Module 20 - Decentralization. Flashcards
When considering business division what must be taken in to account?
Decentralisation- the level of decision making control that can be delegated to the divisional management.
Monitoring - the measures by which head office monitor the divisional management.
What are the advantages of decentralisation?
- Decision making - managers have more up to date information
- Freeing up upper management
- Motivation
- Training
What are the disadvantages of decentralisation?
- Cost
- Dysfunctional Decisions
- Innovations - the spreading of good ideas
There are two major measures used in the evaluation of divisional performance.
- Residual Income
2. Return on Investment.
What are the three advantages of ROI?
- Allows year on year comparison
- Easy to understand and encourages investment in high returning assets.
- Calculated using information from the financial reports.
What are the 4 disadvantages of ROI?
- As it is an accounting policy it is open to accounting distortion
- ROI above company level but below divisional level may be rejected
- Choice of appropriate benchmark
- Use of a single performance indicator may benefit divisional ROI in the short term but hinder company wide ROI in the long term
What are the advantages of Residual Income?
- As it is a company wide hurdle rate, projects with an ROI below divisional levels will not be rejected and they will contribute to the company as a whole.
What are the disadvantages of RI?
- Setting of the hurdle rate can be difficult and the level of risk a project has hard to assess
- RI tends to favour larger organisations
What is the balanced score card?
A series of performance measures that are directly linked to company strategy.
The balanced score card is based on four principles - what are these?
- Financial perspective
- Customer Perspective
- Internal Business Process Perspective
- Learning and Growth Perspective.
