Objective: Understand decentralization and different types of responsibility centers
Mindset: Appreciate the need for various responsibility centers
Organizations with a relatively small scope of operation, either individually-owned or with simpler management structures usually have planning and operating decisions made by the owner or the top manager, referred to as a “centralized” model. As an organization grows in size and complexity, the management of operations usually requires an increasingly “decentralized model.
Decentralized operations involve separate operating segments and delegation of decision-making to managers of the segments in order to execute company-wide business strategies. Such decentralization may involve one or more of the following: geographic area; product line; distribution channel (i.e., retail vs online sales); customer base; and business function.
Growing companies must decentralize out of necessity when businesses increase revenues significantly or product lines diversify, enabling managers to be trained and to deal with suppliers and customer relationships. The creation of separate “responsibility centers” requires segment managers to avoid the risks of cost duplication and failures of communication with other segments while achieving “goal congruence” with senior management. By the use of performance evaluation systems, senior management can establish benchmarks, continue to communicate expectations and reward employee success through bonus incentives and promotions.
Read Chapter 10 in your textbook.
Prepare to discuss decentralization and responsibility centers. Ensure the following points are addressed.
Why do companies decentralize?
What are the advantages of decentralization?
What are the disadvantages of decentralization?
What are the advantages of Performance Evaluation Systems?
What is the need for various responsibility centers?
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