Merits and Limitations of Centralisation and Decentralisation | Business Management (2024)

This article provides a comparative account of the merits and limitations of centralisation and decentralisation.

Comparative Account # Merits of Centralisation/Limitations of Decentralisation:

Following are the advantages of centralisation/limitations of decentralisation:

(i) Consistency/Lack of Consistency in Decision-Making:

Centralisation leads to consistency in decision-making; because decisions are taken by a small group of managers at upper levels of management.

According, there are lesser problems of co­ordination. In decentralisation, there is a lack of consistency in decision-making; because a large number of managers at lower levels may decide the same issue in diverse manners – despite operating within the organisational policy framework. Accordingly, problems of co-ordination are accentuated.

(ii) Strong/Weak Top Management:

Centralisation of authority strengthens top management; and it is in a position to provide outstanding leadership to the whole enterprise by virtue of its vast authority. Under decentralisation, top management is rather weak; as most of its powers are given away among lower levels of management. It is not in a position to provide outstanding leadership to the organisation, because of its reduced powers.

(iii) Lower/Higher Costs of Administration:

In a centralised set-up of the organisation, the cost of administration is lesser; because the enterprise can operate with a limited number of managers. This is a good advantage of centralisation, in the present-day-times characterised by highly inflationary conditions. In a decentralised set-up, the cost of administration is higher; because to operate the decentralised units, a large number of managers is necessitated.

(iv) Broad/Narrow Approach to Managing:

In centralisation, the top management has a broad outlook to managing; as it takes decisions from the system’s perspective – viewing the functioning of the organisation as a whole. In decentralisation, the managers of decentralised units have, usually, a narrow outlook to managing. For them, their own departmental interests are supreme – as against the overall interests of the whole organisation.

(v) Discouraging/Encouraging Inter-Departmental Conflicts:

Centralisation discourages inter-departmental conflicts; because major decisions of departments are taken at upper levels of management with an orientation towards departmental co-operation.

Decentralisation encourages inter-departmental conflicts; because different departmental managers take decisions in their own unique manners and styles, by virtue of, their vast powers and hell care for departmental co-ordination and co-operation.

(vi) Mature/Risky Decision-Making:

In centralisation, upper management, because of its experience, wisdom and broad outlook, is more mature in decision-making. Such decisions carry the chance of being least risky. In decentralisation, lower level managers, because of their less experience, wisdom and narrow outlook are less mature in decision-making.

Sometimes, under decentralisation such risky decisions might be taken as might endanger the very survival of the business enterprise.

(vii) Retention/Loss of Control by Top Management:

In centralisation, top management retains tight control over the whole organisation, because of its vast powers. In decentralisation, top management’s control over the organisation is loosened; as its substantial powers are passed on to the lower levels of management.

(viii) Optimum/Less than Optimum Utilisation of Resources:

Under centralisation, there is an optimum utilisation of organisational resources, because of rational allocation of scarce resources among different uses. Under decentralisation, there may be, at times, less than optimum utilisation of resources; because the same set of activities may be duplicated in various decentralised units – leading to wastage of precious organisational resources.

(ix) Efficient/Inefficient Handling of Emergencies:

In centralisation, there is an efficient handling of emergencies by top management; and it can overcome organisational crises in an intelligent and planned manner. In decentralisation, lower level management may be frightened by emergencies and run to seek the shelter and guidance of top management for handling emergency situations.

Failure to effectively deal with emergencies by lower level management, may tell upon the survival and prosperity of the whole enterprise.

(x) Suitable/Unsuitable in the Present-Day Environmental Scenario:

Centralisation/re-centralisation is highly suitable for tackling present-day environmental scenario; which is highly volatile and turbulent. Under these circ*mstances, top management can take sound decisions in consultation with specialists, from various fields.

Present-day environmental scenario makes decentralisation impractical. For taking sound decisions under these circ*mstances, top management cannot provide specialists to every Tom, Dick or Harry manager at lower levels in the organisation, because of financial implications.

