One of the fundamental problems of organization is to decide how much authority should be centralized in the hands of the Chief Executive and how much should be distributed among the lower level management, i.e., what should be the right degree of centralization or decentralization. Complete centralization is possible only in a one-man enterprise. But the moment its scope is enlarged, decentralization becomes inevitable.
What is centralization?
‘Centralization‘ means concentration of power of decision-making. Concentration is the systematic and consistent reservation of authority in the central hands in the organization.
Its implications, are that:
- decision-making power in regard to planning, organization, coordination and control is reserved in the hands of the top executive;
- operating authority is reserved with the middle level managers; and
- operations at lower levels are subservient to command, consent and control by the higher level authority in time.
What is Decentralization?
Decentralization on the other hand, means delegation of business decisions by the owners to their subordinates, and then the others further down in the management hierarchy.
Allen defines decentralization as systematic effort to depute the lowest levels all authority except that which can only be exercised at central points.
When is an organization considered centralized or decentralized?
If decision-making power is centralized in the hands of a single individual, the organization is fully centralized; but when the power of decision-making is widely scattered throughout the organization, it is a decentralized set-up.
As George Terry puts it:
“Decision-making and responsibility are centralized in that authority and formal activities are centralized in fewer and fewer managers as the organization structure is relieved from the lower to the higher organization levels. At the very top, all decision-making and responsibility theoretically emanate from the apex of the chief manager.
In contrast, proceeding from the top to the bottom levels, decision-making and responsibility are decentralized, in that they are dispersed among an increasing number of management members, the greatest number being at the lower level of organization.
An organization may be considered centralized despite the fact that its physical offices and workers are generally scattered. Similarly, an organization may be considered highly decentralized despite of the fact that its employees and physical offices are situated at one spot.
The point to note is that neither the actual performance of work by the employees nor the physical dispersal of activities is the factor determining a centralized or a decentralized organization.
The determining factors of centralization and decentralization are:
- Who is authorized to make decisions? i.e., who enjoys the decision-making power?
- Whether this power is centralized in a few hands (centralized) or it is widely dispersed throughout the organization (decentralized).
Everything that focuses the significance of subordinate’s role in decision making process is decentralization. Things that minimizes the subordinate’s role as decision-maker is centralization.
Centralization vs Decentralization
Centralization and decentralization are the opposite ends of an organization continuum. Basically, centralization procedures, uniformity of policy and action utilize the skills of centralized and specialized staff and enable closer control over operating units. Decentralization, on the other hand, tends to effect faster decision-making and action on the spot without consulting the higher level; and creates a tendency towards greater interest and enthusiasm on the part of subordinates.