Centralization

The Basic Idea

Consider who makes decisions in your family. When you were young, you were likely to have little influence over important decisions – your parents would choose where you went to school, whether you were moving, and where the next vacation spot would be. The decision-making was concentrated in the hands of the bosses. When important decisions are reserved to those at the top level of the unit, we call the decision-making process a centralized one.

When we talk about centralization, we are usually referring to an organization’s structure when it comes to making decisions. Centralization means that decision-making power is reserved for a specific, small group of people. Usually, this tends to be the higher-ups – the Chief Executive Officers or Presidents of a company, but in theory, power can be condensed to any level. Regardless of whether the power is, a small number of people end up making all of the decisions that affect the company at large.1

The opposite of centralization is decentralization. Decentralization is the delegation of authority across all levels of management in an organization. More people are responsible for making decisions. Oftentimes, decentralization occurs as a result of people from the head office delegating tasks to people in the main office – the final say can still be the responsibility of the CEO, but multiple people put forward their input before that decision is made. Centralization and decentralization can be best visualized on a continuum, with organizations and political systems usually finding their operations fall somewhere in between the two extremes.

We might think about the difference between centralization and decentralization as the difference between a democratic society and an authoritarian society but on an organizational scale. In a democratic society, the people have the power – they get to have their say. In an authoritarian society, the power is in the hands of the government – they are a dictatorship.

An administrative organization is centralized to the extent that decisions are made at relatively high levels in the organization; decentralized to the extent that discretion and authority to make important decisions are delegated by top management to lower levels of executive authority.

– American economist, Herbert A. Simon, in his 1954 book Organizing the Controller’s Department: A Research Study and Report2

Key Terms

Chain of command: a hierarchical structure where each person reports to a singular figure of authority higher up in the organization.3

Bureaucracy: A management style that prioritizes rules, regulations, and formal structures.

Adhocracy: A management style that prioritizes individual initiative and deemphasizes formal rules or hierarchies. Adhocracies function according to decentralization most of the time.4

Decentralization: the transfer of authority and decision-making responsibilities to a larger group of people, not just the people in the top level of an organization.

Mechanistic organizations: hierarchical organizations with multiple levels of management where decision-making power is centralized at the higher levels.5

Organic organizations: flat organizations with few levels of management where decision-making power is distributed relatively evenly across all levels.5

History

The Qin Dynasty

The centralization of authority was a structure first formally introduced in the Qin Dynasty of China. The Qin Dynasty ruled from 221-206 BC after rivaling for power following the end of the previous dynasty, the Zhou Dynasty. For hundreds of years, seven states in China fought during the time period now known as the Period of the Warring States. The power ended up being consolidated to the emperor of the state of Qin, Qin Shi Huang.6

Qin Shi Huang placed all the regional and local governors under the control of the central government, instead of allowing various regions to make their own decisions. Qin’s methods for achieving centralization were ruthless. He burned books so people wouldn’t have the knowledge to have power, he confiscated weapons and destroyed all the walls that had separated the states. Instead of independent states, he created one – which he had sole control of. He monopolized all of the resources, making the Qin Dynasty one of the most extreme examples of centralization. 6

Although the Qin Dynasty is usually cited as the first example of centralization, as long as humans have lived in organized communities – which goes all the way back to the Neolithic period 1900 BC – there has existed a degree of centralization. As societies grew, so did the complexity of disputes between people, which required authorities to resolve. Hierarchical organizational structures were needed for a smooth running of societies, and chiefs and elders ended up being trusted with the power to make decisions.7

The industrial revolution

However, it wasn’t until the industrial revolution that people really began to pay attention to how power was divided in organizational structures. During the industrial revolution, the U.S. economy experienced a manufacturing boom, which required people to look at businesses differently. There were now hundreds of staff per organization, which meant hundreds of decisions as well. Systems had to be created to ensure efficient workplaces.8

In 1916, French engineer Henri Fayol introduced 14 principles of management in his book General and Industrial Management. One of the important principles of his book was the chain of command, a hierarchical structure where each person reports to a single figure of authority. Introducing a hierarchy was a step closer to centralization, where some individuals hold greater power than others. Having a dedicated and clear superior would make employees aware of who they should be listening to and who to accept commands from.8

A few years later, in the 1920s, a German scientist followed in Fayol’s footsteps and doubled down on the importance of a clear chain of command and hierarchy. Weber formalized the idea of a bureaucracy, an organizational system that emphasizes a formal set of rules and regulations, as well as a well-defined hierarchy. Workers should follow the decisions and commands of superiors, which Weber believed would lead to the most efficient organizational structure.8

The 20th century

Throughout the 20th century, various economists and behavioral scientists continued to examine the organizational structure to determine how structures impacted efficiency, motivation, and success. In 1961, British sociologist Tim Burns and his colleague George Macpherson Stalker introduced new terms to the field: mechanistic and organic. Mechanistic organizations are ones where power is centralized, and control is achieved through hierarchical communication channels. Organic organizations are more flexible and decentralized, where there is open communication between levels.5

Consequences

The degree of centralization or decentralization can determine whether an organization is successful. One of the most important parts of building an effective organizational structure is deciding at what level – and by how many people – decisions should be made.

