What is Centralization?
Centralization is the process of systematically retaining decision-making power at the top level of management. Top-level management makes autonomous decisions. In a centralized organization, considerable authority and accountability remain at the top of the hierarchy. The rest parties of the organization receive the command from the top manager and follow.
In centralized organizations, only a few members have the decision-making authority or the only head office makes the managerial decisions and the rest branches follow the direction provided by the central office. Centralization of authority is appropriate in small business organizations where tasks are few and a single manager is able to handle easily all the organizational activities.
Centralization of authority is the reservation of decision making authority at the top-level management. It reduces the role of subordinates and the top-level assumes full authority of running business activities.
Ricky W. Griffin – Centralization is the process of systematically retaining power and authority in the hands of higher level managers.
Robbins and Coulter – Centralization is the degree to which decision making is concentrated at a single point in the organization.
Ivancevich, Donnelly, and Gibson – Centralization refers to the location of decision making authority in the hierarchy of the organization.
Centralization facilitates a manager to keep in touch with all the activities of the organization and facilitates quicker decisions. This system is highly appropriate in small organizations performing business in a competitive environment. However, expansion of the size of business creates complexities in business activities, and in such a situation centralization becomes impractical. Top management needs to form departments and branches on the basis of the nature of work and decision-making authority should be delegated to the departmental heads.
Advantages of Centralization
Centralization and decentralization both are important concepts for running an effective business. Let’s take a look into the reasons why business organizations adopt the centralized structure?
#1 Facilitates Unified Decisions
In centralization, all decisions make the top-level manager. It is not necessary to consult and take the consent of subordinates while taking a decision. The subordinates perform activities on the basis of instructions that facilitate maintenance of uniformity and consistency in performance.
#2 Simplifies Structure
In a centralized organization, the structure tends to be simple and clear. It involves two levels managerial and operating levels. The managerial level is responsible for decision making whereas the operating level is responsible for execution.
#3 Facilitates Quicker Decisions
Centralization facilitates quicker decisions as one manager takes all decisions. Managers can take suggestions and guidance from experts and professionals, but the final decision is taken by him. A quick decision is essential for business success in a competitive environment.
#4 Economy In Operation
In a centralized organization, many levels and positions of management are reduced. It minimizes the overhead cost of the organization. It also helps in the effective utilization of skilled, qualified, and experienced members.
#5 Integrate Operation
Centralization helps to integrate and unify all the operations of the organization. The top-level manager maintains close supervision of the subordinates and their functions. On the basis of requirement, a manager takes quick decisions to control the activities of employees.
#6 Suitable For Small Firms
Centralization is highly appropriate in small business firms that that has fewer branches. In such organizations, managers can personally look after the overall activities of the organization.
Disadvantages of Centralization
Centralization is only appropriate in small size of organizations, but when the business activities are growing, there is difficult to handle all the activities by a single manager. Some drawbacks of centralization are as follows:
#1 Unsuitable For Large Organization
Centralization is impractical in large business organizations having various branches in different locations. It is difficult to communicate managerial decisions to different operating levels in the management hierarchy. Top managers can not effectively supervise and control all the activities of the organization.
#2 Manager is Overburdened
Top managers are overburdened with authority and responsibility while managing each and every activity of the organization. He can not devote sufficient time to other major activities. This leads to a decrease working efficiency of the organization.
#3 Possibility of Misuse of Power
Centralization of authority at the top level may result in underutilization of power. Top managers may exercise powers on the basis of their personal judgment. This may lead to misuse of authority if the managers lack proper skills and ability.
#4 Low Morale and Motivation
Middle and lower-level managers may feel uncomfortable while doing assigned tasks. They do not have the required authority to deal with problems effectively. They do not get any opportunity to show and develop their potentiality. The lack of motivation tends to affect the morale of subordinates.
#5 Lack of Environmental Adaptation
The business environment is dynamic, it changes according to the time and situation. In business, it is essential to make quick decisions to resolve the problems of concerned departments or branches. Centralization is not applicable in a dynamic environment as flexibility will not come promptly from the top level.
#6 Inappropriate For Routine Decisions
In centralization, top-level managers devote maximum time to making routine decisions. Therefore, they can not devote more time to non-programmed decisions. This will have a negative impact on the long-term performance of the organization.
Thus, centralization means decision-making authority concentrated on the top-level manager. It is appropriate in small and inappropriate in a large organization. But today’s business environment focuses on employee participation in decision making. That makes a feeling of importance in the organization to subordinates where they can show their potentiality. Thus, depending upon the nature and size of the organization effective utilization of centralized authority is essential.