Centralization is a common occurrence in small enterprises. The success of a small enterprise depends upon the dynamic manager who single-handedly commands the running of the concern. He takes all the decisions himself and entrusts only implementation to the subordinates. There is a direct link between the proprietor and his employees. He personally supervises all managerial functions of production, marketing, financing, etc. In fact, he has no organization other than himself. He is consulted for every type of guidance and his counselling is final.
Centralization is generally successful in small-scale enterprises. This is possible because the operations are limited and the proprietor is able to devotes personal attention to every activity of the business. This type of management is useful where emergency decisions are to be taken. With the expansion of business the control becomes difficult and the need for decentralization arises.
Factors Determining Centralization of Authority:
The management of an undertaking may centralize decision-making for the following reasons:
1. Achieving Uniformity of Action:
Uniformity of action is possible when decision-making authority is centralized. The decisions taken at the top will be implemented at every level. There may be more than one unit under the same management and it may be desired to have same types of policies and procedures. If the units take their independent decisions then uniformity of action will not be achieved. Under such situations centralized decision-making will enable unity of action.
2. Facilitating Integration:
There may be a need to integrate all operations of the enterprise for achieving common objectives. Centralized management will facilitate integration of activities by devising common policies and programmes.
3. Promoting Personal Leadership:
The small enterprises grow on the strength and capability of their manager. Even big concerns too depend upon the qualities of their managers during initial periods. The whole authority will be in the hands of the chief executive. This will result in quick decisions and imaginative actions. The manager will acquire more and more skill and experience which will promote their personal leadership.
4. Handling Emergencies:
Under uncertain business conditions there is a need to take emergency decisions. Sometimes the existence of small- scale units is endangered if timely actions are not taken. Centralized authority will enable quick and timely decisions from short-term as well long-term perspective.
Advantages of Centralization:
Following are the advantages of centralization:
1. Standardization of Procedures and Systems:
Centralization enables standardization of procedures and systems. It facilitates smooth working in the organization. There is also a consistency in day-to-day working. The consumer service will also improve if standard policies are used.
2. Facilitates Evaluation:
When same policies are used for all segments of the enterprise their performance can easily be evaluated. It also helps in comparing the results of different departments. This will bring a sense of competition among various segments. Ultimately the overall performance will improve.
Centralization of management will bring in economies of large scale. There will be a centralized buying and selling. This will enable bulk buying resulting in discounts and savings in transportation expenses. When sales are done in large quantities then customers are offered better terms and low prices. There will be an economy in managerial expenses also.
4. Co-ordination of Activities:
Co-ordination of activities of various segments is also facilitated by centralized management. In the absence of centralization, different segments may pursue their independent policies. This may result in disunity and disintegration. Different segments may emphasize their own goals only without bothering about organizational objectives. Centralized management will help in coordinating the work of different segments in such a way that organizational goals are achieved.
Disadvantages or Evils of Centralization:
Centralization may be useful only up to a certain level and also under certain conditions. Beyond a certain point it creates difficulties in day-to-day working and also restricts the growth of an enterprise.
Following are some of the disadvantages of centralization:
1. Destroys Individual Initiative:
Centralization revolves around one person only. One man takes all the decisions and decides the modes of implementing them. Nobody is given the authority to use his own judgment even if there are glaring lacunae in the decisions. It destroys initiative of subordinates. They do not make any suggestions and just carry on with whatever has been conveyed to them.
2. Over Burden of Few:
This system gives all responsibilities to few persons in the organization. They remain over-burdened with routine work while sub-ordinates do not have sufficient work. The centralization of all powers do not allow the chief executive to devote sufficient time for important tasks of planning, coordinating and motivating. In a decentralized set-up routine matters are left to the subordinates and manager concentrates on important administrative work only.
3. Slows Down the Operations:
The operations of the enterprise are slowed down under centralized set-up. All decisions are taken only by one person and his unavailability keeps the matters pending. Even clarifications about decisions are referred to the top which destroys invaluable time in formalities. If the subordinates have powers to interpret decisions then operations can be toned up. Things move very slowly in a centralized set up because everything has to pass through the manager.
4. Distance from Customers:
The customers do not come into contact with policy-makers. They meet only those officials who do not have the powers to take decisions. Moreover one person cannot meet and know the reactions of customers regarding products and service. This also comes in the way of intimate understanding of market situations by the chief executive.
5. No Scope for Specialization:
Centralization does not offer any scope for specialization. All decisions are taken by one person and he may not be a specialist in all the areas. In the present competitive world there is a need for employing the services of specialists. The specialists will be able to introduce new things in their fields and they may improve the performance of the enterprise.
Even if specialists may be employed under centralized set-up they will not be given a free hand in their areas. They will keep on convincing the chief executive who is the ultimate decision-maker. The specialists do not have any role in an organization with centralized authority.