In this article we will discuss about centralisation and decentralisation of authority as studied in Business Management. This article will further help you to learn about:
- Centralization and Decentralization
- What is Centralization and Decentralization
- Advantages of Centralization
- Centralisation and Decentralisation in Management
- Advantages and Disadvantages of Centralization and Decentralization
- Centralization in Management
Centralization and Decentralization
Centralization:
Centralization of authority refers to the concentration of decision making power at the top level of management. All important decisions are taken at the top level. Everything which goes to reduce the importance of subordinate is called centralization.
‘Centralization is the systematic and consistent reservation of authority at central points within the organization.’ – Louis A. Allen
Advantages of Centralization (Importance of Centralization):
Top management may prefer to reserve maximum authority with itself because of the following advantages:
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
4. It helps in quick decision making which in turn facilitates effective handling of emergency situations
5. It reduces wastages of efforts by avoiding duplication of work
6. It makes control easier
7. It allows flexibility and rapidity of adjustments to changing conditions
Disadvantages of Centralization:
(a) It increases the burden of the top executives with routine functions and hamper their development
(b) It affects the initiative of the lower level management people
(c) It does not provide scope for employee participation in decision making
(d) There is no scope for specialization because an individual will have to look after many functions at a time.
Decentralization:
It refers to the dispersal of decision making power to the lower level of the organization.
‘Decentralization refers to the systematic effort to delegate to the lowest levels all authority except that which can only be exercised at central points’. – Louis A. Allen
‘When authority is dispersed decentralization is present.’ – George Terry.
In large organizations it is not always possible for all activities to be organized from the centre. Hence, a certain amount of decentralization becomes necessary.
Advantages of Decentralization (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.
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:
a. 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.
b. It may lead to inconsistencies, when every department or division does not adopt procedures uniformly.
c. It creates a problem of among various units or departments.
d. Differences of opinions of top management and unit head often lead to conflicts.
e. Among the departments hostility may be developed due to severe competition. This will hamper the sharing of knowledge and resources.
f. Economies of scale may not be realized as each unit becomes small and independent.
By and large, decentralization is suitable for large scale organizations operating in different geographical areas or dealing with multiple products.
Factors Determining the Degree of Decentralization:
Centralization and decentralization are two extremes. Any of these cannot be exclusively adopted by any organization. In any organization there is a lesser or greater 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
2. History of the organization
3. Availability of competent managers
4. Top management outlook
5. Control techniques
6. Planning pattern
7. Rate of change in the organization
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. History of the Organization:
Organizations grown internally will have a tendency to retain their original structure and to keep authority centralized. On the other hand, organizations which have diversified through amalgamation or absorption show a definite tendency to retain decentralized authority.
3. Availability of Competent Managers:
If competent managers are available, the scope for decentralization is more.
4. 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.
5. Control Techniques:
If better control techniques are used, the scope for decentralization is more. Absence of control techniques reduces the chances for decentralization.
6. Planning Pattern:
When standing plans are properly laid down, the chance for decentralization is high.
7. 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.
It must also be understood that both absolute centralization and absolute decentralization are undesirable, for, the former refers an autocratic structure while the latter results in a chaotic situation. For this reason, decentralization must be viewed as a relative concept, not as an absolute one.
But total decentralization with no coordination from the top would be undesirable. That is why, the question before manager is not whether an organization should be decentralized, but to what extent it should be decentralized. A manager has to balance between these two extremes.
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. For example, production and sales departments, in general, have gained a high degree of decentralization in many organizations, whereas financial departments have tended to remain relatively centralized.
Factors Influencing Decentralisation and Centralisation:
The starting point of decentralisation will be centralisation and the extent of decentralisation is governed by the centralised 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, decentralisation 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 decentralisation. 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:
Decentralisation 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).
4. Better Control:
Superiors under decentralisation 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:
Decentralisation 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 decentralisation 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.
Centralization and Decentralisation of Authority
Centralization:
According to Allen, centralization is the systematic and consistent reservation of authority at central points within the organization. In centralization little delegation of authority is the rule- power and discretion are concentrated at the top levels. Control and decision making resides at the top levels of the management.
The more highly centralized the organization, the more control and decision making reside at the top. However absolute centralization is untenable because it would mean the subordinates have no duties, power or authority. Most organizations start out centralization of authority initially. Such an arrangement helps the manager to be in touch with all operations and facilitates quick decision-making.
Centralization may be essential in case of small organizations to survive in a highly competitive world. But as the organization becomes more complex in terms of increasing size, interdependence of work-flow complexity of tasks and spatial physical barriers within and among groups, a function requisite for efficiency is to move decision-making centres to the operating level.
Thus, the larger the size of an organization, the more urgent is the need for decentralization. This does not mean that decentralization is good and centralization is bad. Centralization or decentralization may be in part merely the result of circumstances.
There are certain special circumstances forcing managers to reserve authority and centralize decision-making power:
1. To Facilitate Personal Leadership:
Centralization generally works well in the early stages of organizational growth. Working under a talented and dynamic leader, a small firm can derive advantages in the form of quick decisions, enterprising and imaginative action, and high flexibility.
Centralization enables a small organization to capitalize on the loyalties, ability and experience of its most talented top management people. Under this arrangement the manager is in touch with all operations, makes all decisions, and gives all instructions. Thus, centralization can project the personality and skills of one outstanding leader more meaningfully.
2. To Provide for Integration:
Under centralization, the organization moves like one unit. It keeps all parts of the organization moving together harmoniously toward a common goal. It assures uniformity of standards and policies among organizational units. The danger of actions drifting and getting off course is minimized.
The manager acts like a unifying force and provides direction to enterprise activities. In the process duplication of effort and activity are also avoided. To see that all units do the same thing in the same way or at the same time without wasteful activity, centralization is essential.
3. To Handle Emergencies:
Centralization is highly suitable in times of emergency. The resources and information can be mobilized quickly and efficiently. Quite often emergency situations like declining sales, introduction of a highly sophisticated competitive product, government policy changes may force the organization to cut down costs, maintain inventories at an optimum level, utilize resources effectively and instantaneously. Centralization of decision-making ensures prompt action necessary to meet the emergencies.
Decentralisation of Authority:
Decentralization is nothing but pushing the authority to make decisions to lower levels. In decentralization a great deal of authority is delegated and more decisions are made at lower levels. It gives added responsibility to managers at all levels below the top. Centralization is the opposite action, where the authority and responsibility are tightly held by upper levels of the organization and are not delegated. As Fayol stated ‘everything which goes to increase the subordinate’s role is decentralization, everything which goes to reduce it is centralization’.
