6 Flashcards
What are the advantages of team based structures and fatter hierarchies
Managers of teams have better local information about markets and operations to enable them to manage their areas more effectively
Provides managerial training for future higher-level managers
May lead to greater motivation and job satisfaction for unit managers
Allows corporate managers more time for strategic issues
Delegation allows organisation to react quicker to opportunities and problems as they arise
What are the disadvantages of team based structures and fatter hierarchies
Managers may focus too narrowly on their own units performance rather than on attaining organisations overall goals
Some tasks and services may be duplicated unnecessarily
What is goal congruence
Represents consistency between managers personal goals and goals of organisation
Helps ensure that decentralised organisations are effective
What are the agency problems behavioural changes
Goal congruence may be difficult to achieve in a decentralised organisation due to self interest
Productivity is affected by all team members but inputs such as effort is hard to observe
Team members therefore have incentives to free ride
Principal agent problem can lead to agency costs(decline in firms value due to agent pursuing his/her own interests)
Is it goal congruence achievable
Probably unrealistic. Self interested individuals often don’t change their preferences
What do financial performance reports show
Key financial results appropriate for type of responsibility centre
What are cost centres
Budgeted and actual costs that relate to operations
What are profit and investment centres
Wider range of financial information in line with managers specific responsibilities
What are summary profit based measures used for
To evaluate the performance of profit and investment centres
Profit
Return on investment
Residual income
Economic value added
What are ways to improve return on investment
Increase return on sales by increasing selling price or sales revenue, or decreasing expenses
Increase investment turnover (sales revenue to invested capital) by increasing sales revenue or reducing invested capital
However, actions taken with sole purpose of making these ratios more favourable in short term may have adverse effects on performance in future years
What are the advantages of return on investment
Encourages managers to focus on profits and assets required to generate those profits
Promotes an understanding of relationship between revenues, costs and assets
Can be used to evaluate relative performance of investment centres even when those business units are of different sizes
What are the disadvantages of return on investment
Encourages manages to focus on short-term financial performance at expense of long-term viability and competitiveness
Encourages managers to defer asset replacement – to maintain high ROI and apparent high-performance
Discourages managers from investing in projects which are acceptable from organisations point of view but decrease investment centres ROI
How do you minimise the behavioural problems of ROI
Use ROI as one of several performance measures that focus on both short-term and long-term performance
Always use market value (not depreciated value) of assets
Use alternative financial methods such as residual income or economic value added
What is residual income
Amount of profit that remains after subtracting an imputed interest charge
What is imputed interest charge
Company’s rate of return expected from its investments
This is based on either minimum required rate of return on invested capital or weighted average cost of capital
