Centralisation of authority denotes the concentration of authority in a few hands, generally at the top of the organisational hierarchy.

Decisions are taken at the top by a few, and communicated down to the lower rungs of the management. That’s means that all operational and policy directions are given by a few at the top management level while those below have to carry out the instructions.

Decentralisation of authority may be defined as “a situation in which ultimate authority to command and ultimate responsibility for results is localised as far down in the organisation as efficient management of the organisation, permits. It is carried out by creating; under a central organisation, a number of autonomous units with mandates to operate as independent units.”

Learn about the centralisation of authority:-


1. Definitions of Centralisation of Authority 2. Meaning of Centralisation of Authority 3. Concept 4. Effects 5. Factors 6. Advantages 7. Demerits.

Also, learn about the decentralisation of authority:-

1. Definitions and Meaning of Decentralisation of Authority 2. Concept of Decentralisation of Authority 3. Importance 4. Effects. 5. Reasons for Decentralisation Degree 6. Forms 7. Factors 8. Benefits 9. Disadvantages.

Learn about Centralisation and Decentralisation of Authority

Centralisation and Decentralisation – Definitions and Factors Responsible for Centralisation and Decentralisation

Definitions of Centralisation:

Centralisation has been defined as the “systematic and consistent reservation of authority at central point within the organisation.” This means the scope for delegation is limited as far as possible, the decisions are taken at the executive level precluding thereby the subordinates from taking decisions or performing some work.


In this way, under centralisation, the executive reserves work for himself instead of delegating to his subordinate and ultimately reserves authority; but where he is forced to delegate work, he may do as by not delegating adequate authority so that the subordinate must approach him to arrive at approximate decision.

As stated by Louis A. Allen, “centralisation denotes that a majority of the decisions having to do with the work being performed, are not made by those doing the work but at a point higher in the organisation.” Further, Henry Fayol defines it as “everything that goes to increase importance of the subordinate’s role is decentralisation, everything which goes to reduce it is centralisation.”

Reserved Authority:

But it should be noted that reservation of authority by executives is justified where they are expected to take decisions with objectivity and perspective regarding over-all planning organisation, co-ordination, motivation and control. Such decisions taken by the top management are considered as policy decisions and are required to be expressed as clearly as possible. They are applied repetitively to problems that come up in the operations of the company.

Factors Responsible for Centralisation:


(1) To Facilitate Personal Leadership:

Where company’s size is not large, personal leadership plays an important role particularly at the early stage of its growth. Under such a form of organisation, personal leadership will have a potent influence retaining power of authority and responsibility at the central point. The existence and success of new but small enterprises may depend upon singleness and flexibility.

He is a talented leader, who, with all powers in his hand, not only commands but takes quick decisions, and imaginative action. He further sees that his small centralised company often shows distinctive flair in adopting new fashionable style, production pattern and new techniques is sales. All these may put his concern at a competitive advantage as against those that are decentralised. Therefore, centralisation in a small company is adopted giving full scope to a dynamic leader.

(2) To Provide Integration:

For the accomplishment of operation of the enterprise, it is found by many companies that integration of activities is an essence of operation and tins objective can be fulfilled only when there is centralisation in the company. Common objectives can be fulfilled by integrating different activities. This is possible by issuing central directions; hence is the need of centralisation.

(3) To Promote Uniformity of Action:

When a company desires that it’s all branches must have a uniform policy as regards purchases, sales, advertisements etc. and feels that there should be uniformity in existence, there must be centralisation of the appropriate decisions.

Centralisation is practised largely where:

(a) Uniformity of action is desired particularly in a multi- unit company;


(b) Uniformity of action for handling personnel matters is important;

(c) Framework within which salary, job classifications and salary ranges are to be established;

(d) Uniformity in the goods offered for sale is necessary; buying of such goods is centralised;

(e) To schedule production more effectively in its own factories, buying of materials is centralised;


(f) Uniformity of these, quality as to type of advertisement art work, copy and design etc. to be ensured on uniform basis for advertisement programme.

(4) To Handle Emergencies:

Emergency decisions that are likely to affect all units of the company are made by the central authority to maintain proper equilibrium between executives and subordinates of all different units. As we find that the competition is more acute or the emergency is urgent and immediate, the need for centralised decision making is also great.

