Both Berkley and Oakley are large public corporations with subsidiaries througho

Question

Both Berkley and Oakley are large public corporations with subsidiaries throughout the world. Berkley uses a centralized approach and makes most of the decisions for its subsidiaries. Oakley uses a decentralized approach and its subsidiaries make many of their own decisions. a. Would the agency problem be more pronounced for Berkley or for Oakley? Explain. b. Would agency costs likely be higher for Berkley or Oakley? Why? c. Discuss a major advantage and a major disadvantage to a centralized approach such as Berkley uses. d. Discuss a major advantage and a major disadvantage to a decentralized approach such as Oakley uses. e. Which is better, a centralized or decentralized approach? Explain.

Explanation / Answer

A, The agancy problem be more strong for Oakley as the decision taking authority is with the subsidiary and hence there parent company has no control over it.

B. Agency costs will be higher for Oakley as it needs to have upper management staff in the subsidiary which will have an impact on the deployment cost of the company. Also, the directors remenueration and the bonus or profit sharing will also affect the return to the directors of the parent company.

C.Centralized approach refers to a management structure of a company where the major decision-making power and authority rests in the hands of the group of leaders of the parent company. Often, this group of leaders work in a company's main office or say, head office.

This kind of organizational structure helps to concentrate power in the hands of key experts and can improve consistency in decision-making.But on the other hand, it too have a drawbrack, in centralization all authority is retained by top management, and lower levels have a very little authority, this situation sometimes turns into chaos for the operation of organizations.

D. In decentralized structure, company executives place important decision-making authority in the hands of front line and local managers versus reserving all critical decisions at the top. In this case, the subsidiary holds the decision making authority. It is a process of handing down the decision making authority to lower level of the organization. This kind of structure has both cons and prons.

In decentralization, mangers or employees from lower level participate in decision making, that participation increases their loyalty and dedication for their organization. In other words this can be use as the motivation tool for organizational success.

On the other hand, managers must be trained to handle decision making, and this may require expensive formal training program.

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