Answer:
1. Companies can decentralize for several reasons:
- To reduce the workload of top-management, and allow them to focus on developing strategic plans for the future.
- To improve efficiency by empowering middle-managers to take productive decisions more rapidly than if each of these decisions were first analyzing by the CEO.
- To improve corporate culture, because the more people in the company are empowered, the more likely the are to feel appreciated, productive, and fulfilled. According to Abraham Maslow, humans have a need for self-actualization, and a great way to meet this need is to be given complex responsabilities in the workplace.
Some common methods of decentralization are:
- Devolution - consists in the creation of new deparments (for example, reponsability centers) that have great control over specific product lines.
- Delegation - consists in the assignment of certain tasks to lower-level managers, and does not necessarily entail full control over the product lines.
- Horizontal organization - in this structure, the company has very little hierarchy, and all worker are in theory at the same, or almost at the same level. Top managers have direct communication with middle-management and rank and file workers.
2. The four most common types of responsability centers are:
Expense centers - The goal is to minimize expenses in the long-term. Expenses have to be incurred in the operation of a company, but these shoul be minimized in the long-term in order to maximize profit.
On the other hand, minimizing expenses in the short-term can lead to increases in long-term expenses. For example, buying cheaper machinery can the reduce costs in the meantime, but with time, those machines will have to be replaced sooner than expected, and total expenses will rise.
Investment centers - The goal is to maximize the rate of return.
The rate of return the profit as percentage of the cost of the investment. The manager can invest money different forms of capital, whether they are directly related to the daily operation or not.
For example, the investment center of a car factory can invest in more machinery, or can invest in stocks; what is important is to maximize the rate of return of those investments.
Profit centers - The goal is to maximize profit
Must be in close contact with the revenue and expenses centers, because profit is equal to revenue minus expenses.
In some companies, the profit center manager is the revenue and expense center manager at the same time. This manager controls sales price and volume, which are the most important factors in determining sales revenue, and therefore, profit.
Revenue center - The goal is to maximize sales - closely related to the expenses center, and the profit center. The manager has to supervise sales volume and price, but he may not be in direct control of it.