Management Control in Decentralized Organization - Case Study Example

Finance and accounting term paper al affiliation) Management control in decentralized organization Introduction A decentralized organization structure involves delegation of authority for some decision making activities by the senior management to the lower level of the organization. This means that the manager of a profit centre, cost center, or investment centre has the authority to make decisions that impact on her or his area of responsibility. Some decisions can be delegated to individual employees even though some decisions are typically limited expenditures that are associated to customer services for example deciding to offer the customer after sell services such as shipping (Horngren et al., 2014). The paper aims at explaining the significance of management control in organizations that are decentralized, explaining the meaning and the structure of decentralization, understanding the situations in which decentralized organization works well and describing the advantages and disadvantages of decentralized organizational structure and its role in accountings. Meaning and structure of decentralization This type of management approach is often recommended as it tends to promote more rapid-fire and informed decision making process. Clear rules should, however, be put in place since there can be problems in determining where the local mangers begin and where the senior management begins. It can also be challenging for small business owner to change to this type of structure, given that the person who is likely to begin the business as the sole person in charge must be able to learn how to direct decision to others. Decentralized organizations are those types of organizations that delegate operational responsibility and decision making process to managers of each segment or unit in the organization. A good example is when universities are segments into departments that are headed by deans (OShaughnessy & Morris, 2010). Retail companies on the other hand are often segmented by regions with each local manager responsible for each region. Service companies on the hand are often divided into service categories with each category such as accounting firms segmented into tax and audit. Decentralization is not limited to specific organizations and most organizations that have grown in complexity and size decentralize to some extent. Organizations often decentralize as a result of increase in responsibility brought about by expansion. The responsibility of a group of mangers or a single manager to run the entire organization is often considered overwhelming due to increase in the number of products that is offered. Game products Inc is one of the company that begun with the sale of board game to various retail stores in the northern US. At the start, the company was not at a good position to decentralize given that they only sold 2 products and that the market covered was still covered. A few years later the company decided to expand its sales and market to Canada and other part of the United States of America. In addition, the company decided to venture into other businesses such as computer game through purchase of small maker of computer related games (Horngren et al., 2014). Even though operations were not made at this point, all decisions were being developed at the top level. As a result of diversification the top management begun to encounter a lot of challenges in managing the 2 segments of the company, the decision making process in the company become slow and cumbersome with the company beginning to miss various opportunities that would have increased profits and sales. In the following two years, the company decided to venture into another business venture, the sporting good market. At this time the top management decided to decentralize. As a result a manager was assigned to manage each unit owned by the company. These changes allowed the top level management level to concentrate on other critical issues such as the long term strategic plan for the company. The decision making process was now in the hand of managers in charge of each single unit owned by the company. the company based on various advantages of decentralization such as increase of expertise, quick decision making process, motivation of local managers as well as refocusing of top management responsibilities when they came up with the decision (Prohl & Schneider, 2009). Decentralization of services such as accounting and finance made it easier to manage the finances in the various units that were owned by the government. Game products Inc is not the only organization that has benefitted from decentralization approach. Many multinational organizations are utilizing the same approach to reach it many customers around the world and increase their sales. The significance of decentralization One of the significance of decentralization is that it helps in the development of initiatives among the staffs or workers. Passing of authority and information at lower and middle levels shows the faith and trust of the top management towards their subordinates and such faith and trust often motivate the employees who are working at various levels as they are permitted to make decisions without necessarily seeking approval from the top management. The second importance of decentralization is that it helps in the development of managerial talent for the future. The approach often ensures that the managers working at the middle and lower levels are able to learn the art of decision making (Yakita, 2011). They learn to get manage the authorities accorded to them as well as get the experience of performing the activities of the top executives. In case of a job position at the top level of management, managers at the lower or middle level can compete for the same. The 3rd significance of the approach is that is allowing quick-decision making process. Decision making process in a decentralized organization is never restricted to only the top management level but is entrusted to all the other levels of management who are performing activities or taking actions. The process often results to faster decisions especially at the point of customer contact. The other significance of the approach is to relief the top management of some duties. The top management level is not overburdened with the authorities and responsibility at various levels and they become free to concentrate on