What is Decentralization?

What is Decentralization?

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Rashmi
Rashmi Karan
Manager - Content
Updated on Dec 1, 2023 11:45 IST

Decentralization is a fundamental concept in organizational management and governance that revolves around distributing decision-making authority and responsibilities from a central authority to various levels or units within an organization, government, or system. Understanding the principles and implications of decentralization is crucial for effective organizational management, governance, and decision-making in today's complex and dynamic environments. Learn what is decentralization, its types, its advantages and disadvantages, and points to consider when implementing decentralization.

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Decentralization meaning – Decentralization is an economic concept that denotes the disintegration of powers within an organization, company, or state. This supposes the dispersion of decision-making and resources in different hierarchies or regions.

Decentralization refers to a process of atomization of authority within a company, organization, or country. This necessarily indicates that responsibilities are also distributed. 

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Objective of Decentralization

The objective of decentralization is that power and decision-making should be delegated to lower workforce levels and not just concentrated in top management. In such a scenario, people in the lower hierarchical levels are granted greater autonomy and freedom.

Decentralization helps make decision-making more agile, primarily when a problem needs to be addressed and solved quickly. Besides, decentralization also facilitates the lower-ranking employees to feel more valued and involved with the functioning of the company/organization.

Another aim of decentralization is to free the higher-ranking employees from work overloads and focus on more critical business areas or issues.

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Difference Between Centralization And Decentralization
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Types of Decentralization

There are different types of decentralization. 

  • Horizontal: Power is distributed among areas that have the same level.
  • Vertical: Power distributes to lower levels (delegation of tasks)
  • Territorial: The decision-making task is given to an entity that decides on a delimited territory.
  • Functional: Certain skills are recognized from a particular sector of activity to a specific area.
  • Fiscal: It aspires to greater financing efficiency and quality of public services. This type of decentralization seeks a balance of expenses, taxes, and transfers between the different governments.

Economic Decentralization

There are mainly two types of decentralization at economic levels, which are discussed as follows – 

Decentralization at the Microeconomic Level

It is usually established that the appearance of decentralization in commercial companies responds to the need to distribute authority and corporate decision-making among various hierarchical points.

This happens in most cases in large companies that cover different markets simultaneously and even with multinational life. In this way, controlling its operation and profit creation is more effortless. In this way, the specific needs of each branch of the organization should be known.

Decentralization can come hand in hand with the specialization of work. However, you can even favour it by attending to the specific needs of the different points of your organization chart. This happens when different administrative areas (legal, fiscal, labour) and decision-makers focus more on each matter.

Must Read – What is Finance?

Decentralization at Macroeconomic Level

The distribution of power, factors of production, infrastructure, or economic resources in decentralized countries supposes the existence of a distribution map of regional or territorial administrations in charge of exercising authority in the political and economic sphere.

Thus, the weight of the central state in day-to-day society is reduced, as there is authority more focused on autonomy. This implies a greater scope of freedom in terms of higher volatility of price levels, fewer generic restrictions, and more attention to the specific needs of each region.

To learn more about finance and its intricacies, you can explore Online Finance Courses

Advantages of Decentralization

1. Faster decision making

Decentralization allows better and quicker decision-making, where the power trickles down to the operational level to take care of the decision-making process.

‍2. Personnel development

Decentralization helps to instil confidence and self-sufficiency among subordinates while delegating them the authority to trust their judgments. Such a situation challenges the team members, prompting them to find solutions for their day-to-day work-related problems.

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3. Development of managerial skills

Any organization’s decentralized structure allows its subordinates to prove their abilities and grow. It allows the supervisors more time and freedom to spend more time on managerial aspects and make authoritative decisions. All in all, it sets the limits of direct supervision.

4. Facilitates growth

Middle managers get more independence in their work and can perform tasks most appropriate for their department or division. Decentralization inculcates a culture of competition where team members look for innovative ways to maximize their productivity and outperform others. Such a scenario leads to higher returns on investments for the firm while paving the way for more employee growth. 

5. Better Performance Management 

Decentralization allows teams to perform better and manage their performances even better. The personnel performance at each level can be measured, and the departments are held separately accountable for their results. The extent to which they achieve the organizational goals can be easily determined through regular performance measurements.

6. Effective communication

Decentralization improves communication and bridges the gap between management and teams. It strengthens the relationship between the higher authorities and the team members from various departments and helps middle management and their subordinates gain work experience, reducing pressure from top management.

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Disadvantages of Decentralization

Although in an organization, decentralization can offer several advantages mentioned above, it may sometimes pose challenges such as the following:

  • Bosses do not choose the right people in charge: Not everyone has the skills or leadership skills necessary to take responsibility for an activity. He may be very good at carrying it out but not know how to lead a team.
  • Not leaving enough autonomy: The fear of letting go of the activity follow-up, being too much above the person in charge, and not leaving the team members with the slightest autonomy generate insecurity, discussions, and mistrust among workers.
  • Not wanting to spend time explaining tasks: Some bosses believe they waste more time explaining the activity than doing it themselves. They do not consider that this activity is repeated several times over time, and it is in the medium and long term that the real advantage exists.
  • Decisions Lack Specialized Knowledge: Since top management may not be experts in all areas, their decisions will lack a specialist’s perspective. Even a specialist or employee under a centralized set-up does not have a free hand in his area. His job will mainly be convincing the top executives that they implement his suggestion.

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What must be taken into account when deciding about implementing decentralization?

Different factors related to the company’s structure and its environment must be considered when deciding whether to centralize or decentralize an activity. They are the following:

  • Type of activities that are developed in the organization: If the activities are more mechanical and require less specialization, it is easier to assign a person to supervise all of them because a wide range of knowledge is not required. Now, if we talk about more specialized performances, they must be directed by qualified personnel.
  • Territorial dispersion: In cases where there are different production centres, it is necessary to decentralize activities and assign a person in charge since it is impossible for one person to assume the direction and supervision of many tasks scattered throughout the space.
  • Need for communication between departments or areas: In cases where a rapid transmission of information is needed, a single person must assume it because it can be transmitted more quickly to whoever is needed.

FAQs - Decentralization

How does decentralization differ from centralization?

Centralization involves concentrating decision-making authority at the top of an organization, while decentralization disperses authority to lower levels or units.

What factors influence the decision to implement decentralization in an organization?

Factors that influence the decision to implement decentralization in an organization include the organization's size, industry, culture, competitive environment, and the need for faster decision-making and adaptation.

How does decentralization impact employee empowerment and motivation?

Decentralization often empowers employees at lower levels to make decisions, fostering a sense of ownership and motivation as they take on more responsibility.

What are some real-world examples of decentralized organizations?

Decentralization is often seen in industries where local adaptation and customer interaction are critical, such as retail, franchising, and regional government. Companies like Google, Toyota, and 3M are known for embracing decentralization in various aspects of their operations to encourage innovation and creativity.

How can an organization strike a balance between centralization and decentralization?

Achieving the right balance involves assessing the organization's unique needs, considering industry best practices, and regularly reviewing the effectiveness of the chosen approach to adapt as needed.

About the Author
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Rashmi Karan
Manager - Content

Rashmi is a postgraduate in Biotechnology with a flair for research-oriented work and has an experience of over 13 years in content creation and social media handling. She has a diversified writing portfolio and aim... Read Full Bio

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