Centralization and decentralization refer to the extent to which managerial authority is concentrated at the higher levels of management, or distributed down the organizational hierarchy.
In a centralized organization power and authority is concentrated at higher levels of management. Managers at higher levels take decisions even in minor matters, while managers at lower levels just follow instructions. In comparison, decentralized organizations have authority and power delegated more widely. The top management takes only the major decisions such as overall objectives, targets, budgets, resource allocation and the like. Lower level managers have substantial discretion and flexibility to decide details of their actions within the overall the limits of higher management decisions. For example, in a decentralized organization, a traveling salesman may be free to plan his day to day schedule of sales call provided he is able to meet his target of total number and types of sales calls to be made every week. In contrast, the sales manager in a highly centralized organization will instruct the sales man on time and sequence of each sales call.
Every organization, to be effective, must have a appropriate balance between centralization. No organization can become effective by adopting extremes of either centralization or decentralization. In fact, it is impossible to have an organization with either absolute centralization or absolute decentralization. Absolute centralization implies that all decisions are taken by just one person at the top of the organizational hierarchy. No other person in the organization has any discretion to make any decision. To start with, it will be impractical to decide and instruct individuals in so much detail that they don’t can work effectively without any initiative or decision on their part. Further, this will mean heavily under utilizing the brain power of human beings. Finally, human beings do not like to work under such restricting conditions, and it will be almost impossible o find suitable persons to work in such organization.
An absolutely decentralized organization also cannot exist in reality. Such an organization implies that everyone working in the organization is totally free to act in any manner he or she chooses. In this situation there is no mechanism possible to direct the effort of all the individuals in appropriate direction to achieve the organizational goals or to coordinate the efforts of different individuals.
The following factors influence the design of the extent and type of decentralization in any organization.
· Complexity of Task
· Subordinate Training/Capability
· Subordinate Motivation
· Manager Capability
· Rate of Change
· Amount of Personal Contact Needed
The information Technology (IT) also has substantial effect on nature of effect decentralization. On one hand, IT promotes centralization possible to exercise more control with less efforts. At the same time it promotes decentralization by enhancing the decision making capabilities of individuals. The resultant effect of this is that of reducing the total number of levels in organization. Managers at top and bottom levels of organization can both have more decision making power, making some of the intermediate level redundant.