In any organization, there are two ways of operation: centralization and decentralization. There is a hierarchy of formal authority in centralization for making all the organization's important decisions. Decentralization means that decision-making is delegated to the lower levels of the organization.
Before heading onto the advantages and disadvantages of Centralization and Decentralization, one needs to understand properly, what do the terms- Centralization and Decentralization are. Only then, you can fully understand the merits and demerits of Centralization and Decentralization. As they both help us determine the fiscal situation of a firm or country.
So, let us now understand what the terms centralization and decentralization mean in the coming section.
What is Centralization?
Centralization is an organizational structure that gives the ability of decision-making responsibilities to higher management. Few selected members are given the authority to create and determine strategies and goals. It also clarifies the motives and mission of the organization, which must follow to achieve its goals.
In centralization, the type of organizational structure allows higher management to create the rules including procedures that are used to communicate with lower-level employees. Lower-level employees have to obey the rules made by the higher management organization without doubting the rules and regulations.
What is Decentralization?
Decentralization is an organizational structure where the delegates are assigned to manage the organization. They are selected by the higher authorities. The selected candidates are mostly their middle and lower subordinates.
The decentralization type of management helps to organize daily duties. They also take part in minor decision-making. A lot of responsibilities are given to the middle and lower levels subordinates.
Because of the well-distributed job roles, the higher management authorities get a chance to focus more on major business decisions.
Advantages and Disadvantages of Centralization
There are numerous advantages and disadvantages of Centralization. Let us learn them in detail below.
Merits of centralization:
Centralization has a very important role in providing a disciplined environment in an organization. The higher level of the management doesn’t only look after taking essential decisions for the organization, they are also the hearing aid for the employees when they face problems regarding work. Whenever the employees of middle to lower-level management face a concern regarding work and need a few changes, they can go to the higher-level management authorities. Centralization makes the decision-making, problem-solving matters easy as it helps them to keep them in proper order and all the final decisions are taken by the higher management authority.
All the middle to lower-level employees is the workers under higher management authorities. Whatever works they are given by higher-level management, they keep a check on them because every lower lever worker is answerable to higher authorities. So, in fear of supervision, they tend to do their daily duties properly. It is one of the reasons for a better quality of work with high productivity.
The higher-level of management has more experience than other people. They tend to have more business experience and knowledge. They have the idea of how to deal with specific situations and how to not. With their knowledge based on their experience, they tend to be better decision-makers for the centralized organization.
Every organization be it centralized or other, they have a plan or a vision that they want to see accomplished in the coming years. For the success in the future, it can’t be expected from the efforts but if they have centralized or higher-level authorities which have power in the hand for deciding for the company’s good. They can decide on their vision for the future with full focus. They will make the workers of the company achieve the goals for the company.
Whenever more people are involved in the decision-making process, more time will increase the decision-making process. And it will tend to make it slow because more people shall give more opinions and views about certain objectives. So, having a centralized organization will have only the top management for decision-making while the employees will be responsible for only work, not for decision-making.
In a centralized organization, the higher authorities are those who started the business. So, they save the money for hiring any other business experts for the decision they need to make.
Demerits of Centralization:
The lower-level authorities work under the guidance of their superiors, who are eligible to take any decisions whenever required.
They don’t have the exposure to show their skills as they have to follow the rules and orders by the higher authorities. They feel demotivated while working, as they have no chance of getting a promotion.
In a centralized organization, the decision-maker has the power. Employees tend to work under them according to their rules. In such situations, their work outcome is not creative. With the controlled nature of the centralized organization, their productivity suffers the most.
As the worker is constantly working under rules and supervision via higher authorities, they get the feeling of slaves rather than organization employees. This leads to disloyalty, and they tend to leave when they receive a better opportunity.
Employees at lower levels need to depend on the decision made by top management, which decreases productivity. They tend to waste time on the decision-making processes by the higher authorities.
Merits and Demerits of Decentralization
There are several advantages and disadvantages of fiscal decentralization. Decentralized decision-making advantages and disadvantages also, helps us to understand the correct way to approach any fiscal problem and take adequate decisions. So without any further ado, let's find out the advantages and disadvantages of Decentralization.
Merits of Decentralization:
Decentralization allows middle to lower authorities to participate in the decision-making processes. It helps to reduce the pressure of higher authorities. Higher authorities can easily focus on more important works rather than on minor decision-making processes.
Decentralization allows the employee to show their creativity and skills. It helps the employee for their power and independence.
In a decentralized organization, the decision-making process is quite quicker than centralization. From the middle to the lower level, employees are allowed to make minor decisions. Based on the situation, they can take ownership of the required action and implementation.
