In a centralized organizational structure, decision-making authority is concentrated at the top, and only a few people are responsible for making decisions and creating the organization's policies. In a decentralized organization, authority is delegated to all levels of management and throughout the organization. An organization's degree of centralization or decentralization depends on the extent of decision-making power that is distributed throughout all levels.
An organization's structure and its degree of centralization or decentralization depends on a number of factors, including the size of the organization and its geographic dispersion. In a very large and diversified organization, it is unlikely that a handful of people will possess all the resources to achieve all goals and objectives of the enterprise. As a result, it becomes impractical to concentrate power and decision-making authority at the top. Similarly in a geographically-dispersed organization, a centralized approach will not be the most efficient, as the people with the most authority will be unable to directly supervise operations on a day-to-day basis.
Advantages of Centralization
The most apparent advantages of centralization are an organization's ability to closely control operations, provide a uniform set of policies, practices and procedures throughout the organization, and better use the knowledge of centralized experts. In a small organization, operations are likely to be not as diversified, and top management may realistically possess the skills and expertise required to manage all facets of business. In such a centralized environment, actions of individuals are also better aligned with management's prescribed policies, as the rules emanate from a single source, and there is little ambiguity.
Advantages of Decentralization
Decentralization is a common trait of forward-thinking organizations. A decentralized organizational structure allows faster decision-making and better adaptability to local conditions and context. In a large organization, a high degree of centralization would lead to inefficiency as all actions would have to be approved and cleared by top management. Decentralization also enables an organization to better adapt to conditions by delegating authority to those who are physically present and active in a particular project or operation. Another important advantage is management grooming. In a decentralized organization, managers at lower levels gain relevant experience, which improves quality of human resources.
The extent of delegation distinguishes a centralized organizational structure from a decentralized one. The first task in delegating is to choose appropriate delegates, based on a fair and objective evaluation of individual skill sets, and their relevance to responsibilities. Efficient delegation happens when delegates clearly see the outcome of their efforts, and how it fits into the organization and its goals. Modern business thinking also contends that delegates should be aware of performance measures and expected results, and should be recognized for achievements.
Delegation & Empowerment
Delegation is a traditional management model concept, whereas empowerment belongs to the new management model, and both are integral parts of a decentralized organization. Delegation only thrusts authority on individuals, and overlooks aspects such as motivation and will to achieve the task. Empowerment on the other hand replaces authority with ownership, and considers unique capabilities of the individual, such as initiative and efficacy, rather than just roles and responsibilities.