OB lecture 5 simulated decentralization

Functional structure: Disadvantages: Slow in communication Cumbersome in decision making Functions (i.e. department) are not result orientated but activities orientated => To overcome shortcoming of functional structure: We can: 1.Add Team structure (Matrix Structure) or as a complement to Functional structure 2. Add Divisional structure on the functional structure

Simulated Decentralization

Lecture 5

Unit 3 Organizations and Behaviour

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Organizational Structures

We have covered so far:

1 Simple Structure ( no structure)

2 Functional Structure

3 Team and Matrix Structure

4 Division Structure

5 Simulated Decentralization (this lecture)

Functional Structure

Its efficiency derives from ‘division of labour’.

- a principle described much earlier by

Adam Smith in ‘The Wealth of Nations” (1776).

I.Laissez – fair - free

market , free trade

II Division of Labour

Adam Smith

The Wealth of Nations, Adam Smith,

1776

It contains 2 major ideas

The ‘Pins’ Story

10 men, 40,000 pins

Functional Structure

Disadvantages:

1 Slow in communication

2 Cumbersome in decision making

3 Functions (i.e department) are not result orientated but activities orientated

To overcome the

shortcoming of Functional Structure

We can:

1.Add Team structure (Matrix Structure) or as a complement to Functional structure

2 Add Divisional structure on the functional structure

Why Team Can Work So Well

Organizing Work, physical as well as

mental, can be

organized in 3 ways:

1 Organized by each stages in the process

2 Work moves where the skills and tools are for each of the steps (Functional Structure)

3 Skills and tools join together and move to the work – Team Structure !

Divisional Structure

As a principle of organization, division

structure satisfies most requirements in

1 Communication

2 Decision making

3 Performance orientation

4 Management development

Disadvantages

Increasingly, not all businesses can be

organized as pure divisional structure

Stimulated Decentralized / Stimulated

Divisional need to be used

Conglomerate can used a pure division Structure

A conglomerate is a company with

diversified ( unrelated) businesses

e.g General Electric (GE)

GE Aviation – Jet Engine

GE System

GE Plastic

GE Medical – X-ray, MRI

GE Financial

Simulated Decentralization

Dell Thailand Production

Dell Vietnam South

Dell Vietnam North

Dell Vietnam Central

Sale Finance

Human Resource

s

Production

Dell Singapor

e

Dell Viatnam

Dell Malaysia

Dell Asia

There is no economy of scale for Dell Vietnam North

Simulated Decentralization

There may be a Dell ‘production’ for Dell

Asia that produces and sells PCs to the other

divisions using Transfer Price.

Each division (including ‘Production’ is a

profit and loss centre

Transfer Price is a big issue in

simulated decentralization.

Variable Cost + Fixed Cost + Markup/Profit = Price

Management Accounting 20 %

How to absorb fixed cost into variable cost is what we will be studying in

Unit 9 Management Accounting

Transfer Price

• If the transfer price is too high, “Dell Production Asia” is too profitable, “Dell Vietnam North” makes losses

• If the transfer price is too low, “Dell Production Asia” makes losses, Dell Vietnam North too profitable

Frequently, it requires top management

intervention

Taxation Dimension of

Transfer Price

e.g If Dell Production Asia is in a low tax

country

Make Transfer price high so that more profit

is made by “Dell Production Asia” and less

tax is paid

You will study transfer price in Unit 12

Taxation

Drucker defined 2 types of decentralization

1 Federal Decentralization

2 Simulated Decentralization

Peter Drucker The Inventor of Management

– Business week

Drucker borrows the term ‘Federal’ from political science

Federal States - USA, Germany, Malaysia

a union of partially self-governing states or regions united by a

central (federal)

government

Unitary State - China, Vietnam

A unitary state is a sovereign state governed as one single unit in which the

central government is supreme and any administrative divisions (subnational

units) exercise only powers that the central government chooses to delegate

Simulated Decentralization

‘Simulated’ means fake.

As business units in a simulated

decentralization may not be a true

independent business

But increasingly, large organization uses

Simulated decentralization

Example 2 of Simulated

Decentralization

Du Pont

Production Chemical 1 Japan

Production Chemical 2 USA

Production Chemical 3 China

Automotive Industry

Pharmaceutica

l

Computer Industry

Sales and Marketing R&D Production

Plastics Adhesive Coating Cleanser

Tr a

n sf

e r

P ri ce

In this example, Production Chemical 1.

Production Chemical 2, Chemical 3 are

Plant located in Japan, USA and China respectively.

They produce chemical 1, chemical 2, and chemical 3 and sell to Sales /Marketing using transfer price.

Production Chemical 1, Production Chemical 2,

and Production Chemical 3 are profit and loss centres.

‘Sales/Marketing is also a profit and loss centre.

Sales / Marketing may buy materials from other sources outside DuPont, however, it is not likely as

Quantity or quality make it unlikely that

Sales and marketing can obtain the materialelsewhere

IBM (Simplified)

Software Hardware

3 rd Party e.g Oracle database

A business unit in a simulated

decentralized structure may buy

from outside company

Buying from Outside Is Feasible

Simulated decentralization is increasingly the structure for large organizations

e.g Telecommunication company

Singapore Telecom

VP (Corporate Communication)

VP (Human Resources)

VP (Outside Plant)

VP (Exchange)

VP (Satellite)

VP (Submarine

)

VP(Mobile Network)

President and CEO

EVP (Network)

EVP (Customer Services)

VP(Informatio

n System)

VP (Residentia

l)

(Business)

VP (Property)

VP (Carrier)