Centralization and Decentralization of an organization carries with it various advantages and disadvantages. Lets look at some of them.
Advantages of Decentralization
Decentralization of authority has certain advantages, such as:
1. Diversification of activities: Decentralization reduces the burden of the chief executives with making routine decisions. They can easily devote the time available for important activities such as diversification of products, raising necessary finance, obtaining licenses and starting new lines of production and solving crucial problems of the business concern, while less important and routine may be left to the middle and supervisory levels.
2. Development of the Managerial Personnel: As the business grows in size, it requires the services of a large number of managers and here decentralization provides a training ground for the would-be managers. The managers learn by experience within the organization concerned.
3. Effective Control and Supervision: Decentralization leads to effective control and supervision. 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.
4. Improvement of morale: Decentralization helps improvement of managerial ability which leads to an increase in their morale and this results in a higher productivity.
5. Satisfaction of human needs: Decentralization is an important tool for satisfying human needs of power, independence, status and prestige. This satisfaction helps in building a cadre of satisfied managers, who feel their responsibility towards company’s work.
6. Quick and wise decision possible: Since decision-making authority is as near as possible to the place where action takes place, those having this authority can make reasonably accurate, wiser and timely decisions because they are well aware of the realities of the situation. Decentralization also minimizes the delay in communicating information.
7. Other economies may be achieved through the better utilization of lower and middle management, greater incentive, more and improved training opportunities, insurance that some products will not be pushed at the expense of others.
8. Closer and better employee management and community relations are possible in small administrative units for business as a whole, where decentralization may mean a more widespread distribution of roles and purchases, which may reduce proportionately the unfavorable impact of sales decline.
9. Decentralization may result in an increase in the managerial social net product, i.e., benefits to the community as distinct from benefits to the company. These general benefits may include more freedom of action for individuals, more widespread opportunity for constructive individual participation, less social stratification within the business.
10. Reduces the Burden of Top Executives: It frees the top managers from the burden of taking too many operating decisions. This enables specialization and also permits the top managers to think for the future and make plans accordingly.
11. Facilitates Diversification: Diversification of products or markets is possible only by departmentalization. Without decentralization, departmentalization is meaningless and practically impossible.
12. Improves Motivation: Decentralization provides more chances for the executives to exercise initiative without any undue interference from the top executive. This improves the improves the morale of the employees and motivate them for peak performance.
13. Secures Better Co-ordination: As self-sufficient departments are established with necessary service functions, all the activities are coordinated at the departmental level.
14. Ensures Effective Control: It is comparatively easy to measure the performance of the operations at the department level. This will lead to effective control.
15. Develops the Quality of Managers: The executives will get training and also opportunities to develop their talents.
16. Flexibility: It permits the enterprise to move quickly and there will be more flexibility in meeting competition because prompt and spot decisions are possible.
Disadvantages of Decentralization
Not withstanding the merits of decentralization, there are certain difficulties in its application to all cases and in all circumstances The serious limitations of decentralization are as follows:
1. Decentralization makes the utilization of the services of exceptionally talented people. Because of weak financial resources, appointment of such persons may not be possible.
2. Decentralization increases the problems of coordination among the various units.
3. In some cases, decentralization may not be possible at all. External factors make this difficult, such as company wide strikes.
4. It increases the administrative expenses because highly-paid managers have to be appointed.
5. High Cost of Operation: Establishing of various departments and employment of specialists in each department will result in a higher cost of operation.
6. Lack of Uniformity: There shall not be uniformity in policies and actions, since each manager will form his own genius in designing them.
7. Unsuitable for Small Firms: Departmentalization is completely unsuitable for small firms as it involves high operating costs.
8. Reliance on the Manager: Decentralized organization has to place undue reliance on the efficiency of the divisional managers. If they do not have enough skill or competence to take appropriate decisions, the enterprise has to incur heavy losses due to their faulty decisions.
9. Self Centered Attitude: Each department will tend to be self centered ignoring the broader interests of other departments and that of the entire firm.