Reference no: EM13876081

Centralization versus Decentralization: Banking RNB is a bank holding company for a statewide group of retail consumer-oriented banks. RNB was formed in the early 1960s by investors who believed in a high level of consumer services. The number of banks owned by the holding company expanded rapidly. These banks gained visibility because of their experimentation with innovations such as free-standing 24-hour automated teller machines, automated funds transfer systems, and other advances in banking services.

RNB's earnings performance has been better than that of most other banks in the state. The founders organized RNB and continue to operate it on a highly decentralized basis. As the number of banks owned has increased, RNB's executive management has delegated more responsibility and authority to individual bank presidents, who are considered to be representatives of executive man- agement. Although certain aspects of each bank's operations are standardized (such as procedures for account and loan applications and salary rates), bank presidents have significant autonomy in determining how each bank will operate.

The decentralization has led each bank to develop individual marketing campaigns. Several of them have introduced unique "packaged" accounts that include a combination of banking services; however, they sometimes fail to notify the other banks in the group as well as the executive office of these campaigns. One result has been interbank competition for customers where the market over- laps. The corporate marketing officer had also recently begun a statewide advertising campaign that conflicted with some of the individual banks' advertising. Consequently, customers and tellers have occasionally experienced both confusion and frustration, particularly when the customers attempt to receive services at a bank other than their "home" bank.

RNB's executive management is concerned that earnings will decline for the first time in its his- tory. The decline appears to be attributable to reduced customer satisfaction and higher operating costs. The competition among the banks in the state is keen. Bank location and consistent high- quality customer service are important. RNB's 18 banks are well located, and the three new bank acquisitions planned for next year are considered to be in prime locations. The increase in operat- ing costs appears to be directly related to the individual banks' aggressive marketing efforts and new programs. Specifically, expenditures increased for advertising and for the special materials and added personnel related to the "packaged" accounts.

For the past three months RNB's executive management has been meeting with the individual bank presidents to review RNB's recent performance and seek ways to improve it. One recommen- dation that appeals to executive management is to make the organization's structure more central- ized. The specific proposal calls for reducing individual bank autonomy and creating a centralized individual bank management committee of all bank presidents to be chaired by a newly created posi- tion, vice president of bank operations. The individual banks' policies would be set by consensus of the committee to conform to overall RNB plans.

Required

1. Discuss the advantages of a decentralized organizational structure.

2. Identify disadvantages of a decentralized structure. Support each disadvantage with an example from RNB's situation.

3. Do you think the proposed more centralized structure is in the strategic best interests of RNB? Why or why not?