Centralization and Decentralization

What are the advantages and disadvantages of decentralization?

Centralization and decentralization are the two key concepts in analyzing an organization’s structure. Centralization is defined as the type of organization where most of the decision making power is vested on the top management. While on the other hand the philosophy of decentralization believes in empowering the employees in the lower level of the organization to take certain decisions. In the practical world, hardly do we encounter organizations which are completely centralized or decentralized; instead it’s the degree which decided the organizational Philosophy.

Determinants of Centralization/Decentralization:

a)      Type of organization: Some organizations are more conducive to centralized way of working i.e. military and some dwell well in decentralized way of operations like automobiles where the ground level information has to be taken care of

b)      Type of workforce: Type of workforce is also a key determinant in shaping organization structures. Labor intensive organizations generally work in centralized way of functioning while in case of knowledge intensive firm, the competency is present among the workforce, and decentralization is more effective.

c)      Scale of Operations:  Centralized way of operating is more relevant in the small-scale level of operations. As the scale of operations widens, and in the present age of the globalized world, it is almost imperative to go for centralization

d)      Management Philosophy: Generally the decision making structure of an organization is also influenced from the management philosophy. Generally a family driven organization prefers a centralized decision making structure, while the professionally managed organizations usually lay more emphasis on decentralizing their activities.

Advantages and Drawbacks

Centralization:

Advantages	Disadvantages
Quicker decision making	Lower employee Motivation
Focused Approach	Over-burdening of Management
Reduced Conflict	Can’t Support large scale of operations
Control and Accountability	Hampers development of next generation managers

Decentralization:

Advantages	Disadvantages
Higher employee involvement and motivation	Can slow down decision making due to multiple stakeholders
Supports growth	Potential co-ordination problems can rise between different departments
Develops managerial skills in staff	Competency of workforce can also be a limiting factor in de-centralization efficacy
Enables the management to focus on critical affairs of organization	Not east to fix responsibility and accountability of decisions.