Everything you need to know about the advantages and disadvantages of decentralization.
Decentralization is today’s concept where decision making is not the prerogative of top management only. With the increasing professionalism in the management function and global span of business, decentralization has become a need if an organization wants to grow.
Advantages and Disadvantages of Decentralization
4 Advantages and Disadvantages of Decentralization
Advantages of Decentralisation:
i. Decentralization may be, in part, merely the result of circumstances (Dale). Centralization enables a competent leader to control work and produce results quickly and effectively.
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ii. It helps to coordinate work and put all activities on track. There are certain special circumstances forcing managers to reserve authority and centralize decision-making power.
iii. Actions can be focused on what needs to be done and duplications can be put to rest. It becomes easy to get all units and people do the same thing in the same way at the same time without wastage of resources and energies.
iv. Decentralisation is the best solution to handle emergency situations—such as declining sales, cutting costs, using resources productively, pushing a competitor to the wall, handle policy changes of government etc. Centralization ensures prompt decisions – flowing from one individual who is ultimately made responsible for everything.
However, centralization makes it extremely difficult for managers to process the bundles of data regarding products, markets, costs, finances, people etc., in quick time and take decisions in an appropriate manner. The managers are burdened with a great amount of detailed and exhaustive work; they have to work for painfully long hours and take a stuffed briefcase (of problems) home with them.
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Centralization forces top management to possess a broad view that may be beyond their capacity (Carvel). The vast amount of power given to a few people may be abused (power corrupts absolutely, and may be used as a ‘whip’). More dangerously, the fortunes of the organization depend on the health and vitality of top management people. The organization is highly vulnerable to what happens to its dynamic and talented top management people. Centralization floods communication lines to a few individuals at the top of the organization.
As a result, the speed of communications upward and decisions processes are slow. Lastly, centralization kills the initiative, self-reliance and judgment of lower level personnel. It inhibits the development of operating personnel.
Disadvantages of Decentralisation:
Decentralization is not a sure bet. It could prove to be a troublesome exercise if not carried out in a proper way, in the following ways:
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1. Conflict:
Decentralization puts increased pressure on divisional heads to realize profits at any cost. This may lead to inter-divisional rivalry leading to bitter fights. Each divisional head might be tempted to build his own empire at the cost of others. Problems of coordination and control may also arise when such ‘mini-companies’ or ‘little empires’ exist within an organisation.
2. Cost:
Decentralization results in a duplication of staff effort. To be independent, each division should have access to purchasing, personnel, marketing and other specialists. As a result each division is expected to carry a large group of staff specialists at enormous cost.
3. Some Disadvantages of Decentralization Relate to the Profit-Centre Concept:
Often capable and competent individuals may not be available to run the divisionalised organizations. Freedom of action may lead to diversity of decisions. Many a time the remote control from headquarters may prove to be ineffective as the enterprise grows. In addition, decentralization demands training programmes that may be time-consuming and highly expensive.
7 Advantages and Disadvantages of Decentralization
Advantages of Centralization:
Centralization of decision making authority may bring many advantages to the organization:
1. Standardization:
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Centralization decisions result into standardize policies and procedures to be uniformity followed throughout the organization making coordination easier.
2. Uniformity of Action:
Where a company wishes all operative units to do certain things in the same manner, centralization of appropriate decision making can bring such uniformity.
3. It Facilitates Personal Leadership:
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Personal leadership is an important point for the success of small enterprises. It is also important during the early stages of the enterprises. In both the cases, the manager having entire authority himself can exercise power over the subordinates.
4. Quality Decisions:
Top management people are experienced and have an overall view of the company. Their decisions tend to be mature and are taken keeping in mind the overall benefit of the company.
5. Handle Emergencies Effectively:
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At the time of emergency, centralize decision-making works as a quick respite as there is no time for consulting others.
6. Economies:
A high degree of centralization of authority absolves the lower level staff from decision-making, thereby demanding lesser managerial skills from them. Economy can be observed in hiring comparatively less skilled managerial staff. Moreover centralized management can bring economies of large scale, For example- bulk buying and selling will result in lower overall costs.