Decentralization is the systematic effort to delegate to the lowest levels all authority except that which can be exercised at central points. It is the pushing down of authority and power of decision-making to the lower levels of organization. The centres of decision-making are dispersed throughout the organization.
Generally speaking, decentralization is said to be greater when:
a. More decisions are made at lower levels.
b. More important decisions are made at lower levels.
c. More functions are affected by decisions made at lower levels.
d. The checking on the decisions made at lower levels is minimal.
Factors Determining Degree of Decentralisation:
The appropriate organizational mix of centralization and decentralization is affected by the following situational variables (Carlisle):
1. Purpose and Goals of an Organization:
An organization that developed through one-person operation may have a highly centralized structure. In contrast, an organization that has grown through a number of mergers will be forced to decentralize because of the varied product lines.
2. Knowledge and Experience of Executive:
The availability of competent managers is a crucial factor influencing the dispersal of decision-making in an organization. If subordinates are skilled, trained and committed, it creates conditions conducive to decentralization.
3. Organization Size:
As an organization grows in size there is a tendency for decentralization to increase. Obviously in large organizations, top management people do not have the time or knowledge to make all managerial decisions.
4. 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.
5. 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 centres of knowledge inevitably.
6. 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.
7. Importance of the Decision:
As a general rule, ‘the more costly the action to be decided upon, the more probable it is that the decision will be made at the upper levels of management’. High cost decisions are retained; decisions with a minimal cost impact are delegated (Koontz).
8. 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 subordinates function independently in implementing the decision in the organization.
9. Planning and Control Procedures:
If the organization has clear objectives and a plan for achieving them, a superior is more willing to allow subordinates make decisions independently. Decentralization would be fruitful if precise, clearly written policy statements defining the attitudes, philosophy and direction of the organization, are available.
To be effective, decentralization should be supported by a well-defined system of control procedures. In the absence of a good system of control procedures, it would be difficult for top management to determine the effectiveness of decisions made by subordinates.
10. Environmental Factors:
Generally speaking, decentralized structures are more adaptive and resilient and therefore more suitable to firms operating in unstable environments. Thus, organizations in fast-growing industries, say electronics or software industries, tend to need greater decentralization.
Decentralization is not necessarily good, nor is centralization necessarily bad.
Both have advantages and disadvantages of different kinds in different situations, and the most appropriate balance between them in something that each organization must discover for itself.
To ensure effective decentralisation, 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 decentralisation 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. Provide for Communication and Coordination:
The inherent dangers in decentralized management must be recognized by all managers working in an independent fashion. Decentralization tends to create rivalry and conflict among operating divisions. Departmental managers constantly jockey for power and prestige, they compete for scarce resources and in order to show performance they may be working at breakneck speed at the cost of other departments. The remote control from headquarters many prove to be ineffective as the enterprise grows in size and complexity.
To prevent the disintegrating tendencies arising from out of a tunnel vision on the part of each divisional manager, it is necessary to provide for communication and coordination among operating divisions at regular intervals. Coordinating executives and committees may be appointed to meet this end. The dangers of too much fragmentation can be avoided by laying special emphasis on interdepartmental coordination, mutual help and cooperation.
4. 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.
Centralisation and Decentralisation of Authority: Factors, Advantages and Disadvantages
Centralisation:
Centralization of authority means the retention or concentration of management authority at the top level. The authority will usually be in the hands of a few important managerial positions. In this case the top management assumes total responsibility for achieving the organisational goals.
Centralization implies that the administrative authority of planning, organizing, coordinating, and controlling gets concentrated in the hands of higher level management. At the top-level planning is done, implementation is closely supervised and all related decisions are taken.
Definitions:
Henry Fayol has rightly pointed out that everything that goes to reduce the subordinates role is centralization.
Louis Allen observes that centralization is the systematic and consistent reservation of authority at central point within an organization.
Advantages of Centralisation:
i. Centralisation is a means for enforcing uniform policies and to achieve coordination and conformity since all decisions are made at one central point.
ii. It even avoids duplication of efforts and resources for similar activities being conducted by different sector of the organization.
iii. Centralisation helps in the optimum utilization of human and physical resources.
iv. There will always be consistency and stability in decision-making.
Disadvantages of Centralisation:
Following are the limitations of centralisation:
i. There may be possibility of wrong decisions due to lack of employee participation.
ii. Centralization restricts the growth of the enterprise because all decisions are taken by the higher level.
iii. Excessive burden of workload on the top executives.
iv. Possibility of delayed decisions and their implementation.
v. Lack of motivation to lower level executives and employees.
Decentralisation:
Decentralization refers to the participation of employees in the decision making process. In other words, it refers to the extent to which authority has passed to lower levels. Some authority will be retained at the top because all the authority cannot be delegated. That means that there can be total centralisation but there cannot be absolute decentralisation.
Authority can be decentralised in any manner such as on the basis of functions or product, or on the basis of profit centers. The greater the number of decisions made and the more the functions affected by decisions at lower levels, the greater will be the degree of decentralisation.
According to Louis Allen, “Decentralisation refers to the systematic efforts to delegate to the lowest levels all authority except that which can only be exercised at the central points.”
Advantages of Decentralisation:
i. Decentralisation leads to prompt actions and quick decisions.
ii. It helps to improve the efficiency of managers.
iii. Decentralisation is highly motivational for subordinates because it gives them the freedom to act and freedom to make decisions.
iv. Decentralisation improves the morale of the personnel of the organization.
v. Development of self-reliant managers is encouraged. Every manager knows what he is expected to do.
vi. It relieves the top executive from excessive workload, since in decentralisation; most of the routine managerial responsibilities are delegated to subordinates. This gives the central management more time to concentrate on planning, coordination, policymaking, control and so on.
Disadvantages of Decentralisation:
i. Coordinating and controlling become difficult under decentralisation because of different policies and procedures.
ii. Top management has to remain in constant touch with the progress of each department in the absence of which it will not be in a position to exercise effective control. Due to large number of executives and specialists engaged in the organization, the overhead cost gets increased which is another limitation of decentralized system.
iii. Such set up is suitable only for large scale enterprises involving complex production operations.
iv. Decentralisation is possible only when the services of capable and competent managers are abundantly available.
Hence it can be concluded that there should be blend of both centralisation & decentralisation in an organisation to increase its efficiency for achieving organisational objective.
Factors Determining the Degree of Decentralisation:
Factors determining the degree of decentralization are explained as under:
1. Importance and Significance of the Decision:
One of the important factors determining the degree of decentralisation of authority is costliness of the decision. Generally authority for crucial decisions are not delegated, decisions which are costly in terms of money or goodwill tends to be centralized where there is not much scope of mistake.
