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Volume I, Issue I (2017) pp. 11-23

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HOW CENTRALIZATION AFFECTS THE EMPLOYEE PERFORMANCE

IN HOSPITALITY ORGANIZATIONS?

Publication No. SM-17-I-II

Faryal Malik1 (Corresponding author)

[email protected]

Bahria University, Islamabad

Haseeb Rehman2

[email protected]

Bahria University, Islamabad

Abstract

The underlying research has conducted an empirical investigation to assess the impact of degree of

centralization upon employees’ performance. The study has focused on the soft dimensions of

performance, i.e., satisfaction and commitment. The data has been collected from 100 employees

of different five-star hospitality organizations situated in twin cities of Pakistan, i.e., Islamabad and

Rawalpindi. The study has used the Robbin’s standardized questionnaire on organizational

structure. However, the questionnaire was amended according to the prevailing research context.

The data has been mainly collected from the middle managers who remain in touch and supervise

the frontline staff. Pearson Correlation and Linear regression tests have been run to report the

findings. The results have proposed that the degree of centralization explains 15 percent of the

employee performance measured in terms of satisfaction and commitment. However, the Pearson

Correlation, as well as Linear Regression have proved that the impact is moderately negative, yet

statistically significant. Management of modern organizations needs to adopt a moderate approach

and wisely choose the best fit between centralization and decentralization to ensure effective

alignment with organizational culture and characteristics of its human resource. The structure

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SCIMASS (Scientific Journal of Management and Social Sciences) Volume I, Issue I (2017)

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should be centralized enough to empower the top management in strategically important issues and

decentralized enough to foster innovation and satisfy core psychological needs of the workforce.

Keywords: Organization Structure, Centralization, Employee Performance, Job Satisfaction,

Employee Commitment.

Introduction

Organizational structure is regarded as an anatomy which offers a basis for effective functioning.

The structure of an enterprise has a significant impact on the employees’ behaviour which consequently

affects their productivity (Harper, 2015). The effect could either be positive or negative, depending upon

the alignment of the structure with the prevailing culture. Hence, the deficiencies prevailing in the structure

have strong tendency to influence the behavior and performance of employees negatively, resulting in a

decline in overall organizational performance (Alomuna & Chima, 2016). In the contemporary era, the

major issue being faced by modern enterprises is the successful alignment of organization’s structure with

its culture (Alagaraja & Shuck, 2015). How the resources are allocated, how the employee ranking is made,

how teams are formulated and how the structural hierarchies influence the communication between

supervisor and subordinates to determine the structure-culture alignment efficiency.

The technological advancement and major transformations in the macro-environment have induced

the organizations to focus on the competency building of their human resource, which has become the only

competitive edge in today’s hyper-competitive market (Albrecht, Bakker, Gruman, Macey & Saks, 2015).

However, it is equally crucial for the firms to identify the factors that affect the competency and productivity

of their employees. Organizational structure is one of most widely studied factors that have a significant

impact on the employees’ performance. The studies have suggested that organizations need to integrate the

structure that aligns with the specific working environment and determines the alignment efficiency by

assessing the reaction of its human resource towards the integrated structure (Buller & McEvoy, 2012). The

underlying study would specify its focus upon the influence of centralization, which is one of the most

important dimensions of the organizational structure, upon employee performance. This research would

measure the employee performance in terms of motivation and satisfaction, and investigation would be

carried out in the hospitality sector of Twin cities of Pakistan, i.e., Rawalpindi and Islamabad. The research

has based its theoretical model on Robbins (2008) theory of organizational structure.

Literature Review

Review of literature has revealed that hotel management is significantly influenced by the typical

notion of management and leadership (Pittaway, Carmouche, & Chell, 1998). A recent study has also

confirmed that hotel employees tend to follow a particular structure and instructions from the top

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management (Yen & Teng, 2013). Traditionally, the hospitality organizations have been characterized by

a high degree centralization, which is signified by authority order and centralized decision making where

input from employees is not taken. A number of previous studies has discussed the policies and practices

of hospitality organizations as inflexible and archaic (Tracey & Nathan, 2002). Raub (2008) has contended

that acceptance of the prevailing work environment is considered as the value, deeply integrated into the

industry’s culture. Hence, generally, highly centralized structure prevails in most of the hospitality

organizations, requiring formal systems and routines for coordination of tasks and successful achievement

of organizational goals and objectives (Øgaard et al., 2008).

