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Lecture Notes 3

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AYB321 – STRATEGIC MANAGEMENT ACCOUNTING Lecture 3: The Elements of Organisational Architecture DECISION RIGHTS Assigning Decision Rights to Individuals  Jobs have at least two important dimensions: o The variety of tasks the employee is asked to complete; and o The decision authority to determine when and how best to complete the tasks Centralisation versus Decentralisation Benefits Costs  More effective use of local knowledge  Incentive problems  Conservation of management time o Developing control is difficult  Training and motivation for local managers o Larger the further down in the organisation decision rights are placed  Coordination costs and failures  Less effective use of central information o Observation is critical o Promote information flows and coordination amongst decision makers (costly) Managerial Implications  Optimal level of decentralisation depends on the firm’s environment and strategy  Choosing where within a given hierarchical level of decision should be made is critical  Common factors across firms: o The benefits of decentralisation to be highest rapidly changing environments where timely use of local knowledge is important; o The benefits of decentralisation to increase as the firm enters more markets (corporate strategy); o Centralised decision-making to have particular advantages where coordination of activities within the firm is important  Global competition – decentralisation trend o Larger firms with more specific knowledge, higher diversification and less regulation are more likely to have a greater degree of decentralisation o Pressure to cut costs, produce higher-quality products and meet consumer demands  Technological changes – rate of change: respond quickly or lose profitsdemand for middle managers o Rate of information transfer has increased o Allowed many firms to flatten management structures – reduced  Reducing costs of information transfers Assigning Decisions Rights to Teams  Team refers broadly to the many different types of work groups that have decision making authority o Permanent business unit or a small section o Temporary project team to design products, recommend actions etc. Benefits of team decision-making  Improved use of dispersed specific knowledge o Individuals with specific knowledge are directly involved in the process  Employee buy-in o Employees more likely to support the final decision and actively implement it Costs of team decision-making  Collective-Action Problems o Slow – not always efficient or rational o Can be subject to manipulation  Free-Rider Problems o Team members bear the full costs of their individual efforts but share the gains which accrue to the team o This problem can be reduced through appropriate performance-evaluation and reward schemes but these are costly to administer Managerial Implications  Teams will be most productive when (cost/benefit): o The relevant specific knowledge is dispersed and; o The costs of collective decision making and controlling free rider problems are low  Optimal team size. Again, cost/benefit – increase the size of team increases both: o Knowledge base o Incentives to free-ride and costs of collective decision making  Optimal sixe is where the additional costs of adding a new member are equal to the incremental benefits Decision Management and Control There are four steps:  Initiation: generation of proposals (ideas, recommendations)  Ratification: choice of decision initiatives to be implemented  Implementation: execution of ratified decisions  Monitoring: measurement of the performance of decision agents and implementation of rewards Which of these can be decentralised and which need to be maintained a higher level?  Decision Management: the initiation and implementation of decisions o Initiation o Ratification  Decision Control: the ratification and monitoring of decisions o Implementation o Monitoring Allocating Decision Rights – Basic Principle: If decision makers do not bear the major wealth effects of their decisions, decision management and decision control will be held by separate decision makers Influence Costs  Include: o Seeking to influence decision-makers o Making rivals look bad o Arguing over decisions o Not working as a team  Firms can use bureaucratic rules that purposefully limit decision making e.g. promotion on seniority o Bureaucratic rules negate the benefits of decentralised decision rights REWARDS The Level of Pay Basic Competitive Model:  If a firm pays: o Too little How does a firm know what wage rate is  Not able to attract qualified employees  High turnover optimal? o Too much  Long queues for job openings  Low turnover  Will do poorly in the market place Compensating Differentials  Jobs vary in many dimensions: o The quality of the work environment o The geographic location o The exposure to danger  To attract employees to less desirable jobs, firms must increase the level of pay, individuals self-select. Premium known as a compensating wage differential o e.g. choice of lifestyle over wage Costly Information about Market Wages  Compensation data is typically not readily available  Two important indicators of whether a firm is paying the market wage rate: o Number of applicants for job openings o Quit rate  Consider the trade-offs between incremental compensation and turnover costs Incentive Compensation  Combination of fixed salary and variable (performance based) component  Basic problem: owners and employees have different objectives  Also; o effort is often not observable; o output is difficult to measure; and o is affected by factors beyond the employee’s control.  Standard agency problem: Employees have the incentive to renege on their promise and provide less effort. They are paid anyway and are better off not working so hard. o Most of the costs of exerting effort are borne by employees while much of the gains go to the owners  Compensation is used to: o Motivate employees o Share risk more efficiently  Trade-off:
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