2. Size of the Enterprise:
The size of the organisation is another factor that affects decentralisation. As an organization grows in size, there is an increasing tendency to decentralise its operations. In a large and complex organisation there is greater need for decentralisation.
But in a relatively small and simple organisation, top management can make most of the decisions and creation of autonomous units may be a very costly scheme. Thus, the size of the organisation determines the extent of decentralisation.
Larger the enterprise more is the need for decentralisation, as every decision cannot be taken by top management. Decisions at the point of action will be faster & more appropriate as the real problem is properly known.
3. Management Attitude and Philosophy:
Decentralisation is a question of character of top executives and their attitude. Executive with traditional rigid outlook hardly thought of delegating authority attaching any reason to it, on the other hand rational managerial temperament believe in participative approach of doing work & rely to take maximum opportunity out of an individual.
To be effective, decentralization should be supported by a well-defined system of control procedures in order to ensure that the performance at different levels in the organization is in accordance with its plans. The greater the degree of development and use of control techniques, the better is the chances for effective decentralization.
5. Availability of Capable Executives:
The degree of decentralization in an organization is influenced by the availability of competent managers. The top executive willing to delegate authority find themselves handicapped for want of capable & qualified subordinates. The key to safe decentralization is adequate training to subordinate & make them able to shoulder higher responsibility.
Besides the factors mentioned above, there are environmental factors also that affect the degree of decentralization. External uncontrollable factors even influence the decision of management to delegate authority to the lower level in the organisation.
Centralisation and Decentralisation of Authority (with Advantages and Benefits)
Centralisation:
Centralisation is the systematic and consistent reservation of authority at the central point within the organisation. If a manager reserves work, he has to reserve the authority also. In some cases, managers delegate work without delegating authority necessary to carry out the work. In such cases, the decisions are taken by those people who do not actually perform the work.
Every manager should reserve certain amount of authority for those decisions which are of strategic nature and which cannot be taken by the managers at the lowest level objectively and perspective.
i. Facilitates Personal Supervision:
Centralisation helps for personal supervision. In some organisations particularly in the production activities the supervisor or manager has to closely supervise the activities in order to prevent the possible poor quality or deviations from the plans. In such case centralisation of authority and responsibility help the organisation better.
ii. Provides Personal Leadership:
Some people need inspiration, influence and direction directly from the leader. Similarly, certain activities need information directly from the leader. In such cases centralisation provides for direct and personal leadership.
iii. Promotes Integration and Co-Ordination:
Organisational activities and business process is divided into parts for the purpose of convenience. They need to be integrated and coordinated for getting final and unified product or activity. As such the divided processes need to be co-ordinated and integrated. Centralisation provide for the integration and coordination.
iv. Promotes Uniform Action:
Organisations ultimately provide unified product to the customer which needs uniform action to be performed at each level. Centralisation promotes uniform action.
v. To Handle Emergent Situation:
Emergency situations need flow of authority, resources, information etc. From one point or place only. Centralisation provides for it. Emergency situations can be efficiently managed through centralisation of authority.
Disadvantages of Centralisation:
i. Delay in Communication:
Top management communicates the information to all levels in the organisation as the authority is centralised. As such management may fail to communicate the information within the right line.
ii. Delay in Decision-Making:
Top level management has to process all necessary data and information, identify the organisation problems, develop the alternative solutions and make the final decision. Top management takes relatively more time to perform all the sub functions of decision making. As such decision making is delayed in centralisation.
iii. Fail to Pay Proper Alternative on Policy Issues:
Centralisation process requires the top management to concentrate both on routine issues and policy issues. Routine issues normally draw most part of the time pay due attention on strategic and policy issues.
iv. Under Utilisation of Organisational Human Resources:
People in the organisation are not delegated with authority and responsibilities under centralisation. Hence, they do not perform most of the important functions in the company and do not use their potentialities fully.
v. Employee Dissatisfaction:
Most of the people under centralisation system perform routine activities. They cannot perform meaningful and challenging work. Hence, majority of the employees are dissatisfied with their job irrespective of salary levels.
Decentralisation:
It refers to the systematic effort to delegate to the lowest levels all authority except that which can only be exercised at central points. It proceeds at different rates to different levels and for different functions within the same company. It generally spreads level by level from the top to the bottom. Decentralisation can be accomplished to a certain extent in a functional type of organisation structure.
The decision to decentralise is complex as it involves a major change in the company’s philosophy of management. The factors which dictate divisionalisation also dictate decentralisation. These factors include easing the burden of top executives from routine matters, to facilitate diversification, to provide product market and customers’ emphasis, to encourage the development of the managers and to motivate people.
Factors determining the degree of decentralisation are:
i. Cost pertaining to the decision;
ii. Desire for uniformity of policy;
iii. Size of the organisation;
iv. Number of levels in the organisation structure;
v. History of the enterprise;
vi. Philosophy of the management;
vii. Decision for independence;
viii. Availability of managers with skill, knowledge and ability;
ix. Availability and use of control techniques;
x. Need for decentralised performance in different geographical areas;
xi. Business dynamics and the need for adaptability to the situation and
xii. Influence of internal and external environmental factors.
How to Make Decentralisation Effective?
The management has to take the following steps while decentralising authority:
i. Establishment of appropriate centralisation of authority to the required level;
ii. Development of managers in the areas of decision-making skill, interpersonal skills, job knowledge, organisation knowledge, technical knowledge, general knowledge, etc.;
iii. Providing for communication and coordination and
iv. Establishment of adequate control techniques and providing for appropriate follow-up.
Benefits of Decentralisation:
Decentralisation benefits the superiors, subordinates and the organisation in general.
These benefits include:
i. Effective Communication:
Decentralisation provides for a number of communication points and thereby reduces the number of persons or stages between the sender and the receiver of the communication. This process enhances the effectiveness of communication.
ii. Reduces Red-Tapism:
Decentralisation reduces the supervisory levels in the organisations and thereby reduces the degree of red-tapism.
iii. Fast Decision-Making:
Decentralisation enhances the decision points. Each decision point is very close to the helm of affairs. Each decision point gets the necessary and accurate information quickly. Thus, it provides an environment for fast decision-making.
iv. Enhances Employee Job Satisfaction:
Decentralisation increases authority and decision making points. Most of the employees get the opportunity of managerial positions. They get the freedom and autonomy to make the decisions, use their authority and make use of their talents. This process in turn leads to job satisfaction.
v. Executive Development:
Decentralisation enhances the managerial positions. Existing employees acquire skills of decision making, handling various situations, and directing skills etc., leading to development of a number of executives in the organisation.
vi. Competitive Advantage:
Decentralisation enables the managers and employees to be innovative and creative due to the autonomy and freedom it provides. In addition, the other benefits of decentralisation enable the organisation to produce the products at low cost of high quality and have other competitive advantages.