However, a more recent study conducted by Pavia & Pilepić (2010) has negated the findings of

previous researchers and has contended that the traditional centralized structure in hospitality organizations

has transformed to become more flexible and process teams have caused the management to delegate

authority and promote the culture of shared decision making. In a decentralized environment, the employees

are not supposed to follow the strict hierarchal order and obey the commands given by their supervisor, but

to focus on the customer needs and devise ways to enhance customer satisfaction by utilizing the delegated

authority. Erstad (1997) has defined the employee empowerment as a strategy to foster an organizational

change in the context of the hospitality industry. According to Pavia and Pilepic (2010), the shared decision

making in hospitality organizations has become an integral part of every process and human resource has

become autonomous and responsible for making decisions on a collective basis. Hence, in the contemporary

era, the hospitality industry has integrated both notions, centralization and decentralization for bringing

structural alignment and efficiencies (Yen & Teng, 2013).

Lambert, Paoline and Hogan (2006) conducted a study to assess the impact of formalization and

centralization on organizational commitment and job satisfaction of employees. A survey was conducted

to collect the responses from 272 employees, employed at the Midwestern state prison. the researchers

assessed the centralization in two important dimensions, job autonomy and decision making input. The

findings revealed that the hob satisfaction and commitment with the organization were negatively affected

in the absence of shared decision making and job autonomy. The results were the same for employees as

well as correction officers. Contrary to this, the formalization carried a positive effect on satisfaction and

commitment. Al-Saber and Al-Foraih (2001) conducted an empirical investigation to assess the impacts of

the change in organizational structure measured in terms of centralization, formalization, size and

configuration upon the performance of employees. The results revealed that organizational structure is

strongly correlated with the employees’ motivation and satisfaction with the job. Moreover, the results of

paired sample t-test revealed that productivity of employees was higher when the structure of the

organization was aligned with the characteristics of its human resource.




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Centralization has been defined as the authority locus to make important strategic decisions at the

organizational level (Mok, 2013). For example, if the decision-making authority is withheld by only one or

a few individuals, then the organization would have a centralized structure. Whereas, if the authority to

make decisions is dispersed and input from every member of the organization is taken before making any

important decision, then the structure is considered to be decentralized (Modrak, Radu and Modrak, 2014).

Hence, the centralization could be regarded as the authority dispersion within an organization (Mok, 2013).

Previous literature has reported a mix of findings while assessing the impact of centralization on employee

performance at the unit level.

Some studies (e.g. McMahon, 1976; Miller, 1967) have reported the negative effects of

centralization on the efficiency of the human resource while some studies (e.g. McMahon & Ivancevich,

1976; McMahon & Perritt, 1971) have proposed that centralization does not have any effect on employee

performance. The findings have been the same when the assessment was made on organizational level (e.g.

Beck & Betz, 1975; Luke, Block, Davey, & Averch, 1973; Sorensen & Baum, 1975) which reported a

negative association, while some studies (e.g. Bowers, 1964, Fiedler & Gillo, 1974; Reimann & Neghandi,

1976) reported no association between both the variables.

An empirical evidence in the context of Pakistan suggests that centralization and management’s

leadership style has a significant effect on employee performance. For instance, Hassan et. al. (2011)

conducted an empirical investigation to assess the leadership’s decision-making style and reported that

autocratic and political style of leadership negatively affects the employee performance as well as the

overall organizational effectiveness. Another empirical investigation was carried out by the Hunjra et. al.

(2010) in context of Banking sector of Pakistan. The research was executed to assess the factors that induced

the employees to leave the organization. The findings reported that male employees were more likely to

leave the organization when they were not given opportunity to participate in the decision-making process.

Overall, the study concluded that centralized decision making results into reduced employee satisfaction

and a consequent high turnover.

Overall, the existing research does not propose a unified result, and it is difficult to arrive at a

precise conclusion. The contradictory findings in the literature suggest that there is a need to conduct more

context specific research and further explore the underlying phenomenon so that a firm conclusion could

be made. As discussed earlier, the centralization has been the key characteristic of the hospitality sector .

However, the latest advancements in macro-environment have caused the hospitality management to revisit

their management and leadership philosophy. The current research would explore the issue by assessing

the soft aspects of employee performance, measured in terms of satisfaction and motivation.

Hypothesis development


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The underlying research has been executed to assess one main hypothesis.

H1: Centralization has a significant effect on the employee job performance.

