Investment Centers and Performance Appraisal
In general a large organization can be structured in one or two ways: functionally (all activities of a similar type within a company, such as production, sales, research, are decentralized finance news placed under the control of the appropriate departmental head) or divisional (split into divisions in accordance with the products which are made).
Divisional managers are therefore responsible for all operations (production, sales and so on) relating to his or product, the functional structure being applied to each division. It is quite possible, of course, that only part of a company is divisional and activities such as administration are structured centrally on a functional basis with the responsibility of providing services to all divisions.
In general a divisional structure will lead to decentralization of the decision- marking process and Divisional managers may have the freedom to set selling prices, choose suppliers, make product mix and output decision and so on. Decentralization is however, a matter of degree, depending on how much freedom Divisional managers are given.
Advantages of divisional.
o Divisional can improve the quality of decisions made because divisional managers (those taking the decisions) have good knowledge of local conditions and should therefore be able to make more informed judgments. Moreover, with the personal incentive to improve the division’s performance, they ought to take decisions in the division’s best interests.
o Decisions should taken more quickly because information close not have to pass along the chain of command to and from top management. Decisions can be made on the spot by those who are familiar with the product lines and production processes and who are able to react to changes in local conditions quickly and efficiently.
o The authority to act to improve performance should motivate divisional managers.
o Divisional organization frees top management from detailed involvement in day-to-day operations and allows them to above more time to strategic planning.
o Decisions provide valuable training grounds for future members of top management from by giving them experience of managerial skills in a less complex environment than that faced by top management.