Centralization refers to the degree to which decision making is concentrated at a single point. In centralized organizations, top managers make all the decisions, and lower-level managers merely carry out their directives. At the other extreme, decentralized decision making is pushed down to the managers closest to the action or to workgroups. The concept of centralization includes only formal authority—that is, the rights inherent to a position.

A decentralized organization can act more quickly to solve problems, more people provide input into decisions, and employees are less likely to feel alienated from those who make decisions that affect their work lives. The effects of centralization and decentralization can be predicted: Centralized organizations are better for avoiding commission errors (bad choices), while decentralized ones are better for avoiding omission errors (lost opportunities). Management efforts to make organizations more flexible trend toward decentralized decision making by lower-level managers, who are closer to the action and typically have more detailed knowledge about problems than top managers.

Decentralization is often necessary for companies with offshore sites in order to best respond to each region’s profit opportunities, client base, and specific laws, while centralized oversight is needed to hold regional managers accountable. Failure to balance these priorities can harm the organization and its relationships with local governments.