A centralized organizational structure is one in which the entire organization is controlled by a few top level managers and all powers of decision making rest with them. Such an organization thus leads to a “flat” organizational structure. The alternative to centralization is decentralization, in which decision making power and authority is pushed down towards lower level employees in the organization. A decentralized structure leads to “tall” organizational structures.
Let us examine the merits and demerits of a centralized organizational structure.
The Advantages of Centralization
When an organization’s structure is centralized, this allows the top management to look into all aspects of the business. As these senior executives are very knowledgeable, educated and experienced, this means that the decisions they make are usually the most optimum.
In times of crisis, a centralized structure becomes useful as the top management can issue direct orders that will be acted on immediately. Whereas in a decentralized structure, decisions may take a long time to be implemented.
Centralized organizational structures will be most appropriate for businesses in which there is little change in the business environment and businesses that require the intervention of senior managers in many day-to-day matters.
The Disadvantages of Centralization
It is often said that centralization is an out-dated organizational structure and has many shortcomings. One such shortcoming is that centralization makes the organization very rigid and inflexible, therefore making the business unresponsive to change in its environment. This can be attributed to the fact that all decisions have to be made by the top managers and thus decisions may be too slow to respond to the changes in the environment. In a decentralized organization, the power to make decisions is delegated to those closest to the action and therefore ensuring that quicker decisions can be made.
A centralized structure restricts and inhibits the growth of the organization. For instance, if the organization is growing and is considering entering the export market, then this would certainly require more decentralization as it would be impossible for the few top executives to look into all aspects of the export business such as contracting with freight companies in Sydney, maintaining relationships with international distributors, etc.
Another problem with centralization is the lack of motivation it instils in lower level employees. Due to the fact that lower level employees don’t get to make decisions, they become demotivated, thus affecting the productivity of the organization. In a decentralized organization, lower level employees are given power and authority, thus making them more motivated to work hard.
Top level executives, though rich in knowledge and experience, might not be aware of “ground realities” i.e. what goes on at the lower levels of the organization and might therefore not be the best ones to make decisions regarding certain business matters. This problem is solved in the decentralized structure as employees at ground levels who are aware of ground realities are given the power to make decisions.