Definitions and Meaning of Decentralisation:

Decentralisation of authority may be defined as “a situation in which ultimate authority to command and ultimate responsibility for results is localised as far down in the organisation as efficient management of the organisation, permits. It is carried out by creating; under a central organisation, a number of autonomous units with mandates to operate as independent units.”


From this definition it is clear that decentralisation is a systematic effort made for delegating authority to the lowest levels in the organisation. However, the right to take decisions on vital matters will remain with the central authority. But when the lowest levels receive Orders, they receive them with necessary amount of responsibility and authority. They get more or less autonomous position in the organisation. Thus decentralisation is mainly concerned with the placement of authority with reference to responsibility.

Degree of Decentralisation:

The degree of decentralisation is determined by:

(a) What kind of authority is delegated?

(b) How far down in the organisation it is delegated, and

(c) How consistently it is delegated.

So the degree of decentralisation is to be decided by the authority given. For example, if A is empowered to buy certain types of materials worth up to Rs. 1,000/- and B is allowed to do the similar type of work worth Rs. 5,000/- naturally there is less degree of decentralisation in the case of A as compared to B.


This can be taken as the ready index to the degree of decentralisation. It should be noted that different degrees of authority may be delegated to different people with varying powers assigned to them. For example, A may be permitted to take final decisions whereas B may be required to consult A or C before he takes any decision.

Factors Helping Decentralisation:

(1) To Ease Burden on Top Executive:

Centralisation of authority puts the whole responsibility on the shoulders of the executive and his immediate group. This will put the executive in an embarrassing position, because he is over-burdened with each and every aspect of management and, therefore, will hardly find any time to think over and plan ahead, for organisational problems, co-ordination and business controls.

Proliferation of personal staff by the executives is an indication that he is tired of his job and would like to get assistance from his colleagues to complete part of his workload. When this has been practised very often, there will be a general discontent among his assistants, since they are to do the work without having any authority.

Centralised executive also forms committee to get rid of his work-load. Through this method, he brings together experienced managers who are well qualified to take approximate decisions. This is how the executive tries to lessen the burden of his work by introducing systematic decentralisation.

(2) To Facilitate Diversification:


Diversification of products or marketing is possible when divisionalisation is generally based on the principle of decentralisation. Even without diversification, a company can grow very large either in sales or employees and can be managed by one man, provided problems presented to him are limited in respect to his capacity and are not complex and varied. This is possible again only when one line of business is prevailing.

But where a company deals in varied products such as chemicals, feeds and pharmaceuticals etc., one man’s control over all the different aspects of marketing these products will not be effective. So, in order to grow markets for these varied products, decentralisation must be adopted to such point where skilled and experienced judgement can be brought fully to solve the major problems.

Thus we find that it is diversity, rather than size, which is mainly responsible for decentralisation. This conclusion holds good in any type of company irrespective of its size.

(3) To Provide Market and Product Emphasis:

When a company is not in a position to satisfy its customers by supplying the products and fails very badly to face the competition, it is ascribed to the inefficiency of a highly centralised management. In a competitive market, customers expect salesman to offer them a new style, lower prices, qualitative goods etc. without bothering themselves with the difficulties of the top management.

Therefore, a customer can be given full satisfaction in respect of quality, delivery, novelty and prices of products he intends to purchase if different departments are formed with full responsibility and authority. This ends the process of centralisation and given birth to decentralisation.


(4) To Encourage Development of Managers:

If management is centralised, hardly one or two a chance to take decisions on vital matters. This method provides no opportunity to others either at the middle or lower level management to develop their thinking power nor gives them a chance to show their ability, skill or efficiency in handling matters independently.

The development of managers is possible only by giving them a management job to do and delegating to them the authority to make important decisions. It is also found that decentralisation gives managers freedom to try new methods and techniques and a chance to every individual to learn how to lead. Further, decentralisation helps managers to develop their skill, because it spreads decision ­making to more positions.

(5) To Improve Motivation:

It has been observed that organisation structure can influence the motivation of people within the company. If the organisation structure is based on sound principles, it also motivates managers to the highest productivity. Therefore, the organisation structure expected for this purpose should be of small groups and should provide not only close interaction but mutual interdependence.

This means the large-scale decentralisation stimulates the formation of small cohesive groups. Where the organisation is decentralised, leadership in this type of organisation demands a high degree of participation, constant effort to communicate, and continuing personal interest in the welfare of the members of the company. Under decentralisation scheme, the executive will be further motivated since he gets opportunity to work closely with his subordinates and is, therefore encouraged to guide them and also to appraise their performance.

