Centralization versus Decentralization. Centralization is the
degree to which formal authority is centralized within a unit or level of
an organization. Decentralization is the process of actively shifting authority
lower in a firm’s hierarchical structure. This effectively gives
more decision-making power and responsibility to those in supervisory
roles. Centralization and decentralization have their benefits and
costs. While centralization provides top-level managers with a better
overview of operations and allows for tighter fiscal control, it can result
in slower decision making and limit innovation and motivation.
Decentralization, by contrast, can speed up decision making and increase
motivation and innovation, but this is done at the expense of a
top manager’s view of the firm and financial control.