PRINCIPLES OF MANAGEMENT

SEMINAR
TOPIC: CENTRALIZATION AND DECENTRALIZATION

CENTRALIZATION AND DECENTRALIZATION

When the power to take decision rests with the top management it is called as ‘Centralization’.
When the power to take decision is given to the person performing the job it is called as
‘Decentralization’. An organization must not be completely centralized or decentralized, there
should be a match between the two depending upon the size, nature and location of business. The
top management must keep the authority to take important decisions of the organization but
adequate authority must be delegated to the lower level employees to take the department level
decisions. This will facilitate the proper and timely functioning in the organization. And the top
management will be free from extra burden of taking and handling each and every affair of the
organization. All the lower level problems will be handled at that level only, this also gives a
feeling of superiority to the lower level employees which motivates them to perform better.
DEFINITION
1. Louis A. Allen, “Centralization is the systematic and consistent reservation of authority at
central points within the organization”.
2. Louis A. Allen, “Decentralization refers to the systematic effort to delegate to the lowest
levels all authority except that which can only be exercised at central points”.
CENTRALIZATION
ADVANTAGES OF CENTRALIZATION
1. Centralization is convenient regarding coordination with different individuals and units.
2. Probably, the higher management might be extra professional and experienced that may lead
to effective and efficient decision making.
3. Regarding decision-making, the higher management possesses a broad perception as per
various situations.
4. It can help avoid the duplication of efforts performed different units across the organization.
5. The leadership that seems strong and efficient is promoted.
IMPORTANCE OF CENTRALIZATION
1. It facilitates greater uniformity of action throughout the organization
2. It provides better opportunities for development of personal leadership
3. It facilitates integration of efforts and unites total operations of an enterprise

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4. It helps in quick decision making which in turn facilitates effective handling of emergency
situations
5. It makes control easier
6. It allows flexibility and rapidity of adjustments to changing conditions
DISADVANTAGES OF CENTRALIZATION
1. It increases the burden of the top executives with routine functions and hamper their
development
2. It affects the initiative of the lower level management people
3. It does not provide scope for employee participation in decision making
4. There is no scope for specialization because an individual will have to look after many
functions at a time.
DECENTRALIZATION
ADVANTAGES OF DECENTRALIZATION
1. The concentration of top managers stays on the major issues.
2. The job duties of lower-level staff are given the opportunity to improve decision-making.
3. The decision-making process can become faster.
4. The lower-level professionals might know the in-depth condition of the problem, which may
result in better decision making regarding the position of the lower-level employees.
5. Similar independent units or departments are merged as a division that allows a convenient
measurement of regular outcomes
6. If the organization is extra-large, whereas the higher-level managers don’t have such
knowledge or additional time to sort out all the matters.
7. A few operations are scattered geographically.
8. Top managers are not capable of surviving with complex technology.
IMPORTANCE OF DECENTRALIZATION
1. It is a good philosophy to motivate the mangers so that it results in better job satisfaction.
2. It increases the morale of lower level managers by satisfying their need for participation and
independence.
3. It helps to meet the challenges and complexities of big enterprises and provides scope for
growth and development.

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4. It promotes quick decision making and avoids confusion
5. It provides training for future managers by giving them an opportunity to develop their skills.
6. It facilitates effective communication, because in decentralization set up span is wider with a
few levels of organization.
7. It ensures effective control and supervision. As all activities are coordinated at the lower
level, any sort of adjustment can be made at lower level itself. Thus, it gives complete
freedom of action.
8. It gives a relief to the top management from concentrating on day-to-day affairs and permits
them to concentrate on developmental activities.
DISADVANTAGES OF DECENTRALIZATION
1. It is costly because it requires competent people to be employed to accept authority. The
success of a unit depends on the ability and capability of the head.
2. It may lead to inconsistencies, when every department or division does not adopt procedures
uniformly.
3. It creates a problem of among various units or departments.
4. Differences of opinions of top management and unit head often lead to conflicts.
5. Among the department’s hostility may be developed due to severe competition. This will
hamper the sharing of knowledge and resources.
DIFFERENCE BETWEEN CENTRALIZATION AND DECENTRALIZATION
BASIS FOR CENTRALIZATION DECENTRALIZATION
COMPARISON

Meaning The retention of powers and The dissemination of authority,

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

Involves Systematic and consistent Systematic dispersal of authority.

reservation of authority.

Communication Vertical Open and Free

Flow

Decision Making Slow Comparatively faster

Advantage Proper coordination and Sharing of burden and responsibility

Leadership

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Power of decision Lies with the top management. Multiple persons have the power of
making decision making.

