait long periods to get guidance on their next projects.

4. Lack of employee loyalty

Employees become loyal to an organization when they are allowed personal initiatives in the

work they do. They can introduce their creativity and suggest ways of performing certain tasks.

However, in centralization, there is no initiative in work because employees perform tasks

conceptualized by top executives. This limits their creativity and loyalty to the organization due

to the rigidity of the work.

Summary

Centralization refers to a setup in which the decision-making powers are concentrated in a few

leaders at the top of the organizational structure. Decisions are made at the top and

communicated to lower-level managers for implementation.

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5. Practical study of Organization:

Centralized Management – Advantages and Disadvantages

There are some very good reasons why companies choose to centralize their management, but

also big disadvantages to going too far.

Advantages

McDonald’s uses centralization to get a standardized menu everywhere

The upper management at a centralized company will have complete control over training,

products they offer, and are more likely to ensure the company’s core objectives and values are

maintained. A centralized management style also has the potential to improve the organization as

a whole instead of just one smaller branch at a time.

Centralized management usually keeps its external communication, like Business to Business

relationships, controlled down to just a few individuals, which helps keep the company’s

messaging consistent and more efficient. Centralization also helps standardize products and

materials, which in turn helps speed up preparation and procurement.

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McDonald’s is a prime example of centralized management and standardization. The exact same

number of pickles is put on each burger no matter where you are in the world. Airlines do this

too – you will get the exact same brand of bottled water on every airplane in the same brand.

Companies often centralize when they want to improve the consistency of their product quality,

and standardize production.

Disadvantages

Centralized management strategies limit the creativity to the top management that makes the

majority of the decisions. This can lead to problems for the company trying to adapt to a

changing market. Heavily centralized organizations involved in a fast-paced product and rapidly-

changing industries are not able to react quickly to changing demands of their customers.

An example of this retail stores selling trendy clothing. The sales and staff managers often

receive feedback from shoppers that would be vitally important for the purchasing department to

cater to the needs of the customer. This information needs to be relayed through the line of upper

management, usually through weekly or monthly reports, putting a huge delay on the changes

that impact the storefront.

Decentralized Management – Advantages and Disadvantages

Decentralization avoids some of the biggest drawbacks of centralized management, but it has

pitfalls of its own for managers to avoid.

Advantages

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Decentralization has a broader immediate contact with customers by allowing management to

have more decision-making ability. This can give more efficient managerial decisions because

lower-level managers have more direct control over their day-to-day tasks and can

reward/discipline employees as needed. It allows managers to have a clear view of performance-

related results among their employees.

Giving the lower levels of the organization more flexibility to make decisions, it also increases

job satisfaction, and gives awareness of how significant their job is to the whole company.

Disadvantages

A decentralized organization has a lot riding on the decisions made by many employees. This

means that if some of those lower-level managers lack training, experience, education, or

competence, it can damage the organization as a whole. Smaller organizations are the least-likely

decentralize their organization successfully, since having many low-level managers making their

own decisions can be costly. Larger companies with strong upper management are the most

successful at successfully using decentralized organizational styles, simply by having a large

pool of talented middle managers to give more responsibility.

Providing Accountability

When a company suffers from low employee efficiency, the biggest culprit is usually “job

ambiguity”. This is where individual employees do not have their roles in the organization

clearly defined. Employees need precise job descriptions to be liable for their performance – by

reducing uncertainty, employees can develop skills to better perform their job, and gives

managers more accurate ways to measure performance.

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As companies centralize and decentralize, the main question is how exactly is the role of each

manager and employee being defined. If individuals are given too many unrelated tasks, it

becomes harder to measure their overall efficiency. On the other hand, if the company centralizes

decisions to the point where employees have very little flexibility, they may feel their hands are

tied and their efficiency is held back by “red tape”.

Autonomy in the workplace has shown to create a sense of job empowerment, allowing

employees to not only take on more responsibility but to also give them the freedom to make

decisions that affect their performance. This allows managers to delegate responsibility and hold

employees accountable for their results and focus less on the process of how the desired

outcomes were achieved.

How Businesses Are Organized to Achieve Desired Goals

Every business has goals and objectives it reaches for – usually this is defined in their mission

and vision statements. Regardless of its size, everything the business does in some way is

striving towards these goals. At the individual level, they want the goals of each and every

employee to have clearly defined goals, and to understand why their position is important to the

company’s overall objectives.

Businesses recently have been developing “nontraditional” corporate models to give employees

more autonomy: we are currently in a wave of broad decentralization in the business world. This

freedom allows employees to have more flexible schedules, but also gives them a more realistic

view of their individual impacts on a company, and what role their individual tasks play in the

bigger picture.

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Decentralizing without a clear target does not provide any advantage. Failed attempts at

decentralization usually stem from lack of communication between the middle and lower level

managers, and lack of clearly-defined goals for each employee. As companies shift their

management strategies, they need to make sure employee’s goals stay S.M.A.R.T.

SMART 

6. Conclusion

The degree of centralization and decentralization will depend upon the amount of authority

delegated to the lowest level. According to Allen, “Decentralization refers to the systematic

effort to delegate to the lowest level of authority except that which can be controlled and

exercised at central points.

Decentralization is not the same as delegation. In fact, decentralization is all extension of

delegation. Decentralization pattern is wider is scope and the authorities are diffused to the

lowest most level of management.

Delegation of authority is a complete process and takes place from one person to another. While

decentralization is complete only when fullest possible delegation has taken place. For example,

the general manager of a company is responsible for receiving the leave application for the

whole of the concern. The general manager delegates this work to the personnel manager who is

now responsible for receiving the leave applicants. In this situation delegation of authority has

taken place. On the other hand, on the request of the personnel manager, if the general manager

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delegates this power to all the departmental heads at all level, in this situation decentralization

has taken place.

There is a saying that “Everything that increasing the role of subordinates is

decentralization and that decreases the role is centralization”. Decentralization is wider in

scope and the subordinate’s responsibility increase in this case. On the other hand, in delegation

the managers remain answerable even for the acts of subordinates to their superiors.

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