Centralization

In any business organization, concentration of authority and

powers in the hands of top management is referred to as
centralization, everything which goes to reduce the
importance of subordinates role in an organization is known
as centralization. In such a type of office organization, the
authority and powers of each and every activity lies in the
hands of top few, say office manager and his immediate
subordinate, and other subordinates play the second and
subsequent fiddles. In fact, they are not to play any role.
Instead they asked to work and only work according to the
dictates of what the boss wants and orders.
In the words of Henry Fayol, Every thing that goes to
increase the importance of subordinates role is
decentralization, everything that goes to reduce it is
centralization.
 Definition
Under Centralization, the executive reserves the
authority with himself instead of delegating it to his
subordinates and ultimately reserves authority. But
where he is forced to delegate, he may do so by not
delegating adequate authority so that the subordinates
must approach him to arrive at the appropriate
decision.
According to Allen, Centralization is the systematic and
consistent reservation of authority at central points
within an organization.
Centralization, according to Fayol, It is that organization
where the role of the subordinates is reduced.
 Characteristics of Centralization
i. Almost all the authority to take decision is
kept reserved at top level.
ii. The role of the subordinates gets no
importance and their main job is to
implement the decisions.
iii. Process of delegation of authority is issued
to minimum.
iv. Distance between the place of work and the
place where decision are taken.
 Advantages of Centralization
Independent Set-up: Under a centralized set-up the superiors
remain free because of the little role of the subordinates, thereby,
that they do not depend upon their subordinates.
Less Skilled Subordinates: An enterprise running on the lines of
centralization need not have highly skilled subordinates. It results in
the economy of wages and salaries.
Personal leadership Centralization encourages and permit
personal leadership. The introduction of personal leadership
facilitates quick action, aggressive marketing and attainment of pin-
pointed objective or purpose,
Better co-ordination Centralization facilitate better coordination
among various operations. Direct control and supervision are
facilitated which results in less likelihood of conflict of authority and
duplication of work.
 Cont.
Specialization. Specialization of work as well as process and
handling of the work by the staff who has specialized in the work he
is handling are a few of the meaningful advantages of specialization.
Reduced costThe standardized procedure and method helps in
considerably reduction of office cost. Office cost is reduced as it
does not emphasizes on more specialists, and more departmental
machines and equipment.
No duplication of work. Centralized personal leadership, uniformity
of activities and specialization leave no scope for duplication of
work in the office. Thus extra labor and extra cost involved in
duplication is avoided and economy is ensured.
Quick decision. For taking advantage of rare opportunities coming
in the way, it is necessary that decision should be quickly taken lest
the opportunity so available may be slipped away. Centralized office
organization helps in such a quick decision.
 Cont.
Effective control. Uniformity in activities, specialization and
standardization facilitates greater degree or supervision,
effective co-ordination, self and departmental integration
and thus ensure effective control.
Uniformity of activities. Obviously when centralized, the
activities will be either in the hand of one individual or a
few one but under his (one) direct, control. This will result
into uniformity of activities and thereby ensuring uniform
decision and uniform process.
Greater flexibility. In case of any emergency arising the
uniformity of activities help in adjusting the activities,
procedure and decisions taken. This adjustment ensures
flexibility the opportunity for which is available in
centralized office organization in greater degree.
 Disadvantages of Centralization
Delay in work Centralization creates loss of man-hours
and delay in performance of work because of transmission
of records from and to the central control room. Quick
decision is not possible which also results delay in office
work.
Remote controlBetter supervision is not possible as the
executives are under heavy pressure of work. Slackness in
work is developed in the absence of better control and
supervision.
No SecrecySecrecy is not possible in centralized set up
organization because here orders and decisions flow from
one place and are conveyed to all.
No special attentionIn centralization no special attention
is given to special work as all works are done at one place.
 Cont.
Excessive Work-load for Top Executives: Since all the
decisions are taken at the level of the superiors, their
workload increase, and consequently solid decisions cannot
be taken.
Low motivation and commitment: - When employees have
the authority to make decision, naturally they will be de-
motivated at work and their commitment decreases, their
moral will be low.
Delayed decision: - Top level management will be
overloaded by decision making and decisions cannot be
taken at right time.
Industrial Disputes: Because of the distance between the
place of work and the place where decisions are taken, the
superiors fail to understand the problems of the
subordinates. It results in industrial disputes.
 Cont.
Decrease in Initiative: Because of the lack of authority
the subordinates pay no heed to the problems
appearing in their work sphere, and nor do they try to
understand them. Them inevitable kills their initiative.
Diversification Impossible: Centralization and
diversification are at variance with each other. It means
that it is impossible to find them both together.
Problem of Communication: Under centralization the
managers in the top hierarchy face difficulty in
collecting the information which is so essential for
taking decisions. Incidentally, the information is
available at the lower level and the decisions are taken
at the top level.
 Decentralization
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.
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.
 Definitions
In the words of Satya Saran Chatterjee
"decentralization means pushing down of
authority and power of decision making to lower
levels of organization".
Henry Fayol define that everything that goes to
increase the importance of the subordinates role
is decentralization He obviously was referring to
division of authority which certainly is the
essence of decentralization.
E.F.L Breech has rightly put it as the pattern of
responsibilities resulting from delegation.
 Characteristics of Decentralization
I. It is an extended from of delegation
II. It gives importance to the role of the subordinates
III. This is a process applicable to the entire
organization
IV. It reduce the work-load of the managers in the top
hierarchy
V. Under it decisions are taken by those who
implement them
