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MODULE ONE
WHAT IS DIVISIONALISATION?
It involves the decentralisation of decision making powers to divisions and hence the division achieving some degree of autonomy.
A divisionalised company therefore is one whose organisation and operations are segmented into semi-autonomous units each with a large degree of responsibility for decision making within its respective unit.
In general a large organisation can be structured in one or two ways: functionally (all activities of a similar type within a company are placed under the control of appropriate departmental head) or divisionally (split into divisions in accordance with the products which are made).
This is illustrated by the following diagrams.
MAIN BOARD
MAIN BOARD
From the above illustration each divisional manager is responsible for all operations relating to his or her product and that the functional structure is applied to each divisions. It is quite possible of course, that only a part of the company is divisionalised and activities such as administration are structured centrally on a functional basis with responsibility of providing services to all divisions.
CENTRALISATION
Centralisation is the tendency to restrict delegation of decision making in an organisation, usually by holding it at or near the top of the organisation structure.
DECENTRALISATION
This will represent the delegation of decision making responsibility especially on a relatively permanent basis or the tendency to disperse decision-making authority in an
Production Sales^ Administration Research
Alpha Product Beta Product Gamma Product
organisation structure. Whether authority should be concentrated or dispersed throughout the organisation is a question not so much of what kind but how much authority. Absolute centralisation is one person because it implies no subordinate manager and therefore no structured organisation. Consequently, it can be said that some decentralisation characterizes organisations. On the other hand, there cannot be absolute decentralisation, because if managers should delegate all their authority, their status as managers would cease, their position would be eliminated and there would again be no organisation.
The prime need is for there to be an ability to segregate a definable amount of sales generated by the particular segment. The person responsible for a profit centre should have control over both the sales policy and the production facilities.
Profit centres generally are likely to be larger than cost centres and may include a number of cost centres for internal control purposes.
Some of the problems of establishing a profit centre are as follows:
Segregating sales by product lines if customers take several products and of identifying individual sales if all invoicing is done by a national head office. Pricing of inter-departmental transfers when components of products are supplied between profit centres. On the cost side, there would be the need to apportion corporate advertising, research expenses and general administrative cost
Investment Centre : This is a profit centre controlling revenue and costs but in which in addition, the profit is related to the assets employed in earning the profit. The prime need is the identification of the assets employed in the particular business segment or product line.
As many assets may be in common use by several profit centres, for example, the factory building, utilities, transport, materials and tools stores, investment centres are likely to even be larger than profit centres. An investment centre may comprise several profit centres giving control at a higher stage in the management structure. Some of the difficulties involved in the establishment of investment centres are as follows:
The necessity to allocate all fixed assets in use. Difficulty in establishing a base to relate profit for inter-departmental comparison whether the fixed assets should be at cost, at written down value or at replacement value. How will joint assets be allocated e.g. boiler plants, canteen and sports facilities. Will assets include idle plant and incomplete construction? In making comparison, will all segments be expected to make the same return on whatever assets base that is chosen?
While it may be desirable for a manager of investment centre to have some control over the investment policy in his particular area, this condition is not absolutely necessary before designating a segment of an organisation an investment centre.
MODULE THREE
The Balanced Scorecard
The balanced scorecard is a performance measurement which consists of a variety of indicators both financial and non-financial.
The balanced scorecard approach is ‘An approach to the provision of information to management to assist strategic policy formulation and achievement. It emphasises the need to provide the user with a set of information which addresses all relevant areas of performance in an objective and unbiased fashion. The information provided may include both financial and non-financial elements, and cover areas such as profitability, customer satisfaction, internal efficiency and innovation.’ (CIMA Official Terminology)
The balanced scorecard focuses on four different perspectives, as follows:
Perspective Question Explanation
Customer What do existing and new customers value from us?
Gives rise to targets that matter to customers: cost, quality, delivery, inspection, handling and so on
Internal
What processes must we excel at to achieve our financial and customer objectives?
