A Business Encyclopedia


Definition: Decentralisation can be understood as the orderly assignment of authority, throughout the levels of management, in an organisation. It describes the way in which power to take decisions is allocated among various levels in the organisational hierarchy. In other words, it refers to the dissemination of powers, functions and responsibility, away from the central location.

Entrusting a portion of work to subordinates is called delegation, but when it is extended all over the organisation, it is known as decentralisation. It is a situation, high-level delegation of authority, at the different level of the enterprise. It is a philosophy, which refers to the selective diffusion of authority, which advocates the belief that the workforce is capable, competent and resourceful.

Importance of Decentralisation

  1. Quick decision making: Decision making becomes quicker and better at the same time, by pushing down the power to make a decision to the operational level, which is nearest to the situation.
  2. Executive development: It encourages self-sufficiency and confidence amongst subordinates, as when the authority is delegated to lower levels, they have to rely on their judgement. By such delegation, the executives are constantly challenged, and they have to find solutions, for the problems they face, in the day to day operations.
  3. Development of managerial skills: In a decentralised structure, subordinates get an opportunity to prove their abilities and management also get a pool of competent manpower, which can be placed at more challenging and responsibility-prone situations, by way of promotions.
  4. Relieves top management: It reduces the extent of direct supervision over subordinates by the supervisor, as they are given the liberty to decide and act accordingly, within limits set by the superior. As a result, the top management gets more time to take policy decisions.
  5. Facilitates growth: It confers greater independence to the lower management levels, along with the heads of departments, divisions, units, etc., as it let them perform functions in the way that is most appropriate for their department or division. It propagates a sense of competition among various departments, to outperform others. This ultimately results in the increased production level and generates more return to the enterprise.
  6. Better control: The performance of each level can be measured, and the departments are also held accountable separately for their results. The extent to which organisation goals are achieved and the contribution of each department is determined.
  7. Effective communication: The communication system of the organisation becomes more effective, through decentralisation. It also builds a strong relationship between superior and subordinates.

Decentralisation lessens the burden of top level management and gives actual work experiences to some middle and lower level executives, which improves their morale.

Factors Determining Degree of Decentralisation

  • Importance and significance of decision: The costliness is the key factor which determines the extent of decentralisation. The term costliness of decision, entails the money value, goodwill and reputation of establishment associated with the decision.
  • Management Attitude: The attitude of top level management plays a significant role ascertaining the extent to which activities are dispersed to lower levels. It is true that executives that┬áhave traditional rigid perception, hardly permit delegation of authority, as they want everything under their control and does not like change.
  • Size of the enterprise: The size f the firm has a great role to play in determining the degree, in essence, the larger the firm, the more the decisions which are to be taken. Therefore, there are several departments and levels in it, and coordination between all of them is a bit difficult, and the decision making is delayed. Such organisation requires the high level of decentralisation than those which are smaller in size.
  • Availability of qualified manpower: A reservoir of capable executives also ascertains the degree of dissemination of authority. Proper training helps the subordinates gain ample knowledge and experience to shoulder higher responsibilities effectively.
  • Environmental influences: It includes forces like government control, fiscal policy of the country, national unions, government purchases and so on.

Any organisation can never be fully centralised or decentralised; the top management always keeps certain authorities in their hand. So, the major question is not whether decentralisation should be implemented or not, the question is to which extent it should be adopted, what authorities are assigned to the subordinates and what authorities should remain with the top executives.

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