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AYB321 Strategic Management Accounting

Tutorial Solutions
TUTORIAL 4
DECISION RIGHTS

Review Questions:

1. Discuss the costs and benefits of decentralised decision making relative to


centralised decision making.

The issue of decentralisation focuses on the level of the firm’s hierarchy to place a
decision right. Decentralisation decision rights marry authority with local specific
knowledge.

The benefits of decentralisation are:


• more effective use of local knowledge,
• conservation of the time of top management, and
• training and motivation for local managers.

The costs of decentralised decision making are:


• agency costs,
• coordination costs and failures, and
• less effective use of central information.

2. Define the terms decision management and decision control. Under what
circumstances might it be optimal to make one individual responsible for both
decision management and decision control? What do you expect the ownership
of common stock to look like in such a firm? Explain.

The decision making process is characterised by breaking it down into four steps:
initiation, ratification, implementation, and monitoring. Decision management refers to
initiation and implementation; while decision control refers to the ratification and
monitoring of decisions.

If the specific knowledge/information that is necessary for both decision management


and decision control is vested in one agent it can be too costly to try and separate the two
decision functions.

When decision management and control are combined the agent is likely to be the
primary residual claimant (bear the major wealth effects of the decisions), otherwise, the
resulting agency problems would be too great.

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3. Many companies have been experimenting with organising their manufacturing
around teams of employees. The employees are given decision rights on such
things as how to organise the work and employee schedules. Often the employees
are paid bonuses on team output. Sometimes, this organisational arrangement
has worked well. In other cases, it has not. Discuss the conditions under which
you think that this type of team organisation is most likely to succeed.

Teams are most likely to be productive when the relevant specific knowledge for the
decision is dispersed among individuals and where the costs of collective decision
making and controlling free-rider problems are low.

4. Define the following: functional organisations, product organisation, geographic


organisation, matrix organisation, and network organisation.

a. Functional organisations group jobs by functional speciality (engineering, design


sales, finance, etc)

b. Product and geographic organisations group jobs around product and geography,
respectively

c. Matrix organisations are characterised by intersecting lines of authority (they maintain


functional departments but form teams based on product, geography, or customer).

d. Network organisations are divided into work groups where the relationship among
groups is fluid and flexible (determined by the demands of specific projects and
activities) and change frequently with changes in the business environment.

Analytical Thinking, Critical Thinking and Problem Solving Questions:

1. Mark Wilson, chief of personnel, has been instructed to increase the hiring of
women at the Morton Cement Company. Mark will be evaluated by company
president Josh Cohen on his success or failure in meeting this goal. Mark does
not evaluate the performance of any of the division chiefs and each chief must
approve all new division employees. Do you expect Mark to succeed in this
endeavour? Why or why not? Provide two solutions.

Issue/ Problem Relevant Theory Solution


Mark is not assigned the Balanced organisational If Mark is to be evaluated
relevant decision rights architecture: and rewarded on meeting his
to help him accomplish - Decision rights goal, he needs to be assigned
this goal. - Performance Evaluation the relevant decision rights to
There are no direct - Rewards help him accomplish it.
incentives for division
chiefs to listen to Mark’s Alternatively, the division
requests. chiefs could be evaluated and
rewarded on the targets.

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2. Microsoft’s Encarta is a multimedia encyclopaedia on CD-ROM. It has nine
different editions. Examples include editions in British English, American,
German and Italian. The North American Version alone has 40 million words
and 45,000 articles. Microsoft has delegated major editorial decisions to teams of
local experts, mostly academics and specialists, “who know their stuff.” For
example, a team of experts primarily from Italy have been given editorial
decisions for the Italian edition. Encyclopaedia Britannica uses a different
policy. Its central staff has decision rights to assure a standard presentation is
presented in all editions. Discuss the pluses and minuses of Microsoft’s policy
relative to Encyclopaedia Britannica’s.

This Microsoft case focuses on the level of the firm’s hierarchy to place a decision right,
ie whether to centralise or decentralise decision making. The advantages and
disadvantages of decentralising major editorial decisions are as follows:

Pluses of the Microsoft policy: Local experts are more likely to be aware of facts
pertaining to the local area. They are also more likely to know how to present the
material in a readable way to local residents. They will also be aware of cultural issues
(e.g., what the local people would find offensive, etc.). Microsoft did not always use this
policy and had made a number of mistakes about boundaries, culture, etc. that had made
people angry. For example, at one point the South Koreans were so upset about incorrect
statements about Japanese dominance of Korea in the third and fourth centuries that a
Korean newspaper called for a boycott on all Microsoft products. Essentially all these
benefits relate to co-locating decision rights with relevant knowledge. Doing so
presumably has the potential to increase sales.

Minuses of the Microsoft Policy: There are likely to be inconsistencies across editions.
For example, in the U.S. edition Alexander Graham Bell is credited with inventing the
telephone. In the Italian edition, the credit goes to Antonio Meucci (an Italian-American).
These types of inconsistencies and potential inaccuracies can potentially hurt the
reputation of Encarta as an authoritative source of information. They are due to both
coordination problems and agency problems. Local experts might have their own political
and social agendas, and may have less than optimal incentives to worry about the overall
value of Microsoft. Also, this type of decentralized decision making can be difficult to
coordinate. The system might also be more costly because it does not take advantage of
potential economies of scale from having one central staff.

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