7. Simplicity:
Centralize decision making make the power structure of the company simple to understand. There is no confusion or conflict regarding the decision making power among the staff of the organization.
Limitations of centralization. Centralization may be useful only upto certain extend and under certain conditions. Beyond that it creates difficulties in day to day working and restricts growth of the enterprise.
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Some of the disadvantages of the centralization can be viewed as follows:
1. Overloaded Top Management:
Due to overload of work, top level managers cannot concentrate on important functions and matters as they keep themselves engaged in day to day decision-making.
2. Imbalanced Structure of Organization:
Top level loaded positions and empty lower levels may create an imbalance in the structure of an organization.
3. Destroys Individual Initiative:
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Centralization evolves around few persons (top management) only. They take all the decisions and decide how to implement them. Others are not supposed to take any initiative and are to carry out whatever they have been told. This practice destroys individual initiatives and does not allow any second line of command to grow in the organization.
4. Slow Down the Operations:
Since executives at the work place are not free to take the decisions, in case of any contingency, by the time decision comes from the management, it may be too late to implement. Moreover unavailability of top management may leave the organization without any decision in case of need.
5. Decisions Lack Specialized Knowledge:
Since top management may not be expert in all areas, decisions taken by them will lack perspective of a specialist. Even a specialist or employee under centralized set-up, does not have a free hand in his area. His job mainly will be convincing the top executives that his suggestion should be implemented.
Advantages and Disadvantages of Decentralization – Explained
Advantages of Decentralization:
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Decentralization is today’s concept where decision making is not the prerogative of top management only. With the increasing professionalism in the management function and global span of business, decentralization has become a need if an organization wants to grow.
Some of its advantages are listed below:
1. Reduces Burden of Top Executives:
Centralization over burdens top executives. They are left with no time for planning, policy making etc. Decentralization relives top executives from some of their burdens.
2. Quick and Better Decisions:
Under decentralized system, decision making power is delegated to the level of actual execution. Whenever there is a need for taking a decision, the concerned executive may decide the things without delay. There is no need to make reference to the top level for most of the work.
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Moreover, subordinates may have a better knowledge of local conditions affecting their areas of work. This should allow them to make more informed well-judged choices, e.g., salespersons have detailed knowledge of customers.
3. Facilitates Diversification:
With the centralized system of authority, diversification cannot grow beyond a certain level. With decentralization diversification can be taken to any extent.
4. Use of Capabilities of Subordinates:
In a decentralized system subordinates get a chance to show their skills and imagination. They may lead to something which top management cannot even perceive.
5. Development of Executives:
Management at middle and junior levels are groomed to take over higher positions. They are given the experience of decision making when carrying out delegated tasks (management development).
6. Motivates Subordinates:
Under decentralization, subordinates get opportunities for taking decisions independently. This fulfils the human need for power and status, by motivating the individual to work upto his optimum capability.
7. Reduces Burden of Communication:
Decentralisation reduces the volume of day to day communication between head office and the branches, therefore giving senior managers the time to consider long term strategy.
Disadvantages of Decentralization:
As no ‘good’ in the world exist without ‘bad’, decentralization has its own costs and shortcomings.
Some of the possible disadvantages of decentralization are listed below:
1. Increases Costs:
Decentralization increases the administration expenses because it requires the employment of trained personnel to accept authority. Moreover, there is a duplication of management functions in various departments/units resulting in increased cost.
2. Loss of Control:
Too much of decentralization may result in loss of control from the hands of top management. Different units of the organization may start working as autonomous units working in their own interest in contrast of the overall interest of the organization.
3. Misuse of Authority:
At times the lower level management is not able to handle the authority with dignity. They may use it for their personal purposes in contrast with the interests of the organization.
4. Difficult Coordination at Control:
Decentralization may bring inconsistencies in the company. For instance, uniform procedures may not be followed for the same type of work in various divisions. This makes the task of coordination and control difficult.
9 Advantages and Disadvantages of Decentralization
The following are the ways in which decentralisation is helpful in business administration:
(1) It Reduces the Burden of Top Executive:
Decentralisation helps in reducing the burden of the top executives as they delegate their power to their subordinates and make them free for more important work requiring their urgent attention.
