Centralization: Importance, How it Works, Determinants, Pros, Cons (2023)

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What’s it:Centralization is a hierarchical decision-making structure in which company executives retain authority and have full control over decision-making. It contrasts to decentralization, where upper management delegates it to lower levels and gives them more autonomy.


Several factors influence it, including organizational size, managers’ quality at each level, and management style.

Centralization allows for independent and controlled decision making. Subordinates only need to follow directions from top management.

But, it can lead to demotivation. Subordinates feel the company is not empowering them since they cannot participate actively in making decisions about their work.

Why is centralization important?

Decentralization and centralization are two approaches in legitimizing decision-making in companies. Under a decentralized structure, managers share decision-making. Top managers make core strategic decisions; others are left to lower managers.

The decentralized structure allows for faster decision-making. For example, suppose a problem occurs at a lower level. In that case, it doesn’t have to be brought to the top management for a decision. Instead, lower-level managers can make decisions. That can save time, especially if the decision hierarchy involves multiple layers.

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Decentralization also allows for better employee participation. They are likely to be motivated and excited about having the opportunity to make decisions about their work.

However, decentralization comes with some risks. First, subordinates may make mistakes a lot. They may be experts in their field. However, they may not be good decision-makers. And, they may need more training or experience before they can become effective decision-makers.


Another drawback is inconsistency. What subordinates decide may be contrary to the manager’s wishes. That could be a problem and, perhaps, lead to disharmony in their relationship.

Decisions can also be uncoordinated. For example, each subordinate makes their own decisions. Thus, the results tend to be random and undirected.

And, centralization is important to address such problems. In addition, top managers can make more independent decisions. They don’t have to consult the managers under them.

In addition, decisions can be more directed and not random. It allows subordinates to move in the same mode without being busy making their own decisions.

How does centralization work?

Centralization emphasizes concentrated decision-making in several positions. Top managers have the highest decision-making power.

How it is implemented can vary between companies. For example, top-level managers become decision-makers. Meanwhile, middle-level managers only have operating authority. Meanwhile, lower managers carry out every directive from above. And, all decisions from lower levels must obtain approval from higher levels.

Because it relies on a few people to make decisions, leadership qualities are vital. It determines how effective the organization is. But, of course, poor quality makes organizations ineffective.

A common example is a small business. Take a sole proprietorship as a case. The owner is responsible for the entire organization. He makes all the decisions about the business, from marketing to production.


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Subordinates must report to him when they want to make a decision. And they don’t have the flexibility to do it. And, they can only do so if they get instructions and orders from him.

What are the factors that affect centralization?

Some companies tend towards centralization. While others are more towards decentralization. It all depends on several factors, including:

  • Cost
  • Organization size
  • Management style
  • Quality managers at every level
  • Geographical spread
  • Business environment

Cost. Centralization allows for fewer costs. On the other hand, decentralization consumes more costs, including risks, if subordinates make the wrong decisions. So, if companies want to save costs, they may choose centralization.

Take decisions about procurement as an example. When centralized, the company can buy in bulk, allowing it to get discounts from suppliers.

Conversely, if each department or unit does it separately, it is difficult to get a discount. Finally, the company does not benefit from purchasing economies of scale.

Organizational size.Large companies tend to be more decentralized. Operation is more complex. Thus, it is almost impossible to make all decisions under a few people.

Management style.Authoritarian leadership tends to lead to centralization. In contrast, decentralization is common under a democratic leadership style in which subordinates participate more in making decisions.

Quality managers at every level.When quality is more evenly distributed at the middle and lower levels, decentralization may be a good fit. They can be effective decision-makers. Thus, top managers trust them and delegate more decisions.


Geographical spread.When operating in multiple geographic areas, companies rely more on decentralization. Branch or unit offices are more aware of problems in their area than the head office. So, giving them the authority to make decisions is better.

Business environment.Dynamic business environments often require more decentralization. Companies mustmake quick local decisions. Thus, top managers are more likely to delegate authority and decision-making.

What are the advantages of centralization?

Greater control.Top managers have more power to make decisions about allocating the company’s resources. They also have more control over employees.

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Consistent decisions.Decisions are more consistent because few people have the authority to do so, i.e., centralized in top managers. Thus, it will be consistent across all departments or divisions.

Good business image.The company can maintain a unified business image because decisions are taken consistently. Consistency is important, especially when a company faces a crisis and faces the public.

Easier communication.Centralization requires less employee involvement. Thus, top managers can make decisions at their discretion.

Unity towards the goal.Top managers make decisions. And, lower management can focus on executing those decisions without too much deliberation.

Order in business.Management encourages employees to obey and not to deviate. It creates order and smooth operation within the organization.


Saving money.Centralization minimizes problems due to duplication and extra work. A good example is the procurement case above, allowing companies to achieve economies of scale from purchasing.

A clear chain of command.Everyone knows who has the authority to make decisions. As a result, there will be no overlap or confusion in decision-making. And a clear chain of command is even more important when companies have to make unified decisions.