Centralisation and Decentralisation of Authority – Benefits

The terms centralization and decentralization refers to the centralization or decentralization of authority or the concentration or dispersion of authority. In organizing, an important concept related to the question of delegation is the extent of centralization of authority in a particular organization structure.


Centralization in this context refers to concentration of authority whilst decentralization recommends greater dispersion of authority. In every organization, there is a certain degree of dispersion of authority. Take for example a family, father delegates some of his powers/authority to mother and mother in turn delegates a part of her authority to one of the children and so on. But ultimate responsibility of the family performance or welfare is the responsibility of the father only.

In practice, these terms are used regarding centralization of decentralization of physical resources such as material stores, human resource etc., whether the authority is to be centralized or decentralized depends much on the size of the enterprise. In case of small business the authority is centralized and as the business grows decentralization is preferred. As the organization grows, it becomes necessary or compulsory to delegate authority resulting in greater decentralization with increase in the size of the operations.

Benefits of Decentralization:

Centralization and decentralization both enjoy certain advantages and disadvantages.

The advantages of decentralization are:

(i) Gives Relief to Higher Executive:

By delegating a part of their authority to subordinates, higher up executive will get some relief and he can concentrate his time on important matters. In fact, decentralization is a means of expanding business activates.

(ii) Facilitates Managerial Development:

As delegation of a part of authority of higher executive to the subordinate, the subordinate will get experience in discharging his superior. This will make the juniors to learn work and become capable for promotion, by learning managerial work like planning, organizing, staffing and controlling.

(iii) Promotes Coordination:

Because of the decentralization, junior’s gets opportunities of promotion, because of their managerial capability acquired through delegation of authority by superiors. Naturally it smoothens personal relationship and promotes coordination among employees.

(iv) Boosts the Moral and Efficiency of Managers:

Because of decentralization the divisional managers performing the superior’s duty with greater care, this will enhance the performance of his department or division. The department’s achievements may be measured in terms of benefits to the enterprise from the divisions to recognize the efficiency of divisional manager and necessary award may be given to the division. This will generally boosts the moral and efficiency of divisional managers.

(v) Infuses Greater Motivation:

By delegating greater decision making power on managers down the line, imitative is prompted and they are motivated to higher performance.

Disadvantages of Decentralization:

Some of the disadvantages of decentralization are:

(i) Increased Costs:

As decentralization increases, the size of the organization and each division will work in its limitation to reach the goal of the organization as a whole. At the same time, the division will work to satisfy its goal. This may some­times results in duplication of certain work by different departments. This will lead to increase the overhead cost of the organization and remain a costly affair.

(ii) Need for a Generalist Manager:

The effect of decentralization is that the organization has too much depend on the effective working of the divisional managers. They need timely and efficient guidance from the top executive who has vast experience, knowledge and must be able to handle the problems of all the departments under him. Hence, decentralization will be effective in the hands of a generalist manager.

Advantages of Centralization:

Too much of decentralization gives a certain degree of freedom and autonomy to lower level managers, which is dangerous to the organizations. Therefore, to certain extent in certain aspects centralized control is essential.

The advantages of centralized control are:

(i) Symbol of Prestige:

Because of centralized power, the chief executive of the enterprise will get more power and importance, which is a Prestige Symbol for him.

(ii) Uniformity in Policies, Decisions etc.:

As policies, decisions and practices are made at top level of the enterprise, there will be uniformity in them.

(iii) Lower Costs:

Few number of specialist staff are required under centralization as they are pooled up centrally and fewer physical resources are required which aims at reduction in operating costs.

(iv) Better Specialists:

Centralization aims at use of few highly qualified specialists, as the quantum of their work and scope are adequate to support and challenge such executives.

(v) Tighter Control:

Under centralization, all the facts are coming to the notice of the top executive. He himself can use his authority to set the things right. In this way, centralization aims at greater and tighter control.

Centralisation and Decentralisation of Authority

Centralisation and decentralisation are two ends of a continuum of options for structuring an organisation.


An organisation structure can be said to be centralised when all the power for decision making rests at a single point in the organisation – frequently in the hands of one person. An organisation can be said to be decentralised when decision making power is dispersed among many people throughout the organisation.

