Chapter 12: Organizational Structure and Performance Measurement Flashcards
In a broader context, performance management includes
specifying how individual units within an organization will be evaluated, what measures will be used to evaluate these units, and what actions will be taken to ensure continuous progress
Centralized organization
An organization in which decisions are made by a single manager or a small management team.
Including strategic and day-to-day operating decisions
Decentralized organization
An organization in which decision making is not confined to a few top executives but, rather, is spread throughout the organization.
Factors that will play into determining how a organization is decentralized and the extent of decentralization include:
the number of distinct business lines; the geographic spread of the organization; and the complexity and scale of various business functions like operations, purchasing, accounting and finance, and information systems
When an organization is decentralized, it is divided into different units or _______
segments
Depending on the dimension of segmentation, individual segments may represent different divisions, product lines, market territories, or even individual departments
Example: A university can have multiple levels of segmentation, the first line may be the different faculties (nursing, business, Arts, etc) and then the second line could be within those (marketing, accounting, etc)
Advantages / benefits of decentralization
1) Top management is relieved of much day-to-day problem solving and is left free to concentrate on strategy, higher-level decision making, and coordinating activities
2) Provides lower-level managers with vital experience in making decisions. Without such experience, they would be ill prepared to make decisions when they are promoted to higher level positions
3) Added responsibility and decision-making authority often result in increased job satisfaction. They make the job more interesting and motivate people to put fourth their best efforts
4) Lower level managers generally have more detailed and up to date information about conditions in their own area of responsibility than do top managers. Therefore, the decisions of lower level managers are often based on better information
5) Lower level managers will likely act in more responsible manner when they are held accountable for their actions as well as the results
Major disadvantages of decentralization
1) Lower level manager may make decisions without fully understanding the big picture. While top level managers typically have less detailed information about operations than do lower level managers, they usually have more information about the company as a whole and may have a better understanding of the company’s strategy
2) In a truly decentralized organization, there may be a lack of coordination among autonomous managers. This problem can be reduced by clearly defining the company’s strategy and communicating it effectively throughout the organization
3) Managers objectives may be different from those of the owners of an organization as a whole; this suggests a lack of goal congruence between owners and managers
4) In highly decentralized organization, it may be difficult to disseminate innovative ideas effectively. Someone in one part of the organization might have a terrific idea that would benefit other parts of the organization, but without strong central directions the idea may not be shared with, or adopted by, other parts of the organization
From a performance management perspective, there are two key issues relating to decentralization
1) Clarifying the decentralized segment manager’s scope of responsibilities
2) Deciding how the manager’s performance will be evaluated
Responsibility centres
Segments of an organization whose managers are responsible and accountable for costs, revenues, profits, or investments.
There are two key issues relating to decentralized organizations:
- Clarifying the decentralized segment manager’s scope of responsibilities and
- Deciding how the manger’s performance will be evaluated.
The three primary types of responsibility centres are:
1) Cost centres
2) Profit centres
3) investment centres
Cost centre
An organizational segment whose manager is responsible for costs but not for revenues, profits, or investments.
Examples: Accounting, finance, general administration, human resources, production)
Does not have the capability to directly generate revenue or profit
Profit centre
An organizational segment whose manager is responsible for the segment’s profitability and has the authority to strongly influence both costs and revenues.
Does not need top management approval for production, operations, and pricing decisions but does need approval for spending money on capital acquisition or disposal
An example would be managers of individual stores or a major retail chain.
Investment centre
A business segment similar to a profit centre; the manager of an investment centre is responsible for both profitability and investments in operating assets.
Example: Vice president of a product division of a large company
Evaluated using return on investment (ROI) or residual income (RI) measures
An example would be corporate headquarters.
Segment
An individual unit within an organization whose manager has the responsibility to carry out its activities.
Can be segmented by plant, geographic territory, product line, sales territory, service centre
Traceable fixed expense (or cost)
A fixed cost incurred because of the existence of a particular business segment.
If the segment were eliminated, the fixed cost would disappear
In general, should be assigned to specific segments
examples: Salaries and benefits, office equipment, building rent, selling and administrative
Common fixed expense (or cost)
A fixed cost that supports more than one business segment but is not traceable in whole or in part to any one of the business segments.
Even if a segment were eliminated, there would be no change in the common fixed costs
In general, should not be assigned to specific segments
Examples: Senior management salaries, corporate office building, legal and accounting
In general, _______ costs should be assigned to segments, but _____ costs should not be assigned to segments
traceable
Common fixed
Return on investment ROI (definition)
Net operating income divided by average operating assets. It also equals margin multiplied by turnover.
Good for comparing any size companies as it is standardized