significance issues. In addition, the process facilitates growth of the organization, allows better control through management information system and score cards and promotes creativity and initatiated. Decentralization also permits improved team work (Yakita, 2011). All the employees and managers keep on sharing the decision making powers. This freedom of action and sharing of decisions develops team spirit and integrate employees as one team. Situations in which the decentralized organization functions more appropriately There exist various situations that decentralized organization functions well. One of the situations entails where a strong level of individualized customer service is required for example at the point of contact between the sales person and the customer. During such a point, the sales person has to make decisions that will compel the customer to purchase certain goods. The second situation that calls for decentralization of functions and decision is when a company posses numerous store locations. In such a scenario, the senior management cannot reasonably make decisions or monitor for all the locations. The third situation is when the organization is facing a lot of competition from organizations that deals in the same kind of business or targets the same consumers (LEE, 2010). Decentralization will allow creation of myriads of decisions in order to respond to the actions of the competitors. The last situation that calls for decentralization is when the business model utilized in the organization is changed constantly as a result of innovations so that no centralized control is possible. Advantages of decentralized organization The advantages of decentralized organizational structure are based on decisions, speed, turnover, wide span of control and training. Local employees possess the best knowledge base that can be utilized in the decision making process. The approach can help improve tactical level throughout the company. Decentralization enables the senior managers in the organization to delegate some of the many small decision giving them more time to develop strategic directions for the growth of the organization. The second advantage focuses on speed. A decentralized structure has fewer layers of bureaucracy. The decision making process in an organization that is decentralized often takes faster, which is significant in a business environment that is highly competitive. The third advantage is based on turnover. Employee turnover often declines in a decentralized organizational structure given that employees who are given more authority stay with the company for a longer period of time. The fourth advantage focuses on training. Giving authority to employees and local managers is an efficient manner of observing their decision making ability. The approach can be utilized to determine their promotion to the next level or positions (Jones, 2010). The last advantage of decentralized organizational structure is about a wide span of control. The structure reduces the need for middle managers given that many employees are able to report to fewer managers. The approach may help decrease the overhead costs. Disadvantages of decentralized organizational structure Despite the advantages that are associated with this type of structure, decentralization can also impact negatively on the flow of information in the company. The disadvantage of the structure will focus on procedural differences, silos and local view points. The structure and process may allow the local manager to make decisions based on his local view about the operation of the company. The move may not favor the company as a whole. For instance, a local manager may decide to increase funding to a store that is already struggling yet a senior manager might to shutter the store and cut losses in the process. Another disadvantage is that the structure can lead to emergence of control problems (Hegewisch, 2010). Decentralization often result to the development of small procedural differences targeting the area of authority given that each manager may decide to alter systems in order to fit their own needs. Moreover, decentralization may lead to development of more functional silos at each functional level of the organization. Without the intervention of the senior manager, it may be difficult for such information to be shared with another level for the growth of the organization. Recommendation and conclusion Given the many benefits of decentralization such as development of initiatives among the staffs, development of managerial talents for the future, quick decision making process, relief to the top management level, growth facilitation, promotion of creativity and initiatives and improvement of team work, organizations should be able implement strategy in order to increase performance and sales. Being a policy plan managers should plan for it in advance before the company is expanded (Horngren et al., 2014). A company such as Game product Inc was able to manage the various units around the country by decentralization approach. In conclusion, the benefits of decentralization to any organization are unquestionable. It is the mandate of the top management level to ensure that decentralization approach is introduced in the long term strategic plan of the company. Companies that decentralize part of their operations and functions to middle and lower levels are known to perform well. References Hegewisch, A. (2010). The Decentralization of Pay Bargaining: European Comparisons. Management Decision, 30(6). doi:10.1108/eum0000000000104 Horngren, C., Sundem, G., Burgstahler, D., Schatzberg, J., Battista, D., & Horngren, C.(2014) Introduction to management accounting. Jones, J. (2010). Decentralization as a Management Tool. NASSP Bulletin, 55(359), 83-91. doi:10.1177/019263657105535911 LEE, M. (2010). Decentralization of OR Management. Business Management (Springhouse), 18(3), 72D. doi:10.1097/00006247-198703000-00014 OShaughnessy, J., & Morris, W. (2010). Decentralization in Management Systems. An Introduction to Design. OR, 19(4), 488. doi:10.2307/3008727 Prohl, S., & Schneider, F. (2009). Does Decentralization Reduce Government Size? A Quantitative Study of the Decentralization Hypothesis. Public Finance Review, 37(6), 639-664. doi:10.1177/1091142109345264 Yakita, S. (2011). Fiscal decentralization, migration and economic growth. Regional Science Policy & Practice, 3(4), 381-399. doi:10.1111/j.1757-7802.2011.01049.x Read More