Effects of Centralisation:

Centralising decision making at one point in an organisation impacts a number of activities. For example, centralised decision making affects the manner in which individuals comply with organisational rules and decisions. This is particularly true if evaluation of individual’s performance is carried out by people at the top of the organisation.

Effect of Decentralisation:

At the other end of the continuum is a highly decentralised organisation. Decision making is pushed down in the organisation so that everyone is involved. Similarly, everyone is involved in evaluating employee performance. Rules and policies are kept simple and adhere to the original guiding principles set out at the beginning.

Other Organisational Conditions:

Centralisation and decentralisation affect a number of other organisational conditions. Chief among these are size, technology and the relationship of the organisation to its environment.

1. Size:

As organisations grow in size the pressures for decentralisation of decision making grow. At the same time, the increased importance of managerial decisions discourages delegation for fear of loss of control by top management. As organisations grow we find the increased use of rules and policies to guide the decisions that must be delegated to lower-level personnel.

One of the ways in which many organisations deal with these pressures is to centralise some decisions while decentralising others. For example, it is easier to decentralise decision making if the organisation has a centralised policy with respect to employee qualifications.

2. Technology:

Organisations that employ routine technologies such as assembly lines tend to be more centralised. Automobile manufacturing plants are highly centralised as the work can be governed by a set of rules and overseen by a small number of supervisors, similarly, the work done by bank tellers can generally be designated routine, with exceptions requiring the intervention of a supervisor. This is particularly apparent in the increased use of ATMs to handle most day-to-day banking transactions.

Organisations that focus on research and development (R & D) such as Microsoft and Lucent Technologies tend to be more decentralised. In these firms there is no routine technology. Instead, small groups of employees work on projects that utilise specialised technology.

A system software designer at Microsoft, for example, works to design a system that will meet a particular set of customer needs. Similarly, research teams at Unilever or Procter and Gamble work on developing new products to meet customer needs. In both cases, decisions about the direction and development of the project are left to the employees involved in the project.

3. Environmental Relations:

Successful organisations adapt to their environments. In a stable environment where there is very little change, a centralised organisation will generally be successful. However, when an environment is dynamic — that is, when there is frequent need for product changes and competitive conditions are unpredictable — a more flexible, decentralised organisation will be successful.

Complex environments also require greater decentralisation. A complex environment is one in which a great deal of information must be gathered in order to make a decision. This generally requires that many employees become involved in the process, each bringing his/her own expertise to the decision-making process.

The biotechnology industry faces a complex environment in which a firm must deal with government regulators, consumer groups, investors and the scientific rigours and uncertainties of developing genetically engineered products which can be taken to market. In this industry decision making has to be decentralised so that the experts in each area can address their particular set of issues.

The Reasons for Decentralisation:

A centralised organisation structure allows one person to coordinate all the decision making in the organisation. Decisions in such an organisation are implemented through direct supervision; that is, the decision maker decides what needs to be done, gives the orders, and coordinates all activities herself or himself to ensure that the activity such as – a project is carried out.

If organisations centralise to carry out decisions, why decentralise?

The reasons are the following:

(i) Growth:

The first reason for decentralisation is corporate growth. Organisations may simply grow too large for all decision making to be done by one individual.

(ii) Increased Information:

Another drive to decentralise is increased information. The increased use of personal computers, cell phones, fax machines, and the Internet means that many managers are being given much more information than they can take in. This leads to a situation where either employees at lower levels of the organisation must defer to managers who are frequently out of touch with the situation, or the organisation must delegate some of the decision making to those employees with the necessary expertise to address the situation.

In both of these situations decentralisation allows an organisation to respond quickly to changes in its environment. Rather than having to send information back to headquarters for review and then wait for a decision to be handed down, local managers are empowered to decide how to address a changing situation. In this way, essential time is not wasted and the organisation can move ahead.

(iii) Attracting and Retaining Creative People:

Finally organisations decentralise because it allows the firm to attract and retain creative and intelligent people. With the emergence of new Internet and electronic commerce companies, there has been an increasing number of individuals leaving traditional organisations and moving to these new firms. One of the attractions is the decentralised nature of the firm, and the freedom to put knowledge and experience to use in an environment which rewards initiative and empowers the individuals.

Different Forms of Decentralisation:

There are four different types of decentralisation:

1. Functional Decentralisation:

This type of decentralisation occurs when specialist departments are delegated in decision-making authority.

