As far as we are concerned with different business organizations, Centralization and Decentralization are two relative terms. Centralization focuses all the decision-making functions at the top of the management hierarchy. Such a situation would get rid of the need for a management hierarchy. In other words, the decision-making authority lies with the higher management. Decentralization implies assigning all the decision-making functions to the lower level of the hierarchy, and that would remove the need for higher management, i.e., the decision-making authority is divided between all the levels of the hierarchy. Both of these situations are unrealistic, and therefore both centralization and decentralization are needed in the working of an organization.
Interdependence between Centralization and Decentralization
An organization is both centralized as well as decentralized. In many organizations, all the major decisions are taken by the top level, while in some organizations that power is vested in the lower organizations. The organization whose decisions are taken by the top management are known as centralization, whereas the organizations whose decision-making responsibilities are distributed between the lower levels are termed decentralization. It is more likely for an organization to make decentralized decisions because of its constant growth and complexity. In larger organizations, the employees who are at the lower levels are usually more involved in different kinds of operations and tend to have more knowledge and understanding about the working of the organization. Therefore, there is a need for both forces in an organization. Thus, there should be a balance between centralization and decentralization in every organization.
Delegation is more important than Decentralization
Delegation means the downward flow of responsibility and authority from top management or superior to lower levels of management or subordinate. Delegation helps the organization to work efficiently by enabling the manager to use his time to focus on other important tasks. It also gives the subordinates some kind of recognition and also provides them with opportunities to help them develop.
Delegation helps the manager to extend his work as he can distribute his responsibility and work on other areas otherwise his responsibilities would be restricted to only what the manager might be capable of doing. This does not mean that he will not be accountable for the tasks performed. The authority delegated to the subordinate can be taken back or transferred. But irrespective of the delegation, the manager will still be responsible for the assigned tasks.
Delegation is much more important than decentralization. This is because in decentralization only the decision and authority are passed on between different levels of management whereas in delegation the manager transfers some of his authority and responsibility to his subordinates. Delegation is required in almost every field whether big or small. An organization cannot work without delegation. While on the other hand decentralization is only a part of mostly bigger organizations. It is not mandatory.
Decentralization is an extension of Delegation
When in delegation, the management of an organization is evenly assigned to the lower levels, which eventually leads to decentralization. In delegation, the managers assign some of their tasks to their subordinates, and they have to work accordingly. In delegation, the authority is just transferred by the manager to the subordinates, whereas in decentralization, it is passed on to the subordinates of different levels of management. Thus, in decentralization, the authority passed on by the manager to subordinates is multiplied from a single level of management to several different management levels. Therefore, we can say that delegation is an extension of decentralization.
Importance of Decentralization
Decentralization is not only the passing of authority onto the lower levels of management, but it also involves the selective distribution of authority to the lower levels because of the belief that they are resourceful, knowledgeable, and efficient. Decentralization is an important step, and it can be understood by the following points:
- Develops initiative among subordinates: Since the lower levels of management have to make decisions on their own and perform the tasks with the help of their capabilities, they become more confident and self-reliant. It also enables them to stay focused and find the answers to solve all the different kinds of problems they might have to face. Decentralization is helpful for the subordinates to develop and identify themselves, and also to find their potential to become strong leaders.
- Develops managerial talent for the future: The experience that a subordinate gain from handling different kinds of tasks and situations is equally important that one receives from the training based on skills and talent. Decentralization gives the subordinates a purpose to prove themselves and helps them build their potential to qualify for a more ambitious position through promotion. It is also a means to identify those persons who are not ready and need more training and development. Thus, it is an opportunity for the subordinates to implement their training in real-life situations.
- Quick decision making: In centralization, the decisions are taken by the top level of management, which has to be transferred down to the lower levels. This transfer of information has to go through several levels, which could slow down the response and hence the decision-making. However, in decentralization, the decisions are taken even at the lower levels, so they are already updated, and therefore, there is no need for the information to travel through long channels for their approval. This makes communication quick and easy and also saves up a lot of time for the organization. Besides this, the information is more accurate, as there is no need for it to pass through all the levels of management.
- Relief to the Top management: Decentralization reduces direct management of the subordinates at the hands of the superiors, as the subordinates are free to act and manage the given activities by the restriction set by the top management. The top management can focus better on the policy decisions, i.e., future decisions, rather than being concerned with both policy and operational decisions. They can invest their time in thinking and planning for the future of the organization without being worried about daily activities. Thus, decentralization is helpful as the superiors do not have to check up on all the decisions made by the lower levels every single time.
- Facilitates growth: Decentralization makes the lower levels as well as the top management or departmental heads self-reliant. This allows them to make better decisions concerning their departments. Decentralization also creates a competitive environment for different departments, which enables them to compete and excel with each other. This competition promotes productivity and allows the different departments to generate greater returns to help expand their business.
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Better control: Decentralization makes it possible for the top management to manage and control each level based on their performance. Also, their department will be held responsible for their actions alone. The result accomplished by the organization and the contribution of each department in achieving those objectives can be determined through decentralization. Reports received from each level help the organization understand and improve its performance of the organization. This encourages the organizations to improve and develop an innovative system of management.