People Management: Centralisation (GCSE)

One of the issues that a business needs to address is where decision-making power resides in the organisational structure.

Decision-making is about authority. A key question is whether authority should rest with senior management at the centre of a business (centralised), or whether it should be delegated further down the hierarchy, away from the centre (decentralised)

The choice between centralised or decentralised is not an either/or choice. Most large businesses necessarily involve a degree of decentralisation when it starts to operate from several locations or it adds new business units and markets.

The issue is really how much independence do business units or groups within a business have when it comes to the key decisions?

Centralised structures

Businesses that have a centralised structure keep decision-making firmly at the top of the hierarchy (amongst the most senior management).

Fast-food businesses like Burger King, Pizza Hut and McDonalds use a predominantly centralised structure to ensure that control is maintained over their many thousands of outlets. The need to ensure consistency of customer experience and quality at every location is the main reason.

The main advantages and disadvantages of centralisation are:

Advantages of centralisation:

Easier to implement common policies and practices for the business as a whole

Prevents other parts of the business from becoming too independent

Easier to co-ordinate and control from the centre – e.g. with budgets

Economies of scale and overhead savings easier to achieve

Greater use of specialisation

Quicker decision-making (usually) – easier to show strong leadership

Disadvantages of centralisation:

More bureaucratic – often extra layers in the hierarchy

Local or junior managers are likely to much closer to customer needs

Lack of authority down the hierarchy may reduce manager motivation

Customer service does not benefit from flexibility and speed in local decision-making