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Centralized management refers to the traditional organizational structure of keeping decision making authority at the top. In this structure, executive level management is responsible for making the decisions that affect the rest of the organization. Rather than placing a high level of authority with field managers or representatives, policies and procedures are handed down from employees who work in the corporate office or other centralized location.
An organization's management structure is considered to be centralized when the authority to spend money, hire personnel and make strategic decisions is farther up within the company's hierarchy. For example, many large, established corporations operate under a centralized management structure. Policies concerning customer service, hiring criteria and cash management are formulated by the corporate office. The individuals who design the company's policies may never set foot in all of the field locations for which decisions are made.
A hierarchy or chain of command usually exists in companies that operate under centralized management. For example, a sales company with a hierarchical organization might divide its territories into regions, each of which is controlled by a regional vice president. The vice president might report to a director of sales, who in turn might report to the chief executive officer.
The potential lack of authority and autonomy at the field level is a key characteristic of centralized management. Front line employees are responsible for implementing policies and procedures that are handed down to them, often in the form of an e-mail or voicemail. Any employee who reports to someone with greater authority is considered to be a subordinate in the hierarchy. He or she may have to consult with someone higher up in the chain of command prior to responding to front line conditions or requests.
The communication flow starts from the top and reaches lower level employees through middle or front line management. In a sales organization, this communication might include current promotional initiatives, sales objectives and targets as well as mandatory safety policies. The employees who receive these communications do not have a chance to participate in the decision making process. The policies and initiatives affect how an employee's job is performed, and the expectation is often that policies will be carried out without question.
A large amount of control and power reside in high level executive positions in a centralized management system. Not only does information flow from the top down, but performance results and feedback flow back up from the front line. Future decisions and policies may be affected by feedback received from lower level employees; however, the final authority remains at the executive level. Furthermore, the process of responding to front line feedback and market changes may take longer due to the hierarchical structure.