What is decentralization explain the meaning and nature of decentralization?

In brief, Decentralization can be defined as the organizational structure.  In such a structure, the top management of a firm entrusts the middle and lower-level management with the responsibility to take decisions pertaining to the firm’s daily operations.

To elaborate, they are responsible for planning, crafting suitable strategies and taking necessary decisions to boost the proficiency at each level and in turn, optimizing the overall productivity of the company.

Owing to its numerous benefits and positive influence on the company’s performance, business owners tend to prioritize the structure of power delegation. Resultantly, they can make the most of the time and opportunity to focus on the major concerns of their business and also to plan its expansion. 

In the era of globalisation, where the entire world is connected and turned into a small village, decentralisation is a development process facilitating development ideas that are pro-poor, pro-nature and protects the regional characteristics in the development process. This process will help in bringing out the voice of the depressed, poorest of the poor and make decisions that are democratic and also help in the representation of the local communities in the decision making process. 

Types of Decentralization

1. Democratic Decentralization

It is the transfer of political authority and devolution of powers to the low levels of administration that are below the center. For example, the transfer of power to the states and district authorities from the center is a form of political decentralization.

2. Administrative Decentralization

It is the transfer of power to make decisions that involve utilization of natural resources, mobilization of other resources, administrative authority. It is again divided into divestment, devolution and deconcentration. Divestment is when the powers are transferred to some voluntary organizations from the government. A delegation is an exclusive form in which the powers and authority are delegated to the subordinate officials. 

3. Fiscal Decentralization

It is the devolution of economic powers to the lower rungs. This is again divided into two elements. One is devolution of power to spend the money and allotting them with some funds. Another element is to allow the lower levels to collect revenue in the form of taxes and cess charges.

Features of Decentralization in India

• Reservation provision exists for the SC, ST, women and OBC at times. This reservation is extended to panchayat level administration also

• Article 243E of the Indian constitution clearly mentions forming local level panchayats and also makes a provision to constitute the next panchayat before the completion of its term. 

• The constitution also recognizes that the panchayats need some powers to function and made a provision making the state government devolution some powers to the panchayats. 

Importance of Decentralization

Now that we have gained a basic idea about decentralization let’s glance through its vital role in a commercial set-up mentioned below –

1. Accelerates  Decision Making

Since middle and lower-level management is in charge of everyday operations, it accelerates the process of decision making. The freedom to take prompt decisions further enables them to execute their decisions quickly and effectively.

2. Improves Leadership Skills

As employees have the freedom to perform tasks individually, it offers them substantial exposure. In turn, it helps to create a work environment; wherein, employees can hone their executive skills significantly. As they learn to improve their skills and take responsibility for various tasks, it enhances the overall productivity of the firm. 

3. Improves Administration

As the manager at each level is allowed to make decisions pertaining to their department, it offers them more room to bring necessary adjustments through the course of operation. In turn, it not only helps to improve the quality of the department’s performance as and when required but also allows them to come up with suitable solutions to tackle departmental challenges. All of this helps to improve the quality of administration at each level significantly. 

4. Facilitates  Greater Control

With the help of decentralization, top management can evaluate the performance of different departments more effectively. Further, it helps them to review and identify the prevailing shortcomings and helps to bring necessary changes to the same. This not just helps to lower the occurrence of operational shortcomings but also offers greater control over each area of operation.

Test your Knowledge: In what other ways do you think decentralization is essential for a firm?

Advantages of Decentralization 

Moving on, let’s quickly check out how a firm benefits through decentralization –

1. Facilitates Smooth Communication

With the presence of fewer hierarchical levels, there is a smooth flow of communication between the superiors and subordinates in each department. In turn, such a set-up comes in handy for the top management and keeps them informed about the grievances and functioning of each department.

Additionally, it allows them to reach out to their subordinates as and when required and implement decisions more effectively.

2. Promotes Expansion 

With the middle and lower-level management being more involved with the everyday operation, the top management seeks the opportunity to focus on expansion and sustenance of profitability. 

Further, with decentralization management is more adept at identifying areas that require more attention or reforms to emerge as more productive. This helps management to make necessary changes quickly and with more effect, thus facilitating expansion and profitability in a real sense.  

3. Motivates Subordinates

Decentralization is an effective way to boost the morale and feeling of job satisfaction among employees. Being entrusted with responsibilities around the department offers them a sense of belonging and further inculcates a team spirit in them.

Although decentralization lays a positive impact on the productivity of a firm, it brings forth specific challenges as well.

Disadvantages of Decentralization

Take note of these common challenges of a decentralized firm –

1. External factors

Factors like market fluctuations, government policies and intervention and trade union movement often present a challenge to optimize the productivity of a company through decentralization. 

2. Lack of coordination

Each department is given due powers to delegate their operations adequately. However, different departments may not be eager to cooperate, which defeats the purpose of a decentralized structure altogether. 

Give your opinion: Imagine yourself as an owner of a company. How would you overcome the shortcomings of a decentralized firm?

Difference Between Centralisation and Decentralization

Check out the table below to find out the difference between centralisation and decentralization –

Parameters

Centralisation 

Decentralization

Definition

In such a managerial set-up, only the top management has the power to make decisions.

In such a managerial set-up, decision-making powers are delegated across different levels.

Suitability

It is suitable for small scale firms.

It is suitable for large scale firms.

Information flow

Mostly vertical, i.e. flows from the top level to the low level.

Open and free flow.

Decision making

Slow process.

Relatively faster.

Involvement

Only handpicked employees can partake in the decision making process.

Individuals from each level partake in the decision-making process actively. 

Conflict

Less likely to occur.

Often a persistent problem.

Motivation level

Employees are often demotivated.

Employees are motivated and satisfied.

Burden

The burden rests only upon a few.

The burden is distributed evenly.

Stability

Since the top managerial level makes the decision, such a set-up is comparatively stable.

Conflicting decisions may lead to instability.

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