Students might have often come across the terms Centralization and Decentralization when studying management and accounting in Commerce. These are terms that are used to denote the structure of an organisation.
These two structures function exactly opposite to each other. However, they are critical from the macroeconomic and microeconomic standpoint.
Meaning of Centralization
Centralization is a form of organizational structure where the decision making capability rests with the top management. A couple of hand-picked members are entitled to create strategies, determine the goals and objectives based on which an organisation will function.
In a centralized organisation, the top management sets rules and procedures which are then communicated to the lower-level employees, who are expected to carry out the same without questioning the authority.
The advantage of such a structure is, it allows employees to have a well-defined framework within which all work needs to carried out.
The disadvantage of such a structure is that it increases the time taken to arrive at a decision. As decision-making authority lies with selected people from top management, it may result in biased decision making.
Meaning of Decentralization
Decentralization is another form of organizational structure that functions by delegating decision-making capabilities to multiple teams across geographies.
In such an organization, most of the planning, strategy and decision to implement them are taken by the people in the middle and lower level of management.
The advantage of decentralization is that the employees are empowered to make their own decisions that will benefit the organization, which results in a high level of employee satisfaction and boosts the productivity of an organization.
Decentralization enables low-level employees to gain leadership skills, which can contribute to the growth of the organization in the long run.
Let us look at the most crucial points of difference between centralization and decentralization in the following table.
|Decision-making capabilities delegated across multiple levels||Decision-making capability rests with the top management|
|Flow of Information|
|Open and free||Vertical|
|Decentralization is ideal for large-sized organizations||Centralization is ideal for small-sized organizations|
|Significantly faster||Comparatively slow|
|In decentralization, a higher number of people from each level are involved in the decision-making process||In centralization, only a few handpicked people are involved in the decision-making process|
|Highly motivated employee||Demotivated employee|
|Conflict in Decision|
|Most likely to occur||Least likely to occur|
|The burden gets shared among many levels||Only one group is carrying the burden|
|Prone to instability due to multiple conflicting decisions||Relatively stable as decisions are made by a central authority sharing a common ideology|