Decentralisation further enables the managers to specialise in those activities in which they have expertise. Managers may specialise in line activities or in staff activities. Now, we shall discuss the line and staff relationships, which are critical for organisation design, authority, responsibility etc.
Centralisation and Decentralisation of Authority (with Features)
Centralisation of Authority:
Centralisation of authority implies concentration of decision-making power at the top of managerial hierarchy. In a centralised organisation, decision making authority is located at the top point in few hands. In the words of Allen “Centralisation is the systematic and consistent reservation of authority at central points in an organisation.”
According to Koontz and Weihrich, “Centralisation as an aspect of management is the tendency to restrict delegation of decision making. A high degree of authority is held at or near the top by managers in the organisational hierarchy.”
1. In centralisation, a limited amount of authority is delegated. Decision authority is centralised at the top.
2. Actions at the lower levels are subject to the approval of the top managers.
3. It reduces the importance and role of subordinates in decision making.
4. Henry Fayol says, “Centralisation belongs to the natural order. It is not a system of management good or bad of itself, capable of being adopted or discarded at the whim of managers or of circumstances; it is always present to a greater or less extent.
5. It is differentiated from ‘centralisation of performance’ in one geographical area or in a single location. It is also different from “departmental centralisation” wherein specialized activities are concentrated in one department.
Decentralisation of Authority:
Decentralisation is an important organising concept. In decentralised organisation, authority is pushed down to the lowest possible hierarchical level. It is pushing decision making to lower levels of the organisation. In the words of Allen, “Decentralisation implies consistent and systematic effort to delegate to the lowest levels all authority except that which can only be exercised at central points.”
According to McFarland, decentralisation of authority is defined as “the degree to which an organisation places authority and responsibility for decisions as far down in the organisation as efficient management permits.” Henry Fayol says, “Everything that goes to increase the importance of the subordinate’s role is decentralisation.”
Characteristics of Decentralization:
1. Decentralisation is the dispersal of decision making power in an organisation both horizontally and vertically.
2. It is a fundamental aspect of delegation. The greater the amount of authority delegated throughout the organisation, the more decentralized the organisation is.
3. The key issue to consider when assessing the extent of decentralisation, is the management level at which the decision is actually made.
4. It is a relative and analytical concept.
5. Decentralisation is a matter of degree. Koontz and Donnell say, “Centralisation and decentralisation are tendencies; they are qualities like ‘hot’ and ‘cold’.”
6. There are two types of decentralisation. Vertical decentralisation concerns the dispersal of power down the chain of command. Horizontal decentralisation relates to line and staff relationships.
7. Decentralisation is not universally good. It may be preferable for firm. A but disastrous for firm B. (Massie)
8. It implies more than delegation. It reflects a philosophy of organisation and management. (Koontz and Donnell)
Centralisation and Decentralisation of Authority (with Factors and Advantages)
Centralization:
Centralizations a common occurrence in small enterprises. In all businesses all decisions will be taken by manager himself and entrust only implementation to the sub-ordinations. But any how this may not be suitable if the organization increases in size and also in large scale enterprises. Centralizations refer to the retention of control by the top management in the area of decision-making.
The following definitions will further explain centralizations in detail:
According to Allen, “Centralization is the systematic and consistent reservation of authority at central points within an organization”.
According to Robert Krietner, “Centralization is the relative retention of decision-making authority by top management”.
Thus, from the two definitions one can conclude that almost all decisions are made by the top management in highly centralized organizations.
Factors Determining Centralization of Authority:
The management is highly centralized because of the following factors:
1. Uniformity of action can be possible when decision-making authority is centralized.
2. Centralized management will facilitate integration of activities by devising common policies and programmes.
3- Centralized authority will enable quick and timely decision from short-term as well as long-term perspectives.
4. Successful handling of all types of situations in the business.
Advantages of Centralization:
The following advantages can be drawn from centralisation:
1. Facilitates Personal Leadership:
In a small company, centralisation is /desirable since the leader has to take quick decisions. According to Louis A. Allen, “The small company can retain the advantages of centralisation so long it continues to function as one entrepreneurial unit; that is, so long as it can operate effectively as a projection of the personality and skills of one outstanding leader.”
2. Less Skilled Sub-Ordinates:
An enterprise running on the lines of centralisation need not have highly skilled sub-ordinates. It results in the economy of wages and salaries.
3. Handling Emergencies:
In the centralised organisation, emergencies can be handled promptly. The more acute the emergency or the more competitive the situation, the greater is the need for centralised decision-making.
4. Integration of Total Operation:
In highly decentralised entrepreneurial units, it is very difficult to integrate the total operations of the enterprise. A centralised enterprise gets benefits of enduring nature (e.g., stable market, efficient production etc.). Since it can keep all the departments of a company integrated “central direction is needed to keep all parts of the company moving harmoniously together toward a common objective.” (Louis A. Allen).
5. Uniformity of Action:
Centralisation of decision-making is essential in case of multi-units or multi-branches of a company, so that there is uniformity of action. To the extent that the company wishes all its units to do the same thing in the same way or at the same time there must be centralisation of the appropriate decisions. Uniformity is essential in matters like buying, selling, advertisement, personnel etc.
Limitations of Centralisation:
1. Centralisation of authority increases the burden on the top executives and little time is left for them for attending to important functions of administration like planning, organisation, motivation, etc.
2. Centralisation hampers the growth of development of subordinates as they are not given any authority to take independent decisions. The sense of “oneness” disappears from the subordinates.
3. Centralisation tends to slow up the operations as most of the decisions are not taken at a point where the work is carried out but at a point higher in the organisation.
4. It reduce the scope for specialisation as the persons taking decisions at the top level with regard to various fields are not all round experts.
Decentralization:
This term is open to number of interpretations in the management literature. It may sometimes refer to Departmentation of activities, division of responsibilities or dispersal of centers of authority etc. But in simple words, decentralization is simply a matter of dividing up the managerial works and assigning specific duties to the various executive levels.
Further one can still clearly understand the meaning of this term by observing the following definitions:
According to Allen, “Decentralization applies to the systematic delegation of authority in an organization wide context”.
According to Earl P. Strong, “Decentralization means the division of a group of function and activities into relatively autonomous units with over all authority and responsibility for their operation delegated to a head of each unit”.
Thus decentralization is concerned with the decentralization of the power of decision-making to lower levels in the management hierarchy.
