Business Economy

Effects of Decentralization of Authority in a Business Enterprise

Centralization and decentralization are opposite terms. They refer to the location of decision making authority in an organization. Decentralization means disposal of authority throughout the organization. It is the extension of delegation. It is not the same thing as delegation. It is something more than delegation. Delegation means entrustment of responsibility and authority from one individual to another. But decentralization means scattering of authority throughout the organization. The extent to which the authority should be dispersed is basically a policy matter and so the top management must take decision, in the regard while designing the organizational structure.

The costliness of decision is the main factor which affects the process of decentralization. If the decision involves heavy cost or investment, decision making should not be delegated recklessly because if anything goes wrong, the enterprise has to face financial losses. When there is no need for uniformity of policy, high degree of decentralization is possible. On the other hand, if the company desires to obtain uniform policy, centralized authority is the easiest road to attain it. In fact the history or the past performance of the enterprise is an important factor which affects decentralization. The way in which the business has been built is another factor. If it has developed a set of departments the degree of decentralization or divisions are established later, authority tends to be centralized.

The character and philosophy of the executive also influence the extent of decentralization. If the persons in the helm of affairs believe and have faith in decentralization then it will prevail. If they are inclined to centralize authority due to various reasons centralization will prevail. In fact, the desire of the top management to develop the group executive at lower level so as to motivate them shall also pave way for decentralization. It also reduces the burden of top level executives.

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