What is Centralization?
Centralization is a type of organizational structure in which systematically the decision-making power is vested only in the top management. The top manager makes all the decisions in the organization and is responsible for his decisions and results.
As in this structure, the decision-making power is centered only on the top manager or only a few members of the organization it is also commonly referred to as the centralization of authority. Here, subordinate employees do not have the right to make decisions however they must follow and implement the decisions made by the top manager.
In a centralized organization, considerable accountability and responsibility remain at the top of the hierarchy. Top management makes all the decisions without the consent of the subordinates. And, the role of subordinates is only to implement the decisions made by top management.
This philosophy of management is best suited in small organizations where there are few employees, few resources, and few operations to handle. However, this philosophy may not be effective when a business expands and requires conducting various business operations simultaneously.
Advantages of Centralization
The following are the notable advantages of centralization of authority.
Unity in Decision
In a centralized organization, all significant choices are made by senior management or the general manager. Without any dissent, subordinates must carry out the upper level’s decision. As a result, it becomes simple to maintain consistency and uniformity in decisions inside the business.
Related: Unity of Direction
Less Operation Cost
Numerous positions within the organizational hierarchy might be eliminated because there is just one decision-maker. This lowers the cost of administration. As a result, only a selected few managers can do the job with the lowest possible production cost.
As decisions are made at the top level by a small number of people, only a few levels and roles are applicable under this management concept. The top manager’s direction and instructions must be obeyed by every employee.
It is not necessary to delegate authority to several individuals through a complicated process. This organizational structure is therefore simple to recognize and use.
In a centralized system, all decisions are made by the top leader. A leader handles every facet of the business. Talented decision-makers act swiftly.
There won’t be any ambiguity regarding choices or courses of action. Leaders develop their creativity and competitiveness in this process. This provision facilitates the quick growth of the organization.
A top manager makes all the decisions, and departmental managers and subordinates need to implement the decisions. This reduces the chance of interdepartmental conflict in resource utilization. Thus, central decision-making improves coordination and control.
No Duplication and Overlapping
There won’t be any duplication or overlap of activities because there is just one senior management who makes all choices. There will be no possibility of making decisions more than once.
At the same time, there will be no chance of completing any task. Thus, the centralization management philosophy facilitates the maximum utilization of resources.
Top managers maintain a close relationship with every supervisor and subordinate. Activities and efforts of every unit and department are integrated for organizational purposes. Effectiveness and efficiency can be increased with the synergy effect. This facilitates organizational growth and expansion.
Suitable for Small Businesses
Centralization of authority is highly suitable for small businesses conducting operations in a competitive environment. In such organizations, the top manager can personally look after the all activities of the business.
Read Also: Types of Organizational Structures
Disadvantages of Centralization
Centralized philosophy is not always beneficial. It is not suitable for large and diversified businesses. It also has many drawbacks despite its many advantages. Some of its disadvantages are:
Delay in Decision
Because the files must be moved from the bottom to the top level in order to make decisions, there is a chance that the process will take longer than expected. Only one person always can not make all the decisions quickly. This increases the chances of losing business opportunities and profitability.
In centralized companies, subordinates’ abilities cannot be used in the decision-making process. Even for many functional areas, all decisions must be made by a single management. Making all the judgments swiftly and efficiently may not be possible for one person.
Thus, the limited capacity of the manager may decrease the quality of the formulation of strategies operational plans, and implementation which results in low performance of the organization.
As only one person has to make all the decisions, the top manager has to always work under overload. It delays decision-making. This also decreases the quality of decisions. This may prevent business growth.
Low Morale and Motivation
Middle-level managers, supervisors, and operating employees are not involved in the decision-making process. They have only the responsibility of job accomplishment but not the authority to make decisions. They have to wait for decisions from top authorities.
They even do not get an opportunity to show their skills and potential. These reasons decrease the morale and motivation of employees. As such, the turnover of qualified and skilled personnel gets increases.
Misuse of Power
The top manager makes decisions on the basis of personal judgment as the authority is centralized. The decision-maker may think he/she is the sole authority of the organization. This increases the chance of misuse of power for personal benefit.