Lecture 3
Financial Management
Responsibility accounting and divisionalization
Look at the organization as a whole. Organizations are complex. We often talk about them
as a whole/one thing. But although we speak of them as one being, they are complex and
multifaceted.
Organizations often pursue multiple objectives. Hospitals are not supposed to be for-profit,
but they go bankrupt if they do not earn anything. So need to also focus on that for
example. Another objective could be being a good employer to its employees, educating
your staff, researching new technologies, providing patient centered care. Example: the
Mayo Clinic.
How to manage complex organizations with multiple objectives? The president/chief
executive officer has many responsibilities to manage this.
What is financial management?
- Planning, organizing, directing and controlling;
- The organization’s financial activities;
- In an efficient and effective way;
- Such that the organization’s objectives are met (multiple objectives in complex
organizations, divisionalize and assign responsibilities)
Responsibility accounting structure
To realize organizational objectives, we must:
- Allocate decision rights (who’s responsible for what)
- Measure and evaluate performance
- Incentivize performance
It’s wise to have the responsibilities shared, incentivizing it. Step 2 is measuring and
evaluating whether someone is doing a good job. This is done using key performance
indicators. Then step 3, if people do a good job, you want to reward them in some kind of
1
, way (doesn’t have to be financial every time, but let them know they are doing well).
Example:
People are responsible for different things: revenue (Sales), standard expense (production)
etc. There are different centers with different objectives/tasks and therefore different
responsibilities.
Divisionalization (dividing the organization)
Characteristics:
- Distributed – relocated resources – OLI* paradigm to use proximity of markets,
suppliers, specialized low cost labour etc. You want to be close to you consumers
and suppliers.
- Differentiated – split by function, product lines, market region. Allows to focus on
subunits or sub goals production efficiency or innovations. E.g. in health care there
are different types of departments with different specialties.
- Decentralized – assign responsibilities to subunit managers – responsibility centers.
You can have a combination of these. What you typically see is differentiation (bc of the
high level of expertise, e.g. radiologists in radiology) and decentralization (where one
assigns responsibility to subunit managers about e.g. the quality of a department/unit).
Decentralization
- Delegation of decision-making authority to lower levels in the organization
- Provision of sufficient material and formal resources to execute that authority
- Assignment of accountability and responsibility for the quality of decision making to
a responsibility center.
o Responsibility center: an organizational unit headed by a manager charged
with achieving certain agreed-upon results.
- Hold the managers accountable for what they do, once a year talk about what
he/she has been doing. Can be formal or informal.
- Advantages:
o Improvement of quality of decision-making of higher level managers
o Improvement of quality of decision-making of lower level managers
o Increased economies of scale and specialization
o Management development
- Challenges:
o Decentralized managers do not automatically understand organizational
goals and strategies, nor how they can contribute
o Also they don’t automatically agree with organizational goals and strategies
2
Financial Management
Responsibility accounting and divisionalization
Look at the organization as a whole. Organizations are complex. We often talk about them
as a whole/one thing. But although we speak of them as one being, they are complex and
multifaceted.
Organizations often pursue multiple objectives. Hospitals are not supposed to be for-profit,
but they go bankrupt if they do not earn anything. So need to also focus on that for
example. Another objective could be being a good employer to its employees, educating
your staff, researching new technologies, providing patient centered care. Example: the
Mayo Clinic.
How to manage complex organizations with multiple objectives? The president/chief
executive officer has many responsibilities to manage this.
What is financial management?
- Planning, organizing, directing and controlling;
- The organization’s financial activities;
- In an efficient and effective way;
- Such that the organization’s objectives are met (multiple objectives in complex
organizations, divisionalize and assign responsibilities)
Responsibility accounting structure
To realize organizational objectives, we must:
- Allocate decision rights (who’s responsible for what)
- Measure and evaluate performance
- Incentivize performance
It’s wise to have the responsibilities shared, incentivizing it. Step 2 is measuring and
evaluating whether someone is doing a good job. This is done using key performance
indicators. Then step 3, if people do a good job, you want to reward them in some kind of
1
, way (doesn’t have to be financial every time, but let them know they are doing well).
Example:
People are responsible for different things: revenue (Sales), standard expense (production)
etc. There are different centers with different objectives/tasks and therefore different
responsibilities.
Divisionalization (dividing the organization)
Characteristics:
- Distributed – relocated resources – OLI* paradigm to use proximity of markets,
suppliers, specialized low cost labour etc. You want to be close to you consumers
and suppliers.
- Differentiated – split by function, product lines, market region. Allows to focus on
subunits or sub goals production efficiency or innovations. E.g. in health care there
are different types of departments with different specialties.
- Decentralized – assign responsibilities to subunit managers – responsibility centers.
You can have a combination of these. What you typically see is differentiation (bc of the
high level of expertise, e.g. radiologists in radiology) and decentralization (where one
assigns responsibility to subunit managers about e.g. the quality of a department/unit).
Decentralization
- Delegation of decision-making authority to lower levels in the organization
- Provision of sufficient material and formal resources to execute that authority
- Assignment of accountability and responsibility for the quality of decision making to
a responsibility center.
o Responsibility center: an organizational unit headed by a manager charged
with achieving certain agreed-upon results.
- Hold the managers accountable for what they do, once a year talk about what
he/she has been doing. Can be formal or informal.
- Advantages:
o Improvement of quality of decision-making of higher level managers
o Improvement of quality of decision-making of lower level managers
o Increased economies of scale and specialization
o Management development
- Challenges:
o Decentralized managers do not automatically understand organizational
goals and strategies, nor how they can contribute
o Also they don’t automatically agree with organizational goals and strategies
2
