Decentralization

Organisation Mechanisms

Market driven mechanisms Non market mechanisms-internal communication, budgeting,reporting..

Environment of a firm

Complexity of a firms environment complexity of the internal structure Firms whose internal processes are consistent with external demandseffective in dealing with environment Structure of a firm- depends on external environment

Mechanistic vs organistic firms

Stable vs Dynamic Defined specific tasks vs Evolving Problem oriented tasks Top down control and authority vs decentralized authority Rules, instructions oriented vs Information oriented

Decentralization-Need

Information movement up and down Distortion/Insufficiency of information Absence of local knowledge in decision makers Loss of time in upward movement of information

Decentralization in Practice

Decision on- degree of authority, degree of responsibility Level of autonomy required Designing appropriate incentive systems Alignment of divisional goals with organisational goals

Types of Decentralised Units

Standard Cost Centres Revenue centres Discretionary expense centres Profit centres Investment centres

Standard Cost Centres

Input required to produce output-defined Useful for repetitive and measurable operations For what should managers be accountableactivity levels or efficiency? Under/over absorption due to volumes? Revenues?

A little note on absorption

Capacity 50,000 units Units produced- 40,000 Fixed cost per unit- Rs.2/Variable cost per unit Rs.6/Actual VC incurred Rs.6.5 Fixed cost Rs.110,000/Std hrs per unit -2hrs Actual hrs-76000 hrs

Accountability in cost centre

What is the accountability of cost centre head? Efficiency variance?? Volume variance?? Spending variance??

Acc..

Accountable for- performance, quality and timeliness Not accountable for- revenue, profit, uncontrollable costs

Revenue Centers

Marketing activities Selling and distribution-main responsibility Is it possible that sales increases, but revenue decreases? Can revenue centre be converted to a profit centre?

Discretionary Expense Centers

Output not measurable in financial terms No strong relationship between input and output Examples-R&D, Admin, Advertising

How to evaluate performance?

Breakthrough achieved- R&D Market penetration- Marketing Quantitative controls Extremely Difficult Control tends to be on input- not output

Limitations

Low or high spending cannot be interpreted as positive or adverse variance Cost overruns need not be bad Quality and level of service- difficulty of measurement Output measure- elusive in such departments

Budgeting for DE centers

Inter company comparison- expressing costs as a percentage of sales Determining the budget on certain norms Zero based budgeting Activity Based costing

Profit Centers

Significant extent of decentralization Examples of decisions that Profit centre heads can make- product mix, trade off between price and volume, outsourcing decisions, etc. Any difficulty in measuring performance of Profit Centers???

Investment Centers

Responsible for profits Also for Return on Working Capital and Assets Profit related to the assets employed to generate the same

Dysfunctions of Decentralization

Problems of Goal Congruence- Pursuit of local goals to the exclusion of organizational goals Measures of performance- based internal measures rather than the external environment Future economic implications of current activities-ignored

Dysfunctions..

Problems of Externalities- Actions of one unit/division may also affect other units Performance of one local unit could be dependent on performance of another unit Performance will need to be measured beyond financial measures

Dysfunctions..

Over consumption of perquisitesDiscretionary expense centers Empire Building- Resulting in non monetary rewards