Policy framing, programme scheduling and important decision making are a few of the important jobs which top executives have to undertake and give proper attention. Time is short at the disposal of the top executive. He has to fruitfully utilise every minute at his disposal. For this he has to delegate. Decentralisation makes him more alive, alert, smart and sharp. His efficiency and output increase in a decentralised organisational structure.
(2) It Makes Diversification Effective:
Diversification of products in particular helps in taking the advantages of market conditions. This helps in increasing both the productivity and profitability. Labour too stands benefited since there is more chances of specialisation and standardisation.
(3) It Helps in the Development of Managerial Faculties:
Everybody has managerial skill and talents in his own sphere. Even an ordinary worker at the lowest level knows how to manage his own affairs in the best possible manner. The skill is acquired and faculties are developed. Decentralisation helps in the development of such faculties if authority is properly delegated and accepted by the delegate in right earnest.
(4) It is Very Important for Production and Marketing Activities:
Nobody can deny this fact that the main objective of an enterprise is to increase its profitability. For this, production as well as marketing functions has to show best results. Human element is involved in both.
Decentralisation touches this very human element in order to maximise the efforts on the part of those who are at work. Obviously production and marketing functions gain importance in decentralised form of organisation.
(5) It Creates Perfect Atmosphere and Development of Morals:
Job satisfaction is an important essential of a good management. A worker who likes his job and is satisfied with its nature puts more efforts to attain the objective. On the contrary, dissatisfied worker is disinterested, consequently his efforts are at its minimum. Since decentralisation takes ego and vanity of human beings into consideration, it is helpful in raising the morals of the workers. The result is more work, no dispute and good working atmosphere.
Decentralisation relieves a worker from the tension with which he suffers. When he knows that he has to wait longer for even smallest decisions. This relieving of mental tension helps in creating good atmosphere.
(6) It Provides Effective Control and Supervision:
The greater the degree of decentralisation, the more effective becomes the span of control. It leads to the effective supervision as managers at the lower levels have complete authority to make changes in work assignment, to change production schedules, to recommend promotions and to take disciplinary actions.
(7) It Avoids Red Tapism in Making Decisions:
Decentralisation avoids red tapism in making decisions as it places responsibility for decision-making as near as possible with the place where actions take place. Those closest to the work situation can make reasonably quick and accurate decisions because they are well aware of the realities of the situation. It also minimises the delay in transmitting information from and to the work place.
(8) It Reduces the Need of Co-Ordination in the Enterprise as a Whole:
Coordinative efforts are needed only in the segments created by decentralised system of organisation. This makes the co-ordination more effective.
(9) It Achieves Several Internal and External Economies:
Decentralisation achieves several internal and external economies. Internal economies include speedier communication, better utilisation of lower level and middle level executives, greater incentive to work and greater opportunities for training. These make possible for the management to reduce the cost of production and meet competition effectively.
Though decentralised organisation is costlier and often quick decision is not possible particularly in emergency when the lower level of worker wishes not to take the decision of their own; but the decentralisation surely leads to progress and prosperity. Of course there is a condition – decentralisation should not mean “Loose authority.”
Disadvantages of Decentralization:
1. Co-Ordination Difficulty:
Diverse policies and procedures followed by different units make coordination difficult.
2. Waste of Resources:
To make divisional units self-sufficient, necessary service functions such as accounting and personnel are to be provided for each division separately. Further, separate production and marketing facilities are to be arranged for each division. Thus, because of the duplication of functions, resources are wasted.
3. Larger Interests of the Enterprise Neglected:
Each department or divisional unit tends to be self-centered thus pushing aside the larger interests of the firm.
4. Emergency Decision not Possible:
When a company is to make some urgent adjustments in its products or major policies, decentralization is a handicap.
5. Lack of Qualified Managers:
If sufficient number of qualified and competent managerial staff is not available to plan and operate the different units, decentralization becomes a hard nut to crack.
6. Certain Activities Decentralization not Possible:
Certain activities such as handling relations with labour unions, corporate laws etc., cannot be decentralized.