Implemented Inadequate control over the Considerable control over the

when organization organization

Best suited for Small sized organization Large sized organization

EXAMPLE
1. 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. Decentralization is wider in scope and
the subordinate’s responsibility increase in this case.
2. 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.
FACTORS DETERMINING THE DEGREE OF DECENTRALIZATION
The degree of decentralization is determined by a large number of factors and some of them are
briefed below:
1. Size and Complexity of the Organization: The larger the size of the organization, more
urgent is the need for decentralization. For taking quick decisions and for reducing cost
authority should be delegated whenever feasible.
2. Availability of Competent Managers: If competent managers are available, the scope for
decentralization is more.
3. Top Management Outlook: When top management believes in individual, freedom and
initiative, the scope for decentralization is more. If top management is conservative and
wants to maintain strict control, it is likely to concentrate authority.
4. Control Techniques: If better control techniques are used, the scope for decentralization is
more. Absence of control techniques reduces the chances for decentralization.
5. Planning Pattern: When standing plans are properly laid down, the chance for
decentralization is high.
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6. Rate of Change in the Organization: If the organization is fast developing and is facing the
problem of expansion and diversification, then there is more scope for decentralization.
However, the degree of decentralization in an organization will vary with time and
circumstances. It will also vary for the different units of the organization.
7. Geographical Dispersion: In case of organizations having dispersed plants and offices,
decentralization is more beneficial. The remote control from headquarters may prove to be
highly ineffective as top management people are not aware of the local conditions and
problems.
8. Technical Complexity of Tasks: Technology has increased the complexity of tasks and
placed greater reliance on knowledge-based influence. It is virtually impossible for the top-
level executives to sit through technical matters comfortably without consulting a responsible
research scientist. An organization that continues to take up highly technical projects has to
funnel authority to the centers of knowledge inevitably.
9. Time Frame of Decisions: In order to survive in a highly competitive world, organizations
are forced to sit through problems quickly and encash the opportunities wherever they are
available. Under decentralization decisions are made closer to the scene of action and there is
no need to refer decisions up through the hierarchy.
10. Views of Subordinates: The willingness of the subordinates to take on additional
responsibilities is another factor influencing the degree of decentralization. Generally
speaking, decentralization is to be preferred when subordinates are educated, talented and
possess requisite skills to take on additional responsibilities. Decentralization is also
advisable when the acceptance of the decision by subordinates is important and especially
when the subordinate’s function independently in implementing the decision in the
organization.
FACTORS INFLUENCING DECENTRALIZATION AND CENTRALIZATION
The starting point of decentralization will be centralization and the extent of decentralization is
governed by the centralized authority depending upon the following factors:
1. Relief of Excessive Workload: Top management can be relieved from routine work requiring
regular monitoring and cross-checking. Instead, decentralization confers these responsibilities on
their subordinates and can receive periodic updates from them on budgeting and reviewing
finances or operations via occasional meetings.
2. Prompt Decision-Making: Subordinates can make quick and prompt decisions through
decentralization. The decision-making process is not just restricted to their superiors but also to
their subordinates. This can lead to quick and prompt business decisions on situations closest to
the subordinates.
3. Facilitates Growth: Decentralization facilitates growth and expansion of a business involved
in production or servicing a variety of products/services. Every product/service can be given
individual and specialised attention with (specialised) subordinates obtaining the freedom to
decide and act (though under the advice of their superiors).

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4. Better Control: Superiors under decentralization do not keep away from business operations
with subordinates granted with few powers. The decisions of subordinates are usually confirmed
and conveyed to the superiors implying better control over the operations. The superiors identify
some control standards for the subordinates to measure their success in finding /implementing
solutions to specific issues or problems during operations.
5. Promotes Initiative and Creativity: Decentralization gives an opportunity to subordinates to
learn by taking initiatives. This creates a positive working climate where they are given the
freedom, to make decision, to use judgement and to act. This may instil competitive atmosphere,
better participation and encourages training and development of new ideas, approaches and
methods.
6. Improved Teamwork: In decentralization the superiors and subordinates share the decision-
making process with subordinates monitoring all activities and taking decisions under the
guidance of their superiors. This can lead to integration of all superiors/subordinates as a team
and develop team spirit among them
EFFECTIVE DECENTRALIZATION
To ensure effective decentralization, the following things need to be put in place:
1. Establish Appropriate Centralization: To get quick and effective results, it is necessary to
establish central points of control. The central authority ensures close coordination between
various operating units and secures maximum total performance. Without the strong cement
of centralized planning, organization, coordination and control the diversified company is ‘in
danger of coming apart at the seams’.
2. Development of Managers: Effective decentralization requires managers to plan, organise
and direct activities fairly independently. They need to do things on their own, committing
mistakes and learning from them continually. Top management should allow people at
middle and lower levels to handle things independently. Managers develop skills and
competencies required to run the show on their own, without any interference from ‘upstairs’
3. Establish Adequate Controls: Decentralization demands an appropriate control system that
will distribute the resources, assign costs fairly and indisputably to the operating unit that
utilises or incurs them. Budgets can be prepared and standards devised to see whether various
units are going in the desired direction. To ensure accountability, managers at all levels
should be allowed to participate in budget formulation. This would not only make managers
feel responsibility but also ensure an objective standard to measure performance and reward
the same suitably.

SUITABILITY OF CENTRALIZATION
After having studied the merits and demerits of centralization we may conclude that it is suitable
in respect of enterprises which are on small scale or where the subordinate managers are not
competent.

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SUITABILITY OF DECENTRALIZATION
After having studied the merits and demerits of decentralization we can conclude that it has only
advantages which are manifold. The demerits are, simply because of the lack of understanding of
its principles. But it cannot be denied that it is a costly arrangement. Therefore, it is very useful
in those enterprises where the organization is very big and complex, and competent and efficient
managers are available.
EXAMPLES OF CENTRALIZATION
1. Military
2. Government
3. Microsoft
EXAMPLES OF DECENTRALIZATION
1. Internet
2. Linux
EXAMPLES OF BOTH CENTRALRALIZATION AND DECENTRALIZATION
1. Facebook
2. Supermarket
3. eBay
CONCLUSION
If we look at decentralization and centralization collectively, it can be said that neither is possible
in toto. It means that the more important decisions should be taken at the top hierarchy leaving
decisions of daily routine and decisions of less important nature to the middle level and lower
level managers. In addition to it complete arrangement for coordination and control should be
made at the central level. Decentralization is not necessarily good, nor is centralization
necessarily bad. Both have advantages and disadvantages of different kinds in different situa-
tions, and the most appropriate balance between them in something that each organization must
discover for itself.
REFERENCE
1. Principles and Practice of Management - LM Prasad
2. Business Management – Gupta CB
3. https://keydifferences.com
4. https://www.businessmanagementideas.com