Method

The underlying study has chosen a descriptive and practical approach by executing the survey,

whereas the nature of the study is correlational. The research scope has been formulated by exploring

different dimensions of the underlying phenomenon; that is centralization and performance. The

centralization was mainly gauged by dispersion of authority, decision-making practices, job autonomy, the

number of hierarchies and prevailing communication channels. The data was collected within the time

scope of 1st November 2016 to 8th of December 2016. Whereas, the research area scope of the research was

the five-star hospitality organizations of twin cities of Pakistan. The study used the Robbins standardized

questionnaire on organizational structure and added the questions pertaining to job satisfaction and

employee commitment on the basis of the model proposed by Thomas & Velthouse (1990) and Porter,

Steers, Mowday & Boulian (1974). However, the questionnaires were adapted in compliance with the

requirements of the present research. The data was mainly collected from the middle managers that remain

in touch with and supervise the frontline staff. The Likert scale was employed to measure the responses. In

order to get a quick response, a questionnaire was emailed to different organizations after getting the

consent on the telephone. In order to assess the validity, firstly, a pilot study was run, and reliability test

was conducted which was taken by 30 respondents. Afterwards, percentage analysis, Pearson Correlation

and Linear Regression tests were run to test the study hypothesis. Initially, the questionnaire was sent to

around 220 respondents. However, the response rate was 48 percent, amounting to 106 questionnaires. Out

of 106, 6 questionnaires were half filled, so they were excluded from the analysis. Random sampling

technique had been opted to draw the sample considering the ease of its use and time constraints.

Results

Reliability Analysis

Reliability Statistics

Cronbach's Alpha N of Items

.809 17

0.7 is considered as the ideal value for Cronbach alpha. Any value equal or above 0.7 is deemed to be

adequate. Here, the value for Cronbach alpha is 0.809 while the total number of items (questions) is 17.

These results have confirmed that the research instrument used in the execution phase is reliable and valid.

Demographic Analysis


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Age

Frequency Percent Valid

Percent

Cumulative

Percent

Below 20 5 5.0 5.0 5.0

21-30 35 35.0 35.0 40.0

31-40 40 40.0 40.0 80.0

41-50 16 16.0 16.0 96.0

Above 50 4 4.0 4.0 100.0

Total 100 100.0 100.0

The findings collected from the close ended questionnaire predicted that the majority of the respondents

were middle-aged (30-40 years old), however, below 20 and above 50 aged group made the lowest

contribution.

Education


Percent

Cumulative

Percent

Intermediate 6 6.0 6.0 6.0

Bachelors 27 27.0 27.0 33.0

Masters 54 54.0 54.0 87.0

MPhil/PhD 3 3.0 3.0 90.0

Vocational 10 10.0 10.0 100.0

Total 100 100.0 100.0

With respect to education, the demographic analysis showed that majority of the respondents were Master’s

degree holders followed by Bachelors. Whereas, the MPhil/PhD group made the lowest contribution.

Experience


Percent

Cumulative

Percent

Less than year 8 8.0 8.0 8.0

1-2 years 13 13.0 13.0 21.0

2.1-3 years 30 30.0 30.0 51.0

3.1-4 years 43 43.0 43.0 94.0

above 4 years 6 6.0 6.0 100.0


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Total 100 100.0 100.0

The experience was the last demographic variable. The above table has shown that majority of the

respondents were having 3 to 4 years of experience, amounting to 43 percent of the total sample. Whereas,

respondents having above four years of experience made the proportion of only 6 percent.

Pearson Correlation

Correlations

Centralization

Employee

Performance

Centralization Pearson Correlation 1 -.388**

Sig. (2-tailed) .000

N 100 100

Employee

Performance

Pearson Correlation -.388** 1

Sig. (2-tailed) .000

N 100 100

**. Correlation is significant at the 0.01 level (2-tailed).

In order to assess the nature and strength of causal association prevailing among centralization and

employee performance, the Pearson Correlation was run, and results revealed that centralization has a

moderately negative, yet, statistically significant impact on the employee performance, with the Pearson

Correlational values of (r=-0.388, p<0.005). The results have confirmed that the employee performance

derives a negative influence from centralization.

Linear Regression

Model R R Square

Adjusted R

Square

1 .388a .150 .142

a. Predictors: (Constant), Centralization

b. Dependent Variable: Employee Performance

In order to check the overall statistical significance of the theoretical model, the underlying study

executed the Linear regression test. The above table shows the power of explanatory variable along with

the ability of an independent variable to describe the variation in the dependent variable. The R (0.388)


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shows that the explanatory variable that is centralization has significant strength. Nevertheless, it can be

enhanced by adding more variables. Similarly, the value for adjusted R Square is 0.142 which infers that

centralization is causing the 14.2 percent fluctuation in the soft dimensions of employee performance. The

figure, in this case, is not very strong. However, acceptance or rejection of the study hypothesis would

depend upon the value of the F-statistic and corresponding value of significance.

The above table has shown the value of F-statistic and corresponding Sig. value, (F (1,98) =17.332,

p<0.005). These results suggest that the overall theoretical model is statistically significant and

centralization has successfully explained the variation in the employee performance.

