Decentralisation Vs Centralisation

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Last but not least, decentralization increases top management’s burden of supervision (Urwick, 1922). Executives may need to attend many not-so-important conferences and contact with lots of employees per day, which takes up time otherwise could be used for strategically important decisions. Moreover, the increased workload could lead to inefficient decision making from top management and is harmful to the corporation.

Factors related to centralization

Size

Generally, small businesses often run in a centralized manner because of the smaller size of their workforces. At the beginning, the founder can sometimes be the only manager in the whole corporation and all the employees will report directly to him. This is practical as the business is not large, the workload for the owner to make all key decisions is not that big. Through centralization, operating cost can be reduced since the company can hire less people and the owner can ensure strategies implemented are aligned with the company’s objectives.

Product characteristics

Company with limited product ranges and repetitive and standardized production procedure usually has a centralized structure to benefit from economies of scale. It will share equipment, plants and human resources among its divisions and produce in large batches, leading to a lower unit cost.

Business Environment

The more stable and certain the markets the corporations operate in, the more likely centralized organization structure will be adopted and hence high level of formalization. There is no need for local managers to tailor strategies to local markets, because the headquarter will set up all standardized rules and procedures. All they need to is abide by these rules (Hopper, Northcott, & Scapens, 2007).

Geographical proximity

The proximity of local divisions to the headquarter will decide whether centralized management will be chosen. If local divisions are close to the main office, it is possible to for local managers to come to the headquarter for a discussion with top management. However, if the distance is very far and it takes days for the trip, more authority should be granted to divisional managers otherwise valuable opportunities may slip.

Leadership of top management

The organization with the top manager who has strong leadership ability usually works well under centralization. Through the leader’s charisma, employees will not feel being controlled, instead they are committed to the common goal described to them. For example, Jack Ma has the ability to convince his employees that one day Alibaba will be the biggest e-commerce company in China when the company just started.

Conclusion

Whether a company is suitable for centralization depends on many factors such as size, product characteristics, geographical proximity of operations, business environment and leadership of top manager. If appropriately implemented, centralization can lead to the success of a company. However, it should be noted that centralization and decentralization are not incompatible. Even in a centralized company, there is always a certain level of decentralization, and in most of the case, an organization’s structure is in the middle between them and may change through time.

References

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Hopper, T., Northcott, D., & Scapens, R. (2007). Issues in management accounting: Pearson education.

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Urwick, L. F. (1922). The Manager’s Span of Control. Bulletin of the Taylor Society, 7(2).