Advantages of Decentralization:
1. Reduces the Burden on Top Executives:
Centralization relieves the top executives from the burden of performing various functions. Centralization of ‘authority puts the whole responsibility, on the shoulders of an executive and his immediate group. This diminishes the time at the disposal of top executives to concentrate on other important managerial functions. So, the only way to lessen their burden is to decentralize the decision making power to the sub-ordinates.
2. Facilitates Diversification:
Under decentralization the diversification of products, activities and markets etc., is facilitated. A centralized enterprise with the concentration of authority at the top will find it difficult and complex to diversify its activities and start with additional lines of manufacture or distribution.
3. To Provide Product and Market Emphasis:
A product loses its marketability when new products appear in the market on account of innovations and changes in the customer demand. Authority is given to the regional units to render instant service taking into account the price, quality, delivery and novelty, etc.
4. Executive Development:
When the authority is decentralized, executives in the organisation will get the opportunity to develop their talents by taking initiative to enable themselves to develop qualities for managerial positions. The growth of the company rests on the capacity of the talented executives.
5. It promotes Motivation:
To quote Louis A. Allen,” Decentralization stimulates the formation of small cohesive groups. Since local managers are given a large degree of authority and local autonomy, they tend to weld their people into closely knit, integrated groups.” This improves the morale of employees as they are also involved in decision-making process.
6. Better Control and Supervision:
Decentralisation ensures effective control and supervision as the sub-ordinates of the lowest levels will have the authority to make independent decisions. As a result they have through knowledge about the particular assignment under their control and will be in a position to make amendments and take corrective action.
Limitations of Decentralization:
1. Under decentralization, it is not possible to follow uniform policies and standardized procedures. Each manager will work and frame policies according to his talent which will never be common.
2. Decentralization of authority creates problems of co- ordination as authority lies dispersed widely under such a set up throughout the organisation.
3. Decentralization requires the employment of trained personnel to accept authority. It imposes more financial burden and a small enterprise cannot afford to appoint experts in various fields.
4. Decentralization creates problems of co-ordination and control. Decentralization becomes useless when there are no qualified and competent personnel.
Factors Determining Decentralization:
The following factors should be kept in mind while deciding decentralization:
1. Size and Complexity of the Organization:
In a large and complex organization there is greater need for decentralization. But in a relatively small and simple organization, top management can make most of the decision and certain of autonomous unit may be very costly scheme.
2. Dispersal of Operation:
When the production and sales of an enterprise and geographically scattered, centralized control become very difficult and there is greater pressure for decentralization of authority. But if all the activities are located in one building centralized control is much easier.
3. Degree of Diversification:
In a company having several diverse product lines, decentralization is not only necessary but beneficial. High degree of standardization, on the other hand results in centralization.
4. History of the Enterprise:
An organization which has grown internally is likely to retain its original structure to some extent on the contrary, if it has expanded through amalgamation or absorption; it is likely to be more decentralized.
5. Outlook of Top Management:
When the top executives believe in individual freedom, there will be a high degree of decentralization. But if top management is conservative and prefers centralizes control it is likely centralize authority.
6. Availability of Competent Personnel:
It is advisable to decentralize authority only when managers at lower levels are able and experienced lack of trained executives will restrict decentralization.
7. Nature of Functions:
Generally, basic functions like production and sales are more decentralized that staff functions such as personnel, finance, research and development.
8. Communication System:
An effective communication system is required to co-ordinate and controls the activities of operational units. In case communication system is effective, centralization should be advocated. However, computerized management information system has enabled centralizes decision-making.
9. Planning and Control Procedures:
If the organization has clear objectives and policies, superior are more willing to allow subordinates to make decision independently. Decentralization can be successful when there is a sound system of control. Such a system would enable the top management to determine the effectiveness of decisions made by sub-ordinates.
10. Complexities of the Situation:
Environmental factors exercise significant influence on the degree of decentralization for example, where business condition are highly uncertain, high degree of freedom to operating units may endanger the very existence of the enterprise.
Process of Decentralization:
The following steps make the decentralization process:
1. Centralization:
Initially, the organization starts as a centralized structure. The power and authority to make decisions vests with the top management. As it grows, the need for delegating the operating authority arises while important decisions related to planning, organizing motivating etc., continue to be exercised by the top management. This ensures uniformity in the working of the organization.
Following are the strategic areas where decision-making should remain centralized:
(a) Centralization of Planning:
To ensure consistency and uniformity in the operations of the organization, the framework of planning consisting of policies, procedures, programmes, schedules, etc., is developed by top managers, whatever the degree of decentralization in the enterprise. It is within the overall planning that various units make sub- plans to synthesize with the broader plans.
(b) Centralization of Organizing:
The organization structure to be adopted, creating departments, defining authority- responsibility relationships amongst members, the levels to be created (span of control) are decided by top management and the task of actually working within that structure is delegated to lower levels by dividing the overall work into sub-units and assigning each task to different individuals.
(c) Centralization of Co-Ordination:
More the degree of decentralization, more the problem of coordinating the activities. The chief executive should retain with him the power to coordinate the activities of all divisions and departments. This avoids duplication of efforts exercised by different divisions.
(d) Centralization of Motivation:
Individuals are motivated by different factors. While financial rewards are important for some, non-financial rewards of acceptance and recognition are important for others. Various motivational factors should be thoroughly studied by the management and a suitable policy for motivating employees of different nature should be made.
(e) Centralization of Control:
When authority for making the overall plans is reserved with top management, the task of ensuring that plans are adhered to is also the responsibility of top managers. The task of setting adequate measures of control to ensure that actual performance conforms to planned performance is reserved or centralized with the top management.
2. Development of Managers:
Once the basic framework of organization is structured, various plans and standards for measuring performance are made, techniques of co-ordination and motivation are laid, top managers decentralize the enterprise by delegating operating authority to lower level managers.
These managers frame policies for their units. Though decisions made by these managers do not relate to strategic issues, yet they are important for overall functioning of their units. Unless managers have the skill and competence to make such decisions, they cannot plan for their units.
3. Communication and Co-Ordination:
Though co-ordination of different activities is the task of top management, departmental managers must also ensure co-ordination of different work units. This is possible through open system of communication where information flows freely, both vertically and horizontally.
4. Control:
The measures of control are set by top management through techniques like budgets, Pert and CPM to evaluate overall performance of the organization. This does not relive lower level managers from exercising control over their units. They must also participate in controlling activities of their units and ensure their efficient functioning.
5. Dispersion:
Dispersion refers to geographic separation of central head office from the operating units. This done so that interference of top executives in the working of operating units is minimized. Dispersion helps to locate the units near the source of raw materials or markets (thereby reducing the costs) and enhances the leadership and supervision qualities of managers in charge of their units. Increase in their skills and creativity motivates employees of their units, resulting in higher productivity.
