Question 1. 10 points) Both Berkley and Oakley are large public corporations wit

Question

Question 1. 10 points) 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. Agency problem would be more pronounced for Oakley

--- as different subsidiaries tend to take different decisions at their own level -without consulting the main branch or the parent company - sometimes even conflicting with the parent company.This is due to the decentralised approach of Oakley.

b.Agency costs likely to be higher for Oakley

---- For reasons stated above, and employment of competent people at all subsidiaries who are capable of taking their own decisions- agency costs are bound to be higher for a decentralised set-up.

c.A major advantage and a major disadvantage to a centralized approach such as Berkley uses

A major advantage

Reduced agency costs and centralisation power and authority to take policy decisions vests with the parent company. There is only one voice of the company as a whole that is heard to outsiders.

a major disadvantage

Delay in exection of policies as everything has to wait for the parent company. The expertise and the experience of people at subsidiary levels are wasted

d. A major advantage and a major disadvantage to a decentralized approach such as Oakley uses

A major advantage

Quicker exection of policies as decisions are made at subsidiary levels themselves without looking upto the parent company. The expertise and the experience of people at subsidiary levels are well utilised.

A major disadvantage

Increased costs of operation as there are number of subsidiaries .Also there is the possibility of sending out deifferent decisions by different branches, for a similar situation-sometimes conflicting with the parent company also- affecting the credibility of the copany as a whole.

e. A combination of both centralized and decentralized approaches  is better

Keeping in mind, the disadvantages of both the approaches, centralisation of very major policy decisions -proper and timely communication to the subsidiaries utilising latest technlogies- and decentralising the execution parts of the decisions -nwill be a better approach. To this end, a mixed approach, allowing the managers at all levels ,participation in drafting of policies- and giving them the freedom to execute in their own way,in communion with their branch people- will pave way for unison in the common organisational goal.This will be in the common interest of the organistion,lending credibility to the organisation

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