Focused operation.The company can fulfill its vision easily. Top managers make strategic decisions and set goals. Meanwhile, middle and lower managers implement it. Thus, operations throughout the company move towards and focus on the stated goals.

Maintained quality.Top managers rely on standard procedures and rules to ensure subordinate compliance. Thus, their output is uniform with quality according to standards.

Take, for example working in a factory. If each supervisor makes their own decisions, it can result in the output being out of specification. What’s worse, the production process can be disrupted because it is not well coordinated.

What are the disadvantages of centralization?

Demotivating. The subordinates were discouraged because they were not empowered. They cannot participate in making decisions related to their work.

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Low retention.Demotivation can lead to high employee turnover. In addition, employees are disloyal to the company because they do not have the opportunity to actualize personal initiative.

Low creativity. Subordinates are less involved. Thus, it leads to no new ideas and perspectives being brought into the management system.


Bet for success.Organizational success depends on how qualified the leader is. If they are not good decision-makers, it can be fatal.

Organizational rigidity. Subordinates may feel like machines that can be used and directed according to the leader’s needs.

Slow decision. Problems at the lower level have to go through several layers to get to the top to be decided. And it spends more time to reach the intended person. Thus, the problem can become more acute before a decision is made. This negative effect can be significant for companies operating in several geographically dispersed locations.

Undeveloped competencies. Centralization prevents subordinates from developing their competencies. They have no opportunity to develop themselves with the skills associated with taking on more authority. In the end, they can’t be good decision-makers.

Business interruption.When the key manager exits, it can interfere with operations. The successor may not be ready to replace them effectively. And, the subordinates are not equipped with adequate competence, so they are not ready to replace him.

Heavy workload. Corporate executives are under tremendous pressure. They have to spend a lot of time formulating decisions for the company.

Good decision, bad implementation.Executives spend more time handling decisions. Finally, less time to oversee how decisions are implemented at lower levels. Finally, without an effective control system, many decisions are poorly implemented or ignored by subordinates.

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  • Accountability: Importance, Examples, Components
  • Centralization: Importance, How it Works, Determinants, Pros, Cons
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What is the importance of centralization? ›

Centralization allows an organization, or at least the upper levels of the organization, to control lower level employees' behaviors so that they are consistent with organizational goals.

How does centralization work? ›

Centralization (also called centralisation or consolidation) is an organizational structure in which a single leader or small group of people makes all decisions. It's the opposite of decentralization (or decentralisation), in which decision-making power exists in upper and lower levels of management.

What are 3 factors that will influence if decisions should be centralized or decentralized? ›

The outlook of the top management. Nature of functions of the organization. Communication system. Planning and control procedures.

What is centralization and example? ›

Centralization means bringing things to one central place or under unified control. The centralization of a school district might mean the superintendent makes important decisions for all the schools, rather than leaving those choices to individual principals.

What is the meaning of centralization? ›

Centralisation or centralization (see spelling differences) is the process by which the activities of an organisation, particularly those regarding planning and decision-making, framing strategy and policies become concentrated within a particular geographical location group.

Which best defines centralization? ›

Centralization refers to the concentration of management and decision-making power at the top of the organizational hierarchy for the purpose of coordinating financial, human, and other business resources.

What are the factors of centralization? ›

Listed below are nine factors that may determine whether to implement a centralised authority in an organisation:
  • Nature of the organisation. ...
  • Size of the organisation. ...
  • Nature of the work. ...
  • Efficiency of the employees. ...
  • Ability to delegate work. ...
  • Uniformity of action. ...
  • Facilitation of integration. ...
  • Management of emergencies.
Sep 22, 2022

What is an example of centralization in business? ›

Apple is an example of a business with a centralized management structure. Within Apple, much of the decision-making responsibility lies with the Chief Executive Officer (CEO) Tim Cook, who assumed the leadership role within Apple following the death of Steve Jobs.

What are the examples of centralized? ›

Centralized management is the organizational structure where a small handful of individuals make most of the decisions in a company. For example, a small family diner owned by a married couple probably uses centralized management.

What are the types of centralization? ›

2.2. Kinds of Centralization
  • 2.2.1. Proprietary Centralization. ...
  • 2.2.2. Beneficial Centralization. ...
  • 2.2.3. Concentrated Centralization. ...
  • 2.2.4. Inherited Centralization. ...
  • 2.2.5. Platform Centralization.
Jul 9, 2022

What are the benefits of a Centralised structure? ›

Advantages of a centralised management structure include:
  • consistency across the business.
  • the business has a clear direction.
  • operations and decisions are closely controlled and managed.
  • the chain of command and accountability are clear.

What are the 3 C's of effective decision-making? ›

Clarify= Clearly identify the decision to be made or the problem to be solved. Consider=Think about the possible choices and what would happen for each choice. Think about the positive and negative consequences for each choice. Choose=Choose the best choice!

