Decentralization means diffusion of authority. The dispersal of the authority of decision-making to the lower level management is termed as decentralization. Decentralization of authority is a fundamental phase of delegation and the extent to which authority is not delegated is called centralization.
What Does Decentralization mean?
Everything that goes to increase the importance of the subordinate’s role is called decentralization.
Decentralization about office denotes the disperse of office services and activities. The necessity of decentralization of office services occurs when official activities are performed at the functional departmental level.
Thus, decentralization about the office may include departmentation of activities. When authority is dispersed, decentralization is present.
The need for decentralization is felt when the business grows in its size which necessitates diversification of office activities.
Decentralization occurs at the time of decisions of routine nature but if decisions are vital, the authority is not decentralized. The technological development, political factors, availability of managers also affects the degree of decentralization. Decentralization does not exist in its pure sense.
In a decentralized organization, decision-making authority is spread throughout the organization rather than being confined to a few top executives. All large organizations are decentralized to some extent out of necessity.
At one extreme, a strongly decentralized organization empowers even the lowest-level managers and employees to make decisions.
At the other extreme, a strongly centralized organization provides lower-level managers with little freedom to make decisions. Most organizations fall somewhere between these two extremes.
Decentralization is a fundamental aspect of delegations to the extent that authority is not delegated, it is centralized. Absolute centralization in one person is conceivable.
But it implies no subordinate managers and therefore no structured organization. Consequently, it can be said that some decentralization characterizes all organizations.
On the other hand, there cannot be absolute decentralization, for if managers should delegate all their authority, their status as managers would cease, their position would be eliminated, and there would, again, be no organization.
Centralization and decentralization are therefore tendencies; they are qualities like “hot” and “cold”.
Although closely related to delegation of authority, decentralization is something more: it reflects a philosophy of organization and management.
It requires careful selection of what decisions to push down into the organization structure and what to hold at or near the top, specific policy-making to guide the decision-making, selection and training of people, and adequate controls.
A policy of decentralization affects all areas of management and can be looked upon as an essential element of a managerial system. It is a fact that, without decentralization, managers cannot use their discretion to handle the ever-present and ever-changing situations they continually face.
- Relieves top management of some burden of decision making.
- Gives managers more freedom and independence in decision making.
- Promotes the development of general managers.
- Encourages the assumption of authority and responsibility.
- Makes comparison of the performance of different organizational units possible.
- Facilitates product diversification.
- Aids in adaptation to a fast-changing environment.
The following diagram indicates the tendencies towards decentralization—from complete centralization to complete decentralization.
Importance of Decentralization
The major importance of decentralization include:
Reduces the burden of top executives
Decentralization of authority relieves top executives from operating details or routine work so that they can concentrate on more important functions of policy-making, coordination, and control.
As a company grows beyond the reach of the chief executive, decentralization becomes necessary. By delegating authority for operating decisions, top management can extend its lead over a giant enterprise.
Quick and better decisions
Decentralization permits prompt and more accurate decisions because decisions are made by those who are fully aware of the realities of the situation. Decisions can be made near the point of action without consulting higher levels and without waiting for the approval of top executives.
Growth and diversification
Decentralization facilitates growth and diversification of products and markets. Under decentralization, each product line is treated as a separate division so that it can respond quickly to the changing demands of its special market.
The self-contained product divisions enjoy considerable independence and proper emphasis can be put on each product line under the overall coordination and control of top management.
Decentralization improves organizational communication and efficiency because there are fewer levels of authority. The problems of red-tape and bureaucratic delays are reduced.
Development of executives
Decentralization provides an opportunity to subordinate managers to take initiative and acquire leadership qualities. Lower-level executives learn to manage by exercising delegated authority.
A reservoir of promotable managers becomes available which -simplifies management successions and helps to ensure continuity of management.
Decentralization promotes autonomy, initiative, and creativity on the part of subordinates.
As the success and survival of the organization do not depend upon a few individuals at the top, decentralization makes for stability and continuity of the enterprise.
Improvement in motivation and morale
Decentralization improves job satisfaction, motivation, and morale of subordinates. Opportunity to make decisions provides a sense of belonging and satisfies the needs for power, prestige, status, and independence.
A climate of competition is generated. High motivation and morale help in improving productivity and working relationships. Better utilization of talents at lower levels can be made.
Effective supervision and control
Decentralization results in effective supervision because managers at the lower levels have complete authority to make changes in work assignments, to take disciplinary action, to recommend promotions and to change production schedule.
Decentralization also promotes effective control through a comparative evaluation of performance and clear-cut accountability for results.
Decentralization makes for democratic management and flexibility of operations. People at lower levels do not feel alienated from the top and there is little danger of administration becoming top-heavy or monolithic.
Necessary changes can be made without dislocating the entire structure.
Advantages of Decentralization
The major advantages of decentralization include:
- By delegating day-to-day problem solving to lower-level managers, top management can concentrate on bigger issues such as overall strategy.
- Empowering lower-level managers to make decisions puts the decision-making authority in the hands of those who tend to have the most detailed and up-to-date information about day-to-day operations.
- By eliminating layers of decision making and approvals, organizations can respond more quickly to customers and changes in the operating environment.
- Granting decision-making authority helps train lower-level managers for higher-level positions.
- Empowering lower-level managers to make decisions can increase their motivation and job satisfaction.
Disadvantages of Decentralization
- Lower-level managers may make decisions without fully understanding the big picture.
- If lower-level managers make their own decisions, coordination may be lacking.
- Lower-level managers may have objectives that clash with the objectives of the entire organization. 1 For example, a manager may be more interested in increasing the size of his or her department, leading to more power and prestige, than in increasing the department’s effectiveness.
- Spreading innovative ideas may be difficult in a decentralized organization. Someone in one part of the organization may have a terrific idea that would benefit other parts of the organization, but without a strong central direction, the idea may not be shared with and adopted by, other parts of the organization. This problem can be reduced by effective use of intranet systems that make it easier for information to be shared across departments.
Decentralization and Participative management
Some people get the idea that the more decentralized an organization is, the more democratic or participative it is in terms of managers sharing decision-making with subordinate employees. This is not necessarily true.
Decentralization, however, involves pushing some decision-making down the line to subordinate managers, and, in this sense, it develops more participation in decision-making.
However, this does not mean that all subordinates will participate in all decision-making.
In the first place, as has been noted, decisions on some matters are reserved by upper-level managers and others may be made only by the top managers and, in some cases, even by the board of directors.
In the second place, delegation to subordinate managers of authority to make decisions at their respective levels does not mean that these managers will allow their subordinates to share in top-level decision-making.
Some managers at upper levels may be highly participative or democratic in the way they make decisions, and others may not be. Essentially, decentralization and participative management are different matters.
Decentralization and Segment Reporting
Effective decentralization requires segmented reporting.
In addition to the companywide income statement, reports are needed for individual segments of the organization. A segment is a part or activity of an organization about which managers would like cost, revenue, or profit data.
Cost, profit, and investment centers are segments as are sales territories, individual stores, service centers, manufacturing plants, marketing departments, individual customers, and product lines.
A company’s operations can be segmented in many ways. With the appropriate database and software, managers could easily drill even further down into the organization.
For example, the sales in California could be segmented by product family, then by product line. This drill-down capability helps managers to identify the sources of strong or weak overall financial performance.
These segmented income statements are useful in analyzing the profitability of segments and in measuring the performance of segment managers.