Degree of Decentralization:
After analyzing the various advantages and disadvantages of decentralization, the important question that arises is not whether to centralize or decentralize but how much to centralize or decentralize. Some degree of decentralization is a must. It is important to determine what kind of authority to delegate and how far down the scalar chain it is to be delegated. John Child describes four factors that characterize movement of organization from one end of the continuum to the other i.e., from centralization to decentralization.
These are:
1. Size:
With increase in size of the organization, managers cannot make all major decisions themselves and therefore, move towards decentralization.
2. Geographic Dispersion:
Top executives of the firm whose activities are spread over different geographical areas will be unable to take decisions with respect to all the functional areas and, there is the tendency to decentralize.
3. Technological Complexity:
As a result of technological developments, the top management is unable to make all decisions alone and therefore, the movement towards decentralization.
4. Environment Uncertainty:
The fast changing environment requires- (i) careful analysis of environmental factors that affect the organization and (ii) most speedy and timely decisions by organizations to adapt to the changing environment. The need for decentralization, thus, arises.
Centralisation and Decentralisation of Authority (with Characteristics and Limitations)
Centralisation:
When the authority to take decisions is utilised mostly by the superiors, such a set-up is called centralisation. Under it all the decisions are taken by the managers belonging to top hierarchy and the middle level and lower level managers are there only to explain and implement those decisions.
Whereas in decentralisation almost all the authority is given to the subordinates concerned, while on the other hand, under centralisation all authority stops at one central point. Thus, it can be said that both the set-ups are opposed to each other.
Definitions of Centralisation:
Following are the main definitions of centralisation:
(i) According to Louis A. Allen, “Centralisation is the systematic and consistent reservation of authorities at central points in the organisation.”
(ii) According to Henry Fayol, “Everything that goes to increase the importance of the subordinates’ role is decentralisation and everything which goes to reduce it is centralisation.”
Characteristics of Centralisation:
Following are the characteristics of Centralisation:
(i) Almost all the authority to take decision is kept reserved at the top level.
(ii) The role of the subordinates gets no importance and their main job is to implement the decisions.
(iii) Process of delegation of authority is used to the minimum.
(iv) Distance between the place of work and the place where decisions are taken.
Advantages or Importance of Centralisation:
A centralised set- up is generally free from all those defects which are found under decentralisation. That is why in some enterprises (generally small) centralisation is given priority.
Following are the chief merits of centralisation:
(1) Independent Set-Up:
Under a centralised set- up the superiors remain free because of the little role of the subordinates, meaning thereby, that they do not depend upon their subordinates. The superiors are also free from the risk involved in the decision taken by the subordinates.
(2) More Coordination:
There is full cooperation among all the departments because they are run by a central office. No department hinders the work of the other department.
(3) Uniformity of Decisions:
There is a uniformity of decisions because all the decisions are taken at the central office. A successful decision taken in respect of a particular department can easily be used to solve the problems of other departments.
(4) Cheap Set-Up:
Under this set up there is no need to provide necessary facilities to all the departments to make them self-reliant. Only the central office is taken care of. Consequently, there is less expenditure on administration.
(5) Advantages of Experts’ Services:
Under this set-up the experts are appointed only in the central office. Since all the decisions are taken there the advantages of the expert services can be availed of there.
(6) More Control:
Generally, the responsibility for taking all the decisions is entirely with the superiors. Therefore, they cannot afford to be careless in their work. Since they cannot be careless, it has a direct effect on the control in the enterprise. In other words, full control remains operative.
Disadvantages or Limitations of Centralisation:
Centralisation cannot be considered free from defects in spite of having many merits. The advantages that an enterprise can derive from decentralisation cannot be obtained from centralisation. In fact the merits of decentralisation can be called the demerits of centralisation.
The chief defects of centralisation are given as under:
(1) Excessive Work-Load for Top Executives:
Since all the decisions are taken at the level of the superiors, their workload increases, and consequently solid decisions cannot be taken.
(2) Diversification Impossible:
Centralisation and diversification (the production and sale of different products) are at variance with each other. It means that it is impossible to find them both together. Diversification leads to expansion of business which makes it essential to give authority to the subordinates. Hence, it is useless to desire expansion of business under centralisation.
(3) Worker Producing Set-Up:
Since all the authority is utilised by the top management, it checks the development of the managers at the middle and lower hierarchy. Since they are kept away from managerial decisions, their competence gradually starts declining. In short, it can be said that this set-up creates only workers and not managers.
(4) Decrease in the Morale of Employees:
Since the employees have no participation in management, their morale decreases.
(5) Delay in Decisions:
There is an ever – increasing burden of taking decisions at the top-level which results in the inevitable delay in taking decisions. This reduces the quality of the decisions also.
(6) Ineffective Control:
Centralisation causes both increase and decrease in control. Since there is no carelessness on the part of the top level managers, the control becomes effective. At the same time that is the difficulty of holding the employees responsible for wrong actions. Hence, control becomes ineffective.
(7) Industrial Disputes:
Because of the distance between the place of work and the place where decisions are taken, the superiors fail to understand the problems of the subordinates. It results in industrial disputes.
(8) Decrease in Initiative:
Because of the lack of authority the subordinates pay no heed to the problems appearing in their work sphere, and nor do they try to understand them. This inevitably kills their initiative.
(9) Formation of Profit Centres not Possible:
Independent units are not possible under centralisation which makes it impossible to form profit centres. It means that the profit and loss in respect of different departments cannot be known. That is why the mutual competition among the managers is reduced along with their work efficiency.
(10) Problem of Communication:
Under centralisation the managers in the top hierarchy face difficulty in collecting the information which is so essential for taking decisions. Incidentally, the information is available at the lower level and the decisions are taken at the top level.
(11) Expansion of Market Impossible:
By having a centralised set-up no enterprise can hope to expand the market for its products. The expansion of market requires the opening of branches at other places, and the managers have to be given authority for their success which is not possible under centralisation.
Suitability:
After having studied the merits and demerits of centralisation we may conclude that it is suitable in respect of enterprises which are on small scale or where the subordinate managers are not competent.
If we look at decentralisation and centralisation collectively, it can be said that neither is possible in toto. Therefore, in an organisation such a set-up should be devised as to ensure the merits of both the set-ups. 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.
Decentralisation:
Decentralisation is an extended form of delegation. When a superior delegates to his subordinates the authority which is comparatively more than expected, this is known as decentralisation. Under decentralisation all the authority, except the one which is absolutely necessary for the superiors to hold, is given to the subordinates permanently.
Under decentralisation the number of centres for taking decisions increases because the managers belonging to the middle and lower level have the authority to take important decisions.
