Centralization Essay

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Centralization in the context of an organization relates to the concentration of decision-making authority at the higher levels of management. Its converse, decentralization, is the dispersal of authority from the higher levels to the lower levels of management. If more authority to make decisions is concentrated at the top, we say that the organization is centralized. Real-life organizations do not have absolute centralization or decentralization. The extent of centralization or decentralization varies across organizations, across different divisions and departments, and in the same organization over a period of time. Large organizations generally are believed to allow greater centralization than small organizations, relying on more formalization—the use of rules, procedures, and paperwork. Small organizations can use personal observations and direct contact and so tend to rely on centralization. Thus, there are degrees of centralization and decentralization.

In the contemporary context, there is a bias toward decentralization because it offers several benefits to organizations. Probably the biggest benefit is that decentralization enables delegation of authority from senior managers to middle-level and first-line managers. This makes it possible for the senior managers to concentrate their time and energy on more important tasks of formulating strategies and plans. Delegation of authority to lower levels also allows middle-level and first-line managers to develop their managerial capabilities as they make decisions pertaining to their area of work. This has an added benefit because lower level managers are in direct contact with the situation requiring decisions. Decentralization speeds up the process of decision making—a vital factor in making organizations respond quickly to emerging situations. An organization that adopts a policy of decentralization could foster a healthy, achievement-oriented organizational climate.

It is not as if centralization is undesirable. Some situations may, in fact, favor centralization. These are situations where the senior managers are required to make decisions and act quickly without waiting for their subordinates’ acceptance. Then there are situations where decisions pertaining to the whole organization need to be taken and individual divisions and departments cannot make such decisions. The senior managers also have a better appreciation than the lower level of managers about the external environment, enabling them to make better decisions.

There are many factors that have to be taken into account before an organization centralizes or decentralizes decision making. First of all are the costs involved. If the decision requires heavy investments, then it is more likely that the senior managers would make it. Some organizations also adopt centralization because they wish to have uniformity of policy throughout the organization. How competent the lower-level managers are also determines the degree of centralization and decentralization. The more competent the lower managers, the more likely is the organization to decentralize. Control systems in organizations also often dictate that several aspects of decision making be centralized.

Organizations that operate globally face choices between balancing authority between headquarters and the subsidiaries. When a corporation establishes a subsidiary in a foreign country, its managers must decide how much control they need to maintain over the subsidiary’s managers. A headquarters–foreign subsidiary control relationship can be defined in terms of the degree of centralization or decentralization. The question here is how much authority will be retained by headquarters and how much will be delegated to the subsidiary.

Frequently, there has to be a healthy compromise between local autonomy for the subsidiaries and centralized control by headquarters. Such compromise can vary over time depending on the requirements of the overall strategy of the organization. In situations where more authority is decentralized at the subsidiary level, the managers may be able to provide faster response to local conditions but may become too independent and therefore less accountable to headquarters. Where authority is centralized at the headquarters level, there might be better control and uniformity in decision making but this may stifle initiative and prevent empowerment of subsidiary-level managers. For example, Asea Brown Boveri (ABB), a multinational corporation with headquarters in Sweden and Switzerland, attempts a healthy balance between centralization and decentralization by delegating full authority and responsibility for product categories on a worldwide basis to the subsidiaries. ABB headquarters acts as a facilitator of information and knowledge flows between the subsidiaries. Similarly, Honda, Matsushita, Hewlett-Packard, and Dow also grant autonomy to their subsidiaries by empowering their local boards of directors to make decisions and respond to local conditions.

 

Bibliography:

  1. Richard L. Daft, Organization Theory and Design (South-Western Thompson Learning, 2004);
  2. Ricky W. Griffin and Michael W. Pustay, International Business: A Managerial Perspective (Pearson Prentice Hall, 2007);
  3. Don Hellriegel, Susan E. Jackson, and John W. Slocum, Jr., Management: A Competency-based Approach (SouthWestern Thompson Learning, 2005);
  4. A. Rodrigues, “Headquarters–Foreign Subsidiary Control Relationships: Three Conceptual Frameworks,” Empowerment in Organizations (v.3/3, 1995).

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