The most common functional departments are:

i. Human Resources

ii. Marketing

iii. Finance

iv. Production.

2. Federal Decentralisation:

This occurs when authority is divided between (among) the different product lines of the business. For example, a vehicle manufacturer could have separate truck, car and bus divisions.

3. Regional Decentralisation:

This happens when a business, such as a multinational, has bases in many different regions or countries. Each one has authority over its own operations.

4. Decentralisation by Project Teams:

This occurs when a particular project, for example, the design of a new aircraft, is given to a team involving people from all functional areas.

Advantages of a Decentralised Management Structure:

(i) Decisions are taken by managers who are ‘closer to the action’. For example, managers who have closer contact with customers than the Board of Directors are more likely to know which products are going to be successful. Also, the decision on a new advertising campaign is perhaps best left to the experts in the marketing department who have studied the most effective methods of promotion.

(ii) As decentralisation is a form of delegation, the managers who are now able to take the decisions will feel more trusted and will have more satisfaction from their work.

(iii) Decisions can be made much more quickly than if the Board of Directors or senior managers have to be given all the information before making a decision. When the environment, in which a business operates, is changing very quickly, for example, because of new competitors, then it is very important to be able to take speedy decisions.

In fact, there are both advantages and disadvantages of decentralisation. Advantages are much more important than the seriousness of the disadvantages.

Is complete decentralisation a good idea?

Should all decisions be taken by lower-level management? This would be unwise for most businesses. In nearly all cases, some really important issues would need to be considered centrally. These could include major investment projects costing crores of rupees or decisions to take over other businesses.

The overall aims of the business and long-term policy decisions would nearly always remain centralised. These could include the firm’s growth strategy and social objectives of the business such as – greening the environment. If such issues were not centralised then there could be lack of common purpose and direction for the business.


Most organisations are neither completely decentralised nor completely centralised in their structure. Many centralise parts of their decision making processes which affect the strategic direction of the organisation, and delegate decision making power to the experts for those areas which require knowledge of a particular issue, technology, product or market. A high de­gree of centralisation means greater coordination and less flexibility. Decentralisation means greater flexibility and less coordination. The choice of structure will affect all of the other strategic choices the organisation must make.

Centralisation and Decentralisation of Authority – Concept, Merits and Demerits

Centralisation of authority denotes the concentration of authority in a few hands, generally at the top of the organisational hierarchy. Decisions are taken at the top by a few, and communicated down to the lower rungs of the management. That’s means that all operational and policy directions are given by a few at the top management level while those below have to carry out the instructions.

The concept of decentralisation refers to an extension of delegation of authority and responsibility by the senior management to the junior management in such a way that the latter can make decisions without the necessity of consulting the senior management. The senior management, however, remains in absolute charge of major decisions and policies concerning the organisation as a whole.

The extent to which a junior manager can make decisions and the amount of authority that is vested in him denotes the greater the extent of decentralisation. On the opposite hand, if the decision-making and autho­rity is mostly concentrated at the top level, it will denote centralisation of the authority.

According to Henri Fayol, “Everything that goes to increase the importance of the subordinate’s role is decentralisation, and everything that goes to reduce it is centralisation.” In other words, if decision-making and authority are evenly divided down the hierarchy, it shows decentralisation.

Concept of Centralisation:

Centralisation of authority in an organisation can be said to be a management system wherein the concentration of decision-making is in a small group of the management. All important decisions, if taken at the middle management level are subject to the approval of top management before they can be implemented. According to Allen, “Centralisation is the systematic and consistent reservation of authority at central points in the organisation”. Thus, there is a dependency on the top management for all important decision-making. This top management strictly supervises the running of the organisation exercising strict control.

Centralisation is the concentration of authority at a certain point in the organisa­tional hierarchy. Its effect is to reduce the role and decision-making authority of the subordinate. Inversely, it increases the role and authority of the superior authority or wherever there is a centralisation of authority. Centralisation can be either physical or functional. In physical centralisation, all staff and personnel are located in a centralised location. In functional centralisation, staff and personnel may be located far and wide but the authority is vested in few people and is exercised from a centralised point.

Merits of Centralisation:

Listed below are the merits that result from a centralised system of management:

1. Reduced cost- Centralised authority means centralised decision-making and standardised procedures and methods. It doesn’t require specialist staff at every level which, naturally results in economisation of the expenses incurred.

