Centralized management concentrates authority and responsibility in a small core of decision-makers. The features of centralization include a clear chain of command, standardization and very little freedom for employees. Decision-making in centralized models is easy but often lacks creativity.
Centralized management concentrates authority and responsibility at one point. It may be a boss who makes all the decisions for his team or a multinational firm where every policy across the globe is set by corporate headquarters. Business analysts have argued for decades whether the characteristics of centralization are positive or negative.
Features of Centralization
Centralized management is found in large and small companies around the world. Despite the diversity of businesses that use a centralized model, the characteristics of centralization are consistent:
- The centralized management model has a clear chain of command. Everyone knows who to turn to if a decision has to be made.
- Businesses with centralized management follow standard procedures and methods company-wide. As all the decisions are with one leader or managing body, there's little variation between departments and branches.
- Centralized management is top down. The high command issues orders without worrying about their employees' opinions. Staff's job is to follow orders, regardless of their own opinions.
- With a large company, bureaucracy is usually one of the features of centralization. The chain of command becomes longer as the company grows, with more layers of management between the center and the front lines.
Benefits of Centralized Management
The centralized management model has been around a long time because it provides concrete benefits:
- It makes it easy for the decision-maker to carry out their vision for the company. The person at the top has the clout to see that everyone under them moves in the same direction.
- There's little duplication of effort. The boss assigns everyone their tasks, so there's no accidental overlap.
- Decision-making is simpler because the only people top management has to get feedback from is themselves.
- Centralization can keep production standardized and product quality high. Many franchises, such as McDonald's, hold individual franchisees to tight standards with little wiggle room. That ensures customers get a consistent experience at every store.
- The people at the center can see the big picture. A local store manager might fight desperately to keep their store open even if it's doing poorly. The person at the top can see that it's not worth spending more money on and close the store.
The Bad News About Centralization
Some of the features of centralization are negative ones:
- The leadership team has to provide all the new ideas. With no input from the lower levels, management has a lot less creativity to tap.
- Management may not pay enough attention to how their vision works out in practice.
- Centralized management is often clumsy at adapting. Salespeople have hands-on knowledge of which products sell, but they don't have the freedom to adjust their offerings.
- While centralized leadership can make decisions quickly, it can take forever to gather information and reports through the bureaucratic corporate structure.
- Lower-level personnel get little chance to develop their management and decision-making skills. That makes it harder to train and groom employees for management roles.
- As the company grows or expands, management may not be able to oversee everything well. Tight control over five stores is much simpler than controlling 500.
- Employees often feel like drones with little say in their jobs.
To Centralize or Not?
When you start a business, it may be simple for you to make all the decisions. As the business expands, you'll have to consider whether centralized management still works or if decentralization is a smarter move.
A lot depends on your employees. A decentralized model trusts lower-level managers and frontline employees to exercise good judgment; if their judgment or experience is weak, that won't work. Larger companies are often more successful at decentralizing simply because they have a larger pool to draw on for decision-makers.
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