We just could not react fast enough within the corporate structure, said Roy Harmon, Executive Vice-President...
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"We just could not react fast enough within the corporate structure," said Roy Harmon, Executive Vice-President and Chief Operating Officer of Friendly Skies Airlines (FSA). Mr Harmon was describing the motivation for decentralising FSA's management structure. FSA, the largest airline in the country, had just split its route structure into three semi- autonomous regions: Western, Central, and Eastern. The three regional divisions would compete with other airlines for passengers and with each other for bottom-line profit performance. In addition, 900 cost centres were identified and their individual managers made responsible for productivity and cost control and monitored regularly by regional officers. Brian Flyer, the CEO of FSA claimed "our people out in the field really know their own immediate operations so much better than we do at headquarters. We can provide over-all direction, but they can better make most of the routine decisions. Nitty-gritty decisions should be left to the regional and divisional guys". The separation of FSA into three regional divisions created some surprises. The Central and Western regions discovered that their main competition came from other regional airlines rather than FSA traditional transcontinental rivals. Also, regional managers looked much harder at aircraft allocation decisions. The Newland regional manager revealed, "I wanted very much to put a 747 on the Newland-Oldland trip but I knew there would be £200,000 up-front expenses for ground equipment assigned to my income statement before the first planeload left. I decided to postpone a 747 flight for at least a year." In the past, that decision would have been made at corporate headquarters, based on proposals prepared and submitted by marketing managers around the country. Hence, profitable use of equipment is one of the big pluses gained from the break-up of command. The new operating system was not without its costs. There was the expected confusion and disruption caused by an almost overnight switch from a highly centralised company, with nine executives making all important decisions, to a divisional and decentralised mode of operation. Harmon admitted, "It took a year for all the problems to work themselves out." The firm also greatly expanded its information and reporting system. The 900 cost centres, which formerly operated with quarterly reports, had to institute a monthly reporting cycle and, in some cases, weekly or even daily summary of operations. REQUIRED (a) Comment on the motivation for decentralisation at FSA and discuss the suitability of the multi-divisional structure for this airline company. Make comparisons with a large manufacturing company. (b) Under the new structure, provide justified arguments for changing the management accounting system, highlighting the differences with the previous system. "We just could not react fast enough within the corporate structure," said Roy Harmon, Executive Vice-President and Chief Operating Officer of Friendly Skies Airlines (FSA). Mr Harmon was describing the motivation for decentralising FSA's management structure. FSA, the largest airline in the country, had just split its route structure into three semi- autonomous regions: Western, Central, and Eastern. The three regional divisions would compete with other airlines for passengers and with each other for bottom-line profit performance. In addition, 900 cost centres were identified and their individual managers made responsible for productivity and cost control and monitored regularly by regional officers. Brian Flyer, the CEO of FSA claimed "our people out in the field really know their own immediate operations so much better than we do at headquarters. We can provide over-all direction, but they can better make most of the routine decisions. Nitty-gritty decisions should be left to the regional and divisional guys". The separation of FSA into three regional divisions created some surprises. The Central and Western regions discovered that their main competition came from other regional airlines rather than FSA traditional transcontinental rivals. Also, regional managers looked much harder at aircraft allocation decisions. The Newland regional manager revealed, "I wanted very much to put a 747 on the Newland-Oldland trip but I knew there would be £200,000 up-front expenses for ground equipment assigned to my income statement before the first planeload left. I decided to postpone a 747 flight for at least a year." In the past, that decision would have been made at corporate headquarters, based on proposals prepared and submitted by marketing managers around the country. Hence, profitable use of equipment is one of the big pluses gained from the break-up of command. The new operating system was not without its costs. There was the expected confusion and disruption caused by an almost overnight switch from a highly centralised company, with nine executives making all important decisions, to a divisional and decentralised mode of operation. Harmon admitted, "It took a year for all the problems to work themselves out." The firm also greatly expanded its information and reporting system. The 900 cost centres, which formerly operated with quarterly reports, had to institute a monthly reporting cycle and, in some cases, weekly or even daily summary of operations. REQUIRED (a) Comment on the motivation for decentralisation at FSA and discuss the suitability of the multi-divisional structure for this airline company. Make comparisons with a large manufacturing company. (b) Under the new structure, provide justified arguments for changing the management accounting system, highlighting the differences with the previous system.
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Management Accounting Information for Decision-Making and Strategy Execution
ISBN: 978-0137024971
6th Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young
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