Traditionally, businesses adopt centralized management and hierarchical structures. Centralization places authority over the organization as a whole in a small group of top-level managers. This approach to business structure and hierarchy offers four major advantages: lowered costs through economies of scale, improved productivity through reduction of duplicated efforts, decreased regulatory costs and an overall greater degree in flexibility and agility. Overall, centralization can offer greater productivity and reduced operational costs to businesses and other types of organizations.
Centralization offers four major advantages: lowered costs, improved productivity, decreased regulatory costs and an overall greater degree in flexibility and agility.
Reduced Costs Through Economies of Scale
Centralization helps an organization take advantage of economies of scale to reduce costs. Typically, vendors offer special pricing schemes for many types of services and products. Those pricing schemes can include bulk pricing, volume discounts and other types of reduced pricing structures, but are generally offered only to larger purchasers. When a business engages in centralized procurement and purchasing procedures, it can buy necessary supplies and materials at a lower price than it otherwise would if each department or office managed their purchasing individually.
In addition, businesses can benefit from economies of scale with respect to internal transactions. For example, in decentralized structures, internal departments can adopt widely differing procedures and rules. In a centralized organization, departments or groups within a company typically adhere to a single unified set of rules and procedures. This streamlines processes and functions, which in turn reduces costs, saves time and improves efficiency for the company.
Decreased Enforcement or Regulatory Costs
A centralized structure can also help companies reduce regulatory costs. Any business that adopts rules or procedures for its employees to follow must also have a mechanism in place to handle enforcement and administration of those procedures. Most businesses face some sort of external regulation through industry standards and government statutory or regulatory controls. Through centralized rules and enforcement procedures, the company reduces uncertainty, creates a more consistent working environment and improves accountability. As a result, the company enjoys enhanced security and stability.
Improved Productivity Through Decreased Duplication
The centralization of a company means that the company enjoys an opportunity to streamline its internal processes. By decreasing or eliminating the duplication of efforts and costs on a company-wide basis, a business saves both time and money on multiple levels. For example, if a centralized business has multiple offices in a variety of locations, it can save through economies of sale by consolidating its paper purchases for all those offices. But it can also save time and personnel costs by reducing repetitive intake and processing tasks for that paper purchase. If each office were required to buy its own office paper, it would take far more time than a single transaction for the whole organization.
Greater Efficiency and Responsiveness
Together, these factors help reduce costs across the company. However, centralized businesses also enjoy other, less quantifiable advantages. For instance, a business with a centralized organizational structure can be much more agile and flexible in its responses to a volatile market. Changes in the economy, new challenges and especially pending opportunities sometimes require a quick, efficient response if a business is to maximize growth and minimize costs. Centralization can also increase a company’s efficiency in data collection and analysis, which helps the business track feedback and other data with more precision. Better data, in turn, helps the company improve business functions, sales and marketing.
Advantages and Disadvantages of Decentralization
Despite the perceived advantages of centralized business structure and leadership, some companies have begun to explore decentralization in management. Flattening out a business hierarchy also offers some advantages, as well as disadvantages.
Primarily, decentralization often frees up valuable personnel and resources for higher-value tasks. Delegation of day-to-day decision-making authority means the business’ top-level managers and leaders have more time to create working strategies in pursuit of the company’s long-term goals and vision. This is especially true with very large corporations employing thousands of workers at multiple locations.
By delegating appropriate functions closer to the departmental levels where those functions are carried out, the company is more likely to grow at a healthy rate. Hiring and management of personnel at those levels is usually something departmental managers can handle effectively on their own. Upper-level managers and business leaders generally just slow things down and even stall progress. Streamlining those activities frees up workforce hours and energy for more growth-oriented activities.
Decentralization in management helps train and prepare mid-level managers and team leaders for positions of greater responsibility and authority. Allowing lower-level employees to express and develop their own leadership abilities fosters morale and improves employee engagement, as well. When workers perceive that the company actually provides real opportunities for advancement within the organization, they tend to respond with more loyalty and enthusiasm for the job.
However, decentralization can also create a kind of tunnel vision in lower level managers, who sometimes develop a bias toward considering the needs of their own teams and forget to think about the company as a whole. Decentralization can also lead to inefficiencies as a result of functions being duplicated in each department, where a more centralized approach may be more productive and effective.