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Disadvantages of Decentralization

Decentralization has also certain limitations, important among which are as follows:

1.      Lack of coordination. Under decentralization, each division or department of the enterprise enjoys substantial freedom in the formulation of policies and action plans. This creates a difficult problem of coordination.

2.      Costly. Only a very large enterprise can afford the high operating costs of maintaining a decentralized set-up. This is because under decentralization, each division of the enterprise has to be self-sufficient in every respect, e.g., production, marketing, accounting, personnel, etc. This may not only result in duplication of functions, but may also lead to wastage of resources, because often one or the other facility remains underutilized in each division.

3.      Lack of able managers. A decentralized enterprise has to depend on divisional managers. But it is difficult to find persons who are adequately equipped to run a division independently.