Centralization and decentralization refer to the extent to which decision-making power is devolved in a business.
Business organizations where only a little of power is delegated tend to be centralized. Very few people at the top of the organizational structure including Chief Executive Officer (CEO) and Directors make all the decisions.
Business organizations where a lot of power is delegated to the lower-level employees are thought to be decentralized. This authority for decision-making is delegated to lower-level managers. Responsibilities for duties, power and authority are distributed to lower levels of the business
One of the most important arrangements that a business needs to make – regarding managing and controlling business operations – is to who makes decisions. This decision involves making a choice between being a centralized organization or a decentralized organization.
Centralization – Centralized organizational structure
Some companies are highly centralized and some decisions would be made at Head Office level and filtered down. This is called a centralized or top-down view of decision making.
Keeping important decision-making powers in the headquarters.
Centralized organization is one where decision-making power is held at center – the top level of the organizational structure and then passed down to lower levels in the hierarchy through the chain of command.
In a centralized structure, majority of important business decisions are done by a very small number of decision makers who are usually the senior management team. They retain decision-making authority and responsibility without consulting with other members of the organization.
Example 1: Many international franchise companies such as KFC, McDonald’s, Starbucks or Pizza Hut operate globally a centralized organization structure. It is done primarily to make sure that the Head Office controls what each franchised outlet in different parts of the world offers to customers. These famous franchise businesses need to make sure that their customers receive the same level of service and quality of products in every single one of their outlets.
Advantages of centralization include:
- Rapid decision-making. Top-level managers will not consult staff on decisions, therefore quick decision-making can take place. There will be a fixed set of rules, regulations and procedures in all areas of the business leaving no place for time-consuming discussions. That can help with implementing organizational changes.
- Facilitates coordination. Decisions and policies are consistent with organizational objectives throughout the organization. This gives all employees a better sense of direction, avoids duplication of activities and prevents any conflicts between business departments. Additionally, central buying of raw materials will allow for greater economies of scale.
- Greater use of specialist staff improves decision-making. Business decisions are made by senior managers, who are most qualified and experienced to lead the organization. Decision will be taken at the central office in the interest and for the benefit of the whole business, not just one division of it.
- Better control. Centralization will ensure tighter levels of control across different business functions allowing managers to have a better overview of what is happening in their organizations. This is particularly especially important in large businesses which can experience communication problems and repetition of tasks by different people or departments in the organization.
Disadvantages of centralization include:
- Overburdening of top management. Decision-makers will have added workload and stress when not consultation with other members of the business organization. Without delegating authority, the people in the center could face huge pressure for making important decisions.
- Inflexibility. Centralized businesses want to maintain the same image and product range in all areas to retain certain identity in all markets. When workers have very limited autonomy in making decisions, the firm becomes inflexible leading to poor responsiveness to changes in local markets.
- Slower communication. When a centralized group makes all the decisions, possible delays in decision-making will be quite common. This is simply due to the large number of decisions that the small group of top executives needs to make.
- Demotivating. Limited delegation, poor empowerment and lack of opportunities to be creative and simply follow the orders of the decision-makers may reduce worker motivation. Without making workers feel that they make a genuine contribution to the business, productivity will suffer as workers feel less valued when their talents are not full exploited.
Centralization and delegation
Delegation involves passing decision-making authority and responsibility to individuals in an organization to make decisions rather than everyone having to be told what to do by top managers in a hierarchical way.
With centralization there is minimum delegation to lower-level managers in other areas, departments and divisions of the business. All sections of the business follow the same procedures giving a feeling of uniformity and consistency of operations.
Decision-making powers for all important decisions are kept at the center of the organization. Head Office will exert considerable control over all operations.
In summary, decision-making power in a business organization can be either centralized at the top in the hands of a few people, or shared out among the workforce at lower level in the organizational structure. The extent to which authority is concentrated or diluted within the firm depends on several size of the organization, scale of importance of the decision, level of risk, corporate culture, management attitudes and competencies and use of Information Communication Technologies (ICT).
