Centralization is the process when decision making is concentrated in a few hands. It may also mean having one focus of control which improves efficiency by utilizing economies of scale. Centralization in an organization can lead to decision making only at the top level, operating authority with the middle level managers, lower level operations being performed only at the directions from top level.
Centralized organizations effectively rely on one person to make decisions and give directions to the company. In centralized organizations all decisions of the lower level are subject to the scrutiny and approval of the higher level. Opposite of centralized organization is decentralized organizations where several individuals are responsible for making business decisions and running a business.
Examples of centralized organizations are small businesses where the owner of the business is responsible for the whole organization. For instance when a father and son own a business they decide all important matters regarding the business, the rest of the matters like finance, marketing, and personnel are carried out by the department heads of the respective departments but they have to act as per the instructions and orders of the father and the son. So in this case decision making power remains in the hands of the father and son.
The advantages of centralization are:
1. It pulls groups together and hence creates order and enforces process.
2. It leads to cooperation
3. It is a leveling process
4. It reduces waste of money on duplicate systems , extra work and manual processes
5. They are very efficient regarding business decisions. Owners decide the company’s mission and vision.
The disadvantages of centralized organizations are:
1. All the negatives of a bureaucracy are applicable to centralized organizations as well.
2. There are multiple management layers which results in micro management.