VI. Under it along with authority, responsibility is also
transferred.
 Advantages of Decentralization
Diversification of activities: Decentralization reduces
the burden of the chief executives with making routine
decisions. They can easily devote the time available for
important activities such as diversification of products,
raising necessary finance, obtaining licenses and
starting new lines of production and solving crucial
problems of the business concern, while less important
and routine may be left to the middle and supervisory
levels.
Improvement of morale: Decentralization helps
improvement of managerial ability which leads to an
increase in their morale and this results in a higher
productivity.
 Cont.
Satisfaction of human needs: Decentralization is an important tool
for satisfying human needs of power, independence, status and
prestige. This satisfaction helps in building a cadre of satisfied
managers, who feel their responsibility towards companys work.
Quick and wise decision possible: Since decision-making authority
is as near as possible to the place where action takes place, those
having this authority can make reasonably accurate, wiser and
timely decisions because they are well aware of the realities of the
situation. Decentralization also minimizes the delay in
communicating information.
Development of the Managerial Personnel: As the business grows
in size, it requires the services of a large number of managers and
here decentralization provides a training ground for the would-be
managers. The managers learn by experience within the
organization concerned.
 Cont.
Reduces the Burden of Top Executives: It frees the top managers
from the burden of taking too many operating decisions. This enables
specialization and also permits the top managers to think for the
future and make plans accordingly.
Facilitates Diversification: Diversification of products or markets is
possible only by departmentalization. Without decentralization,
departmentalization is meaningless and practically impossible.
Develops the Quality of Managers: The executives will get training
and also opportunities to develop their talents.
Flexibility: It permits the enterprise to move quickly and there will be
more flexibility in meeting competition because prompt and spot
decisions are possible.
Increase Initiative: Because of the lack of adequate authority the
subordinates do not pay attention to the problems confronting them
in their work area and nor do they try to understand them. Under
decentralization they have sufficient time to understand the problem
and find the solution.
 Cont.
Improves Motivation: Decentralization provides more
chances for the executives to exercise initiative without
any undue interference from the top executive. This
improves the morale of the employees and motivate
them for peak performance.
Secures Better Co-ordination: As self-sufficient
departments are established with necessary service
functions, all the activities are coordinated at the
departmental level.
Ensures Effective Control: It is comparatively easy to
measure the performance of the operations at the
department level. This will lead to effective control.
 Disadvantages of Decentralization
Lack of Uniformity: There shall not be uniformity in policies and
actions, since each manager will form his own genius in designing
them.
Unsuitable for Small Firms: Departmentalization is completely
unsuitable for small firms as it involves high operating costs.
Reliance on the Manager: Decentralized organization has to place
undue reliance on the efficiency of the divisional managers. If they
do not have enough skill or competence to take appropriate
decisions, the enterprise has to incur heavy losses due to their
faulty decisions.
Self Centered Attitude: Each department will tend to be self
centered ignoring the broader interests of other departments and
that of the entire firm.
 Cont.
More cost Decentralization is costly because it encourages
duplication of functions and equipments. As it is costly, it cannot be
adopted by small organizations.
No specialization Specialization suffers in decentralization
because everyone becomes jack-of-all-trades but master of none.
So specialization is affected.
Problem of Co-Ordination: Decentralization of authority creates
problems of co-ordination as authority lies dispersed widely
throughout the organization.
Require Qualified Personnel: Decentralization becomes useless
when there are no qualified and competent personnel.
Lack of control: The Superiors become slack after giving authority
to other people. Their careleness weakness the control in the
entire organization and everybody tends to be autocratic.
 Factors affecting decentralization
Size of the Organization size of the organization, is a major factor
influencing the decentralization. The size of the organization depends
on terms of sales number, plans, number of employees no. of
machines etc. The size of the organization depends on the largeness
of these factors and the requirement of decentralization accordingly.
Managerial Outlook: The extend of decentralization depends
primarily on the outlook of the managers. If the managers happen to
be autocratic by nature, they will prefer to keep most of their
authority in their own hands. In that case, there will be a little
decentralization. On the contrary, if they have democratic outlook,
the extend of decentralization will be more.
Strategy and organization environment strategy and organization
environment influences market, technological environment,
competition. It is the basis of determining decentralization of
authority and centralization of authority.
 Cont.
History of organization: An organization which expands from within
has more centralization. For e.g. Henry Ford made most of the
decisions for Ford Motors. However, an organization which expands
with the help of business combinations has more decentralization.
Availability of Competent Subordinates: If more efficient
subordinates are available, then there will be more decentralization.
However, if there is a shortage of efficient managers then there will
be more centralization.
Control Systems: If there is a good control system in the
organization, then there will be more decentralization. This is
because authority cannot be decentralized and delegated without
proper control techniques.
Uniformity of Policy: When there is no need for uniformity of policy,
high degree of decentralization is possible. On the other hand, if the
company desires to obtain uniform policy, centralized authority is
the easiest road to attain it.
 Cont.
Business Dynamics: The dynamic character also vitally
affects the degree to which authority may be
decentralized. If the business is growing fast,
decentralization becomes necessary. However, this
factor also depends upon the availability of competent
managers.
Riskiness of Decisions: If the number of decisions
involving risk is more, there will be a less tendancy
towards decentralization on the part of top managers.
If , However, on the contrary most of the decisions are
without any risk the extend of decentralization will be
more.
Difference Between Centralization and
Decentralization
Basis for Comparison Centralization Decentralization