Aims to improve internal processes and decision making
Innovation and learning
Can we continue to improve and create future value?
Considers the business's capacity to maintain its competitive position through the acquisition of new skills and the development of new products
Financial How do we create value for our shareholders?
Covers traditional measures such as growth, profitability and shareholder value but set through talking to the shareholder or shareholders direct
Performance targets are set once the key success factors have been identified, and the balanced scorecard is the main monthly report.
The scorecard is 'balanced' in the sense that managers are required to think in terms of all four perspectives , to prevent improvements being made in one area at the expense of another.
The important features of this approach are as follows.
It looks at both internal and external matters concerning the organisation. It is related to the key elements of a company's strategy. Financial and non-financial measures are linked together.
MODULE FOUR
Benchmarking
Benchmarking is ‘The establishment, through data gathering, of targets and comparators, through whose use relative levels of performance (and particularly areas of underperformance) can be identified. By the adoption of identified best practices it is hoped that performance will improve.’
There are four types of benchmarking
(a) Internal benchmarking : A method of comparing one operating unit or function with another within the same industry. (b) Functional benchmarking : In which internal functions are compared with those of the best external practitioners of those functions, regardless of the industry they are in (also known as operational or generic benchmarking). (c) Competitive benchmarking : In which information is gathered about direct competitors, through techniques such as reverse engineering. (d) Strategic benchmarking : A type of competitive benchmarking aimed at strategic action and organisational change.
Benefits of Bench Marking?
Benefits of bench marking include the following:
(a) Its flexibility means that it can be used in both the public and private sector and by people at different levels of responsibility. (b) Cross comparisons (as opposed to comparisons with similar organisations) are more likely to expose radically different ways of doing things. (c) It is an effective method of implementing change , people being involved in identifying and seeking out different ways of doing things in their own areas. (d) It identifies the processes to improve. (e) It helps with cost reduction. (f) It improves the effectiveness of operations. (g) It delivers services to a defined standard. (h) It provides a focus on planning.
Benchmarking has other advantages: It can provide early warning of competitive disadvantage and should lead to a greater incidence of team working and cross- functional learning.
Limitations of bench marking exercises
Difficulties in deciding which activities to benchmark Identifying the 'best in class' for each activity Persuading other organisations to share information
Successful practices in one organisation may not transfer successfully to another The danger of drawing incorrect conclusions from inappropriate comparisons.
Behavioural implications of performance measures
Measuring Staff Performance
Providing targets and measuring performance is often intended to motivate staff to achieve those targets, but this will only be achieved through involvement and the development of goal congruence. Staff may well see the measurement of performance as a policing device particularly if it is used to assess their personal performance rather than that of the unit they manage.
Unrealistic Targets
If the manager feels that the target profit or target output level is too tough then they will be demotivated. If the required standard is too easy they may relax down to the level set as a target.
Budget Pressure
One way to reduce the budget pressure is by the use of several performance measures.
In order to achieve cost savings there are a limited number of things that a manager can do easily. One of these is to cut back on discretionary costs such as entertaining, advertising, training, maintenance. All these cuts will produce a short-term profit improvement; the problem comes with long-term profitability. Cut advertising and future sales may fall, cut training and staff may leave or become less efficient, cut maintenance and plant and machinery will become less productive. Measures are needed to ensure adequate levels of training and maintenance.
Inter-divisional Competitiveness
When performance measures are used there needs to be some incentive to achieve given targets. This may be bonuses, it may be promotion. However, this can have 'dysfunctional' results (sub-optimal results, counter-productive outcomes). Managers may make decisions that make life difficult for other managers. This may simply be a purchasing department buying cheap material making life difficult for a production department. It may involve coercing staff to leave one department and work for another. Managers and staff need to be aware of the overall good of the company.
Controllability and Responsibility
It is clearly desirable that managers' performance should only be assessed by reference to costs or other factors that are under their control. It is worth pointing out two issues here. First, that fewer costs are controllable in the short run than in the longer term. For instance,
