Changing the decision-making authority and the corresponding organizational structure. Explanation of Centralization and Decentralization. Centralization and Decentralization? Description

An organization has to make strategic and operational decisions. Where and by whom should these decisions be made? And: how should the organization structure be adapted? Centralization and Decentralization are two opposite ways to transfer decision-making power and to change the organizational structure of organizations accordingly.

Centralization:

Definition: The process of transferring and assigning decision-making authority to higher levels of an organizational hierarchy.

In a centralized organization, the decision-making has been moved to higher levels or tiers of the organization, such as a head office, or a corporate center.

Knowledge, information and ideas are concentrated at the top, and decisions are cascaded down the organization.

The span of control of top managers is relatively broad, and there are relatively many tiers in the organization. Compare: Fayol.

Decentralization:

Definition: The process of transferring and assigning decision-making authority to lower levels of an organizational hierarchy.

In a decentralized organization, the decision-making has been moved to lower levels or tiers of the organization, such as divisions, branches, departments or subsidiaries.

Knowledge, information and ideas are flowing from the bottom to the top of the organization.

The span of control of top managers is relatively small, and there are relatively few tiers in the organization, because there is more autonomy in the lower ranks.

Three Forms of decentralization

Deconcentration. The weakest form of decentralization. Decision making authority is redistributed to lower or regional levels of the same central organization.

Delegation. A more extensive form of decentralization. Through delegation the responsibility for decision-making is transferred to semi-autonomous organizations not wholly controlled by the central organization, but ultimately accountable to it.

Devolution. A third type of decentralization is devolution. The authority for decision-making is transferred completely to autonomous organizational units.

Strengths of Centralization. Characteristics

Philosophy / emphasis on: top-down control, leadership, vision, strategy. Decision-making: strong, authoritarian, visionary, charismatic. Organizational change: shaped by top, vision of leader. Execution: decisive, fast, coordinated. Able to respond quickly to major

issues and changes. Uniformity. Low risk of dissent or conflicts between parts of the

organization.

Strengths of Decentralization. Characteristics

Philosophy / emphasis on: bottom-up, political, cultural and learning dynamics.

Decision-making: democratic, participative, detailed. Organizational change: emerging from interactions, organizational

dynamics. Execution: evolutionary, emergent. Flexible to adapt to minor issues and

changes. Participation, accountability. Low risk of not-invented-here behavior.

Organization  structure comprises of six key elements they are:

Work specialization Departmentalization Chain of command Span of control Centralization and decentralization Formalization

Work Specialization

The spirit of work specialization is that, in an organization a project has been designed by  one individual and the work will be separated into many steps and every work has been done by a separate individual specialist enable the work to be completed quickly. This is what we call as work specialization.

Departmentalization

Once the work has been assigned, next stage is that you need to assemble  these works together so that the given task can be done in time. The basis by which works are assembled together is called departmentalization.

Chain of command

The every organization have a  chain of commands, chief head of the organization to low level employee has a command like what to do, who is responsible for the given task each department has a command by team leader, department head, head of organization, the command has been passed through one by one in chain form so the this is called as chain of command.

Span of control

If you have a two or three organization the common question will be raised that a manager efficiently and effectively handle how may employees to handle this problem span of control is important in every organization.

Centralization and Decentralization

The decision making is done at a single point from the top of the organization is known as centralization of decision making and the decision making that has done by the any level staff in the organization is known as decentralization.

Formalization

The organization has a procedure to do jobs  there needs to be some sort of formalization in the work process . This work processes is known as formalization.

A centralized organization concentrates all authority, power, and responsibility in the top management of an organization.  All of the businesses decisions must be approved or pre-approved by top management before being carried out by lower level employees.  Business strategy originates from the people at the top with the broadest perspective of the business and the market situation.  Low level employees in this type of organization are expected to do as they are told and may contribute very little to the pool of knowledge used by the organization in forming strategy and decision making.  Centralized organizations usually have tall organizational structures with many layers of management through which authority and responsibility are delegated and decisions are communicated.  Managers have narrow spans of control, span of control meaning the number of employees under a manager’s control.  This causes centralized organizations to often be sluggish in their responses to market changes.  Also, employee morale may be low if they desire more authority and power.  Centralization works best in small organizations, which mitigates centralization’s disadvantages, especially the problem of being slow to react to change.  Centralization is also preferable when tight control of organizational activities is desirable, such as in operations of a critical or sensitive nature like in finance or the military.

A decentralized organization diffuses authority, power, and responsibility throughout the organization.  Decisions may be made and carried out by anyone, even the front-line employees.  Strategy originates from many points of authority and all employees contribute to its creation.  People are free to do what they believe is best for the company or themselves.  Decentralized organizations usually have flat organizational structures with a minimal number of layers of management with broad spans of control.  This gives decentralized organizations the ability to respond quickly to market changes.  It also means

that labor costs can be minimized.  Decentralization is suitable for organizations of any size but is preferable for large organizations that need or want to be able to respond to change and serve customers quickly.  It also tends to spark creative thinking among a larger group of people, which spurs innovation, than centralization does.  Lower level employees may also find the empowerment that decentralization gives them rewarding, thus boosting morale.  The downside to decentralization is that it is possible to lose control of an organization and it is harder to enforce accountability.  Also, it is harder to get separate departments or divisions to work together even if doing so may benefit the organization as a whole.

The Top Ten Things You Need to Know About Centralization Versus Decentralization

1. Centralization is not better than decentralization and vice versa.  Given the nature of a business, either strategy may be appropriate.

2. Centralization and decentralization are not mutually exclusive.  In fact, most companies are not purely centralized or decentralized but employ the balance of the two that works best for their unique situation.

3. The trend for the past couple of decades has been to move toward more decentralized organizations.

4. In order for a large, diversified company to gain the benefits of cross-business strategic fits, such as multiple business units sharing distribution channels to save on overall distribution costs, those shared business functions often need to be centralized even though the company may have a decentralized structure overall.

5. While almost purely centralized organizations have and do exist, almost purely decentralized organizations are extremely rare, and a purely decentralized organization by definition would not be an organization at all. 

6. There is always a need for a decentralized organization to maintain a good measure of centralized control.  The risks of losing control of an organization are numerous and great.  For instance, a front-line sales representative with too much authority and power might give below cost discounts in order to make a sale, which is most likely not in a company’s best interest.

7. Centralized decision making can lead to managers in separate divisions reporting distorted or biased information because the managers want to influence decisions to favor their own division.  A benefit of decentralizing decision making authority is that it eliminates this problem. (Alonso, Dessein, & Matouschek, 2008)

8. For decentralization to succeed, employees must be well trained and highly competent.  Therefore, accessible, relevant, and well-managed training and development programs are a key to success. (Heiden, 2007)

9. The Miles and Snow hypothesis of 1978 contends that organizations will perform better if their organizational structure and strategy match.  “Centralized decision making works best in conjunction with defending [organizations], and decentralized decision making works best in organizations that emphasize prospecting.” (Andrews, Boyne, Law, & Walker, 2009, p. 57)  Defending organizations are trying to defend their market position and typically compete by increasing efficiency of current operations and lowering the price and/or improving the quality of current products and services.  Prospecting organizations look for market opportunities and compete by introducing new products and services. (Andrews, Boyne, Law, & Walker, 2009)

10. With the advancements in communication technology, such as the internet, a centralized structure has become more feasible, especially for international organizations, because managers are now able to easily monitor and direct employees from anywhere in the world, strategies can be instantly shared and coordinated, and knowledge based competencies are more easily transferred and broadened to a global scope.