Centralization and decentralization are two types of systems based on which the decision-making takes place within a business or an organization.
Difference between centralization and decentralization
The main points of difference between centralization and decentralization are given below:
1. Concentration of power:
Centralization, within an organization refers to the concentration of authority of decision-making in the hands of apex management only whereas in a decentralized system the power of decision-making is delegated to middle and/or lower tier management as well.
2. Burden of accountability:
The burden of responsibility and accountability in a centralized system lies mostly upon the upper-level management but in a decentralized system all the middle and/or lower level management is held accountable according to their respective authority to make and implement decisions. In this way, the accountability is shared at every level in a decentralized organization.
3. Employee motivation:
Employees may become demotivated in a centralized system because they exert less power and only follow the orders of upper-level management. This can also affect their performance as they have to implement the plans and budgets which they have not formulated. However, in a decentralized system the decision-making powers are dispersed to lower-level management, divisions and departments, where those managers can set their own goals based on their individual practical situation and perform accordingly.
4. Management indulgence:
The procedures and working patterns in a centralized system are mostly standard and follow strict red tape because the whole organization is controlled from a single center of power. While in a decentralized system managers are required to perform tasks based on their individual conviction which makes them less standard and decrease comparability.
5. Method of communication:
The method of communication adopted in a centralized system is mostly formal. This communication is mostly vertical and top-to-bottom. Whereas the communication in a decentralized system extends in almost all directions. This type of communication is top-to-bottom, bottom-to-top and/or horizontal including grapevine communication structures.
6. Time consumption:
The time taken for decision-making in a centralized system is relatively more as compared to decentralized system. This is because the lower or middle level management cannot prepare any plan unless approved by the strategic level management. This delayed chain of command can sometimes lead to loss of opportunities.
7. Business suitability:
The centralized system of decision-making is best suited for small to medium level organizations because the facets of hierarchy are less in these organizations. In larger companies, decentralization is necessary, as strategic management cannot make well-informed decision about every aspect of business especially in terms of implementation of plans at operational level.
The choice for adoption of a centralized or a decentralized system highly depends upon the nature of business. A business which requires continuous innovation cannot rely upon centralization for its success. The ever increasing competition has increased the necessity for quicker and witty decisions by business managers. Therefore, complete centralization of any business does not seem a practical solution in dynamic structure of today’s capital markets. So, businesses should aim to strike a balance between the level of dominance that upper level management needs to exert and the degree of delegation of tasks at functional as well as operational levels of an organization.