Centralization and De-Centralization

Posted in Business Management, Principles of Management on Mar 3rd, 2014 | 0 comments

Centralization and De-Centralization Concepts

CENTRALIZATION:

The term “centralization” has several meanings:

• Centralization of Performance: Say, if the operations of a company is restricted to a single geographical location, it characterizes centralization of performance.

• Departmental Centralization: Specialized activities are carried out by a single department, say, maintenance of a whole plant, staff recruitment by HR department etc.,

• Centralization as an aspect of management: This implies restricted delegation and exclusivity of decision-making by the top management.

According to Allen, “Centralization is the systematic and consistent reservation of authority at central point in an organization.”

According to Weihrich and Koontz, “Centralization (as an aspect of management) is the tendency to restrict delegation of decision-making.

What are the special circumstances that force the managers to reserve authority and centralize decision making powers?

1.       To facilitate personal leadership

2.       To provide for integration

3.       To handle emergencies

4.       To utilize resources effectively and instantaneously.

DECENTRALISATION:

It is the tendency to disperse decision making authority in a structured and organized manner. It can be viewed as a philosophy rather than a principle where-in “discretion” plays a major role in deciding which decisions to push down into the organization structure and which to hold near the top. Capital expenditure, Investment analysis and major policy decisions have to be dealt with, by the top management.

It is the systematic effort to delegate to the lowest levels of authority except that which can be exercised at central points.

TYPES OF DECENTRALIZATION:

Three approaches to the concept are:

1.       PROFIT CENTRES

2.       COST EXPENSE CENTRES

3.       INVESTMENT CENTRES

Profit Centre: Here the organization is split into divisions on a “product basis” and is given full authority to handle its own scheduled operations, right from placing orders to negotiating the sale of its finished products.

Cost Expense Centre: Whenever it is easy to determine the cost of operations, cost centres are established. Cost centres run on “budgets” which acts as a control tool to run the units within the specified budgetary limits.

Investment Centre: Useful in the case of big multi-product enterprises where product performance is measured by decentralizing the investment aspect. Each strategic business unit is responsible for the acquisition, use and disposition of fixed resources.

Advantages of Decentralization:

1. Managers and executives are relieved form excessive work pressure
2. Even low level employees are involved in decision making thus bringing the decision making process closer to the scene of action.
3. It facilitates product-diversification
4. Creates an opportunity for learning
5. Ensures effective control
6. When a big organization is divided into relatively smaller units, it becomes flexible and also effects close control.

Disadvantages of Decentralization: 

·         Conflict arises between people belonging to different levels of the organization

·         Rising cost

·         Lack of co-ordination between production and marketing departments

·         No defined leadership

Contingency Factors in Decentralizing:

1.       Organizational goals

2.       Organizational size

3.       Geographical dispersion

4.       Technical complexity of tasks

5.       Time frame of discussions and decisions

6.       Subordinates’ take on issues

7.       Planning and control procedures

8.       Environmental factors

9.       Knowledge and experience of managers

Effective Decentralization can be accomplished by

·         Establishing appropriate centralization

·         Developing efficient managers

·         Proper provision for communication and co-ordination

·         Establishing adequate controls

Top management must be willing to delegate authority towards decision making; Middle management must be willing to accept responsibility that is being delegated. Only then effective decentralization is possible.