8 Advantages and Disadvantages of Decentralization
Advantages of Decentralisation:
Decentralisation is important because of the following reasons:
Advantage # 1. Reduction in the Burden of Top Managers:
Managers who look after both strategic and routine matters often become so involved in managing routine problems that they do not have enough time to book after strategic matters of the organisation. The time they should spend on strategic planning is often not spent. Through decentralisation, routine decisions are delegated down the scalar chain and important decisions are retained at the top.
Advantage # 2. Development of Subordinates:
One learns through mistakes. If top executives do not delegate for the fear that subordinates make mistakes, they will not contribute to development of potential managers. Subordinates should be allowed to make mistakes and rectify them so that they learn not to repeat them in future.
This is possible only in a decentralised organisation. Subordinates take independent decisions which fulfils their need for power, achievement and recognition. These are higher-order needs which make subordinates feel important in the organisation. They try new ideas and become capable to assume important positions in the organisation.
Advantage # 3. Quick Decisions:
In a decentralised organisation, employees do not approach higher authorities every time they face a problem. As they are closer to the problem area, they can make quick decisions related to that problem. The decisions are, thus, faster and better.
Advantage # 4. Promotes Diversification:
If top managers retain authority to make decisions, they will be able to look after limited lines of products only. Decentralisation enables them to search for new areas of market. They can diversify into new markets and add new products to the existing line of products.
Advantage # 5. Promotes Motivation:
Rather than offering financial rewards as motivators, if subordinates are allowed to make decisions in their areas of specialisation, it serves as
better motivational force. Thus, decentralisation promotes efficiency of workers resulting in high production and sales.
Advantage # 6. Flexibility:
A decentralised organisation is more flexible as managers at different levels can change policies according to changes in environment.
Advantage # 7. Better Communication:
A decentralised organisation has lesser levels in the scalar chain. Communication amongst people at different levels is faster and efficient. Chances of information distortion (due to increased levels) get reduced.
Advantage # 8. Control:
Managers at different levels frame standards of performance for their respective units and control those activities. This facilitates the process of control.
Disadvantages of Decentralisation:
Decentralisation suffers from the following limitations:
Disadvantage # 1. Coordination:
High degree of decentralisation makes it difficult for top managers to coordinate the organisational activities. Every department, units and sub-units have the freedom to make their policies. The focus is more on departmental performance which makes it difficult to coordinate with performance of the organisation as a whole.
Disadvantage # 2. Control:
Difficulty in maintaining coordination also makes it difficult for top managers to control the organisational activities. Top managers are at distance with units where decisions are taken. The increasing gap makes it difficult to exercise effective control on the activities of different units.
Disadvantage # 3. Costly:
Though useful, it is expensive since every department manages the activities on its own. There is duplication of efforts and physical facilities in the organisation. Decentralisation can be afforded in large organisations as self-sufficient decentralised divisions can afford the cost of their working.
Disadvantage # 4. Adaptability:
In the fast changing environment, unless strategic decisions are centralised, different units will react to changes differently and working of the organisation will become difficult. Strategic decision-making cannot, thus, be decentralised.
Disadvantage # 5. Lack of Uniformity:
In a highly decentralised organisation, uniform policies may not be followed by all the organisational units. Every unit formulates its own policies. The policies are more uniformly followed in a centralised organisation (as the control is centralised at a single point).
Disadvantage # 6. Ability of Managers:
In a decentralised organisation, decisions are taken by managers of different units at their respective levels. If managers are not competent and skilled to make decisions, it will affect efficiency of the organisation.
Advantages and Disadvantages of Decentralization: 8 Quick Points
According to Peter F. Drucker the advantages of decentralisation are as follows:
1. It promotes speed in decision-making and confusion is avoided.
2. Executives get confidence in themselves and are appreciated for jobs well done. Politics also disappears.
3. Avoidance of conflict between the top management and the division is possible.
4. There is informality and democracy in management.
5. There is no gap between the top managers and the subordinate managers. This results in informal organisation.
6. Large number of promotable managers is available. This ensures continuity in operations.
7. Assessment of competitive divisions or units can be made.
8. There is the absent of ‘edict management’ and there is presence of thorough information and consideration of central management decisions.
