“Centralization” has been used to describe tendencies other than the dispersal of authority, as in centralization of performances.
This is a problem of geography: a business characterized by centralized performance operates in a single location or under a single roof. Furthermore, centralization often refers to departmental activities.
Service divisions centralize similar or specialized activities in a single department. But when centralization is discussed as an aspect of management, it refers to withholding of delegating authority for decision-making.
Decentralization is a fundamental aspect of delegations: to the extent that authority is not delegated, it is centralized. Absolute centralization in one person is conceivable.
But it implies no subordinate managers and therefore no structured organization. Consequently, it can be said that some decentralization characterizes all organizations.
On the other hand, there cannot be absolute decentralization, for if managers should delegate all their authority, their status as managers would cease, their position would be eliminated, and there would, again, be no organization.
Centralization and decentralization are therefore tendencies; they are qualities like “hot” and “cold”.
Although closely related to delegation of authority, decentralization is something more: it reflects a philosophy of organization and management.
It requires careful selection of what decisions to push down into the organization structure and what to hold at or near the top, specific policy-making to guide the decision-making, selection and training of people, and adequate controls.
A policy of decentralization affects all areas of management and can be looked upon as an essential element of a managerial system. It is a fact that, without decentralization, managers cannot use their discretion to handle the ever-present and ever-changing situations they continually face.
The following diagram indicates the tendencies towards decentralization—from complete centralization to complete decentralization.
Kinds of centralization
Centralization may take any of the following forms:
- Departmental centralization: this refers to concentration of specialized activates, usually in one department. For example, recruitment for the whole organization may be carried out by a single department.
- Centralization of performance: it indicates geographic concentration, for example, a company operating in a single location.
- Centralization as an aspect of management: this indicates a tendency to restrict delegation of decision making.
Decentralization and participative management
Some people get the idea that the more decentralized an organization is, the more democratic or participative it is in terms of managers sharing decision-making with subordinate employees. This is not necessarily true.
Decentralization, however, involves pushing some decision-making down the line to subordinate managers, and, in this sense, it develops more participation in decision-making.
However, this does not mean that all subordinates will participate in all decision-making.
In the first place, as has been noted, decisions on some matters are reserved by upper-level managers and others may be made only by the top managers and, in some cases, even by the board of directors.
In the second place, delegation to subordinate managers of authority to make decisions at their respective levels does not mean that these managers will allow their subordinates to share in top-level decision-making.
Some managers at upper levels may be highly participative or democratic in the way they make decisions, and others may not be. Essentially, decentralization and participative management are different matters.
Benefits and limitations of decentralization
Decentralization of authority has certain benefits and also some drawbacks. They are stated as under:
Benefits of decentralization
- Relieves top management of some burden of decision making.
- Gives managers more freedom and independence in decision making.
- Promotes development of general managers.
- Encourages assumption of authority and responsibility.
- Makes comparison of performance of different organizational units possible.
- Facilitates product diversification.
- Aids in adaptation to fast-changing environment.
Limitations of decentralization
- May result in loss of some top-level control.
- Following a uniform policy is difficult.
- Complexity of coordination of decentralized units may be enhanced.
- May be limited by inadequate control techniques.
- Can be limited by the availability of qualified managers.
- Involves considerable expenses for training managers.
- May not be favored by economies of scale of some operations.