After reading this article you will learn about:- 1. Meaning of Decentralisation 2. Factors affecting Decentralisation 3. Process 4. Degree 5. Importance 6. Limitations.

Meaning of Decentralisation:

Decentralisation is passing of authority to make decisions to the lowest possible level in the organisational hierarchy. Decentralisation is delegation of authority to the maximum possible extent. “Decentralisation refers to the systematic effort to delegate to the lowest levels all authority except that which can only be exercised at central points.”

Decentralisation is essential but how much to decentralise depends on various factors like size of the company (decentralised decision-making authority increases with increase in size of organisations), cost control (when companies want to maintain strict cost control, decision-making authority is centralised), desire of managers (if managers desire to take decisions themselves, the organisation tends to be centralised), functional areas (decisions related to finance and personnel are generally centralised and those related to production and marketing are decentralised), ability of subordinates (if subordinates are inspiring and hard-working, decision-making authority can be decentralised).

Factors affecting Decentralisation of Authority:

The factors affecting decentralisation can be:


1. External factors and 

2. Internal factors.

External Factors:

The factors external to the organisationare:


1. Environment:

If customers and suppliers are dispersed, competition is not intense, markets provide wide scope for company to sell (by adding new products), the organisation can prefer to decentralise.

2. Regulation of the Government:

If Government has strict policies and procedures for business firms, managers cannot take the risk of delegating decision-making powers to people at lower levels. They have to strictly observe the rules. The tendency to decentralise in such cases is low.


3. Market features:

If firms operate in a market where homogeneous products are produced by all the firms, the power to make decisions can be decentralised to lower level managers.

4. Bargain with trade unions:

If trade unions agree to bargain with lower level managers, decision-making power can be decentralised but if trade unions bargain only with top management, the organisation tends to be more centralised.


Internal Factors:

The factors internal to the organisation which affect decentralisation are as follows:

1. Size of the organisation:

As size of the organisation increases, it becomes difficult for managers to take decisions single handedly. Decision-making will be time consuming. Large organisations have geographically dispersed units with large number of levels in each unit. Coordinating with every level of every unit is complex and time consuming.


This results in delayed decision-making which can be costly for the firms. Therefore, with increase in size of the firms, decision-making power should be delegated to functional managers and lower level managers. This increases efficiency of the organisation since top executives can concentrate on strategic matters and routine matters can be managed at the lower levels. Managers will be close to strategic decision-making points and coordination is facilitated through dispersal of decision-making authority at the point where it is required.

2. Cost control:

Costly decisions where financial outlay is large, for example, the decision to buy a plant or machine, are normally taken by top executives and decisions where financial outlay is not too large can be taken at lower levels. Thus, if firms want to maintain strict cost control, the degree of decentralisation will be less. To maintain financial control, organisations can frame a policy that spending some amount on petty items is the discretion of lower level managers but expenditure beyond this amount has to be sanctioned by top managers.

3. Philosophy of management:


Management philosophy refers to management’s desire to centralize or decentralise. Some managers prefer to retain power and authority to make decisions and, therefore, believe in centralisation of authority. Others, who want the decisions to be taken at lower levels, to improve their creative skills, decentralise the decision-making authority.

4. History of the enterprise:

Enterprises which have always worked as centralized organisations continue to do so in future also. Past precedents are followed in future and are not easily changed unless a strong desire or outside influence is created within or outside the organisation.

Self-made business empires show higher tendency towards centralisation. Organisations which expand through external mergers, acquisitions and amalgamations report higher tendency towards decentralisation. Different managements join together and retain their decision-making authority as they enjoyed prior to external growth measures (mergers, amalgamations etc.). Autonomy to make decisions shows tendency towards decentralisation.


5. Functional areas:

Some degree of centralisation or decentralisation is essential in every functional area. However, some areas like finance and personnel tend to be more centralised while others such as production and sales tend to be more decentralised.

6. Ability of subordinates:

If lower level managers are inspiring and innovative, decision-making power can be given to them. There is greater tendency for decentralisation. Decisions can be effectively made at lower levels and managers also enjoy the power of autonomous decision-making.

