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Dimensions of Organization Structure - Centralization

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Lecture - 10

Dimensions of Organization Structure – III

Welcome to this course on Organization Theory/Structure and Design. As you can see
from this slide now we will talk about the last module in part 1 and we will continue with
our discussion on the Dimensions of Organization Structure that we started in module 8
and continued in module 9.
(Refer Slide Time: 00:54)

Now, let us look at what are the things that will be covered in this module. So, we will
start by describing the relationships between complexity, formalization and
centralization. Then we will identify why organizations must practice decentralization
and then we will discuss how MIS affects structural dimensions. Let us start with the
relationship between formalization and complexity, both these terms we have talked
about in module 9.
So, there is a considerable evidence to support a strong association among specialization,
standardization and formalization. Where employees perform narrow repetitive and
specialized tasks, their routine tends to be standardized and a large number of rules and
regulations govern their behavior.

(Refer Slide Time: 01:46)

Assembly line workers have highly specialized jobs with standardized routines and a
wealth of formal rules and procedures to follow.
(Refer Slide Time: 01:57)

On the other hand we find cases of high complexity being linked with low formalization.
For instance the highly trained specialists or professionals do not require a great number
of rules and regulations. High formalization in such activities would only impose
redundant controls. The preceding findings are not contradictory. They acknowledge the

important difference between functional and social specialization. And the fact that the
two types of specialization have different effects on the need for formalization.
High horizontal differentiation when achieved through division of labor, typically means
hiring unskilled personnel to perform routine and repetitive tasks. Division of labor then
tends to be associated with high degree of formalization to facilitate coordination and
control.
(Refer Slide Time: 03:05)

Where high horizontal differentiation is achieved by hiring specialists and professionals
formalization will tend to be low, these people do non routine tasks. Their previous
socialization will have instilled internal standards of control, so high formalization is not
necessary.

(Refer Slide Time: 03:25)

Our conclusion therefore is that the key to understanding the complexity-formalization
relationship is to focus on these two things, the first is the degree of horizontal
differentiation and the second is the way it is achieved.
(Refer Slide Time: 03:49)

Now, let us move on to understanding what is centralization. Where are decisions made
in the organization up on top by senior management or down low where the decision
makers are closest to the action? The question introduces the last of the components that
make up organization structure. The subject of upcoming slides will be centralization and

its counterpart decentralization. So, let us start with the definition of centralization.
Centralization is the most problematic of the 3 components. Most theorists concur that
the term refers to the degree to which decision making is concentrated at a single point in
the organization.
(Refer Slide Time: 04:38)

The high concentration employs high centralization, whereas the low concentration
indicates low centralization or what may be called as decentralization.
(Refer Slide Time: 04:46)

There is also agreement that it is distinctly different from spatial differentiation.
Centralization is concerned with the dispersion of authority to make decisions within the
organization not geographic dispersion. However, beyond these points the water quickly
becomes muddy. The following questions suggest the breadth of the problem.
(Refer Slide Time: 05:14)

Now, first of this problem is, do we look only at formal authority? Authority refers to the
formal rights inherent in a managerial position to give orders and expect the orders to be
obeyed. There is no doubt that centralization of decision making encompasses those with
formal authority in the organization, but what do those people who have informal
influence over decisions.
For instance, at a major television network Sangeeta is a staff research specialist in the
programming department. Her job is to identify characteristics that differentiate
successful from unsuccessful prime time programs. She prepares the reports on her
findings, but she has no formal authority. Yet the director of programming has her attend
meetings informally where decisions for future programming are made.
Additionally, he rarely makes a major programming decision without checking out
Sangeeta’s opinion. Sangeeta has no formal authority in her position, but she does affect
decisions. Is this consistent with high centralization or low?

(Refer Slide Time: 16:31)

Now, then we move on to the next question, can policies override decentralization?
Many organizations push the making of decisions down to lower levels, but then the
decision makers are bound by policies.
Because, decision choices are constrained by policies do these low level decision makers
actually have discretion or is it artificial? In other words, has decentralization really
occurred if policies force the decisions to conform with what they would be if top
management made them themselves?
(Refer Slide Time: 07:14)

One could argue that even though employees low in the organization are making many
decisions, if those decisions are programmed by organizational policies a high degree of
centralization exists.
(Refer Slide Time: 07:28)

The third issue is what does concentration at a single point means. There may be
agreement that centralization refers to concentration at a single point, but exactly what
that means is not clear. Thus a single point means an individual, a unit or a level in the
organization. Most people think of centralized decisions as being made high in the
organization. But this may not be true if the single point is a low level manager.

