Cost Accounting (14th Edition)

778 CHAPTER 22 MANAGEMENT CONTROL SYSTEMS, TRANSFER PRICING, AND MULTINATIONAL CONSIDERATIONS
management in Sunnyvale, CA from the burden of controlling day-to-day operating
decisions in Japan. The American managers can now spend more time and effort on
strategic planning for the entire organization.
Costs of Decentralization
Advocates of more-centralized decision making point to the following costs of decentralizing
decision making:
1. Leads to suboptimal decision making. This cost arises because top management has
given up control over decision making. If the subunit managers do not have the necessary
expertise or talent to handle this responsibility, the company, as a whole, is
worse off.
Even if subunit managers are sufficiently skilled, suboptimal decision making—
also called incongruent decision making or dysfunctional decision making—occurs
when a decision’s benefit to one subunit is more than offset by the costs to the organization
as a whole. This is most prevalent when the subunits in the company are
highly interdependent, such as when the end product of one subunit is used or sold by
another subunit. For example, suppose that Nintendo’s marketing group receives an
order for additional Wii consoles in Australia following the release of some unexpectedly
popular new games. A manufacturing manager in Japan who is evaluated on the
basis of costs may be unwilling to arrange this rush order since altering production
schedules invariably increases manufacturing costs. From Nintendo’s viewpoint,
however, supplying the consoles may be optimal, both because the Australian customers
are willing to pay a premium price and because the current shipment is
expected to stimulate orders for other Nintendo games and consoles in the future.
2. Focuses manager’s attention on the subunit rather than the company as a whole.
Individual subunit managers may regard themselves as competing with managers of
other subunits in the same company as if they were external rivals. This pushes them to
view the relative performance of the subunit as more important than the goals of the
company. Consequently, managers may be unwilling to assist when another subunit
faces an emergency (as in the Nintendo example) or share important information. In the
recent Congressional hearings on the recall of Toyota vehicles, it was revealed that it
was common for Toyota’s Japan unit to not share information about engineering problems
or reported defects between its United States, Asian, and European operations.
Toyota has since asserted that this dysfunctional behavior will no longer be tolerated.
3. Results in duplication of output. If subunits provide similar products or services, their
internal competition could lead to failure in the external markets. The reason is that
divisions may find it easier to steal market share from one another, by mimicking each
other’s successful products, rather than from outside firms. Eventually, this leads to confusion
in the minds of customers, and the loss of each division’s distinctive strengths.
The classic example is General Motors, which has had to wind down its Oldsmobile,
Pontiac, and Saturn divisions and is now in bankruptcy reorganization. Similarly,
Condé Nast Publishing’s initially distinct (and separately run) food magazines, Bon
Appétit and Gourmet, eventually ended up chasing the same readers and advertisers, to
the detriment of both. Gourmet magazine stopped publication in November 2009. 2
4. Results in duplication of activities. Even if the subunits operate in distinct markets,
several individual subunits of the company may undertake the same activity separately.
In a highly decentralized company, each subunit may have personnel to carry
out staff functions such as human resources or information technology. Centralizing
these functions helps to streamline and use fewer resources for these activities, and
eliminates wasteful duplication. For example, ABB (Switzerland), a global leader in
power and automation technology, is decentralized but has generated significant cost
savings of late by centralizing its sourcing decisions across business units for parts,
such as pipe pumps and fittings, as well as engineering and erection services. The
2 For an intriguing comparison of the failure of decentralization in these disparate settings, see Jack Shafer’s article, “How Condé
Nast is Like General Motors: The Magazine Empire as Car Wreck,” Slate, October 5, 2009, www.slate.com/id/2231177/.