This is a strong motivational force that promotes commitment and loyalty towards the organisation. Though organisation tends to be decentralised when lower-level managers are competent to make decisions, decentralisation also increases the competence of managers to make sound management decisions.

7. Growth of enterprise:


Top managers of a growing enterprise in terms of financial and physical parameters spend more time on important and strategic organisational matters. Thus, there is greater tendency for decentralisation. Growing organisations adapt to the dynamic environment and most of the decisions may be non-programmed in nature.

Since all these decisions cannot be taken by the managers at central locations, they require participation of managers at different levels. Decentralisation facilitates faster decision-making in case of growing organisations.

In case of stable organisations, most of the decisions are programmed in nature and can be taken without much involvement of people at larger scale at larger levels. There is, thus, tendency to centralize the organisation.

8. Communication system:

An effective communication system helps to coordinate diverse organisational activities. An organisation whose communication system is based on modern management information systems can decentralise its operations.

9. Control system:


An effective system of control where regular appraisal of performance against planned performance is done facilitates decentralisation. Performance of units at different levels can be regularly monitored so that organisational activities remain coordinated. Contemporary management is facilitated through advanced control techniques based on computer system which promotes decentralisation.

Process of Decentralisation of Authority:

The following steps make the decentralization process :

1. Centralisation:

Initially, the organisation starts as a centralised structure. The power and authority to make decisions vests with the top management. As it grows, the need for delegating operating authority arises while strategic decisions related to planning, organising motivation etc. are exercised by the top management. This ensures uniformity in the working of organisation.

Following are the strategic areas where decision-making should remain centralised:

(a) Centralisation of Planning:


To ensure consistency and uniformity in the operations, the framework of planning consisting of policies, procedures, programmes, schedules, etc. is developed by top managers, whatever the degree of decentralisation in the enterprise. It is within the overall planning that different units make sub-plans to synthesize with the broader plans.

(b) Centralisation of Organising:

The organisation structure — creating departments, definiting authority-responsibility relationships, the levels to be created (span of control) are decided by top management and the task of actually working within that structure is delegated to lower levels by dividing the work into sub-units and assigning each task to different individuals.

(c) Centralisation of Coordination:

More the degree of decentralisation, more the problem of coordinating the business activities. Chief executive should retain power to coordinate the activities of different divisions and departments. This avoids duplication of efforts exercised by different divisions.

(d) Centralisation of Motivation:


People are motivated by different factors. While financial rewards are important for some, non-financial rewards of acceptance and recognition are important for others. Various motivational factors should be thoroughly analysed and policy for motivating employees of different nature should be made. Motivational plans are, thus, centralised.

(e) Centralisation of Control:

Authority to make overall plans is reserved with top management. Managers also ensure that plans are achieved optimally. Setting measures of control to ensure that actual performance conforms to planned performance is centralised with the top management.

2. Development of managers:

Once the basic structure of organisation is designed, plans and standards for measuring performance are made and techniques of coordination and motivation are laid, managers decentralise the enterprise by delegating operating authority to lower level managers. These managers frame policies for their units. Though decisions made by these managers do not relate to strategic matters, yet they are important for overall functioning of their units. Unless managers have the skill and competence to make such decisions, they cannot plan for their units.

3. Communication and coordination:


Though overall coordination is the task of top management, departmental managers also ensure coordination of different work units. This is possible through open system of communication where information flows freely, both vertically and horizontally.

4. Control:

The measures of control are framed by top management through techniques like budgets, PERT, CPM etc. to evaluate performance of the organisation. This does not relieve lower level managers from exercising control over their units. They also participate in controlling activities of their units and ensure their efficient functioning.

5. Dispersion:

Dispersion refers to geographic separation of central head office from the operating units. This minimizes interference of top executives in the working of operating units. Dispersion helps to locate the units near the source of raw materials or markets (to reduce the costs) and enhance the leadership and supervision qualities of managers in charge of their units. Increase in their skills and creativity motivates employees of their units, resulting in higher productivity.

