What is decentralization?
Decentralization is the act of transferring decision-making power, accountability and responsibility for results. It accompanies the delegation of memorial authority to individuals or colonies at all levels of an organization. Subunits include subsidiaries, divisions, investment centers, profit centers, and so on.
The extent of decentralization varies. For example, a profit center is likely to have the authority to make decisions related to revenue and expenditure, but will not have the authority to make investment decisions or enter into banking relationships.
Advantages of decentralization:
1. Decentralization improves job satisfaction levels as well as employee morale, especially among lower-level managers.
2. Under decentralization, each single product division gains sufficient autonomy to exercise its creative nature. In this way, top-level management can create healthy competition between different divisions.
3. Develop managerial skills and help solve succession problem which ultimately ensures growth and continuity of an organization.
4. Decisions are taken by authorized personnel. This, in turn, makes rapid and accurate decisions that are well aware of the actual scenario.
5. Extensive periods of management under decentralization lead to lower hierarchical levels. This makes the communication system more efficient as familiar relationships develop between superiors and subordinates.
6. Lower-level managers can change production schedules and work assignments with sufficient authority. They can also take disciplinary action and recommend promotions to their peers.
7. Top executives can focus more on executive-level work such as planning and making decisions if lower-level employees take on all the responsibilities on their own. This relieves their workload which is ultimately for the greater good of the organization.
Disadvantages of decentralization:
1. Every department enjoys full autonomy. This, in turn, makes it difficult to coordinate overall activity.
2. The Trade union movement, market uncertainty, and government intervention may make it impossible to make the most of decentralization.
3. Decentralized product lines need to be sufficiently extensive so that autonomous units can thrive within the same. This may not be of much help in small business houses with narrow product lines. Lower levels in the organization also lack competent managers, which increases the difficulty quotient.
4. Every employee takes responsibility for the betterment of the organization, so they all work hard to achieve the organizational objective. In return, they have to pay more which sometimes proves to be too expensive for the company.
5. Each employee makes a decision that is good for the financial results of the subunit but means that the overall result is less than the optimal outcome for the company.
Importance of decentralization:
Development of managerial skills: In a decentralized structure, subordinates have the opportunity to prove their abilities and management also gets a pool of competent manpower, which can be placed more challenging and in positions of responsibility through promotion.
Executive Development: It encourages self-reliance and self-confidence among subordinates because when authority is delegated to a lower-level, they have to depend on their decisions. By such delegation, officers are constantly challenged and have to find solutions to the problems they face, in the running of the day.
Better control: Each level of performance can be measured, and departments are held separately accountable for their results. The extent to which organizational goals are achieved and the contribution of each department is determined.
Relieves top management: It reduces the extent of direct supervision by supervisors to subordinates, as they are given the freedom to make decisions within the limits set by the superiority and act accordingly. As a result, top management gets more time to make policy decisions.
Facilitates development: It provides greater freedom to heads of departments, divisions, units, etc., as well as lower management levels, as it allows them to function in the way that best suits their department or division. It promotes the spirit of competition between different departments, to improve others. This ultimately increases the production level and generates a greater return to the enterprise.
Effective communication: Through decentralization, the communication system of the organization becomes more effective. It also creates strong connections between superiors and subordinates.
Decentralization reduces the burden of top-level management and gives some middle and lower-level executives real work experience, which improves their morale.