Centralization occurs when an organization, such as a company, government or other group, concentrates authority over the whole to a small group (for example, top management). This type of organizational structure reduces operational costs in three ways: it can exploit economies of scale, minimize duplication of efforts or procedures, and enjoy reduced regulatory costs. In addition, centralized organizations tend to enjoy greater efficiency and profitability.
Exploit Economies of Scale
When operations are centralized, it is easier to exploit economies of scale. The organization is able to take advantage of special pricing for products and services (for example, bulk pricing, volume discounts, single orders vs. multiple orders for the same things), as well as exploit economies of scale with regard to the reduction of learning costs. An organization can benefit from economies of scale in reference to transactions within the organization as well. Divisions or groups within the organization would have one set of rules and one set of procedures, streamlining the whole process. Inventory control and asset management are also streamlined.
Reduced Regulatory Costs
Costs can also be reduced through centralization in that centralized organizations have uniform rules and centralized enforcement. Centralization reduces overall regulatory costs as well as prevents regulatory arbitrage, creating a working environment that has greater consistency and better accountability. In this way, centralization can also be said to improve security.
Regulatory costs can also be reduced through the avoidance of overlapping regulatory compliance costs and efforts. By avoiding duplication of efforts, the organization can save considerably in time and money. Likewise, duplication of efforts can be eliminated in other ways; for example, if each division has to process a transaction for office paper, that takes far more time (and possibly money thanks to economies of scale) than if each processed a single transaction for the whole organization.
Greater Efficiency and Response
All in all, these factors contribute to greater organizational efficiency costwise, but a centralized organization enjoys other, less quantifiable, advantages. For instance, centralized organizations tend to be able to respond more quickly and more effectively to changes in the market. Centralization can also increase efficiency with regard to data tracking, allowing the organization to be more precise in the feedback it tracks, as it pertains to functions within the organization and sales as well as marketing effectiveness.