(Refer Slide Time: 08:06)

Does it matter to operative employees whether decisions are made one level above them
or six levels above them? Either way they are allowed little input into their work. If
operative employees are not permitted to participate in decisions about their work, is not
decision making centralized regardless of whether it is concentrated at the next level up
or at the very top of the organization?
The fourth question is does an information processing system that closely monitors
decentralized decisions maintain centralized control? Advanced information technology
via computers facilitates decentralization.

(Refer Slide Time: 08:56)

But that same technology allows top managers to learn of the consequences of any
decision rapidly and to take corrective action if the decision is not to top management’s
liking.
(Refer Slide Time: 09:11)

If discretion is delegated downward but closely monitored by those above, is it real
decentralization? In such cases there is no real sharing of control in the organization. One
could argue that there is only the appearance of decentralization and top management
maintains effective centralized control.

(Refer Slide Time: 09:34)

The next question is does the control of information by low level members result in the
decentralization of what appears to be centralized decisions. Managers rely on those
beneath them to provide the information from which decisions are made. Information is
passed upwards but of course it is filtered, if it were not screened and filtered top
management would be inundated with information.
But this filtering requires subordinates to make judgments and interpretations of what
information should be transmitted. Thus the filtering process gives subordinates power to
pass on to top management only that information that they want top management to
have.

(Refer Slide Time: 10:29)

Further they can structure the information in such a way so as to get the decision made
that the low level members want. As such even though it may appear that decision
making is centralized with top management, is it not really decentralized, since the
decision inputs and hence eventually the decisions are controlled by lower level
personnel?
These questions are not introduced to confuse you, they are meant to dramatize our
position that centralization is a tough concept to nail down; yet our pragmatic approach
demands that we develop a definition that can resolve these issues.

(Refer Slide Time: 11:17)

Towards that end centralization can be described more specifically as the degree to
which the formal authority to make discretionary choices is concentrated in an individual
unit or level, that is usually high in the organization. Thus permitting employees which
are usually low in the organization, minimum input into their work.
(Refer Slide Time: 11:49)

This more elaborate definition answers the question posed earlier. So, the 1st thing that it
answers is, centralization is concerned only with the formula structure not the informal
organization. Therefore, it applies only to formal authority. 2nd centralization looks at

decision discretions. Where decisions are delegated downwards but extensive policies
exist to constrain the discretion of lower level members, there is increased centralization.
Policies can therefore act to override decentralization.
(Refer Slide Time: 12:30)

The third is, concentration at a single point can refer to an individual unit or level, but the
single point implies concentration at a high level. Information processing can improve
top management control, but the decision choice is still with the low level member. Thus
an information processing system that closely monitors decentralized decisions does not
maintain centralized control. The filtering that occurs as information passes through
vertical levels is a fact of life.

(Refer Slide Time: 13:06)

The top managers are free to verify the information they receive and to hold subordinates
accountable in their choices of what they filter out, but control of information input is a
form of de facto decentralization.
Management decisions are centralized if concentrated at the top, but the more the
information input to these decisions is filtered through others the less concentrated and
controlled the decision is. Now, we will talk about the relationship between decision
making and centralization.
(Refer Slide Time: 13:41)

Managers regardless of where they are in the organization make decisions. The typical
manager must make choices about goals, budget allocations, personnel, the ways in
which work is to be done and ways to improve his or her unit’s effectiveness.
As critical as knowledge of authority and the chain of command are to the understanding
of centralization, of equal importance is the awareness of the decision making process.
The degree of control one holds over the full decision making process is itself a measure
of centralization.
(Refer Slide Time: 14:38)

Decision making is presented traditionally as the making of choices after developing and
evaluating at least two alternatives. The decision maker chooses a preferred alternative.
From the perspective of individual decision making this is an adequate presentation but
from an organizational perspective the making of a choice is only one step in a larger
process.

(Refer Slide Time: 14:51)

This figure 10.1 depicts this larger process. So, this figure 10.1 it depicts organization
decision making process. So, the information must be gathered this input establishes the
parameter of what can be done, the information gathered goes a long way towards
controlling what should and will be done. So, you see that it starts from here situation
and then comes this information input, next comes the question what can be done then
again come second step interpretation advice.
Then comes this question, question number 2, what should be done? and then comes the
choice. Again question number 3, what is intended to be done? And then comes the
fourth authorization, then comes the question fourth what is authorized to be done and
then it leads to execution and then comes question what is actually done and then it leads
to action.
So, you see that at each step there is a question that needs to be answered before
proceeding to the next step. So, it starts with situation then comes the information,
inputs, interpretation, advice, choice, authorization, execution and action and in between
there are 5 questions that need to be answered.