Model

Unstandardized Coefficients

Standardized

Coefficients

t Sig. B Std. Error Beta

1 (Constant) 4.176 .295 14.160 .000

Centralization -.387 .093 -.388 -4.163 .000

a. Dependent Variable: Employee Performance

Here, the table has shown the t-statistic value and corresponding value of significance. The overall

model has achieved statistical significance on collective as well as individual basis with the corresponding

values of (t=14.160, p<0.005) and (t=-4.163, p<0.005) respectively.

Hypothesis Summary

ANOVAb

Model Sum of Squares Df Mean Square F Sig.

Regression 7.779 1 7.779 17.332 .000a

Residual 43.981 98 .449

Total 51.760 99

a. Predictors: (Constant), Centralization

b. Dependent Variable: Employee Performance


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On the basis of these results, the underlying study has rejected null hypothesis which suggested that

no relation exists between centralization and employee performance. Whereas, the alternate hypothesis has

been accepted.

Discussion and Conclusion

The literature on organizational behavior has widely discussed the relationship between structural

properties and behavioral, attitudinal and psychological responses of the human resource at the individual

as well as collective level (e.g. Berger & Cummings, 1979; Kohn & Schooler, 1973; Kohn, 1976). The most

widely discussed structural properties are centralization, formalization, a configuration that refers to the

total number of hierarchical levels, and firm size (James & Jones, 1979). Moreover, literature also contains

enriched evidence to assess the significance of the relationship between structural dimensions and the

reaction of human resource measured in terms of productivity, motivation and satisfaction (Berger &

Cummings, 1979). However, a few theorists have developed and tested the models, which determine the

influence of structural properties upon human resource at the individual level (Oldham & Hackman, 1981).

On the basis of empirical research, the underlying study confirms the statistically significant

association between both the variables. The findings of the study have been found to be in coherence with

many researchers, while results of some previous studies have been negated. The existing literature on the

structure-performance relationship is one of the most ambiguous and vexing study area of organization

behavior and management. Generalization and evaluation pertaining to the directions and nature of this

association are tenuous. The findings of the current study carry an element of generalizability due to its

quantitative nature. However, small sample size and industry and region-specific nature of the study

restricts the generalizability of findings.

The present study has proposed that the centralized decision making, strict hierarchy and long chain

of commands tend to reduce the employee satisfaction, which in turn lessens the commitment with the job

and organization. Effective employee performance is dependent upon the satisfaction and commitment of

human resource. Various studies have confirmed the association between satisfaction, commitment and

productivity. A satisfied and committed workforce is more productive as compared to unsatisfied and

uncommitted one. The underlying research has focused on the soft dimensions of employee performance.

Since the Williamson and Chandler’s seminal contribution, an extensive body of research has assessed the

performance benefits of divisionalization of the organization.

However, many studies have negated the possibility of association between structure and

organization (e.g. McMahon & Ivancevich, 1976; McMahon & Perritt, 1971 Bowers, 1964, Fiedler & Gillo,

1974; Reimann & Neghandi, 1976), whereas, various other studies have contended that structure negatively


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affects the performance (e.g. McMahon, 1976; Miller, 1967 Beck & Betz, 1975; Luke, Block, Davey, &

Averch, 1973; Sorensen & Baum, 1975). While many other types of research, particularly conducted in the

context of hospitality industry have contended that centralized structure positively affects the employee

performance (e.g. Pittaway, Carmouche, & Chell, 1998; Tracey & Nathan, 2002; Raub, 2008; Øgaard et al.,

2008), the current study has deviated from the previously held notion that employees in hospitality industry

seek instructions from supervisors and feel comfortable in a centralized structure. Research has proposed

that the latest advancements in the hospitality sector have changed the preference and mindset of employees

of the hospitality sector and modern human resource seeks autonomy and authority instead of obeying

instructions from supervisors (as reported by Pavia & Pilepić, 2010). However, the statistically significant

yet moderate impact suggests that organizations need to leave the traditional strict hierarchal structure and

wisely choose the best fit between centralization and decentralization to ensure effective alignment with

organizational culture and characteristics of its human resource. The structure should be decentralized

enough to foster innovation and satisfy core psychological needs of the workforce.

Future Research

The future researchers are suggested to include the hard criteria of employee performance while

assessing the impact of centralization. The evidence available in current literature has mostly focused on

the soft dimensions of performance, and there is a need to assess the hard aspects further before arriving at

a firm conclusion. Moreover, majority of the studies have employed the quantitative approach that is based

upon the restrictive interpretation of facts and hinders the in-depth exploration of the issue at hand.

Qualitative research might be employed, and a holistic view might be adopted by taking the hard and soft

aspects of performance to make a valuable contribution to existing empirical literature.

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