Centralization is said to be a process where the concentration of decision making is in a few hands. All the important decisions and actions at the lower level, all subjects and actions at the lower level are subject to the approval of top management. Centralization is the systematic and consistent reservation of authority at central points in the organization.

The implication of centralization can be:

• Reservation of decision making power at top level.
• Reservation of operating authority with the middle level managers.
• Reservation of operation at lower level at the directions of the top level.

Under centralization, the important and key decisions are taken by the top management and the other levels are into implementations as per the directions of top level. For example, in a business concern, the father & son being the owners decide about the important matters and all the rest of functions like product, finance, marketing, personnel, are carried out by the department heads and they have to act as per instructions and orders of the two people. Therefore in this case, decision making power remain in the hands of father & son.

The Pros and cons of centralization

Centralized governing structures developed better levels of consistency that were more cost-efficient and fair to all. Waste was eliminated and the ruling class was able to focus on long-term planning and decision-making to the benefit of the whole community. Furthermore, a mix between decentralization and centralization was established to enable flexibility and peak performance of development projects. Other advantages of centralization that stood out included:

• With a centralized authority in place, cost of production eventually reduced due to standardized procedures of trade and production.
• Uniformity in action was also achieved thanks to the control of central administration.
• Improved quality of work was also attained.
• With direct supervision, centralization enabled better coordination in society.

The main advantage of adopting a centralized system was and still is efficiency. Decisions are made quickly in a centralized system and there is little to zero duplication of roles. But of course, such advantages don’t come without drawbacks.

Some of the shortcomings of centralization include the following issues:

• Abuse of power.
• Slow down efficiency.
• Censorship.

On the other hand, Decentralization is a systematic delegation of authority at all levels of management and in all of the organization. In a decentralization concern, authority in retained by the top management for taking major decisions and framing policies concerning the whole concern. Rest of the authority may be delegated to the middle level and lower level of management.

The degree of centralization and decentralization will depend upon the amount of authority delegated to the lowest level. According to Allen, “Decentralization refers to the systematic effort to delegate to the lowest level of authority except that which can be controlled and exercised at central points.

Decentralization is not the same as delegation. In fact, decentralization is all extension of delegation. Decentralization pattern is wider is scope and the authorities are diffused to the lowest most level of management. Decentralization is complete only when fullest possible delegation has taken place. Decentralization is wider in scope and the subordinate’s responsibility increase in this case. On the other hand, in delegation the managers remain answerable even for the acts of subordinates to their superiors.

Implications of Decentralization

1. There is less burden on the Chief Executive as in the case of centralization.
2. In decentralization, the subordinates get a chance to decide and act independently which develops skills and capabilities. This way the organization is able to process reserve of talents in it.
3. In decentralization, diversification and horizontal can be easily implanted.
4. In decentralization, concern diversification of activities can place effectively since there is more scope for creating new departments. Therefore, diversification growth is of a degree.
5. In decentralization structure, operations can be coordinated at divisional level which is not possible in the centralization set up.
6. In the case of decentralization structure, there is greater motivation and morale of the employees since they get more independence to act and decide.

Centralization and decentralization are the categories by which the pattern of authority relationships became clear. The degree of centralization and decentralization can be affected by many factors like nature of operation, volume of profits, number of departments, size of a concern, etc. The larger the size of a concern, a decentralization set up is suitable in it.