Limitations of Decentralisation of Authority:
There are certain disadvantages and limitations of decentralisation which are as follows:
(1) It Increases the Administrative Expenses:
Decentralisation increases the administrative expenses because it requires the employment of trained personnel to accept authority. The services of such highly paid personnel may not be fully utilised particularly in small organisations.
(2) It Requires the Product Lines of the Concern to be Broad:
Decentralisation requires the product lines of the concern to be broad enough to allow the creation of autonomous units which is not possible in small concerns.
(3) It Finds Problems in Bringing Co-Ordination among the Various Units:
Decentralisation of authority may create problems in bringing co-ordination among the various units.
(4) It Brings about Inconsistencies and Uncertainties in the Company:
Decentralisation may bring about inconsistencies in the company. For example: Uniform procedures may not be followed for the same type of work in various organisations and divisions.
(5) It is Not Possible Because of External Factors:
Decentralisation may not be possible because of external factors. If a company is subject to uncertainties, it will not be able to meet these under decentralisation.
Decentralisation requires a balance of necessary decentralisation of important managerial functions and creation of certain facilities:
Firstly – Managers capable of undertaking the operations of the autonomous business units must be developed.
Secondly – Provision must be made for co-ordination and communication between various units.
Finally – Effective decentralisation requires adequate Controls. Unless the top managers have well-established system for measuring the operating results, it is very difficult to achieve effective decentralisation.
Advantages and Disadvantages of Decentralization
Advantages of Decentralization:
The important advantages of decentralization are as follows:
1. Relief to Top Executives:
Decentralization enables the top executives to devote greater attention and effort to important issues. They may not be able to do this if they keep their hands full with problems of a routine nature.
2. Motivation of Subordinates:
Systematic decentralization results in development of initiative, responsibility, and morale among employees. Because the authority to make decisions is placed in the hands of employees who have the responsibility to execute them, the employees are more sincere and hardworking in performing their jobs.
3. Intimate Relationships:
In a decentralized unit, employees have greater opportunities to come in close contact with one another. This results in improved communication, so that employees can benefit from expertise and experience of one another.
4. Sense of Competition:
In a decentralized enterprise, its departments and division are independent of one another. As a result, the management can experiment with new ideas and processes in any department without any risk of its adverse effect on the functioning of other departments.
5. Effective Control:
Though each of the departments and divisions is granted freedom in running its affairs, the control function is not adversely affected. This is because for judging the performance of each unit, an important yardstick is its profitability and the rate of return on investment.
Drawbacks of Decentralisation:
Decentralisation of organisation, though commendable in many ways, has some drawbacks or problems which may be enumerated as under:
(i) It creates problems of co-ordination because authority lies dispersed widely throughout the organisation under such a set-up.
(ii) It is not suitable for the development of specialised services like accounting, personnel, statistical departments.
(iii) It becomes a handicap in case of quick emergency decisions.
(1) Difficulty in Exercising Control and Coordination:
Under decentralization, each division or department of an organization has authority to formulate its action plans within the framework of organizational policies. But for the central unit, there remains the problem of control and coordination of activities of decentralized units.
Only a large organization can bear the operating costs of maintaining a decentralized set-up. Under decentralization, each division needs to be self-sufficient in every respect, e.g., production, marketing, accounting, personnel, etc. This may lead to duplication of functions and also in some cases wastage in terms of under-utilization of facilities at some units.
Success of a decentralized organization depends on leadership of individual units. However, it may be difficult to find competent managers for all decentralized units.
Advantages and Disadvantages of Decentralization
Decentralisation of organisation is commended on account of the following advantages:
(i) Lesser burden on top executives – Centralisation places too heavy a burden on the top executive who alone is responsible for planning and decision-making. In a decentralised set-up, the subordinates share the burden of decision-making and leave the top executive to concentrate on overall planning and control.
(ii) Possibilities of diversification – A centralised enterprise with the concentration of authority in single individual at the top will find it difficult to diversify its activities and start new lines of manufacture or distribution. On the other hand, under a decentralised set-up, diversification is facilitated. This enables the concern to make up any losses in certain lines by gains on other lines and thus reduces the risks of business.
