Centralization is said to be a process where the concentration of decision making is in a few hands. All the important decision and actions at the lower level, all subjects and actions at the lower level are subject to the approval of top management. According to Allen, “Centralization” is the systematic and consistent reservation of authority at central points in the organization. The implication of centralization can be :-
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 levels of 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.
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 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.
Implications of Decentralization
- There is less burden on the Chief Executive as in the case of centralization.
- In decentralization, the subordinates get a chance to decide and act independently which develops skills and capabilities. This way the organization is able to process reserve of talents in it.
- In decentralization, diversification and horizontal can be easily implanted.
- In decentralization, concern diversification of activities can place effectively since there is more scope for creating new departments. Therefore, diversification growth is of a degree.
- In decentralization structure, operations can be coordinated at divisional level which is not possible in the centralization set up.
- In the case of decentralization structure, there is greater motivation and morale of the employees since they get more independence to act and decide.
- In a decentralization structure, co-ordination to some extent is difficult to maintain as there are lot many department divisions and authority is delegated to maximum possible extent, i.e., to the bottom most level delegation reaches.
Centralization and decentralization are the categories by which the pattern of authority-relationships becomes clear. The degree of centralization and de-centralization can be affected by many factors like nature of operation, volume of profits, number of departments, size of a concern, etc. The larger the size of a concern, a decentralization set up is suitable in it.
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Classic organizational structures such as the chain of command have helped business leaders to govern effectively for decades. Over time, however, they have increasingly become thought of as somewhat repressive and counterproductive, which has led to the rise of new and more “modern” structures such as the flat org structure and the decentralized structure.
In recent years, the latter structure has become especially popular as business leaders have begun to recognize its benefits over the arguably outdated corporate hierarchy. Opting for a decentralized organizational structure can help to relieve the vice-like grip that some leaders have over day-to-day operations and give employees more autonomy, empowering them to make more of their own decisions.
A decentralized organizational structure is one where senior management has surrendered the authority for making certain decisions to the lower levels of the organization.
Companies operating with decentralized structures often have mid- and lower-level managers making most of the decisions rather than the senior management team. In many cases, however, decision-making authority is delegated even further down to the regular employees themselves.
While the top tier of the organization will still retain control over making significant, org-wide decisions (e.g., setting its strategic plan), most day-to-day decision-making is delegated as far down the ranks as possible.
A decentralized organizational structure works particularly well in the following scenarios:
- Where a company needs to deliver highly individualized customer service
- When a business has a vast network that can’t be controlled by upper management
- When the nature of the market means that decisions must be made quickly
- When the business model is constantly changing
It is common for businesses to start life with centralized structures and gradually decentralize as they grow. This happens as a growing workforce and burgeoning workloads pile the pressure on upper management, prompting them to delegate day-to-day tasks and decision-making to the employees below them.
What Are the Benefits of a Decentralized Org Structure?
No matter what an employee’s role is within an organization, a decentralized org structure can help them operate more independently and make their own decisions. While implementing a decentralized organizational structure can bring with it many positive returns, it requires commitment at all levels.
Some of the benefits of operating with a decentralized organizational structure include:
Upper Management Can Focus on the Long Term
A decentralized organizational structure alleviates the burden of day-to-day tasks and gives upper managers and executives more time to focus on the long-term goals of the organization, such as setting its mission and devising growth strategies.
Decisions Are Made Quickly
In contrast to a centralized organization, where decisions usually take a long time to be made, decisions in decentralized organizations are made much more quickly. This is because lower-level managers, and in many cases regular employees, have the authority to make and implement decisions without having to seek and wait for approval from higher-ups. This is beneficial in situations where quick decisions are the key to operational success.
Employees Feel More Empowered
Decentralized organizations provide employees with the opportunity to make decisions that impact their work. This serves to give these employees a sense of importance, value, and belonging within the organization, thus leading to an increase in employee engagement and a reduction in turnover. At a time when resignation activity is at an all-time high, this is crucial.
Highlights Employees for Development
Delegating decision-making authority to lower-level managers and regular employees is a great way to reveal those who potentially have the skills to progress to higher positions within the organization in the future.
What Are the Disadvantages of a Decentralized Org Structure?
Although decentralized org structures have plenty of benefits, there are some distinct disadvantages to be aware of. These include:
Potential for Less Knowledge Sharing
The delegation of decision-making can sometimes lead to divisions, departments, and individual teams operating in silos. This is bad for knowledge sharing because siloed teams are more likely to keep information such as project updates, decision-making processes, and procedures to themselves.
Teams Putting Themselves First
When lower-level managers and employees are given the power to make their own decision, there’s a good chance that over time, teams will begin putting themselves first and basing decisions on what best benefits them rather than the organization and its mission as a whole.
Difficulties in Communication and Collaboration
When teams and individuals are independent and are responsible for their own decisions, workloads, and schedules, communication can become difficult. Each manager might have their own preferences, and this can lead to confusion. Collaboration may also suffer because, with so many different managers, processes, and schedules, it can be difficult for two different teams to coordinate efforts together.
Our Tips for Implementing a Decentralized Organizational Structure
If you are going to implement decentralization, consider the following tips to ensure an effective transition that avoids the problems highlighted above:
- Promote constant feedback: The best way to gather information related to performance is to ask for feedback from lower-level managers and employees. This can be used to discover issues with management, communication, collaboration, and more.
- Keep managers in the loop: Ensure that all lower-level managers who are also decision-makers have all the relevant information that they need to ensure that their own decision-making remains on track and contributes to the organization’s overall mission.
- Create a strategy: While a decentralized organization shares decision-making responsibilities, it’s still important to have a centralized strategy that ensures everyone remains on track and works towards the same long-term goals.
Every business has to choose the structure that’s best for their overall organization, and most have a mixture of centralization and decentralization running throughout. When deciding which framework is best for your own organization, consider your long-term objectives, resources, and the industry that you operate within.