The meaning of decentralization is the process of transferring the control of any central authority to several other local offices, or departments. The concept of decentralization is applicable in many spheres such as the government, organizations, data, etc. The digital cryptocurrency market is also based on the decentralized technology called the blockchain. By decentralizing the authority, the level moves from a single point to multiple points. In a decentralized model, the system allows lower levels in the hierarchy to make decisions. An example of decentralization is any fast food franchise where each franchised restaurant has the control and responsibility of its own operations.
This article will look closely at what is centralization and decentralization at their core. Along with going through some merits and demerits of centralization and decentralization.
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With the disruptive market in the digital era and the internet of things, decision-making is no longer the prerogative of top management only. The management functions have become extremely professional, and the globalization of businesses has made decentralization an obvious need for the growth of a company. You can choose if the decentralization model suits your business or organization once you go through the merits and demerits of decentralization.
Efficient during emergencies - In emergencies, decentralization is the best-suited option. For example, if sales are declining, using resources more productively, cutting costs, dethroning a competitor, etc. Decentralization takes off the burden from the managers, and there is not one person who is held responsible for everything.
Coordinating work made easy - With decentralization, coordinating work and keeping all activities on track is very efficient. Since the decision-making authority is closer to employees, quicker decisions can be made. These decisions are often wiser and more accurate too.
Activities are diversified - With decentralization, routine decisions are no longer burdensome for chief executives as they can be left to middle and supervisory level management. The chief executives can better concentrate on important business goals like diversification of products, starting new lines of production, etc.
Development of new managers - A growing business needs a larger number of managers, and decentralization helps in providing a training ground for the would-be managers.
Improved morale and productivity - With the development of managerial capabilities in a decentralized model, the morale of personnel also increases, which in turn results in improved productivity.
Increase in community benefits - Decentralization may result in an improvement in the social net product, which is separate from benefit to the company. These general benefits could come in the form of more opportunities for constructive individual participation, freedom of actions, and less social hierarchical structure.
Decentralization comes with its own set of challenges and limitations and it might not apply in all circumstances. Some of the demerits of decentralization are:
External factors such as company-wide strikes can make decentralization impossible.
There is an increase in administrative expenses since you need skilled managers at many levels who are highly-paid.
There is a lack of uniformity across various departments as each manager will make his/her own policies based on his insight and capabilities.
For small firms, departmentalization is of no use as the operating expenses supersede any benefits that one might derive from it.
Decentralization is as efficient as the manager in charge of that department. If a manager lacks the skill or competence for taking the right decision, the whole organization might have to incur heavy losses.
There is a risk of each department getting self-centered and not bothering about the broader interest of the entire firm.
Most small enterprises operate in a centralized model where the power of planning activities and making decisions about them lies with a central authority. There is a headquarters where all decision-making processes happen which sends commands to other main offices for their operations. Headquarter is the place where the executives and specialists reside.
Management of a firm or undertaking can decide to go for a centralized model of decision-making due to the following benefits it brings:
Standardization - Coordination becomes easy with centralized processes as the policies and procedures are standardized. There is a uniformity of action in a standardized process.
Facilitates integration - Common programs in a centralized model help integrate the operations of all the departments of an enterprise. This makes the process of achieving common objectives simpler.
Decreased expenses - Office and authoritative expenses are saved when the organization is held together by a centralized process. There is a single head office for the chief officers and no need for conveying several offices or different branches. Since the important decisions are made at the head office, the organization does not need to spend on hiring experts for various departments.
Quality decisions - The top management is an experienced lot who have a clear vision of the company goals. The decisions they take are mature and are geared towards the overall benefit of the company.
Simplicity - The power structure of a firm is simpler to understand in a centralized model of management. The staff of the organization is not confused about who has the power to decide, and there is no question of a conflict in such management.
Centralization is good up to a certain extent and in select circumstances. Beyond that, a centralized model starts stunting the growth of the company by making day to day working difficult. Some of the major pitfalls of a centralized management system are:
Overload on the upper-level management - If top management has to oversee all the policies and procedures of the company, they are left with little time for more important functions that could benefit the company at large.
Imbalanced organizational structure - If the top level is loaded with positions while the lower levels are emptier, it creates an imbalance in the firm.
Work is deferred - Since all decision-making lies at the head office, the work gets deferred in passing records to and from the headquarter. If the records are not handed off in time, it results in loss of working hours and in turn monetary loss for the company.
Individual initiative gets curbed - With the entire organization revolving around top management, the individual initiates get destroyed. The second line of command in an organization can not grow in such a scenario.
Dictatorial form of administration - The leadership is quite bureaucratic in a centralized management model. Employees are only following the directives of the top management and implementing them. This leads to a disconnect between the employees and top management since the management is only directing and not implementing. That is why the top management can not understand when the employees face problems in implementing the directives properly.
Q1. What are the Different Types of Administrative Decentralization?
Ans: There are mainly 3 types of administrative decentralization:
Deconcentration - This is the weakest form of decentralization. In this, there is a redistribution of the decision-making authorities (includes management and financial responsibilities) amongst different levels of the central government.
Delegation -Delegation is used to transfer the administration of public functions and decision-making from the central government to semi-autonomous organizations. The central government does not control these organizations completely, but they are accountable to the central government. Few examples are sub-national housing authorities, regional development corporations, etc.
Devolution - In this system, the local governments are demarcated by clear and legal geographical boundaries. The local authorities exercise command and perform public functions in these well-defined regions. This type of decentralization underlines most political decentralizations.
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Q2. What is Fiscal Decentralization?
Ans: Allocation of financial resources and financial responsibility is the central part of decentralization. The local governments and private organizations need adequate revenues to carry out their public functions. These revenues could either be transferred from the government or raised locally. Fiscal decentralization is the transfer of functions from the central government to local organizations for making financial allocations and levy taxes. A complete fiscal decentralization can happen only under political and administrative decentralization. There are many forms that fiscal decentralization can have, as described below:
Cost recovery through user charges.
Expanding local revenue employing sales or property taxes.
Using loan guarantees to mobilize national or local government resources.