Centralisation and Decentralisation

Advanced students of commerce and other disciplines often come across the terms centralisation and decentralisation in the course of study. These are generally socio-economic and political decisions and are impacted by reigning economic theories of an era. 

You must understand these terms thoroughly before you can proceed to the broader aspects of the Indian and other global economies.

Centralisation and Decentralisation Explained

Both these terms can also apply to any organisation, leaving aside broader economic scales. Simply put, centralisation happens when only the top management of an enterprise are involved in decision-making, creating strategies and setting goals. These individuals have all the powers vested in themselves and they alone control the fortunes of that enterprise.

Decentralisation is its polar opposite. Decision-making and other endeavours are delegated by the top management to subordinates, who in turn are the mid-tier management authorities. Delegation is the key to decentralisation. 

Once lower and mid-level management takes decisions which may impact an entire entity, employee empowerment enters the act. The mid-level employees and management have more at stake, and their attention and responsibilities increase automatically.

The primary difference between centralisation and decentralisation lies in how decision-making and strategy-shaping occurs in an organisation. There are various merits and demerits to these two opposing approaches, some of which are discussed below.

For advanced students: Find out how organisations used to work in India prior to 1991 and economic reforms. You will see a wider degree of decentralisation post-1991. Relate it to how the modern economic climate is shaping up. 

For foreign examples, you can study the economy of China and that of Venezuela during and post the presidency of Hugo Chavez.

Advantages of Centralisation

The merits of centralisation and decentralisation in management have been discussed by eminent economists for several decades. There are inherent advantages and disadvantages in both ideas. The primary elements in favour of centralisation are the following.

  1. There is greater uniformity in policy and procedures when an organisation is centralised. Several different departments have to work in conformity. There is a top-down approach in decision-making which creates no room for confusion.

  2. Centralisation has been effective in saving costs and unnecessary overheads since any overlapping or duplicate activities are eliminated. Given that cost-saving is one of the many targets of any organisation and that various companies approach the principles of management centralisation and decentralisation differently, it is a great advantage.

  3. The control on operations is outstanding in centralised entities because the mechanism of decision-making is in a single core. This reduces internal wastage and jettisons unwarranted activities.

  4. Lastly, centralised entities can recognise outstanding talent and enable preferred promotions or other sops to deserving employees. In decentralised companies, merit may go unrecognised.

Advantages of Decentralisation

When it comes to centralisation vs decentralisation, the latter approach boasts these advantages in its favour.

  1. Both mid and low-level management are involved in a decision-making process of a decentralised company. It boosts morale, helps employees and managers take independent calls on slippery real-world business situations and also helps delegation of duties.

  2. Very importantly, decentralisation improves the quality of management in any company. If there is rapid employee attrition in company ‘A’, for example, the blame often lies with the immediate management. Weeding out any problems is thus easier.

  3. There is enough data from research to suggest that decentralised companies take better decisions in crucial situations. The same idea is also true for an entire economy.

Task for Students:  Form 2 different groups among yourselves and pretend that Group A owns a centralised company while Group B has a decentralised entity. Start with Rs 1000 and try selling home-made lemonade, for example. 

You will have a tough time finding customers initially, so Vedantu suggests you approach people you know in your neighbourhood. Inform them you are participating in a real-world study for your knowledge.

You will likely get a taste of the difference between centralised and decentralised approaches within 1-2 week of ‘operations.’

Differences Between Centralisation and Decentralisation

To fully grasp the concept of centralised and decentralised entities, you must analyse them on level terms. To keep it simple, we have tabulated these elements of comparison.

Comparison Basis

Decentralisation

Centralisation

Information flow

Free flow in perfect conditions

Tends to be vertical and top-heavy

Meant for

Ideal for extremely large entities including PSUs

Ideal for smaller companies with smaller workforces

Speed of decision-making

Faster than centrally planned and organise companies & even economies

Tends to be slower

Number of people involved

Has a larger body of managers and decision makers, a prime character to settle the centralisation vs decentralisation debate. 

Fewer people involved in hands-on decision making

Stability

May tend to be unstable due to conflicts in personality and approach to business

Conformity is maintained as decision-making is confined to a select few

Employee motivation

Employees in decentralised operations tend to have better morale in theory. In real-life, that may not always be so

Motivation levels may appear deceptively low since employees may feel they have been ‘burdened’ with decisions

Day to day operations and burden-sharing

Decentralised entities tend to have better sharing of responsibility. This is a possible settlement to the debate on centralisation and decentralisation in management

One select group carries the burden, risks and responsibilities


Delegation versus Decentralisation

There is considerable difference between decentralisation and delegation. Only the prime elements of difference have been tabulated below.

Point of Comparison

Delegation

Decentralisation

Nature

Tends to be between certain individuals, usually between a manager and his/her subordinate

This is an enterprise-wide exercise and trickles down to the bottom-most departments

Control

The delegator or a manager retains control

Mostly rests with a specific department

Responsibility

The delegated remains accountable but ultimate responsibility lies with manager 

Responsibility is fixed at department levels 


For commerce Students: Track how the management of PSUs like Indian Oil Corporation Limited, SBI and National Thermal Power Corporation functions. Then compare it against how proprietary, private and partnership firms operate. 

It will be an exercise to identify real-world differences between delegation and decentralisation. You can also read up on the New Economic Policy (NEP) which came into existence after 1991 on our website, or access the study material via Vedantu app.

FAQ (Frequently Asked Questions)

1. Is Centralisation More Effective than Decentralisation?

It depends on the nature, operations and financial conditions of a firm. There is no blanket rule in place. Some firms function better under centralised command, others do not.

2. Is the Indian Economy Open to Decentralisation?

Certainly. India has a long history of decentralised business ventures as reflected in its growing IT and tourism sectors. Prior to 1991, the economy was largely centralised. Those days are long gone. Important schemes like ‘Make in India’ and ‘Stand up India’ are examples of decentralisation from the cabinet level.