Definitions of Decentralisation:
Following are the major definitions of decentralisation:
According to Henry Fayol, “Everything that goes to increase the importance of the subordinates’ role is decentralisation and everything which goes to reduce it is centralisation.”
According to Keith Davis, “Decentralisation is wide distribution of authority and responsibility to the smallest unit that is practical throughout the organisation.”
According to Louis A. Allen, “Decentralisation refers to the systematic effort to delegate to the lowest levels all authority, except that, which can only be exercised at central points.”
Characteristics of Decentralisation:
Following are the chief characteristics of decentralisation:
(i) It is an extended form of delegation.
(ii) It gives importance to the role of the subordinates.
(iii) This is a process applicable to the entire organisation.
(iv) It reduces the work-load of the managers in the top hierarchy.
(v) Under it decisions are taken by those employees who implement them.
(vi) Under it along with authority, responsibility is also transferred.
Indicators of Decentralisation:
After having understood the meaning of decentralisation, the indicators of decentralisation remain to be understood. They can tell us whether there is decentralisation in a particular organisation or not; and if it is available what amount of it is available there. In fact the chief indicator of decentralisation is authority. It means the amount of decentralisation is directly proportionate to the amount of authority distributed.
Some authorities which are considered the chief indicators of decentralisation are the following:
(i) Authority to appoint the employees,
(ii) Authority to increase pay,
(iii) Authority of Promotion,
(iv) Authority to purchase goods and machines,
(v) Acceptance of Sales orders, and
(vi) Approval of travel Expenses.
The amount of the authority given to departmental managers or their subordinates will determine the quantity or extent of decentralisation. The more transfer of authority means the more decentralisation.
Describing the indicators of decentralisation, the famous management expert Allen has remarked, “The extent of decentralisation is determined by what kind of authority is delegated, how far down in the organisation it is delegated and how consistently it is delegated.”
According to Allen the following are the three indicators of the extent of decentralisation:
(i) What Kind of Authority is Delegated:
The meaning of the kind of authority refers to its importance. It means that the extent of decentralisation will be in accordance with the amount of authority to take important decisions.
(ii) How Far down it is Delegated:
If the authority to take decisions has been transferred only down to the middle hierarchy, the extent of decentralisation will be small but if on the contrary, it moves down to the lower hierarchy, the amount of decentralisation will be much more. Thus, the level of organisation can be considered as an indicator of the extent of decentralisation.
(iii) How Consistently it is Delegated:
The presence of decentralisation in an organisation will be acceptable only if the process of giving authority has been consistent or has permanency.
Factors Affecting the Degree of Decentralisation:
The extent of decentralisation in an organisation is affected by the following facts:
(1) Size of the Organisation:
The size of the organisation is a major factor in influencing the decentralisation. The size of the organisation depends on the quantity of sales, the number of employees, the number of machines, etc. The size of the organisation depends on the largeness of these factors and the requirement of decentralisation accordingly.
(2) Managerial Outlook:
The extent of decentralisation depends primarily on the outlook of the managers. If the managers happen to be autocratic by nature, they will prefer to keep most of their authority in their own hands. In that case, there will be a little decentralisation. On the contrary, if they have a democratic outlook, the extent of decentralisation will be more.
(3) History of the Organisation:
If the business of the organisation has been on a large scale right from the very beginning, the extent of decentralisation will be more. However, if the organisation has a history of gradual development, the extent of decentralisation will be less because of the interference of the superiors which becomes a habit with them.
(4) Availability of Competent Subordinates:
If competent and trained subordinates are available in the organisation, the extent of decentralisation will be more because the superiors will not consider it risky to give the authority to take decisions to their subordinates. On the contrary, if there is a lack of competent subordinates the amount of decentralisation will be less.
(5) Control Technique:
If good control technique has been adopted in the organisation, the superiors will be willing for decentralisation because there is little possibility of taking a wrong decision in the presence of good control technique.
(6) Riskiness of Decisions:
If the number of decisions involving risk is more, there will be a less tendency towards decentralisation on the part of top managers. If, however, on the contrary most of the decisions are without any risk the extent of decentralisation will be more.
(7) Extent of Diversification:
There will be more decentralisation in an organisation which produces many products and whose business is extensive. The simple reason for this as that production and sales require the establishment of separate and different independent units. By doing so the decisions will be good and quick.
(8) Government Interference:
If the government interference happens to be more, the extent of decentralisation will be reduced because the government policies can be better & easily implemented at the central level.
(9) Dynamic Environment:
Decentralisation has greater importance in an enterprise where there is more uncertainty (technique, demand, continuous changes in the market). The changing environment can be better faced by the entire organisation collectively. Moreover, there will be unity in the organisation only when everybody has the authority of taking decisions. On the contrary, there is less decentralisation in business being carried out in stable environment.
(10) Need of Uniformity of Policy:
The extent of decentralisation also depends on the importance given by the top managers to the uniformity of policies. If uniform policies are needed in respect of all the department, the extent of decentralisation will be less.
Principles of Decentralisation:
Factors Making Decentralisation More Effective:
It is important to observe the following principles for the successful implementation of decentralisation in an organisation:
(1) Principle of Good Delegation:
The success of decentralisation depends on a good system of delegation. If the superiors in a concern do not use the art of decentralisation properly or ignore its basic principles, the whole plan of decentralisation will flop. Therefore, it is essential that the delegators should know the art of delegation thoroughly. For this the superiors should be given some training.
(2) Principle of Proper Communication and Coordination:
The greatest problem for decentralisation raises its head when all the units taking independent decisions start acting according to their sweet will by ignoring the top management. It is important to observe the principle of proper communication and coordination in order to avoid such a situation.
Proper communication means giving information about some special decision taken by a particular department to all other departments so that they can take advantage of the experience of other departments in similar situations. The policies formulated by the top management should be widely propagated so that other officers should take them into consideration while taking decisions. A coordination committee should be established to have coordination among all the departments.
(3) Principle of Adequate Control:
Decentralisation does not mean that the superiors should keep themselves aloof after giving the authority of taking decision to the low level managers and allowing them to function autocratically. Rather it is necessary to have control over them. The top level managers should have control over them to ensure that every decision taken by the subordinates is in accordance with the objectives of the organisation. The superiors should have control over the subordinates.
Control does not mean interference in their daily routine. It means keeping an eye on some special decisions taken from time to time. For the purpose of having control over them standards to measure their success can be laid down. When the subordinates know that they have to perform their work according to some standard, they will take their work as a challenge and do it more enthusiastically. Thus, the principle of adequate control instead of complete control for decentralisation should be adopted.
