Answer questions 1,2, and 3 in half a page and write a paragraph for question 4.
ID: 2585473 • Letter: A
Question
Answer questions 1,2, and 3 in half a page and write a paragraph for question 4.
1. Define decentralization and identify its expected benefits and costs.
2. Distinguish between responsibility centers and decentralization.
3. Explain how the linking of rewards to responsibility-center performance metrics affects incentives and risk.
4. After you explain the terms, search the internet for decentralization in real companies and write a paragraph about your observation on the use of decentralization by companies.
Explanation / Answer
“Decentralisation refers to tire systematic effort to delegate to the lowest levels all authority except that which can only be exercised at central points.” —Louis A. Allen
Decentralization is not the same as delegation. In fact, decentralization is all extension of delegation. Decentralization pattern is wider is scope and the authorities are diffused to the lowest most level of management. Delegation of authority is a complete process and takes place from one person to another. While decentralization is complete only when fullest possible delegation has taken place. For example, the general manager of a company is responsible for receiving the leave application for the whole of the concern. The general manager delegates this work to the personnel manager who is now responsible for receiving the leave applicants. In this situation delegation of authority has taken place. On the other hand, on the request of the personnel manager, if the general manager delegates this power to all the departmental heads at all level, in this situation decentralization has taken place. There is a saying that “Everything that increasing the role of subordinates is decentralization and that decreases the role is centralization”. Decentralization is wider in scope and the subordinate’s responsibility increase in this case.
Benefits of Decentralization
1. Reduces the burden on top executives:
Decentralization relieves the top executives of the burden of performing various functions. Centralization of authority puts the whole responsibility on the shoulders of an executive and his immediate group. This reduces the time at the disposal of top executives who should concentrate on other important managerial functions. So, the only way to lessen their burden is to decentralise the decision-making power to the subordinates.
2. Facilitates diversification:
Under decentralization, the diversification of products, activities and markets etc., is facilitated. A centralized enterprise with the concentration of authority at the top will find it difficult and complex to diversify its activities and start the additional lines of manufacture or distribution.
3. To provide product and market emphasis:
A product loses its market when new products appear in the market on account of innovations or changes in the customers demand. In such cases authority is decentralized to the regional units to render instant service taking into account the price, quality, delivery, novelty, etc.
4. Executive Development:
When the authority is decentralized, executives in the organization will get the opportunity to develop their talents by taking initiative which will also make them ready for managerial positions. The growth of the company greatly depends on the talented executives.
5. It promotes motivation:
To quote Louis A. Allen, “Decentralization stimulates the formation of small cohesive groups. Since local managers are given a large degree of authority and local autonomy, they tend to weld their people into closely knit integrated groups.” This improves the morale of employees as they get involved in decision-making process.
6. Better control and supervision:
Decentralization ensures better control and supervision as the subordinates at the lowest levels will have the authority to make independent decisions. As a result they have thorough knowledge of every assignment under their control and are in a position to make amendments and take corrective action.
7. Quick Decision-Making:
Decentralization brings decision making process closer to the scene of action. This leads to quicker decision-making of lower level since decisions do not have to be referred up through the hierarchy.
The Cost of Decentralization
Decentralization increases costs and reduces quality for two reasons: reduced specialization and fragmentation.
To understand the difference between Responsibility Center and Decentralization, we will define both separately.
Responsibility Center
Responsibility Center is a part of decentralization. A responsibility center is a segment of the company for which a manager is responsible. This allows the company to gather quantitative information regarding the segment in order to assess the performance of the manager. There are four types of responsibility centers:
Decentralization is not the same as delegation. In fact, decentralization is all extension of delegation. Decentralization pattern is wider is scope and the authorities are diffused to the lowest most level of management. Delegation of authority is a complete process and takes place from one person to another. While decentralization is complete only when fullest possible delegation has taken place. For example, the general manager of a company is responsible for receiving the leave application for the whole of the concern. The general manager delegates this work to the personnel manager who is now responsible for receiving the leave applicants. In this situation delegation of authority has taken place. On the other hand, on the request of the personnel manager, if the general manager delegates this power to all the departmental heads at all level, in this situation decentralization has taken place. There is a saying that “Everything that increasing the role of subordinates is decentralization and that decreases the role is centralization”. Decentralization is wider in scope and the subordinate’s responsibility increase in this case.
Incentives are the rewards, both implicit and explicit, for managerial effort and actions. A performance metric is a specific measure of management accomplishment. Performance based rewards that enhance managerial effort towards organizational goals gives motivation criteria to management team. Therefore, accounting measures, which provide relatively objective evaluations of performance, are important.
The design of a management control system affects the actions of managers. It specifies how outcomes translate into unit performance metrics and into both explicit and implicit rewards. Agency theory provides a model to analyze relationships where one party (the principal) delegates decision-making authority to another party (the agent). Agency theory is useful to analyze situations where there is imperfect alignment between the principal’s and agent’s
A decentralized approach helps innovation in that it allows different people with different skills, different thoughts, to bring together different products and technologies to satisfy the unmet needs of patients or customers. Decentralization also helps with overseas operations. Franchise organizations provide an ideal example of a decentralized structure. Franchise companies control most product development and marketing decisions at the top, but they give franchise owners a great deal of independence in running their individual stores. Franchise owners make staffing decisions, decisions on hours of operation and compensation decisions completely on their own, for example. Companies with a wide geographical reach also can benefit from a decentralized structure.