What’s it: Centralization is a hierarchical decision-making structure in which company executives retain authority and have full control over decision-making. It contrasts to decentralization, where upper management delegates it to lower levels and gives them more autonomy.
Several factors influence it, including organizational size, managers’ quality at each level, and management style.
Centralization allows for independent and controlled decision making. Subordinates only need to follow directions from top management.
But, it can lead to demotivation. Subordinates feel the company is not empowering them since they cannot participate actively in making decisions about their work.
Why is centralization important?
Decentralization and centralization are two approaches in legitimizing decision-making in companies. Under a decentralized structure, managers share decision-making. Top managers make core strategic decisions; others are left to lower managers.
The decentralized structure allows for faster decision-making. For example, suppose a problem occurs at a lower level. In that case, it doesn’t have to be brought to the top management for a decision. Instead, lower-level managers can make decisions. That can save time, especially if the decision hierarchy involves multiple layers.
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Decentralization also allows for better employee participation. They are likely to be motivated and excited about having the opportunity to make decisions about their work.
However, decentralization comes with some risks. First, subordinates may make mistakes a lot. They may be experts in their field. However, they may not be good decision-makers. And, they may need more training or experience before they can become effective decision-makers.
Another drawback is inconsistency. What subordinates decide may be contrary to the manager’s wishes. That could be a problem and, perhaps, lead to disharmony in their relationship.
Decisions can also be uncoordinated. For example, each subordinate makes their own decisions. Thus, the results tend to be random and undirected.
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And, centralization is important to address such problems. In addition, top managers can make more independent decisions. They don’t have to consult the managers under them.
In addition, decisions can be more directed and not random. It allows subordinates to move in the same mode without being busy making their own decisions.
How does centralization work?
Centralization emphasizes concentrated decision-making in several positions. Top managers have the highest decision-making power.
How it is implemented can vary between companies. For example, top-level managers become decision-makers. Meanwhile, middle-level managers only have operating authority. Meanwhile, lower managers carry out every directive from above. And, all decisions from lower levels must obtain approval from higher levels.
Because it relies on a few people to make decisions, leadership qualities are vital. It determines how effective the organization is. But, of course, poor quality makes organizations ineffective.
A common example is a small business. Take a sole proprietorship as a case. The owner is responsible for the entire organization. He makes all the decisions about the business, from marketing to production.
Subordinates must report to him when they want to make a decision. And they don’t have the flexibility to do it. And, they can only do so if they get instructions and orders from him.
What are the factors that affect centralization?
Some companies tend towards centralization. While others are more towards decentralization. It all depends on several factors, including:
- Organization size
- Management style
- Quality managers at every level
- Geographical spread
- Business environment
Cost. Centralization allows for fewer costs. On the other hand, decentralization consumes more costs, including risks, if subordinates make the wrong decisions. So, if companies want to save costs, they may choose centralization.
Take decisions about procurement as an example. When centralized, the company can buy in bulk, allowing it to get discounts from suppliers.
Conversely, if each department or unit does it separately, it is difficult to get a discount. Finally, the company does not benefit from purchasing economies of scale.
Organizational size. Large companies tend to be more decentralized. Operation is more complex. Thus, it is almost impossible to make all decisions under a few people.
Management style. Authoritarian leadership tends to lead to centralization. In contrast, decentralization is common under a democratic leadership style in which subordinates participate more in making decisions.
Quality managers at every level. When quality is more evenly distributed at the middle and lower levels, decentralization may be a good fit. They can be effective decision-makers. Thus, top managers trust them and delegate more decisions.
Geographical spread. When operating in multiple geographic areas, companies rely more on decentralization. Branch or unit offices are more aware of problems in their area than the head office. So, giving them the authority to make decisions is better.
Business environment. Dynamic business environments often require more decentralization. Companies must make quick local decisions. Thus, top managers are more likely to delegate authority and decision-making.
What are the advantages of centralization?
Greater control. Top managers have more power to make decisions about allocating the company’s resources. They also have more control over employees.
Consistent decisions. Decisions are more consistent because few people have the authority to do so, i.e., centralized in top managers. Thus, it will be consistent across all departments or divisions.
Good business image. The company can maintain a unified business image because decisions are taken consistently. Consistency is important, especially when a company faces a crisis and faces the public.
Easier communication. Centralization requires less employee involvement. Thus, top managers can make decisions at their discretion.
Unity towards the goal. Top managers make decisions. And, lower management can focus on executing those decisions without too much deliberation.
Order in business. Management encourages employees to obey and not to deviate. It creates order and smooth operation within the organization.
Saving money. Centralization minimizes problems due to duplication and extra work. A good example is the procurement case above, allowing companies to achieve economies of scale from purchasing.
A clear chain of command. Everyone knows who has the authority to make decisions. As a result, there will be no overlap or confusion in decision-making. And a clear chain of command is even more important when companies have to make unified decisions.
Focused operation. The company can fulfill its vision easily. Top managers make strategic decisions and set goals. Meanwhile, middle and lower managers implement it. Thus, operations throughout the company move towards and focus on the stated goals.
Maintained quality. Top managers rely on standard procedures and rules to ensure subordinate compliance. Thus, their output is uniform with quality according to standards.
Take, for example working in a factory. If each supervisor makes their own decisions, it can result in the output being out of specification. What’s worse, the production process can be disrupted because it is not well coordinated.
What are the disadvantages of centralization?
Demotivating. The subordinates were discouraged because they were not empowered. They cannot participate in making decisions related to their work.
Low retention. Demotivation can lead to high employee turnover. In addition, employees are disloyal to the company because they do not have the opportunity to actualize personal initiative.
Low creativity. Subordinates are less involved. Thus, it leads to no new ideas and perspectives being brought into the management system.
Bet for success. Organizational success depends on how qualified the leader is. If they are not good decision-makers, it can be fatal.
Organizational rigidity. Subordinates may feel like machines that can be used and directed according to the leader’s needs.
Slow decision. Problems at the lower level have to go through several layers to get to the top to be decided. And it spends more time to reach the intended person. Thus, the problem can become more acute before a decision is made. This negative effect can be significant for companies operating in several geographically dispersed locations.
Undeveloped competencies. Centralization prevents subordinates from developing their competencies. They have no opportunity to develop themselves with the skills associated with taking on more authority. In the end, they can’t be good decision-makers.
Business interruption. When the key manager exits, it can interfere with operations. The successor may not be ready to replace them effectively. And, the subordinates are not equipped with adequate competence, so they are not ready to replace him.
Heavy workload. Corporate executives are under tremendous pressure. They have to spend a lot of time formulating decisions for the company.
Good decision, bad implementation. Executives spend more time handling decisions. Finally, less time to oversee how decisions are implemented at lower levels. Finally, without an effective control system, many decisions are poorly implemented or ignored by subordinates.
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