Centralization and Decentralization

Considerable debate has taken place over the years over the issue of ‘centralization’ that means that the authority for most decisions is concentrated at the top of the managerial hierarchy versus ‘decentralization’ that requires such authority to be dispersed by extension and delegation throughout all levels of management.

There are advantages as well as disadvantages of both types of structures. A pure form of centralization is not practical except in small companies and pure form of decentralization almost never exists. However, the type of organizational structure would determine the degree of centralization or the degree of decentralization.

As the organizations grow bigger by expansion, mergers or acquisitions, decentralization becomes both necessary and practical. For example, if an automobile company acquires a company that makes refrigerators, then decentralization would be the natural outcome since policies and decisions in these two distinctly different 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, it is also advocated by most behavioral scientists as being more democratic and hence highly morale boosting that positively affects productivity. Secondly, if all decisions are made at the top then the lower level organizational members end up only as workers and not as innovators or thinkers and that inhibits the growth and development of personnel.

Also, decentralization tends to create a climate, whereby taking additional responsibilities and challenges, the organizational members receive executive training for growth and development.

Whether centralization or decentralization would be more effective would depend upon the organizational structure and situational factors. Studies have isolated certain variables as being primary in determining the need for a centralized or decentralized structure. Some of these variables are:

Mission, goals and objectives of the organization: Certain types of organizations such as universities and hospitals have a democratic power sharing structure and hence a decentralized form. On the other hand, the goals and purposes of small business and small scale industries would require a more centralized structure.

Size and complexity of the organization: Large organizations with diverse product lines 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 work load.

Location of target market: If the customers of an organization are located far apart geographically, then decentralization would be more appropriate, because in such a case the appropriate management resources would be placed close to the customers allowing quicker decisions and faster customer service.

Competency of top level management: If the top-level managers are more knowledgeable and highly experienced as compared to lower level subordinates, then the tendency of the organization would be towards consolidation of decision-making power at the central management level.

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 would not be advisable .

Desirability of creativity in the organization: If creativity and innovation at all levels of the organization is desirable and necessary, then decentralization would be more appropriate because it gives the subordinates freedom to be innovative and develop better ways of doing things. This freedom is a highly motivational factor that encourages creativity.

The time frame of decisions:  The time frame for making decisions is different in different situations. For example, an airline pilot has to make decisions in a much shorter time frame than a committee establishing long range planning policies.

Where quick on-the-spot decisions must be mode, the authority to make them must be delegated, thus encouraging decentralization. It is understood that such subordinates must be trained to make such decisions before the authority is delegated.

In addition, the significance of the decision is an equally important consideration. Major policy decisions may have to be referred to the central management even if the time frame is very short. For example, allowing a hostile plane for emergency landing may have to be checked with the superiors and may or may not be within the authority of the air controllers themselves.

Adequacy of communication system: If the communication system provides for speedy and accurate transfer of information on which decisions are based, then centralization could be more effective. The introduction of computers and electronic data processing has created a feasibility of making quick on-the-spot decisions and hence a good argument for centralization.

Type of tasks: Certain tasks require so much coordination and precision integration that it is more effective, if such coordination is conducted from a central point such as production control or central purchasing. Some tasks tend to be more independent such as selling and these can be decentralized.

Existence of standing plans: If there exists a clear description of clear cut goals and objectives and precisely structured procedures and plans for solving routine problems and making certain situational and operational decisions, then the outcome of a subordinate’s decision can be easily predicted and hence decentralization would be more effective.

External factors: Certain policies and activities that deal with the external environment must remain the prerogative of central management. These policies relate to dealing with labor unions, community officials, lobbying in the government, matters relating to defense contracts and so on. These factors necessitate centralization.

From organizational behavior point of view, decentralized responsibilities are highly motivational and morale boosting. It gives the junior level managers and supervisors the authority to make decisions relative to their roles and within the general organizational policy guidelines and generally their decisions are highly relevant because they are close to the theater of operations.

Subordinates usually respond to delegation of authority with favorable attitude. They become more responsible and more dedicated to their work and they feel proud of being given the authority. They also feel that such decision-making authority prepares them for upper level executive positions and if they are able to handle problems at the lower level successfully, their chances of promotions to higher levels become higher.

The freedom to make decisions also gives the subordinates a feeling of status and recognition and this results in loyalty, commitment and belonging. The behavioral scientists argue that such commitment leads to higher productivity.

References:

http://smallbusiness.chron.com/centralized-vs-decentralized-organizational-structure-2785.html

http://www.12manage.com/methods_centralization_decentralization.html

http://www.econlib.org/library/YPDBooks/Lalor/llCy200.html