Maruti Automobile Case

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PROFIT CENTRES

GENERALISATIONS :

ALL COMPANIES ARE ORGANISED FUNCTIONALLY AT SOME LEVEL.

THE DIFFERENCE BETWEEN A FUNCTIONAL ORGANISATION AND A BUSINESS UNIT IS A CONTINUUM - BETWEEN THE TWO EXTREMES ALL TYPES OF COMBINATIONS OF FUNCTIONAL UNITS AND BUSINESS UNITS ARE POSSIBLE.

COMPLETE AUTHORITY FOR GENERATING PROFITS IS NEVER DELEGATED TO A SEGMENT OF THE BUSINESS. THE DEGREE OF DELEGATION DIFFERS AMONG BUSINESS.

BASIC CONDITIONS FOR EXISTENCE OF PROFIT CENTRES :

THE MANAGER SHOULD HAVE RELEVANT INFORMATION TO MAKE EXPENSE/REVENUE TRADE-OFFS.

THERE SHOULD BE SOME WAY MEASURE TO MEASURE HOW EFFECTIVELY THE MANAGER IS MAKING THESE TRADE-OFFS

ADVANTAGES OF PROFIT CENTRES

* SPEED OF OPERATING DECISIONS INCREASES. * QUALITY OF DECISIONS IMPROVES. * HEADQUARTERS IS RELIEVED OF DAY-TO-DAY DECISION-MAKING. * PROFIT CONSCIOUSNESS IS ENHANCED. * MEASUREMENT OF PERFORMANCE IS BROADENED. * MANAGERS ARE FREER TO USE IMAGINATION AND INITIATIVE. * IT PROVIDES EXCELLENT TRAINING GROUND FOR GENERAL MANAGEMENT. * PROVIDES MEANS FOR EVALUATING MANAGER’S POTENTIAL FOR HIGHER MANAGEMENT JOBS. * FOR DIVERSIFIED COMPANIES, SUCH STRUCTURE FACILITATES USE OF DIFFERENT SPECIALISTS/EXPERTS IN DIFFERENT TYPES OF BUSINESS. * DIVISIONALISATION PROVIDES TOP MANAGEMENT INFORMATION ON THE PROFITABILITY OF THE COMPONENTS OF THE COMPANY. * PROFIT CENTRES ARE SUBJECT TO PRESSURE TO IMPROVE THEIR COMPETITIVE PERFORMANCE.

DISADVANTAGES

* TOP MANAGEMENT LOSES CONTROL TO THE EXTENT DECISION MAKING IS DECENTRALISED. * COMPETENT GENERAL MANAGERS MAY NOT EXIST OWING TO THE LACK OF OPPORTUNITIES TO DEVELOP GENERAL MANAGEMENT COMPETENCE. * UNITS MAY NOW HAVE TO COMPETE WITH EACH OTHER. * FRICTION MAY INCREASE OVER ISSUES OF APPROPRIATE TRANSFER PRICE, ASSIGNMENT OF COMMON COST, CREDIT FOR REVENUES GENERATED JOINTLY BY TWO OR MORE UNITS. * MAY PLACE…...

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