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Chapter 22: Problem 4

Name three benefits and two costs of decentralization.

Short Answer

Expert verified
Benefits: Faster decisions, enhanced motivation, better adaptation. Costs: Duplication, inconsistency.

Step by step solution

01

Understand Decentralization

Decentralization refers to the distribution of decision-making governance closer to the people or entities that it affects. It contrasts with centralization where decision-making authority is held by top-level executives or a central body.
02

Identify Benefits

Consider the advantages of decentralization: 1. Faster Decision-Making: With decentralization, decisions are made closer to the point of implementation, allowing for quicker responses to changes and local needs. 2. Enhanced Motivation: Empowering lower-level employees to make decisions can increase job satisfaction and motivation as they have a more significant role in the organization. 3. Better Adaptation to Local Conditions: Decentralized management understands local needs and conditions better and can adapt strategies accordingly.
03

Identify Costs

Consider the disadvantages of decentralization: 1. Duplication of Efforts: Different departments or units may end up performing similar tasks independently, leading to redundancies and inefficiencies. 2. Potential for Inconsistent Practices: Without established central guidelines, different parts of the organization may adopt diverse practices that could lead to a lack of uniformity across the organization.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Decision-Making Processes
In decentralized management, decision-making processes are transferred from a central body to smaller, local units or individual employees. This shift allows organizations to respond faster to challenges and opportunities. Local managers or employees can make decisions that impact their specific area directly, without lengthy approval processes.
This leads to a few key advantages:
  • Speed: Because decisions do not need to run through multiple layers of management, implementation is faster.
  • Relevance: Decisions are made by those who understand the specific context and needs of their local unit.
  • Flexibility: Quick adaptation to new information or changes in the market becomes possible.
Thus, decision-making processes in decentralization are all about efficiency and relevance to local contexts.
Employee Empowerment
Employee empowerment in the context of decentralization means giving employees more authority and responsibility over their work. Instead of merely following orders from the top, employees at various levels are encouraged to make decisions that impact their roles and outcomes. This empowers employees to take ownership of their tasks, leading to higher engagement and satisfaction. Here鈥檚 why employee empowerment is beneficial:
  • Increased job satisfaction: Employees feel trusted and valued, boosting their morale and motivation.
  • Improved innovation: With the power to decide, employees are more likely to experiment and come up with creative solutions.
  • Commitment to goals: Empowered employees are more committed to achieving the organization's objectives.
Decentralization fosters an environment where employee empowerment thrives, translating into better performance and loyalty.
Organizational Structure
A decentralized organizational structure is less hierarchical than a centralized one. It involves distributing authority and decision-making powers across various levels and locations. In these structures, small teams or departments have the power to make impactful decisions independently.
Key aspects of decentralized organizational structures include:
  • Flatter hierarchy: Greater empowerment at all levels leads to fewer management layers.
  • Autonomy: Teams and departments operate with a high degree of independence.
  • Inter-department collaboration: Decentralization often requires clear communication and collaboration between independent units.
This kind of structure allows an organization to be more nimble and responsive, adapting to challenges and opportunities with ease.
Local Adaptation
Local adaptation is a significant benefit of decentralization. It refers to the capability of an organization to tailor its decisions and strategies based on specific local needs and conditions. Decentralized organizations leverage local knowledge, allowing units to better serve their unique markets.
The importance of local adaptation is highlighted by:
  • Customized solutions: Local teams can develop strategies and products that fit their market's unique demands.
  • Enhanced customer satisfaction: Rapidly addressing local customer preferences leads to higher satisfaction and loyalty.
  • Competitive advantage: Organizations that adapt locally are often more competitive within regional markets.
Local adaptation empowers organizations to be more relevant and responsive to their diverse clientele across different regions.

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Most popular questions from this chapter

British Columbia Lumber has a raw lumber division and a finished lumber division. The variable costs are as follows: Raw lumber division: \(\$ 100\) per 100 board-feet of raw lumber. Finished lumber division: \(\$ 125\) per 100 board-feet of finished lumber. Assume that there is no board-feet loss in processing raw lumber into finished lumber. Raw lumber can be sold at \(\$ 200\) per 100 board-feet. Finished lumber can be sold at \(\$ 275\) per 100 board-feet. 1\. Should British Columbia Lumber process raw lumber into its finished form? Show your calculations. 2\. Assume that internal transfers are made at \(110 \%\) of variable cost. Will each division maximize its division operating-income contribution by adopting the action that is in the best interest of British Columbia Lumber as a whole? Explain. 3\. Assume that internal transfers are made at market prices. Will each division maximize its division operating-income contribution by adopting the action that is in the best interest of British Columbia Lumber as a whole? Explain.