What are two disadvantages of centralization? ›

The disadvantages of centralization

The employees are not able to participate in the decision-making process and are bound to implement decisions made at a higher level. The executives won't understand if employees have difficulty implementing decisions. They are decision-makers, not implementers.

What is a centralized workplace? ›

Centralized organizational structures rely on one individual to make decisions and provide direction for the company. Small businesses often use this structure since the owner is responsible for the company's business operations.

What is the disadvantage of centralized? ›

Centralized control of a business can have several downsides, including stifled creativity, limited communication, inflexible decision-making, and the danger of losing a key decision-maker.

What is the best example of centralized system? ›

A centralized system is a system in which an individual, a group of people or a corporate entity holds the entire control over the functionality of the system. Online social applications like Facebook, Twitter, Quora are examples of centralized systems.

What are the five features of centralization? ›

The 6 Features of Centralization: Its Advantages and...
  • #1. Top management:
  • #2. Authority to make a decision is in the hand of top management only:
  • #3. Information flows from the upper level to lower levels:
  • #4. Longer time to make decisions:
  • #5. Centralization is suitable for a small organization:
  • #6.
Oct 18, 2019

What is a centralization strategy? ›

What is Centralization Strategy? Centralization refers to a setup in which the decision-making powers are concentrated in a few leaders at the top of the organizational structure. Decisions are made at the top and communicated to lower-level managers for implementation.

How do you manage centralization? ›

Centralized management is when only the executives at an organization manage the planning and decision-making responsibilities. These top management professionals give instruction to all other levels of management at the organization, who help to implement the decision.

What is centralization of performance? ›

Centralization refers to the extent to which decision-making authorities are concentrated at the top management of the hierarchy structure within a firm (Jansen et al., 2006; Zhang & Ma, 2009).

What are the three C leadership? ›

The next time you are leading your team, focus on your mindset and decide to be a three-C leader: competent, committed and with strong character. When we do that, our employees win, and when they win, we all win.

What are the 3 C's of organization? ›

The key to effective organizational change management in AI projects lies in the 3Cs—communication, capability, and connection & culture. These three must be in place to make the employees understand the role of AI and not be wary of them.

What do the 3 C's stand for organization? ›

Past this fundamental definition, developing an intuitive understanding of the concept will be essential as you try to ingrain it into your organization's culture. To help this understanding, think of these “3 C's”: Cooperation, Communication, & Coordination. The “3 C's” are the building blocks of collaboration.

What is centralization risk? ›

Centralization risks are vulnerabilities that both unethical project developers and outside attackers may use to their advantage. They may be used in various attacks, including rug pulls, endless minting exploits and more.

What is the problem with centralized system? ›

Limitations of Centralized System –

Can't scale up vertically after a certain limit – After a limit, even if you increase the hardware and software capabilities of the server node, the performance will not increase appreciably leading to a cost/benefit ratio < 1.

What is the disadvantage of centralization in modern organization? ›

However, a centralized set-up suffers from the following disadvantages: Delay in work. Quick decision is possible but only at the top level, since decision is take only by the top, it is not possible to take quick decision whenever the top is neither available nor is in a mood to take one.

What are the disadvantages of centralized? ›

The disadvantages of centralization

The employees are not able to participate in the decision-making process and are bound to implement decisions made at a higher level. The executives won't understand if employees have difficulty implementing decisions. They are decision-makers, not implementers.

What are two advantages of Centralisation? ›

Easier decision-making

There are a limited number of stakeholders in a centralised business, which can make decision-making quicker and easier. Since only a few individuals give input before making a decision, there is no confusion and there is no scope for excessive discussions or disapproval.

What are the disadvantages of Centralised structure? ›

Disadvantages. Centralised organisational structures are often less responsive to localised external pressures. It can also lead to demotivated staff who are not being given the opportunity to be involved in the decision-making process.

What is a downside of centralized companies? ›

Centralized control of a business can have several downsides, including stifled creativity, limited communication, inflexible decision-making, and the danger of losing a key decision-maker.

What are the key benefits of centralised systems? ›

Whether it's centralising data into one database or aggregating data from multiple systems into one reporting function, having everything in one place has the following advantages:
  • #1 Improved data integrity. ...
  • #2 Reduced data redundancy. ...
  • #3 Reduced cost. ...
  • #4 Valuable insights. ...
  • #5 Centralised reporting.
Oct 19, 2020

What are the advantages of a centralized structure? ›

Advantages of a centralised management structure include: consistency across the business. the business has a clear direction. operations and decisions are closely controlled and managed.

What is one advantage of a centralized organization? ›

Expert guidance

While lower-level managers can be experts in specific areas, they may not be effective decision-makers. A centralized organization system allows business owners or executives to provide strategic orders to guide the enterprise and maintain effective business operations.

What are examples of centralised? ›

Businesses that have a centralised structure keep decision-making firmly at the top of the hierarchy (among the most senior management). Fast-food businesses like Burger King, Pizza Hut and McDonald's use a predominantly centralised structure to ensure that control is maintained over their many thousands of outlets.


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