Organizational structure refers to how authority and responsibility for decision making are distributed in the entity. Top managers make judgments about how to organize subunits and the extent to which authority will be decentralized. Although the current competitive environment is conducive to strong decentralization, top managers usually retain authority over operations that can be performed more economically centrally because of economies of scale. For example, financing, personnel, and certain accounting functions may be maintained “at headquarters” rather than being delegated to organizational subunits.
In designing the organizational structure, top managers normally will try to group subunits either geographically or by similar missions or natural product clusters. These aggregation processes provide effective cost management because of proximity or similarity of the units under a single manager’s control. For example, relative to similarity of mission, there are three generic missions (build, harvest, and hold) for business subunits. Subunits pursuing a “build” mission are using more cash than they are generating. Such subunits are investing cash with an expectation of future returns. At the other extreme, subunits pursuing a “harvest” mission are expected to generate excess cash and have a much shorter investment horizon. If one manager were responsible for subunits that represented both build and harvest missions, it would be difficult for top management to design proper incentives and performance evaluation measures for the subunit manager or to evaluate his or her cost management effectiveness and efficiency. Different cost management tools are used for different subunit missions. If a specific cost management tool is to be applied to an entire subunit but there is a mix of missions across that subunit’s components, there is greater potential for making poor decisions.
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