A high level of centralization consolidates power in only a few individuals, which means that decision-making can be more efficient. “Too many cooks in the kitchen” can sometimes negatively impact the end product. People in more senior positions might have enhanced knowledge on how the organization runs and what decisions need to be made. They usually have a clear understanding of their organization’s goals, mission, and a broad view of operations, whereas multiple perspectives might muddy the vision. Through centralization, authorities can ensure that workers are focused on the organizational goals and that decisions are made accordingly.9

Centralization also makes it very clear to workers who hold the decision-making power, which makes communication more centralized as a result. Responsibilities are well-defined, and decisions can be quickly implemented since they don’t have to pass through the hands of multiple managers. Moreover, since centralized organizations usually have formalized regulations and procedures, office and administrative costs are reduced.10

Controversies

While there are advantages to centralized organizations, there are also various disadvantages. If only the highest level of management gets to make decisions, people in lower levels of the organization may end up feeling like a cog in the system. They are expected to deliver results and nothing else. There are no opportunities for them to demonstrate leadership or to put forth their opinion. A centralized system is unlikely to make employees feel connected to their leadership, which may mean that they leave for another company.

Additionally, if there are only a few people who have the authority to make decisions, there can be delays in getting procedures approved. Every decision must go through the top level of management, so lower levels end up waiting around for instructions instead of using their creativity and intelligence to come up with a solution.10

People in lower levels of management are also often the ones that interact with their customers. They could have much better ideas for how to improve the organization to fit the customers’ needs, whereas CEOs and Presidents are far removed from the everyday people.

Google vs Amazon

Google and Amazon are two of the world’s most successful and profitable countries. In comparing the two, we quickly come to the conclusion that there doesn’t exist a one-size-fits-all approach when it comes to centralization or decentralization. What works for one company might not work for the other. There are various factors that should be considered when choosing an organizational structure: the nature and complexity of the task, the location of the workers, the ability of the manager to delegate responsibility, the amount of interaction between workers and the manager, and the level of skill and motivation of the workers.9

Google adheres to a decentralized organizational structure. Groups that build products like Google Home are left to independently work and have the freedom to come up with their own ideas. Google also allows its employees to spend 20% of their time working on side projects one day a week. The fact that workers are able to work on what they are passionate about and have their ideas matter increases their company loyalty, and can lead to innovative product creation. It is their decentralized approach that resulted in estimates that Google Home, which was released long after Amazon’s Echo, will actually be more successful. The Google Home is designed to respond to people’s needs, so the fact that it is designated by the people – people across all levels of management at Google – may mean it is better attuned to daily usage.11

Amazon, on the other hand, adheres to centralization. Jeff Bezos, CEO of Amazon, is the product manager. Any ideas for new products must be run by him to be approved. The advantages of his approach are that he has the big picture vision and can work closely with development teams to ensure their products are meeting the objectives of the company. However, his reigning authority might not leave employees feeling satisfied with their jobs – rumor has it he ends his emails with a characteristic signature – “Anyone who doesn’t do this will be fired. Thank you; have a nice day!” 11

As the differences between Google and Amazon’s organizational structures highlight, both centralization and decentralization can be successful and have their disadvantages as well.

Related TDL Content

Applying Behavioral Science In an Organization

The success or failure of an organization doesn’t just depend on the organizational structure chosen, behavioral changes that follow those systems also play a role. In this article, our contributor Preeti Kotamarthi explores how behavioral science can benefit organizations, and how it differs from user research.

The One-Man Behavioral Army: Advice for Practitioners and Managers

This article has taken a deep dive into the differences between centralization and decentralization, but there are various other organizational structures. In this article, our contributor Preeti Kotamarthi reviews the models put forward in the Action Design Network’s book, Building Behavioural Science in an Organisation. The three models put forward are: the Individual Contributor Model, the Centralized Team Model, and the Integrated Model.

Sources

  1. Juneja, P. (n.d.). Centralization and Decentralization. Management Study Guide. https://www.managementstudyguide.com/centralization_decentralization.htm
  2. Zannetos, Z. S. (1965). On the theory of divisional structures: Some aspects of centralization and decentralization of control and decision making. Management Science, 12(4), B-49-B-68. https://doi.org/10.1287/mnsc.12.4.b49
  3. Chain of command. (2021, March 17). The Decision Lab. https://thedecisionlab.com/reference-guide/management/chain-of-command/
  4. Adhocracy. (2021, March 26). The Decision Lab. https://thedecisionlab.com/reference-guide/management/adhocracy/
  5. Tetrick, L. E., & Camburn, M. K. (2004). Organizational structure. Encyclopedia of Applied Psychology, 747-753. https://doi.org/10.1016/b0-12-657410-3/00525-0
  6. History of Qin Dynasty. (n.d.). China Education Center. Retrieved September 23, 2021, from https://www.chinaeducenter.com/en/whychina/qin.php
  7. Demyan, M. (2019, April 8). Evolving From Decentralization to Centralization: Back to a Decentralized Future. DZone. https://dzone.com/articles/evolving-from-decentralization-to-centralization-b
  8. Organizational Structures and Their History. (n.d.). Lumen Learning. Retrieved September 23, 2021, from https://courses.lumenlearning.com/wmopen-organizationalbehavior/chapter/organizational-structures-and-their-history/
  9. Degree of Centralization. (2018, September 18). BCcampus – Introduction to Business. https://opentextbc.ca/businessopenstax/chapter/degree-of-centralization/
  10. What is Centralization? (2020, July 13). Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/knowledge/strategy/centralization/
  11. Yu, H. H. (2016, October 28). Google v. Amazon: How a strong CEO boosts corporate innovation. IMD. https://www.imd.org/research-knowledge/articles/google-vs-amazon-how-a-strong-ceo-boosts-innovation/

Read Next