Centralisation and decentralisation are extensions of delegation. The belief that complete decentralisation is always desirable is fallacious. Equally fallacious is the belief that complete centralisation is good. The merits and limitations of decentralisation are discussed below.
Merits
1) Facilitates growing and complex organisation : Centralisation of authority may be desirable under certain special circumstances to accomplish specific results or when the company is small. But when organisation grows in size and becomes complex, even a hardcore autocratic manager is forced to delegate some authority and bring about decentralisation.
2) Reduces the burden of executives: Decentralisation is always preferable when an organisation has grown in size and complexity, and there is a need to reduce the burden of the top executives.
3) Facilitates diversification:Decentralisation is required when business needs to be expanded by diversifying its activities or product lines.
4) Quick decision making:Decentralisation facilitates consultative as well as quick decision-making at the action point. This promotes interaction among the different functionaries giving them an opportunity for self development and training and stimulating them to put in their best effort in the growth and development of the organisation as whole.
Limitations
1) Leads to disintegration: Extreme decentralisation, however, may not be a cure. It may lead to looseness and also ultimately to the disintegration of the organisation. It may bring about the diseconomy of scale with the increase in the overhead expenses of each decentralised unit. The duplication in functions may further add to the total cost.
2) Does not suit specialised services: For specialised services like accounting personnel, research and development etc., decentralisation is unwarranted. Moreover, there are certain areas of control and responsibility like setting up overall organisational objectives, long-term planning, formulation of policy, capital investment etc. which need to be under central control only.
3) Conflict:Decentralisation puts increased pressure on divisional heads to realise profits at any cost. This encourages the managers to become department conscious. Sometimes the top management deliberately encourages competition between different departments to increase the profitability. This competition results in bitter inter-divisional rivalries and conflict.
Thus neither extreme centralisation nor decentralisation is desirable. What is required is a golden means i.e. a balance between centralisation and decentralisation. The question before managers, therefore is, not whether an organisation should be decentralised but to what extent it should remain centralised.