(Refer Slide Time: 16:26)

As noted earlier, the fact that top level managers rely on information fed to them from
individuals lower in the vertical hierarchy gives those subordinates the opportunity to
communicate the information they want to.
(Refer Slide Time: 16:43)

Once the information is gathered it must be interpreted. The interpretations are then
transmitted as advice to the decision makers as to what should be done. So, that is
question number 2.

(Refer Slide Time: 16:57)

In the third step it is about acting on the advice to make the choice. Much of the choosing
of course, has been done previously when that information was selectively screened and
interpreted. The decision choice establishes what the decision makers desire or intend to
have done. So, this is we are talking of question number 3.
(Refer Slide Time: 17:21)

Now, as we move on, wishes unfortunately do not always become actions; the decision
must be authorized and conveyed before it can be executed. So, this is the question
number 4, which is to be answered before we move on to the next stage that is execution.

(Refer Slide Time: 17:44)

So, where there are many layers in the vertical hierarchy the final execution may differ
from the intention. Breakdowns in communication can result in a divergence between
intentions and actions. So too can the interest of those who initiate actions.
(Refer Slide Time: 18:01)

Referring to figure 10.1 it can be said that decision making is most centralized when the
decision maker controls all the steps. That is, he collects his own information, analyzes it
himself, makes the choice, seeks no authorization of it and executes it himself. As others
gain control over these steps, the process becomes decentralized. Therefore,

decentralization can be the greatest when the decision maker controls only the making of
the choice, this is, the least that one can do in the process and still be a decision maker.
So, viewing the organizational decision process as more than merely choosing between
alternatives gives us insight into the intricacies involved in defining and assessing the
degree of centralization in an organization.
(Refer Slide Time: 19:02)

Now, we will look at this important question, that why is centralization important? The
heading of this section may mislead you that it implies centralization in contrasted to
decentralization is important. The term centralization in this context is meant to be
viewed in the same way complexity and formalization are viewed in previous modules. It
represents a range from high to low. It may be clearer, therefore, if we ask why is the
centralization decentralization issue important?
As described in addition to being collection of people, organizations are decision making
and information processing systems. Organizations facilitate the achievement of goals
through coordination of group efforts. Decision making and information processing are
centre for coordination to take place yet and this point is often overlooked by students of
decision making and organization theory. Information itself is not the scarce resource in
organizations.

(Refer Slide Time: 20:23)

Advanced information technology provides managers with bundles of data to assist in
making decisions. We live in a world that drenches us with information. The scarce
resource is the processing capacity to attend to information. Managers are limited in their
ability to give attention to data they receive. Every manager has some limit to the amount
of information that he or she can process.
(Refer Slide Time: 20:56)

After that limit is reached further input results in information overload to avoid reaching
the point where manager’s capacity is exceeded, some of the decisions can be given to

others. The concentration of decision making at a single point can be dispersed. This
dispersion or transfer is decentralization.
(Refer Slide Time: 21:22)

There are other reasons why organization might decentralize. Organizations need to
respond rapidly to changing conditions at the point at which the change is taking place.
Decentralization facilitates speedy action because it avoids the need to process the
information through the vertical hierarchy. It can be acted upon by those closest to the
issue.
This explains why marketing activities tend to be decentralized. Marketing personnel
must be able to react quickly to the needs of customers and actions of competitors.
In addition to speed, decentralization can provide more detailed input into the decisions.
If those most familiar with an issue make a decision, more of the specific facts relevant
to that issue will be available.

(Refer Slide Time: 22:22)

The salespeople at a company’s facilities in Rio de Janeiro are much more likely to know
the relevant facts for making pricing decisions on the company’s products in Brazil, then
would a sales executive five thousand miles north in New York.
(Refer Slide Time: 22:45)

Decentralizing decision making can provide motivations to employees by allowing them
to participate in the decision making process. Professionals and skilled employees are
particularly sensitive to having a say in those decisions that will affect how they do their
jobs. If management holds humanistic values the firm is likely to favor decentralization.

If certain groups are likely to hold humanistic values they are the professionals and the
skilled.
(Refer Slide Time: 23:22)

Because these people desire to share in the decision making process, the opportunity to
do so should be motivating. On the other hand if management holds autocratic values
and centralizes authority, employee motivation can be predicted to be low. A final plus
for decentralization is the training opportunity that it creates for low level managers, by
delegating authority top management permits less experienced managers to learn by
doing.