The retention of powers The dissemination of

and authority with authority, responsibility
respect to planning and and accountability to the
Meaning
decisions, with the top various management
management, is known levels, is known as
as Centralization. Decentralization.

Systematic and
Systematic dispersal of
Involves consistent reservation of
authority.
authority.

Communication Flow Vertical Open and Free

 Cont.
Basis for
Centralization Decentralization
Comparison

Decision Making Slow Comparatively faster

Proper coordination and Sharing of burden and

Advantage
Leadership responsibility
Multiple persons have
Lies with the top
Power of decision making the power of decision
management.
making.
Inadequate control over Considerable control over
Reasons
the organization the organization

Best suited for Small sized organization Large sized organization

 Difference Between Delegation and
Decentralization
Basis for Comparison Delegation
Delegation means handing
over an authority from one
Meaning
person of high level to the
person of low level.
What it is? Technique of management
Superiors are accountable
Accountability for the acts done by
subordinates.
Decentralization
Decentralization is the final
outcome achieved, when
the delegation of authority
is performed systematically
and repeatedly to the
lowest level.
Philosophy of
management.
Department heads are
accountable for the acts of
the concerned
department.
 Cont.
Basis for Comparison Delegation
Yes, for all organization
Requirement delegation of authority is
very necessary.
Subordinates do not have
Liberty of Work
full liberty.
The ultimate control is the
Control
hands of superior.
Creates superior-
Relationship
subordinate relationship.
Decentralization
No, it is an optional
philosophy which may or
may not be adopted by the
organization.
A substantial amount of
freedom is there.
The overall control vests
with top management and
delegates authority for day
to day control to
departmental heads.
A step towards creation of
semi-autonomous units.