(4) Principle of Centralised Decentralisation:
Decentralisation cannot be separated from centralisation. According to this principle, a central office should be established in the organisation which can bind together the entire organisation. It is only through this office that the policies and plans of various departments are formulated and coordination is established in their working. According to one research 95% decisions are taken at the lower level in the General Motor Company in America and only 5% decisions are taken at the higher level.
However, these 5% decisions are so important that the majority of the decisions of the company are certainly affected in some way or the other. Therefore, some more important decisions ought to be taken at the central level.
(5) Principle of Proper Motivation:
There appears to be some distance among the superiors and the subordinates under decentralisation and because of this distance they are not regularly motivated. Consequently, their enthusiasm gets dampened. So in order to make decentralisation a success the superiors should give some reward to the subordinates on their success and honour them suitably so that their enthusiasm never suffers.
(6) Principle of Minimum Interference:
Minimum interference is the foundation of decentralisation. It means that after giving authority, the superiors should not interfere with their work. Repeated interference discourages them and their self-confidence suffers. Interference from the superiors should only be in connection with some important decisions.
Advantages or Importance of Decentralisation:
Regarding the importance of decentralisation it has been observed, “The question is not whether there should be decentralisation, but decentralisation to what degree.” It means that it is not so important to consider whether decentralisation should be adopted or not but what is important is that to what extent or degree it should be adopted. What authority should be given to the subordinates and what authority should remain reserved with the superiors. This is particularly true in respect of big enterprises.
The basis of this truth is the advantages of decentralisation which are as follows:
(1) Relieves the Top Executives of Excessive Workload:
Under decentralisation the daily managerial works are assigned to the subordinates. It leaves enough time with the superiors whom they utilise in planning, coordinating, formulating policies, controlling, etc.
(2) Facility in Diversification:
It cannot be denied that the control exercised by one individual is the best one but it has its limitations. Limitations here refer to the size of the business. It means that so long as the size of business is small, it can be run efficiently by centralising all authority at the top level.
But when the quantity of the products produced in the enterprise increases, centralised control cannot help because a single individual cannot pay sufficient attention to the problems of all the things. In such a situation decentralisation is resorted to. Thus, decentralisation helps the expansion of business.
(3) Managerial Development:
Decentralisation means giving authority to the subordinates up to the lower level to take decisions regarding their work. In this way the opportunity to take decisions adds to the knowledge and experience of the managers at all levels. It can, therefore, be asserted that this arrangement serves the purpose of training.
(4) Increase in Morale of Employees:
Decentralisation increases employees’ participation in management. This establishes their identity in the organisation. When one’s identity is established or one’s importance increases, it naturally enhances one’s morale. This increase in the morale of the employees helps them in making any sacrifice for the success of their unit.
(5) Quicker and Better Decisions:
The burden of managerial decisions does not lie on a few individuals. It gets divided among various persons and thus helps in taking quick and good decisions. All the persons have a complete knowledge of their unit or department. That makes capable of taking better decisions.
(6) Effective Control:
Under decentralisation the work field of the subordinates is limited and, hence, their mistakes can easily be found out and responsibility fixed. Because of the fear of responsibility the managers remain worried about the success of their unit. As a result of this they keep a complete control over all the activities.
(7) Improvement in Industrial Relations:
Understanding one another’s problem is the key to industrial relations. It can be done only when the afflicted person and the person providing solution to the problem have close relations. This is possible only through decentralisation. Under decentralisation the authority to take decisions moves to the lower level.
The managers at the lower level have a direct relation with their subordinates. This helps them in understanding one another’s problems and solves them working together. In this way decentralisation helps sweetening industrial relations.
(8) Increase in Initiative:
Because of the lack of adequate authority the subordinates do not pay attention to the problems confronting them in their work area and nor do they try to understand them. Under decentralisation all the units have sufficient authority. It makes the unit manager alert towards the problems that confront him and he makes efforts to find out an early solution.
(9) Formation of Profit Centres:
The various units established under decentralisation can be considered separate profit centres. By preparing a separate profit & loss account individual profit can be known. By doing so all the departments start competing with one another for earning more profit. This leads to the most efficient utilisation of all the human and material resources available in the enterprise.
(10) Reduces Problem of Communication:
As the expansion of the organisation takes place, it leads to a difficulty in the collection of information necessary for taking decisions. Under decentralisation the authority to take decision is given to those very people from whom the information has to be collected. In this way the problem of communication is reduced as the information happens to be where decisions are to be taken.
(11) Expansion of Market:
An enterprise which adopts decentralisation can expand the market for its products by opening branches at various places. Under this arrangement a branch manager is given all the authority regarding decision. By using this authority the branch managers solve their local problems themselves. In this way business is expanded and the local conditions are profitably exploited.
Disadvantages or Limitations of Decentralisation:
The main disadvantages or limitations of decentralisation are the following:
(1) Dependence on the Ability of Subordinates:
Under decentralisation the success of the organisation depends entirely on the ability of the subordinates. The subordinates have the authority to take some important decisions along with the authority to take decisions on works of daily routine. If the subordinates prove incapable the enterprise may have to pay a heavy price for it.
(2) Lack of Cooperation:
Since all the departments function as independent units, the managers think only about the progress of their own department. Sometimes they act like rivals and instead of offering cooperation they start opposing one another. This problem assumes serious dimension when two inter-dependent departments start opposing each other. For example- the production department deliberately delays production in order to let down the sales department.
(3) Lack of Uniformity of Decision:
Because of decentralisation independent units come into existence and all the departments formulate their separate policies. That is why sometimes completely opposite decisions are taken in different departments to handle a similar problem. In this way one department cannot benefit from the experience of a successful decision of another department.
(4) Costly Set-Up:
Only very big enterprises can have the courage of adopting decentralisation because it happens to be a costly set-up. Under it, it is important to provide all the necessary facilities to all the departments to make them self-reliant which require many equipments and employees. For example- if an organisation is manufacturing and selling any products at the same time, under decentralisation separate departments for all the products will be established.
Again, in every department separate production department, marketing department, accounting department and appointment of employees will have to be provided. This unnecessarily duplicates the work performance. When only one department of accounting can do, arrangement has to be made for many such departments. In this way expenses increase unnecessarily.
(5) Lack of Experts’ Guidance at Decision Making Centres:
Under decentralisation more efficient and competent people are included in the top management, and their lack is felt at the decision making centres. In this way because of the non-availability of expert guidance many decisions turn out to be not so good.
(6) Lack of Control:
The superiors become slack after giving authority to other people. Their carelessness weakens the control in the entire organisation and everybody tends to be autocratic.
Suitability:
After having studied the merits and demerits of decentralisation 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 organisation is very big and complex, and competent and efficient managers are available.