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

Lecture Unit Organizations and Behaviour Simulated Decentralization Google group will not be working Teaching materials will be sent to email address Revision Organizational Structures We have covered so far: Simple Structure ( no structure) Functional Structure Team and Matrix Structure Division Structure Simulated Decentralization (this lecture) Network or Systems Structure (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) The Wealth of Nations, Adam Smith, 1776 It contains major ideas I.Laissez – fair - free market , free trade Adam Smith II Division of Labour The ‘Pins’ Story 10 men, 40,000 pins Functional Structure Disadvantages: Slow in communication Cumbersome in decision making 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 Add Divisional structure on the functional structure Why Team Can Work So Well Organizing Work, physical as well as mental, can be organized in ways: Organized by each stages in the process Work moves where the skills and tools are for each of the steps (Functional Structure) 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 Communication Decision making Performance orientation Management development Simulated Decentralization Simulated Decentralization Needs to be Used Dell Asia Divisional by location Production Dell Thailand Transfer Price Divisional By location Dell Vietnam South Functional Structure Sale Dell Viatnam Dell Vietnam North Finance Dell Malaysia Dell Singapor e Dell Vietnam Central Human Resource s Production There is no economy of scale for Dell Vietnam North to produce PCs 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 = P Management Accounting 20 % How to absorb fixed cost into variable cost is what we will be studying Unit 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 types of decentralization Federal Decentralization Simulated Decentralization Peter Drucker The Inventor of Management – Business week ‘Federal’ 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 of Simulated Decentralization Du Pont Production Sales and Marketing Production Chemical Japan Production Chemical China rP ric e sfe Production Chemical USA Automotive Industry Tra n R&D Pharmaceutica l Computer Industry Plastics Adhesive Coating Cleanser In this example, Production Chemical Production Chemical 2, Chemical are Plant located in Japan, USA and China respectiv They produce chemical 1, chemical 2, and chem and sell to Sales /Marketing using transfer price Production Chemical 1, Production Chemical 2, and Production Chemical are profit and loss cen ‘Sales/Marketing is also a profit and loss cen 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 material elsewhere Buying from Outside Is Feasible IBM (Simplified) Product Group Hardware Software Sales and Services Group Government Banking A business unit in a simulated decentralized structure may buy from outside company Manufacturing 3rd Party e.g Oracle database Simulated decentralization is increasingly the structure for large organizations e.g Telecommunication company Singapore Telecom President and CEO VP (Human Resources) VP (Corporate Communication) EVP (Customer Services) VP (Mobile) VP (Residentia l) VP (Carrier) EVP (Network) VP (Business) VP (Outside Plant) VP (Satellite) VP (Exchange) VP (Submarine ) VP(Mobile Network) VP (Property) VP(Informatio n System) ... 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. .. Aviation – Jet Engine GE System GE Plastic GE Medical – X-ray, MRI GE Financial Simulated Decentralization Simulated Decentralization Needs to be Used Dell Asia Divisional by location Production... will study transfer price in Unit 12 Taxation Drucker defined types of decentralization Federal Decentralization Simulated Decentralization Peter Drucker The Inventor of Management – Business week