(Refer Slide Time: 24:03)

By making decisions in areas where impact is less critical, low level managers get
decision making practice with the potential for minimum damage. This prepares them for
assuming greater authority as they rise in the organization.
(Refer Slide Time: 24:22)

Of course the goal of decentralization is not always desirable. There are conditions under
which centralization is preferred when a comprehensive perspective is needed in a
decision or where concentration provides significant economies, centralization offers

distinct advantages. Top level managers are obviously in a better position to see the big
picture.
This provides them with advantages in choosing actions that will be consistent with the
best interest of the whole organization, rather than merely benefiting some special
interest group. Further certain activities are clearly done more efficiently when
centralized, this explains for instance why financial and legal decisions tend to be
centralized.
(Refer Slide Time: 25:22)

Both functions permeate activities throughout the organization and there are distinct
economies to centralizing this expertise.

(Refer Slide Time: 25:32)

This discussion leads to the conclusion that either high or low centralization may be
desirable. Situational factors will determine the right amount. But all organization
process information, so that managers can make decisions as such attention must be
given to identifying the most effective way in which to organize where those decisions
should be made.
As we close this part on structural components, it is important to attempt to identify what
relationships there are if any between centralization and complexity and between
centralization and formalization. So, now we will look at this relationship between
centralization and complexity. The evidence strongly supports an inverse relationship
between centralization and complexity.

(Refer Slide Time: 26:32)

Decentralization is associated with high complexity. For example, an increase in the
number of occupational specialties means an increase in the expertise and ability
necessary to make decisions. Similarly, the more employees have undergone
professional training, the more likely they are to participate in decision making.
Conversely the evidence find that the greater the centralization of work decisions, the
less professional training is likely to be exhibited by employees. We expect therefore, to
find high complexity associated with decentralization when we examine the structure of
organizations.

(Refer Slide Time: 27:21)

Now, we will talk about the relationship between centralization and formalization. The
centralization-formalization relationship is as ambiguous as the centralization complexity
relationship is clear.
A review of the evidence is marked by inconsistent results. The early work found no
strong relationships between centralization and formalization. Later research reported a
strong negative relationship between the two components that is organizations were both
highly formalized and decentralized.
One follow up effort attempting to reconcile the controversy yielded inconclusive results.
Recent efforts support the high formalization decentralization hypothesis.

(Refer Slide Time: 28:20)

Obviously the relationship is complex given this caveat, however we can suggest a
tentative analysis. High formalization can be found coupled with either a centralized or
decentralized structure.
(Refer Slide Time: 28:31)

Where employees in the organization are predominantly unskilled, you can expect lots of
rules and regulations to guide these people. Autocratic assumptions also tend to
dominate, so management keeps authority centralized. Control is exercised through both
formalization and concentration of decision making in top management. With

professional employees on the other hand you might predict both low formalization and
decentralization. Research confirms this alignment.
(Refer Slide Time: 29:21)

Professional expect decentralization of decisions that affect their work directly but this
does not necessarily apply to personnel issues, like salary and performance appraisal
procedures or strategic organization decisions. Professionals want the predictability that
comes with standardization of personal matters, so, you might expect to find
decentralization paired with extensive rules and regulations.
(Refer Slide Time: 29:39)

Additionally professionals’ interest is in their technical work not in strategic decision
making. This can result in low formalization and centralization. Centralization however
is confined to strategic rather than to operative decisions, the former having little impact
on the work activities of the professionals. Now let us look at how the sophisticated
information system will be changing organization structure.
Sophisticated information systems will be changing the way we look at organization
structures. This is specifically true for the widespread use by management personnel of
personal computers that can tap into large centralized databases and that are linked
together as part of a larger computer network. For example, when managers have direct
access to data they can handle more subordinates.
(Refer Slide Time: 30:50)

Why? Because computers’ control can substitute for personal supervision. The result can
be wider spans of control, fewer levels in the organization and the organizations that are
lower in complexity. Information systems may also lead to less formalization and more
decentralized organizations. Again the reason is that management information systems
can substitute computer controls for rules and decision discretions.

(Refer Slide Time: 31:25)

Computer technology rapidly apprises top managers of the consequences of any decision
and allows them to take corrective action, if the decision is not to their liking.
Information system should lead to the appearance of more decentralization with no
corresponding loss of control by top management. Of course, sophisticated management
information systems might also lead to more centralized organizations.
(Refer Slide Time: 31:56)

Top managers will have the capability of bypassing middle management and directly
accessing data from the operating floor. Thus, decreasing senior management’s

dependence on lower level managers who can hold or distort information and allowing
the former to make almost all key operational decisions or at least closely monitor them.
(Refer Slide Time: 32:25)

So, to conclude in this module we have discussed the relationships between complexity,
formalization and centralization. Then we had discussed in detail why organizations
might practice decentralization and we have also learnt how MIS affects structural
dimensions.
(Refer Slide Time: 32:51)

And these are the 4 books from which the matter for this module was taken.

Thank you.