Degree of Decentralisation:

The important question that arises is not whether to centralise or decentralise but how much to centralise or decentralise. Some degree of decentralisation is essential. It is important to determinate what kind of authority to delegate and how far down the scalar chain it is to be delegated. John Child describes four factors that characterise movement of organisation from one end of the continuum to the other i.e. from centralisation to decentralisation.

These are:

1. Size:

With increase in size of the organisation, managers cannot make all major decisions themselves and, therefore, move towards decentralisation.

2. Geographic dispersion:

If activities are spread over wide geographical areas, top executives cannot make decisions with respect to all the functional areas and, therefore, there is tendency to decentralise.

3. Technological complexity:

As a result of technological developments, top managers can­not make all decisions alone and, therefore, the movement towards decentralisation.

4. Environment uncertainty:

The fast changing environment requires:

(i) Careful analysis of environmental factors that affect the organisation, and

(ii) Most speedy and timely decisions by organisations to adapt to the changing environment. There is thus, need for decentralisation.

Importance of Decentralisation:

Decentralisation is important for the following reasons:

1. Reduces the burden of top managers:

Managers who look after both strategic and routine matters often become so involved in routine activities that the time they should spend on strategic planning is often not spent. Through decentralisation, routine decisions can be delegated down the scalar chain and important decision can be retained at the top. Managers can, thus, focus more on strategic management.

2. Develops subordinates:

One learns through mistakes. If top executives do not delegate for the fear that subordinates will make mistakes, they will not be able to develop potential managers. The subordinates should be allowed to make mistakes and also rectify them so that they learn not to repeat them in future. This is possible only in a decentralized organisation. It also develops lower-level managers to accept more responsibility and become competent in decision-making processes.

3. Fast decisions:

In a decentralised organisation, people do not have to approach the higher authorities every time they make a decision. As they are closer to the problem area, they can make decisions related to that problem. The decisions are, thus, faster and better.

4. Promotes diversification:

If top managers retain authority to make every decision, they will be able to look after limited lines of products only. Decentralisation enables them to search new markets. They can diversify into new markets and add new products. This helps in diversification in terms of dealing in multiple products and operate in multiple geographical locations.

It also promotes organisational growth by reducing the number of levels in the organisational hierarchy. Wide span of management generally denotes committed employees, teamwork and adaptability to dynamic environment.

5. Promotes motivation:

Rather than motivating subordinates through financial rewards, allowing them to make decisions serves as a better motivational force. Thus, decentralisation promotes efficiency of workers resulting in higher results. It promotes self-motivation and self-control.

6. Flexibility:

A decentralised organisation is more flexible as managers at different levels can change their policies according to changes in environment.

7. Better communication:

A decentralised organisation has less levels in the scalar chain. Communication amongst people at different levels is faster and efficient. Chances of information distortions (due to increased levels) are reduced.

8. Control:

Managers at different levels frame standards of performance for their respective units. This facilitates the process of control. People are result-oriented as units are autonomous and frame their sub-goals that contribute to larger goals of the organisations.

Limitations of Decentralisation:

Decentralisation suffers from the following limitations:

1. Coordination:

Managers find it difficult to coordinate the organisational activities when there is high degree of decentralisation.

2. Control:

Difficulty in coordination makes it difficult for managers to control the organisational activities.

3. Costly:

Though useful, it is expensive since each department manages activities in its own way. There is duplication of efforts and physical facilities in the organisation.

4. Adaptability:

In the fast changing environment, unless strategic decisions are centralised, different units will react to changes differently and organisational operations will be difficult to coordinate.

5. Lack of uniformity:

A highly decentralised organisation may not have uniform policies for all the organisational units. Every unit formulates its own policies. The policies are more uniformly followed in a centralized organisation (as control is centralised at a single point).

6. Ability of lower level managers:

In a decentralised organisation, decisions are taken by managers of different units at their respective levels. If lower level managers are not competent and skilled to make decisions, efficiency of decentralised organisation will get reduced.

These limitations are only conceptual in nature. Before making an organization decentralised, managers ensure that these problems should not arise. Even if they arise, they are only theoretical as they are not inherent in decentralisation. They emerge only if decentralisation is not effectively planned and followed. Planned efforts to make an organization decentralised will always bear sound results.