Thursday, July 2, 2009


Investment Centers and Performance Appraisal.

1. What is Divisional isation?In general a large organization can be structured in one or two ways: functionally (all activities of a similar type within a company, such as production, sales, research, are placed under the control of the appropriate departmental head) or divisional (split into divisions in accordance with the products which are made).
Divisional managers are therefore responsible for all operations (production, sales and so on) relating to his or product, the functional structure being applied to each division. It is quite possible, of course, that only part of a company is divisionalised and activities such as administration are structured centrally on a functional basis with the responsibility of providing services to all divisions.

In general a divisional structure will lead to decentralization of the decision- marking process and Divisional managers may have the freedom to set selling prices, choose suppliers, make product mix and output decision and so on. Decentralization is however, a matter of degree, depending on how much freedom - Divisional managers are given.
Advantages of divisionalisation.

  • Divisionalisation can improve the quality of decisions made because divisional managers (those taking the decisions) have good knowledge of local conditions and should therefore be able to make more informed judgments. Moreover, with the personal incentive to improve the division’s performance, they ought to take decisions in the division’s best interests.
  • Decisions should taken more quickly because information close not have to pass along the chain of command to and from top management. Decisions can be made on the spot by those who are familiar with the product lines and production processes and who are able to react to changes in local conditions quickly and efficiently.
  • The authority to act to improve performance should motivate divisional managers.
  • Divisional organization frees top management from detailed involvement in day-to-day operations and allows them to above more time to strategic planning.
  • Decisions provide valuable training grounds for future members of top management from by giving them experience of managerial skills in a less complex environment than that faced by top management.
  • In a large business organization, the central head office will not have the management resources or skills to direct operations closely enough itself. Some authority must be delegated to local operational managers.

Disadvantage of divisionalisation.
  • A danger with divisional accounting is that the business organization will divide into a number of self-interested, each acting at times against the wishes and interests of other segments. Decisions might be taken by a divisional manager in the best interests of his own part of the business, but against the best interests of other Decisions and possibly against the best interests Of the Organization as the whole.
  • A task of head office is therefore to try to prevent dysfunctional decision making by individual divisional managers. To do this, head office must reserve some power and authority for itself so that divisional managers cannot be allowed to make entirely independent Decisions. A balance ought to be kept between decentralization of authority to provide incentives and motivation, and retaining centralized authority to ensure that the Organization’s Decisions are all working towards the same target, the benefit of the Organization as a whole (in other words, retaining goal congruence among the Organization’s separate divisions).
  • It is claimed that the costs of activities that are common to all divisions such as running the accounting department may be grater for a divisionalised structure than for centralized structure.
  • Top management, by delegation decision making to divisional managers, may lose control since they are not aware of what is going on in the organization as a whole. (With a good system of performance evaluation and appropriate control information, however, top management should be able to control operations just as effectively).

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