2. Uniformity of action- Since there is centralised administrative control super­vision rests in the hands of a few chosen. This ensures uniformity of action.

3. Personal leadership- The centralised system of management is characterised by personal leadership which ensures quick and timely decision-making and implemen­tation.

4. Flexibility and quick adaptability- Since decision-making is centralised, the organisation becomes more flexible. It is able to adapt itself to changed circumstances quickly and efficiently. It can react to changed environment with greater rapidity.

5. Better coordination- Centralisation leads to better coordination between the different departments in an organisation. Chances of conflict of authority are greatly reduced; duplication of work does not occur. Thus, efficiency sets in.

Demerits of Centralisation:

1. Remote control- Since the employees are already loaded with extra work, better supervision becomes difficult. As a result, absence of better control and supervision leads to slackness in work.

2. Delay in communication and decision-making- Though centralised decision making is supposed to be free of red tape it is seen that at times decision-making is affected because of delay in information flow from multiple management layers to the centralised command. Quick decisions especially those at the ground level cannot be taken because decision-making authority does not rest with the subordinates. They can only communicate information and wait for the decision. This affects the working of the business organisation.

3. Lack of loyalty- In centralisation, the subordinate does not take any initiative at work because they are expected to perform only a given set of duties. They go on working like a machine in such case and lack any enthusiasm. These factors prove a roadblock in the development of employee loyalty towards the organisational work.

4. No secrecy – In a centralised set-up, orders flow freely from one place and reach all. Hence, there is no secrecy.

5. Lack of specialisation- Centralisation is marked by a lack of specialisation. In the absence of specialisation, the centralised leadership has to be very vigilant and extremely efficient regarding business decisions. This decision-making becomes all the more challenging when the power of centralised leadership rests in just one person. Chances of making the wrong decision are always present in such situations.

6. Very heavy burden on central leadership- In the centralised system, the responsibility of running the organisation rests solely at the top. This could be one body or just one person who has to outline the business vision and mission, set out business objectives and then after motivate the employees towards attaining these goals. These responsibilities place a very heavy burden on the centralised leadership.

Concept of Decentralisation:

Decentralisation is a systematic distribution of decision-making and authority evenly starting from the top and percolating down to the bottom. In a decentralised organisation concern, the top management retains certain critical areas of decision-making for itself and delegates the rest of the authority to the middle and lower level of management. We can say that decentralisation is an extension of delegation.

Decentralisation is just the opposite of centralisation. Here the authority is diffused from the top to the middle and the lower level of management. Delegation of authority is a complete process and takes place from one person to another. Decentralisation increases the subordinate’s responsibility and his accountability. It puts the decision-making responsibilities on the middle and the junior management, thus making them more accountable.

Centralisation is just the opposite of decentralisation. In centralisation authority is retained by the top management. The lower management has to follow instructions. It has no decision-making authority. The extent of centralisation or decentralisation will depend on the external factors facing an organisation.

If the business environment is turbulent and complex it will be more favorable to decentralised management. Decentralisation is capable of raising the junior management’s morale and motivation. On the other hand, centralised management may downplay the junior management’s morale, giving them the notion that they have no role in the affairs of the company’s management.

Some people are of the opinion that centralisation reduces the cost of management as it does not require specialists. There are fewer chances of conflicts and duplication of efforts. In fact there are chances of better coordination because of direct control and closer supervision. Decentralisation may require an increase in the number of line managers, and that may add to the costs of management. It may also lead to duplication of efforts.

Decentralisation has the effect of reducing the burden of the senior management; thus, giving opportunity to junior and middle level staff to contribute their creativity, expertise, and talent to take the organisation forward. In today’s context, organisations are becoming huge in terms of their outreach and footprint; what they need is decentralisation. This enables coordination of efforts at a country-specific level for better functioning in case of multinationals. However, a flip side of decentralisation is that sometimes coordination may suffer in business concerns that are decentralised to a large extent.

However, what has been said above is not to suggest that one system is better than the other. In fact, both systems equally work well depending on the organisation. One system may be the best fit for one organisation, while it may not suit another. While going in for any system or level of centralisation, or decentralisation, the concern has to look within, asses its needs and requirements and culture before deciding the system it would like to choose.