Comparative Account # Limitations of Centralisation/Merits of Decentralization:

Following are the limitations of centralisation/ad vantages of decentralisation:

(i) Heavy Burden/Light Burden on Top Management:

Under centralisation, there is heavy burden of management work on top management; as it has to do strategic planning, policy formulation and controlling the whole organisation. Under decentralisation, there is light burden on top management; as much of the management work is passed on to lower levels of management.

(ii) Organisational Growth Retarded/Facilitated:

Centralisation retards the growth of organisation. Strategies of diversification, expansional programmes cannot be practical for organisation; as top management, already over-burdened with normal management work, can hardly find time to think in these directions.

Decentralisation facilities organisational growth. Dynamic and talented managers at lower levels coupled with power, can easily conceive of and implement growth strategies, of course, in consultation with top management. In fact, a trend towards decentralisation has gained momentum to cope with requirements of growth.

(iii) Lower/Higher Status of Lower Level Managers:

Centralisation decreases the status of lower level managers. As such, they have less motivation to work, because of the non-fulfillment of their ego needs. Decentralisation adds to the status of lower level managers. In fact, everything which goes to increase the status of lower level managers is a measure of decentralisation. With enhanced status, lower level managers have more motivation to work.

(iv) Autocratic/Democratic Management:

Centralisation may lead to autocratic management, in the organisation. Top management with unrestricted powers may not hesitate to impose its autocratic policies and leadership styles on the whole organisation i.e. it may misuse its powers also.

Decentralisation leads to democratic features in organisational functioning. In fact, under decentralisation, management decision-making power gets divided among a large number of lower rank managers. This phenomenon puts restraints over the dictatorial use of powers by the top management.

(v) Initiative Discouraged/Encouraged:

Centralisation discourages the exercise of initiative on the part of lower level managers. Their creativity and innovative skills have no scope, in the organisation. Decentralisation encourages the exercise of initiative on the part of lower level managers.

They can think out and execute their innovative plans, for the overall betterment of organisational life. Their creativity and innovative skills have full scope in the organisation. That is why; many decentralised enterprises have progressed a lot, in some cases.

(vi) Delayed/Quick Decision-Making:

In centralisation, there is delayed decision-making; because top management is burdened with many organisational issues and cannot pay timely attention to decision-making. In decentralizations, there is quick decision-making.

For one thing, lower level managers have comparatively limited managerial work, as they have to attend to only their own departmental problems. And for another, they need not seek approval of upper management for decision-making on issues, for which authority has been decentralised to them.

(vii) Inferior/Superior Decision-Making:

Under centralisation there is inferior decision-making by top management. This may seem paradoxical; but it is true in the sense that top rank managers are much remote to the situational factors, in the context of which decisions have to be made.

Under decentralisation, decision-making is superior, in the sense that lower level managers are close to the situational factors, in the context of which decisions have to be made. In fact, they practically deal with situational factors and develop a better sense of their appreciation and tackling.

(viii) Managerial Development Retarded/Facilitated:

Centralisation retards managerial training and developmental process. Under this philosophy, lower rank managers have little chance of development; because their roles in organisational life are routinized and they have no or little freedom to exercise initiative and take bold decisions, in an unrestricted manner.

Centralisation, in a way, creates problems of managerial succession when some significant top-level managers retire, due to age factor. Decentralisation, is a systematic way of training and developing managers for higher managerial positions. This philosophy more or less does away with the problem of managerial succession.

(ix) Management by Exception Retarded/Facilitated:

Centralisation retards the policy of management by exception, under which top management must concentrate its attention only on strategic issues. Hence, under centralisation, this policy is not possible; as top management has to attend to all aspects of managing, because of reservation of substantial decision-making authority with itself.

Decentralisation facilitates the policy of management by exception. By retaining authority for strategic decision-making with itself, top management can decentralize substantial authority for operational management purposes to lower level managers.

(x) Egoistic/Rational Planning:

Under centralisation, as a matter of great men psychology, top management, sometimes, may indulge in egoistic planning for ambitious purposes without caring for the attainment of enterprise objectives. Under decentralisation, rational planning is done by lower level managers.

They have comparatively little ambition and ego and care more for attainment of their departmental objectives through designing and implementing rational plans.