What is one potential limitation of full-cost-based transfer prices?

"Organizations typically adopt a consistent decentralization or centralization philosophy across all their business functions." Do you agree? Explain.

(J. Patell, adapted) The California Instrument Company (CIC) consists of the semiconductor division and the process-control division, each of which operates as an independent profit center. The semiconductor division employs craftsmen who produce two different electronic components: the new high- performance Super-chip and an older product called Okay-chip. These two products have the following cost characteristics: $$\begin{array}{lcc} & \text { Super-chip } & \text { Okay-chip } \\ \hline \text { Direct materials } & \$ 5 & \$ 2 \\ \text { Direct manufacturing labor, 3 hours } \times \$ 20 ; 1 \text { hour } \times \$ 20 & 60 & 20 \end{array}$$ Due to the high skill level necessary for the craftsmen, the semiconductor division's capacity is set at 45,000 hours per year. Maximum demand for the Super-chip is 15,000 units annually, at a price of \(\$ 80\) per chip. There is unlimited demand for the Okay-chip at \(\$ 26\) per chip. The process-control division produces only one product, a process-control unit, with the following cost structure: The current market price for the control unit is \(\$ 132\) per unit. A joint research project has just revealed that a single Super-chip could be substituted for the circuit board currently used to make the process-control unit. Direct labor cost of the process-control unit would be unchanged. The improved process-control unit could be sold for \(\$ 145\) 1\. Calculate the contribution margin per direct-labor hour of selling Super- chip and Okay-chip. If no transfers of Super-chip are made to the process- control division, how many Super-chips and Okay-chips should the semiconductor division manufacture and sell? What would be the division's's annual contribution margin? Show your computations. 2\. The process-control division expects to sell 5,000 process-control units this year. From the viewpoint of California Instruments as a whole, should 5,000 Super-chips be transferred to the process-control division to replace circuit boards? Show your computations 3\. What transfer price, or range of prices, would ensure goal congruence among the division managers? Show your calculations. 4\. If labor capacity in the semiconductor division were 60,000 hours instead of \(45,000,\) would your answer to requirement 3 differ? Show your calculations

The Bosh Corporation makes and sells 20,000 multisystem music players each year. Its assembly division purchases components from other divisions of Bosh or from external suppliers and assembles the multisystem music players. In particular, the assembly division can purchase the CD player from the compact disc division of Bosh or from Hawei Corporation. Hawei agrees to meet all of Bosh's quality requirements and is currently negotiating with the assembly division to supply 20,000 CD players at a price between \(\$ 44\) and \(\$ 52\) per CD player. A critical component of the CD player is the head mechanism that reads the disc. To ensure the quality of its multisystem music players, Bosh requires that if Hawei wins the contract to supply CD players, it must purchase the head mechanism from Bosh's compact disc division for \(\$ 24\) each. The compact disc division can manufacture at most 22,000 CD players annually. It also manufactures as many additional head mechanisms as can be sold. The incremental cost of manufacturing the head mechanism is \(\$ 18\) per unit. The incremental cost of manufacturing a CD player (including the cost of the head mechanism) is \(\$ 30\) per unit, and any number of CD players can be sold for \(\$ 45\) each in the external market. 1\. What are the incremental costs minus revenues from sale to external buyers for the company as a whole if the compact disc division transfers 20,000 CD players to the assembly division and sells the remaining 2,000 CD players on the external market? 2\. What are the incremental costs minus revenues from sales to external buyers for the company as a whole if the compact disc division sells 22,000 CD players on the external market and the assembly division accepts Hawei's offer at (a) \(\$ 44\) per \(\mathrm{CD}\) player or (b) \(\$ 52\) per \(\mathrm{CD}\) player? 3\. What is the minimum transfer price per CD player at which the compact disc division would be willing to transfer 20,000 CD players to the assembly division? 4\. Suppose that the transfer price is set to the minimum computed in requirement 3 plus \(\$ 2\), and the division managers at Bosh are free to make their own profit-maximizing sourcing and selling decisions. Now, Hawei offers 20,000 CD players for \(\$ 52\) each. a. What decisions will the managers of the compact disc division and assembly division make? b. Are these decisions optimal for Bosh as a whole? c. Based on this exercise, at what price would you recommend the transfer price be set?
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