Divisional Autonomy and Sub-optimization:
How much autonomy should be granted to
divisions in setting their own transfer prices and in making decisions
concerning whether to sell internally or to sell outside?
Should the
divisional heads have complete authority to make these decisions, or
should top corporate management step in if it appears that a decision is
about to be made that would result in sub-optimization? For example, if the
selling division has idle capacity and divisional managers are unable to
agree on a transfer price, should top corporate management step in and
force a settlement?
Efforts should always be made, of course, to
bring disputing managers together, but if a manage flatly refuses to
change his of her position in dispute. then this decision should be
respected even if it results in sub-optimization. This is simply the price
that is paid for divisional autonomy. If top management steps in and
forces the decision in difficult situations, then the purposes of
decentralization are defeated and the company simply becomes a
centralized operation with decentralization of only minor decisions and
responsibilities. In short, if a division to be viewed as an autonomous
unit with independent profit responsibility, then then it must have
control over its own destiny--even to the extent of having the right to
make bad decisions.
We should note, however, that if a division
constantly makes bad decisions, the result will sooner or later reduce
its profit and rate of return, and divisional manager may find that he or
she has to defend the divisions performance. Even so, the manager's right
to get into and embarrassing situations must be respected if
decentralization is to operate successfully. Divisional autonomy and
independent profit responsibility are thought to lead to much greater
success and profitability than closely controlled, centrally
administrated operations. Part of the price of this success is occasional
sub-optimization due to pettiness, bickering, or just plain stubbornness.
Furthermore, one of the major reasons for
decentralizing is that top managers cannot know enough about every detail
of operation to make every decision themselves. To impose the correct
transfer price, top management would have to know details about the
outside market, variable costs, and capacity utilization. If top managers
have all of this information, it is not clear why they decentralized in
first place. |