Importance of Decentralisation:

1. Decision-Making by Middle and Lower Management – In decentralisation, the subordinates get a chance to decide and act independently which develops their skills and capabilities.

2. Effective Communication – The communication system becomes effective by way of a wider span of organisation and fewer levels of organisation. This increases the effectiveness of communication.

3. Motivation of Middle and Lower Level – Decentralisation promotes independent think­ing and innovation. It encourages employees to show initiative. It engages them with a sense of importance and social recognition. All these factors increase the productivity and helps in optimisation of employee output which generates revenue for the organisation.

4. Improved Decision-Making – Decisions are faster and time is not wasted in decision-making. Decisions are made by those who execute the decisions. It cuts the red tape.

5. Effective Supervision and Control – This becomes possible because lower level managers and supervisors have the authority to control and bring about changes which they think will do good to the organisation. By controlling and supervising, the managers are able to evaluate performance of their units and by making necessary changes they are able to correct deviations. Thus, the performance of the organisation is improved.

6. Professional Development of Managers – The decentralised structure makes it possible for middle and lower level managers to exercise judgement and decision-making. This polishes their decision making and leadership skills. It provides them experience and prepares them for taking up bigger responsibilities.

7. Democratic Environment – Comparatively more employees are involved in decision-making in a decentralised organisation. The decision-making is at all levels and all departments. This creates a democratic environment giving all people a feeling of contributing to the organisational goals.

Decentralisation denotes the percolation of decision-making to the junior manage­ment level of an organisation. In other words, it shows that the organisation has faith in the decision-making capabilities of the firm’s junior functionaries. The functions of planning, organising, directing and controlling are spread down in a planned manner right from the top to the bottom. The decentralisation has its distinct advantages and disadvantages.

They are discussed below:

Advantages of Decentralisation:

1. Helps Improve the Quality of Decision-Making:

Decentralisation saves valuable time of the top management when it relieves them of the burden of having to take decision for every paltry and small management issue. The top management can spend more time on strategic and long-term planning safely leaving junior level employees look after day-to-day decision-making.

2. Develop Management’s Talent:

Capability and decision-making can be deve­loped only when organisational functionaries are exposed to it. When they are given the opportunities to exercise authority and decision-making, we can test their capabilities. Giving them exposure ensures that they grow and develop their managerial talents. Thus, they can be expected to contribute to decision-making and organisational growth at increasingly higher levels. Decentralisation gives them opportunities to showcase their talents. They become competent to take up greater responsibilities in this way.

3. Improves Motivation and Output:

People get satisfaction when they feel that they are contributors in the good performance of their organisation. By giving them decision-making authority the organisation makes them feel that they are an important part of the management. It raises their morale and motivates them to greater efforts. The all-round performance of the organisation increases manifold.

4. Speeds up Decision-Making:

In a decentralised management system, depart­mental decision-making authority rests with the individual departments and their heads. Hence, the decisions can be taken within the departments without the need to refer the problem to the top level. This saves time and speeds up the decision-making process.

5. Better Control and Supervision:

Decentralisation sees to it that subordinates are given responsibility for their units or departments and are made accountable. This ensures that they have knowledge of the departmental working tinder their control. They are given authority to supervise and take corrective action where necessary. As a result, it ensures a better supervised and controlled business organisation.

Disadvantages of Decentralisation:

The limitations or disadvantages of decentralisation are listed below:

1. Costly – Decentralised management system requires greater financial resources because more trained and experienced employees are needed to ensure effective decentralisation, especially at the lower level, which grows up the administrative cost.

2. Uniform policies not followed – It has been seen that there is an inconsistency in the level of policies and procedures that are followed. Decentralisation fails to bring about uniformity when it comes to framing and following of policies and procedures. These are followed to varying extent by managerial personnel who work according to their talents and experience.

3. Problem of coordination – As an organisation expands and brings in greater degree of decentralisation, coordination across the organisation becomes an ever growing problem. As authority becomes more widely dispersed, controlling becomes unwieldy. Problems of coordination arise.

4. Conflict of interest – As decentralisation sets in and each department is required to function as an independent and profit making center there is increasing pressure on the departmental heads to make their department perform. This creates conflicts of interest between different departments.

5. Not practicable for small organisations – Decentralisation is expensive both in terms of manpower and administrative costs. It requires at times specialised staff. All this makes it impracticable for a small organisation with limited financial resources.