Who makes the decisions in an organization? Every day operational and strategic decisions must be made to improve the condition of the organization and perform the daily duties of the operation. Centralization and Decentralization are two opposite ways to transfer decision making authority throughout a firm.
Definition – The process of transferring and assigning decision making authority to higher levels of an organizational hierarchy
In a centralized organization the decision making has been consolidated into the higher levels of an organization, such as a corporate head office. The key information and knowledge is concentrated at the top and decisions are cascaded down through the organization.
Definition – The process of transferring and assigning decision-making authority to lower levels of an organizational hierarchy.
In a decentralized organization, decision making has been allowed to move to lower levels of the organization, for example, departments, teams, regions or divisions. There is more autonomy at the lower ranks in these types of organizations which limits the control of the top managers in the firm. Ideas and information are flowing upward from the bottom of the organization
Three Forms of Decentralization
Deconcentration – The weakest form of decentralization. Decision making is redistributed to the lower or regional levels of the same central organization.
Delegation – The responsibility of decision making is transferred to business units not totally controlled by the central organization, but ultimately accountable to it.
Devolution – The decision making is transferred to completely autonomous business units.
Strengths of Centralization
Philosophy – Top Down Control, Leadership, Vision, Strategy
Decision Making – Strong, Charismatic, Visionary, Authoritarian
Organizational Change – Shaped by Top Leaders, Vision of the Leader
Execution – Decisive, Fast, Coordinated
Uniformity – Low risk of dissent or conflicts between parts of the organization.
Strengths of Decentralization
Philosophy – Bottom Up, Political and Learning Dynamics
Decision Making – Democratic, Participative
Organizational Change – Emerging from Interactions, Organizational Dynamics
Execution – Emergent. Flexible to adapt to minor issues and changes.
Uniformity – Higher level of participation and personal accountability