Centralization or Decentralization? | Which is desirable?

Centralization and Decentralization are desirable in an organizational structure of a company.

When is Centralization Desirable?

A higher degree of centralization is needed:

• to facilitate personal leadership when the company is small;
• to provide for integration and unification of the total operations of the enterprise; and
• to promote uniformity of action, credit, price, etc., by the operating levels in a better way; authority for overall planning, organization, coordination, control, etc. must be reserved for the top executive.

When is Decentralization Desirable?

Decentralization, on the other hand, is considered desirable:

• When more decisions are to be made at the lower levels;
• When more important decisions (such as purchasing of plant and machinery or construction of building) are made at lower levels in the organization structure;
• When more decisions relating to all or almost all functional areas are made at lower levels; and
• when no checkings are required.

Some degree of decentralization is usually found in every big enterprise. Allen has given three criteria for guiding the degree of decentralization, viz.,

• what kind of authority is delegated?
• to what extent the authority is to be delegated? and
• how consistently it is to be delegated?

These criteria may be applied to know the degree of decentralization in different areas such as hiring of employees, promotion of employees, acquisition of capital equipment, approval of travel expenses and increases in pay/wages, procurement of raw materials, acceptance of sales order.

The locus or place of decision-making is another criterion. The lower the rank of executives who make given decisions, the greater the degree of decentralization.

In determining the degree of decentralization, it has to be remembered that an enterprise has both formal and informal decision making rules. Official policy statements may be one type of decision making, but actual may be quite different.

Which works better for an organization, Centralization or Decentralization?

The following situations in organization dictates whether to go for centralization or decentralization.

1. Size and Complexity of the Organization: The larger the organization, the more authority and responsibility must be delegated to subordinates by top executive. If an organization is a conglomeration involving several industries, the limitation of expertise dictates the need for decentralization of authority to head the individual units. The rationale behind this is that each product group is likely to have different types of marketing, manufacturing, distribution, and financial problems. Even where a large firm having many units produces the same basic type of product, decentralization is desirable. On the other hand, if the firm is relatively small, centralization of authority is advisable.

2. Competency of Organizational Personnel: If there are adequate number of capable personnel in an organization, who can take decisions quickly, decentralization works effectively. On the other hand, if management personnel are followers and lack initiative, centralization of authority is preferred.

3. Dispersion of Organization Units: If the organization has many units scattered over a large area, decentralization for better results is generally the practice. Although operational control is employed at the lowest level of its divisions, the same is not true for finance. It is generally centrally controlled to maximize the firm’s control over its total assets.

4. Effectiveness of Communication System: The degree of centralization or decentralization is highly determined by the adequacy or otherwiseness of the communication system. If the communication system is quick (such as telegraph, telephone, radio, teletype), centralization can be an effective means of issuing direct orders to distant subordinates.

With the development of electronic devices, computerized management information system, operations research, the issue of directions on matters like sales and production orders, inventories, etc., facilitates the centralization of certain information for managerial purposes. On the other hand, if the communication system is ineffective, there is a tendency towards decentralization.

5. Degree of Standardization in the Organization: The greater the degree of standardization in the organization, the greater is the degree of centralization. If repetition and standardization of operations can be introduced to a large degree in the work place, events can be controlled more easily; and they can also be predicted more accurately. Therefore, authority tends to be centralized.

6. The Span of Control: When there is a narrow span of control and numerous levels in management hierarchy, organizations are ‘tall’ and authority is centralized. Contrarily, if the span of control is wide and there are only a few levels of management, organizations are ‘flat’ and authority is decentralized.

7. When quick, responsible, adaptive, creative action is necessary to be taken on the spot a level at which it is required with a view to cashing on the opportunity present, decentralization is desirable. On the other hand, where delay does not matter, centralization is adopted.

Hartman and others have observed thus:

“Centralization or decentralization may be, in part, merely the result of circumstances. Many of the problems are handled centrally because the laws of the country require it or the union insists on it. Many operating or sales decisions are decentralized because it would be physically impossible to operate successfully if they were centralized. Frequently, the centralization or decentralization of a decision is merely an accident. Finally, there is an increase in the variety of possible human behavior, a vast multiplicity of minute, undiscoverable causes and effects that cannot be encompassed in any principle or standard or evaluation. Thus, there is a large area in which necessity, intrusion, and luck decide the issue between centralization and decentralization.“

Balanced View Needed to go for Centralization or Decentralization

However, where neither absolute centralization or absolute decentralization is preferable, there should be a balance between the two. General motion under the leadership of Sloan adopted the balance between managerial centralization and decentralization by following this management philosophy: “Centralized policy and control and decentralized operations and administration”.

That is, major policy and decision-making powers were duly centralized; and decisions involving execution of major plans, policies and programmes were duly decentralized in the operating units.