Lecture OverviewOrganizations becomedecentralizedwhentop management delegates decisionsdownward (e.g., to segment managers).Responsibility accounting:To ensure that segment managers are accountablefor their decisions, segments should be heldresponsible for costs that they “cause.” Segmentsshould not be held responsible for costs that theydo not “cause.”The costs “caused” by a segment include its variablecosts as well as any “traceable fixed costs”If a manager can make decisions about investmentlevels, she should be held responsible for herinvestment decisions.
3Decentralization and Organizational StructureOrganizational design is driven, substantially, by three factors:1)Information asymmetry:Local managers know more about localoperations than do top managers.2)Costly communication:It is costly for local managers tocommunicate their superior information to top managers.3)Incentive problems:Employees prefer to use their superiorinformation for their own benefit rather than the firm’s.To minimize the costs that result from these three factors (which typicallyincrease with the size of the firm), modern large firms are almost alwaysdecentralizedand organized aroundresponsibility centers:In that way, top management is freed from the need to make day today decisions-- enabling it to focus more of its efforts on long-termissuesAnd, decisions relating to local (regional) operations can be madeby the local managers who, typical, are best informed to make thosedecisions
4Degree of decentralization:•The extent to which decision-making authority is delegated by topmanagement to local managers is determined, in part, by therelative costs of acquiring and communicating needed information.•The move to more decentralized organizations results fromhigherinformation costs.A Trade-off in decentralized organizations:•On the one hand, centralized decisions are generally best for thefirm as a whole, but may be made too slowly (because of the timeand cost of obtaining the necessary information) to be fullyeffective.•On the other hand, local decisions can be made quickly (becausethe necessary information is available at a lower cost), but thosedecisions may not be best for the firm as a whole.
Degree of Decentralization exampleFriday, February 18, 2000BUSINESS BRIEFSBlockbuster, AOL expand shared marketing effortsDALLAS - Blockbuster and America Online are increasing efforts to bring each othercustomers, the two companies said.AOL will pay Blockbuster for new AOL members that the Dallas-based video chain signsup.The two companies first linked when AOL invested $30 million in Blockbuster.com inNovember. Since then, Blockbuster's revamped Web site got a spot in AOL'sentertainment channel, and Blockbuster started distributing free AOL software in itsstores.This summer, Blockbuster expects to have all its 7,153 locations hooked up to its Internetsite. Customers will be able to make online movie reservations, then pick up their moviesat stores.