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Centralization

Updated on April 11, 2024
Article byKumar Rahul
Edited byKumar Rahul
Reviewed byDheeraj Vaidya, CFA, FRM

Centralization Meaning

Centralization is an organizational setting that grants senior management the authority to make decisions. It aims to smoothen decision-making and problem-solving processes since it keeps everything in order and ensures the higher control makes final calls. As a result, it provides a better quality of work and increased productivity.

Centralization

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It aims to empower the upper management and establish the policies and protocols applied to interactions with lower-level staff. Lower-level employees adhere to the rules established by the higher authority without questioning them. It enables the handling of the situation right away.

Key Takeaways

  • Centralization entails a business structure followed by the firms where decision-making authority lies with the top-level management. Decisions related to management can lie with a single leader or in the hands of a few.
  • This type of business structure is best suitable for small firms where the mission and vision are clear to the leader and executed vertically with a clear command. It can be based on departments, management, and geographical locations.
  • Choosing such a business structure depends on several factors the firm’s nature, size, and employees’ efficiency.

Centralization Explained

Centralization is a management strategy focusing on one person as the organization’s top decision-maker, who then delegates enforcement of those decisions and plans to other offices. A centralized organization can be run by a single person, a small group of individuals, or a department that makes decisions for the whole corporation.

Companies can apply a few distinct types of centralization in their management. These may be:

  1. Centralization based on departments is the centralization structure within an organization where the leader makes decisions for each department.
  2. Based on management is the most prevalent kind of this business structure. Management centralization refers to one person or division making an organization’s decisions.
  3. Centralization based on location calls for larger businesses with sites across the country frequently exhibiting this kind of concentration. Each place has a leader or set of leaders responsible for making decisions for that place.

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Factors

Some of the crucial factors determining such structure are the following.

  1. Nature Of Organization – The discussed notion is significantly influenced by the type of company structure. For example, one can use it more effectively in a partnership with a small number of employees or a sole proprietorship business.
  2. Organizational Size – The size and scope of an organization’s operations affect how centralized it is. By consolidating power in a few hands, top management can effectively control the tiny businesses functioning on a small scale.
  3. Nature Of Work – Activities in business that only require a little-specialized knowledge or skill can be managed efficiently by centralizing. On the other hand, all tasks that call for specialty demand particular attention, leading to delegating power to a lower level.
  4. The Efficiency Of Employees – Management will seek to centralize power if employees are ineffective. Workers who lack the necessary abilities cannot assume responsibility for their actions. In such a situation, top-level officials hold the decision-making authority and guide subordinates.

Examples

One can understand the structure of a business setting in the following ways.

Example #1

One of the real-life examples of centralization in management structure is the mobile brand Apple. Tim Cook, who took over as Apple’s leader after Steve Jobs’ passing, is responsible for making many decisions within the company. For a long time, Apple has been seen as a corporation that retains a high level of centralized control over the firm’s strategic efforts, including creating new products, choosing markets to operate, and corporate acquisitions.

Example #2

Fast food company McDonald’s uses a centered structure. This decision was made primarily out of a need to assure uniformity in consumer experience and quality across all locations and a desire to take advantage of economies of scale.

Advantages And Disadvantages

Unlike any other business structure, it also has advantages and disadvantages of its own. Let us go through some of them.

#1 Advantages

The advantages of it are as follows:

  1. Transparency in the chain of command – The centralization of authority and a defined chain of command are features of the centralized organization. Employees are aware of whom they are supposed to report to, and there is a clear line of authority delegation.
  2. Lesser operational costs – The operating costs are lower when there is a transparent chain of command because everyone knows their specific roles. As everyone is informed of their duties, it lowers the cost of outsourcing.
  3. Suitable communication channel – Here, appropriate communication routes are established. Direct control and supervision are helpful to ensure that there is no task duplication or poor quality.

#2 Disadvantages

Some of its disadvantages of it are the following –

  1. Lack of individual initiatives – The fundamental issue with this system is that staff members must be more active in decision-making. It is impossible to value original initiatives and ideas. Also, it prevents workers from making judgments or proposals. Instead, they adhere strictly to the written protocol.
  2. Absence of specialization – The organization needs more effective handling of specialized jobs because a single person makes all decisions in a centralized structure.
  3. Lack of loyal employees – Employers are viewed as cranks in this process. As a result, in centralized organizations, only some employees show loyalty. Personal initiatives are the source of employee loyalty.

Centralization vs Decentralization

The top management can make decisions in an organizational system known as centralization. Decentralization, on the other hand, is a different type of organizational structure that distributes decision-making authority to numerous teams across various departments and geographical locations.

Let us go through some fundamental differences between the two business structures.

Basis Centralization Decentralization
 
Chain of command VerticalFree  
Decision-making process SlowFast
Conflicts No such situationLikely to occur
Ideal for Small-sized firmsLarge sized firms
Employees involvement Less motivatedMotivated

Frequently Asked Questions (FAQs)

What are the features of centralization?

Some of its key features of it are:
– The flow of communication is usually vertical and follows a uniform chain of command.
– Less flexible – Since commands are passed on from top to bottom-level management, the scope of improvisation in the approach makes the process less flexible.
– Slow decision-making process is one of the most criticized features of the system.

What are the reasons for centralization?

Important reasons for having a centralized system in business are:
– Keeping track of the developments in a business
– Ensuring an efficient and organized business working
– Facilitating integration and controlling cost

How centralization affects employee performance?

Since individuals carry out tasks that top executives have planned, it eliminates initiative in the workplace. In addition, owing to the restriction of the job restricts their inventiveness and commitment to the company.

This has been a guide to Centralization and its meaning. Here we explain its comparison with decentralization, advantages, disadvantages, and examples. You can learn more about finance from the following articles –

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Comments

  1. Shadrac Beri says

    I always use this source to get knowledge on my university studies.

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