(iii) Executive development – Decentralisation gives power and initiative and responsibility to a number of executives. This provides a spur to the development of executives in the organisation.
(iv) Improvement of morale – Decentralisation stimulates the formation of small cohesive groups. Since local managers are given a large degree of authority and local autonomy, they weld their people into well-knit groups. With high degree of participation, constant effort to communicate, and continuing interest in the welfare of the members of the group, these managers are able to motivate the subordinates extremely well and secure a high degree of morale among them.
Disadvantages of Decentralization:
Decentralization has also certain limitations, important among which are as follows:
1. Lack of Coordination:
Under decentralization, each division or department of the enterprise enjoys substantial freedom in the formulation of policies and action plans. This creates a difficult problem of coordination.
2. Costly:
Only a very large enterprise can afford the high operating costs of maintaining a decentralized set-up. This is because under decentralization, each division of the enterprise has to be self-sufficient in every respect, e.g., production, marketing, accounting, personnel, etc. This may not only result in duplication of functions, but may also lead to wastage of resources, because often one or the other facility remains under-utilized in each division.
3. Lack of Able Managers:
A decentralized enterprise has to depend on divisional managers. But it is difficult to find persons who are adequately equipped to run a division independently.
Advantages and Disadvantages of Decentralization (With Notes)
The advantages of decentralization are legendary and well documented in management literature thus:
1. Decentralization reduces the workload of an overburdened executive. The executive need not bury himself in endless routine as he is not expected to look into the affairs of a division from close quarters.
2. Decentralization brings the decision-making process closer to the scene of the action. This leads to quicker decisions at lower levels, since decisions do not have to be referred up through the hierarchy.
3. Decentralization facilitates product diversification: For multi-product, multi-plant and multi-centre businesses, decentralisation is the only answer to take adequate care of each product division. Decentralisation facilitates balanced and proportionate emphasis on product sales, branding and other marketing efforts apart from exclusive focus on product manufacturing.
4. Decentralization gives individuals an opportunity to learn by doing. It provides a positive work climate where there is freedom to make decision, freedom to use judgment and freedom to act. Factors like competitive atmosphere, better participation, and independent status create a stimulating effect on the morale of the key people in the semi-autonomous divisions. Shorter chains of command encourage people to take independent decisions quickly. Decentralisation provides a kind of training opportunity to managers to think and act independently and slip into challenging roles in course of time.
5. Effective Control- Decentralization often results in improved controls and performance measurements. Managers, as divisional heads, are held responsible for costs and productivity. Divisionalisation not only helps in fixing responsibility but also encourages competition among various divisional managers. Profit reporting by divisions provides a benchmark for measuring the performance of one manager against another.
6. Profit Centre Approach- A final advantage of decentralized management is associated with the ‘profit centre’ principle. Theoretically the company gets the best of both worlds. “When divided into relatively small operating units, a large corporation gains all the advantages of being small: flexibility, close control, ability to make quick decisions, and so forth. At the same time, central staff coordination of the individual profit centres allows the company to retain the many obvious advantages of size”.
Disadvantages or Limitations of Decentralisation:
The disadvantages or limitations of decentralisation are given below:
1. Limitations of Scale:
To bring about decentralisation, it becomes necessary to create departments and divisions. This is possible only where an enterprise is large and tends itself to departmentation and divisionalisation. Thus small organisations do not have much scope for decentralisation.
2. Costly:
Decentralisation involves duplication of procedures, equipment and services since there are autonomous or semi-autonomous department and sub- departments. This means that the costs of decentralisation are high.
3. Lack of Able and Trained Managers:
Decentralisation assumes that trained managers are available in requisite numbers to assume authority and responsibility but this is not always so. In fact most often there is a dearth of able and trained managers.
4. Lack of Co-Ordination:
Decentralisation also brings in its wake the problem of effective co-ordination amount the activities of different departments, or division or sections of the organisation, According to Koontz and O’Donnell—”As authority is decentralised the manager becomes more and more an independent operator of a small business.”