Decentralization motivates their employees as there are chances to show their skills without the interference of top management. This allows improving the quality of work.
Demerits of Decentralization
In a decentralized organization, many employees are required to be hired according to their work experiences and knowledge. This criterion increases the cost of the company, as more money is spent to hire the most eligible people for the job profile.
In decentralization, there is no uniformity because every manager has their way to make people work.
Decentralization is not effective for building small firms. It is effective because it involves a high amount of cost to run the organization.
Centralization and decentralization are opposite ways to transfer decision-making power and to alter the organizational structures.
There must be a good balance between centralization and decentralization of authority and power. It is necessary to avoid extremes of centralization and decentralization.
Centralization obtains consistent methods and activities and uses closer powers to work units. It can successfully handle the crisis immediately. Decentralization guarantees the dynamic work of the staff and stimulates their enthusiasm. The true realization of joint relies on a reasonable combination of centralization and decentralization. No complete centralization or complete decentralization was found in the association. It only exists in principle. Therefore, a legitimate blend of the two is required. Centralization and decentralization are tangled points. Nor is it a reliable and correct arrangement. Professional issues, such as server organization, and non-technical issues, such as authoritative structures, can be combined or dispersed. Both topics are related to making changes. When introducing such unavoidable improvements, we recommend that you consider the following core values: understanding the clear problem you are understanding; understanding your inspiration for introducing improvements; Incorporate as much as is possible for the time being; recognize that, like any new administration, it requires careful planning; and, most importantly, listen to your clients.
FAQs on Advantages and Disadvantages of Centralization and Decentralization
1. What is the Difference Between Centralized and Decentralized?
The differences between centralized and decentralized are:
Centralization refers to the concentration of power and authority in the hands of top management. Decentralization refers to the dispersal of power and authority from the top level to lower-level management.
Decentralized allows middle to lower-level managers to take minor decisions which reduces the pressure on top management. While centralized decision-making is only done by top management people.
Centralization is best for small firms, while decentralization is best for large firms.
Centralization is more coordinated than decentralization.
The systematic and consistent concentration of authority at key points is known as centralization. Decentralization, on the other hand, is the systematic delegation of authority within an organization.
When an organization lacks control over its management, it implements centralization, and when it has complete control over its management, it implements decentralization.
The centralized organization has formal communication. Decentralization, on the other hand, allows communication to stretch in all directions.
Centralization gives powers only to higher authorities, while decentralization allows the power to middle and lower authorities as well.
2. What is Beneficial Centralization or Decentralization?
Every organization has its pros and cons similarly, decentralization and centralization have some good and bad effects. So, let's discuss how centralization is beneficial for any business.
In centralization, the organization depends on one person for all the decisions, which are beneficial for small firms. While in a decentralized organization, it does not depend on one single person for decision-making. It is ideal for large-scale businesses.
According to the type of work taking place in an organization, the authorities select the most risk-free pattern methods for its firm. In a small firm, fewer employees are required for operating and in decentralization, large-scale employees are required.
3. Why is decentralization treated like an expensive process?
In decentralized businesses, administration costs tend to rise. Every department aims to be self-sufficient when it comes to the employment of trained individuals and the availability of physical facilities. As a result, facilities are underutilized, and functions are duplicated. Because of these characteristics, decentralization is only appropriate for large organizations.
4. Does the size of the organization influence whether the organization has a centralized or decentralized structure?
Companies of all sizes may have centralized and decentralized decision-making tendencies. For example, while Apple may give its stores a great deal of flexibility to meet customer wants, research and development will be reserved for the company's top executives.
5. What are centralization and decentralization in an organization?
The different modes of operation in an organization are centralization and decentralization. The decision-making authority in a centralized organization is held by those in higher management positions. Furthermore, management disperses decision-making authority across the organization and brings it closer to the source of action and information through decentralization.
6. Write a short note on Centralization and Decentralization.
One of the hottest topics is centralization and decentralization. Some people believe that centralization is better, whereas others believe that decentralization is beneficial. People used to conduct their businesses in a centralized manner in ancient times, but the situation has changed dramatically as a result of increased competition, which requires swift decision-making, and many businesses have opted for decentralization.
As absolute centralization or decentralization are not achievable, the majority of organizations now have both aspects. Complete centralization in an organization is not practical because it implies that the top echelon makes all the organization's decisions. Full decentralization, on the other hand, indicates that there is no control over the activities of subordinates. As a result, there should be a balance between the two.
We hope this article on the advantages and disadvantages of centralization and decentralization was helpful to the students. This is one of the important concepts. If you have any doubts or suggestions, let us know in the coming section below. We will be happy to help you.