[Commerce Class Notes] on Advantages and Disadvantages of Centralization and Decentralization Pdf for Exam

In any organization, there are two ways of operation: centralization and decentralization. There is a hierarchy of formal authority in centralization for making all the organization’s important decisions. Decentralization means that decision-making is delegated to the lower levels of the organization.

Before heading onto the advantages and disadvantages of Centralization and Decentralization, one needs to understand properly, what do the terms- Centralization and Decentralization are. Only then, you can fully understand the merits and demerits of Centralization and Decentralization. As they both help us determine the fiscal situation of a firm or country. 

So, let us now understand what the terms centralization and decentralization mean in the coming section.

What is Centralization?

Centralization is an organizational structure that gives the ability of decision-making responsibilities to higher management. Few selected members are given the authority to create and determine strategies and goals. It also clarifies the motives and mission of the organization, which must follow to achieve its goals. 

In centralization, the type of organizational structure allows higher management to create the rules including procedures that are used to communicate with lower-level employees. Lower-level employees have to obey the rules made by the higher management organization without doubting the rules and regulations.

What is Decentralization?

Decentralization is an organizational structure where the delegates are assigned to manage the organization. They are selected by the higher authorities. The selected candidates are mostly their middle and lower subordinates. 

The decentralization type of management helps to organize daily duties. They also take part in minor decision-making. A lot of responsibilities are given to the middle and lower levels subordinates. 

Because of the well-distributed job roles, the higher management authorities get a chance to focus more on major business decisions.

Advantages and Disadvantages of Centralization

There are numerous advantages and disadvantages of Centralization. Let us learn them in detail below.

Merits of centralization:

• Centralization has a very important role in providing a disciplined environment in an organization. The higher level of the management doesn’t only look after taking essential decisions for the organization, they are also the hearing aid for the employees when they face problems regarding work. Whenever the employees of middle to lower-level management face a concern regarding work and need a few changes, they can go to the higher-level management authorities. Centralization makes the decision-making, problem-solving matters easy as it helps them to keep them in proper order and all the final decisions are taken by the higher management authority.

• All the middle to lower-level employees is the workers under higher management authorities. Whatever works they are given by higher-level management, they keep a check on them because every lower lever worker is answerable to higher authorities. So, in fear of supervision, they tend to do their daily duties properly. It is one of the reasons for a better quality of work with high productivity.

• The higher-level of management has more experience than other people. They tend to have more business experience and knowledge. They have the idea of how to deal with specific situations and how to not. With their knowledge based on their experience, they tend to be better decision-makers for the centralized organization.

• Every organization be it centralized or other, they have a plan or a vision that they want to see accomplished in the coming years. For the success in the future, it can’t be expected from the efforts but if they have centralized or higher-level authorities which have power in the hand for deciding for the company’s good. They can decide on their vision for the future with full focus. They will make the workers of the company achieve the goals for the company.

• Whenever more people are involved in the decision-making process, more time will increase the decision-making process. And it will tend to make it slow because more people shall give more opinions and views about certain objectives. So, having a centralized organization will have only the top management for decision-making while the employees will be responsible for only work, not for decision-making.

• In a centralized organization, the higher authorities are those who started the business. So, they save the money for hiring any other business experts for the decision they need to make.

Demerits of Centralization:

• They don’t have the exposure to show their skills as they have to follow the rules and orders by the higher authorities. They feel demotivated while working, as they have no chance of getting a promotion.

• In a centralized organization, the decision-maker has the power. Employees tend to work under them according to their rules. In such situations, their work outcome is not creative. With the controlled nature of the centralized organization, their productivity suffers the most.

• As the worker is constantly working under rules and supervision via higher authorities, they get the feeling of slaves rather than organization employees. This leads to disloyalty, and they tend to leave when they receive a better opportunity.

Merits and Demerits of Decentralization 

There are several advantages and disadvantages of fiscal decentralization. Decentralized decision-making advantages and disadvantages also, helps us to understand the correct way to approach any fiscal problem and take adequate decisions. So without any further ado, let’s find out the advantages and disadvantages of Decentralization.

Merits of Decentralization:

• In a decentralized organization, the decision-making process is quite quicker than centralization. From the middle to the lower level, employees are allowed to make minor decisions. Based on the situation, they can take ownership of the required action and implementation.

Demerits of Decentralization

• In a decentralized organization, many employees are required to be hired according to their work experiences and knowledge. This criterion increases the cost of the company, as more money is spent to hire the most eligible people for the job profile.

Centralization and decentralization are opposite ways to transfer decision-making power and to alter the organizational structures.

There must be a good balance between centralization and decentralization of authority and power. It is necessary to avoid extremes of centralization and decentralization.

Conclusion

Centralization obtains consistent methods and activities and uses closer powers to work units. It can successfully handle the crisis immediately. Decentralization guarantees the dynamic work of the staff and stimulates their enthusiasm. The true realization of joint relies on a reasonable combination of centralization and decentralization. No complete centralization or complete decentralization was found in the association. It only exists in principle. Therefore, a legitimate blend of the two is required. Centralization and decentralization are tangled points. Nor is it a reliable and correct arrangement. Professional issues, such as server organization, and non-technical issues, such as authoritative structures, can be combined or dispersed. Both topics are related to making changes. When introducing such unavoidable improvements, we recommend that you consider the following core values: understanding the clear problem you are understanding; understanding your inspiration for introducing improvements; Incorporate as much as is possible for the time being; recognize that, like any new administration, it requires careful planning; and, most importantly, listen to your clients.