Decentralisation

Decentralisation - Spreading out the decision making throughout the organisation

Why Decentralise?

Making decentralisation good
 * Decision making bad usually because people only concerned with their own division/unit/shop
 * Aligning objectives of decision makers and others
 * Fostering communication
 * Firm-wide performance measures to foster cooperation may cause free riding but improve decision making


 * Internalising Externalities
 * Externalities = how my actions affect other's actions
 * Have to make sure that my actions affect others the least
 * Can have vertical and horizontal externalities
 * Vertical relates to upstream divisions and downstream divisions
 * Horizontal relates to divisions in the same level


 * Being aware of interdependencies
 * Interdependencies = how other's actions affect my actions
 * Have to be aware that different parts/divisions/etc of organisation have to work together

Improving Decision Making 1
 * Managing externalities
 * How to achieve this: make firm see total profits -> aPi + bPi
 * Don't make them see Profit of each division individually
 * maximise profit with combined profit function above to make organisation see externalities of decision they make
 * Improving Referrals
 * Liner has to decide whether to turn over customer to Closer who can close the deal
 * Depends on whether the customer is easy or tough
 * Depends on how well they get compensated or not for closing the deal themselves or turning over the customer to the Closer
 * Remember, the more compensation towards one thing means he will do more of that action. More compensation for transfer, do more transfer. More compensation for close, more close.

Improving Decision Making 2
 * Pricing decisions
 * Paying based on firm-wide performance can align choices of all managers
 * Sometimes may want to correct decision of only one particular decision, can be done through putting cost/subsidy on one decision making task
 * Transfer pricing - The amount paid by one division to another for goods and services exchanged between them
 * Can redistribute profits across divisions
 * Tax implications
 * Managers are evaluated and rewarded for their efforts
 * Upstream sells products to downstream if selling to downstream gives revenue greater than sum of production cost and opportunity cost(what they would have gotten from selling to market) = c + p
 * no opportunity to sell outside of market for upstream TP = c
 * if perfectly competitive market for input then TP = p
 * if imperfectly competitive market for input then TP = marginal revenue if capacity constrained
 * Rent seeking, a pitfall of TP
 * figuring out opportunity cost to find TP is hard
 * may be hard to maintain upstream profits and do TP
 * TP may lead to distortion of incentives
 * If upstream is a profit center ie selling directly to market > selling to downstream, then TP will not work as there is low incentive to lower costs and low profits