Homework Assignment 3, Kranworth Chair Corporation Case Study-Pratistha Das

TO: Kevin Wentworth,

CEO, Kranworth Chair Corporation

FROM: Das Consulting Associates

DATE: September 11, 2015

RE: Effectiveness of Decentralization of organizational structure in Kranworth

Chair Corporation, Evaluation of its new performance measurement and
incentive system and analysis of decentralization of R&D

Kranworth Chair Corporation (KCC) was co-founded by Weston Krantz and Kevin Wentworth in
1987. In early years, KCC specialized in a broad line of high quality and fashionable portable,
folding chairs, which were branded as various models of Fold-it! Brand and were sold
exclusively to distributors. Over the years, KCC diversified its product range and produced
chairs of various sizes, models, designs, chairs with various add-on features, of different prices
and even of different materials. KCC also introduced some related products like ottomans,
tripods, cots and stadium seats. It employed screen-printing artists and seamstresses to
customize certain products. It kept track of its Stock Keeping Units. To boost sales volume KCC
invested in advertising, added other distribution channels and tied up with major retail chains
like Walmart, target, K-Mart, etc. in order to lower labor costs, KCC moved its manufacturing
facilities to Mexico and China, except for some customizing and assembling facilities in Denver.
Initially, the company faced very little competitions, had 20 design patents to its name and sales
margins were high in the range of 40-50%. However, towards late 1990s, sales flattened and
profits dropped due to higher competition from new players in the market (especially cheaper
comparable products mostly from Asian countries) and the economic recession of 2000. In the
late 1990s, the founders of the company were more invested in their personal pursuit and spent
less time at KCC. The company even took a loan of $30 million because the founders wanted to
take significant amount of cash out of the company. The loan interest service reduced KCC
managers margin for error and cash flow became tight especially during October to January.
Due to slow sales and lower profit margins, the companys management incentive plan did not
pay out in 2001 and 2002. However, in 2003, revenues and profits were forecasted to improve
marginally. In 2002, Kevin Wentworth decided to decentralize the organizational structure to
bring more focus on customer service, improve efficiency and asset utilization.

These divisionalization ideas brought up the following issues:

How far the corporation should be decentralized and what will be roles and
responsibilities of new divisional managers.
 How should the performance measurement and incentive system be designed to
maximize employee motivation and employee ownership
Whether the R&D division be centralized or come under the purview of individual
divisions for effective utilization of resources

KCC had a typical functional organization where none of the managers has significant decision-
making authority over both the generation of revenues and incurrence of costs. The VPs in
charge of sales, supply chain and finance and administration reported directly to cofounders.
Budgeting decisions regarding revenues and profits were made at the corporate level.

In the new decentralization plan, the product division was split into two profit centers, Retail
Products and Custom Products. The new system gave division managers more decision-making
authority and they were responsible for their own budget, staffing, supply chain management,
advertising, and other activities. Divisionalization delegated considerable decision-making
power to the managers and brought about more financial responsibilities and accountability for
them. Although the new system was a positive initiative to restructure the corporation, the major
concern was inexperience of divisional managers in managing an entire division.

KCC decided to decentralize Product, Marketing, Sales, Accounting & Administration and
Operations divisions. Supply chain, R&D, Advertising and HR divisions remained centralized.
This could lead to conflict of interests between divisions, like improper allocation or utilization of
resources between divisions, or decisions made at corporate levels affecting the interest of the
individual divisions. For example, Joes complaint about the Supply Chain unit about late
deliveries and missed sales was a major issue that needed to be addressed because theses
irregularities at the corporate level affected the sales of the Retail division and led to customer
dissatisfaction.

One more issue was assessing and implementing new ideas proposed by the individual
divisions. Implementing ideas of individual divisions can lead to conflict at corporate level. For
example, Joe proposed to enter into arrangements with large retailers to take delivery of full
containers at the port of entry. This idea if implemented would reduce significant supply chain
cost but at the same time KCC had to address the division of responsibility for the new proposal.

Robert Chang, VP Finance and Administration, proposed a new and improved performance
measurement and incentive plan. Under the new plan, the managers will be provided with cash
award on achievement of annual targets set for controllable returns at the divisional and
corporate levels. For divisional managers, the bonuses would be based 75% on division
performance and 25% on corporate performance. If the performance actually exceeded the
target, the payouts could be increased by up to 50%. However, there would be no payouts if the
actual performance was below plan. The new incentive plan was an effective plan as it
considered each division as a profit center. However, the major concern of the divisional
managers was assignment of some of the corporate expenses to the divisions. In order to tackle
this issue, considerable freedom was given to individual divisions to influence management
decisions, for example, in choosing an insurance provider of their choice.
Finally, centralization of R&D department was a major bone of contention between Retail and
Custom department. Although the R&D expenses were shared equally between departments,
but utilization of the R&D services were disproportional. According to Joe, Custom was getting
more R&D support even if Retail was funding 50% of the Corporate R&D budget. On the other
hand, Custom complained that R&D is not receptive to radical changes proposed by their
department which were required to tackle market competition.

Conclusion & Recommendations:

Decentralization of the organization structure was positive initiative by KCC. In todays,
competitive market, each division responsible for quality of service and product delivered
should be given more decision-making power and financial controls.
KCCs main motivation for decentralization was to focus on customer service to
maximize profit and improve efficiency and asset utilization. Therefore, managers of
responsibility centers with direct customer interfaces should be held accountable for
revenue or profit along with cost.
While decentralization of Product division was welcome, centralization of HR, Corporate
advertising and Supply chain division was also justifiable. Since both the Product and
Custom departments are at the same location having two independent supply chain
divisions for these two departments will lead to more conflict of interest. On the other
hand, the corporation can develop different strategies for the individual divisions for
optimal utilization of resources at the same time focusing on greater customer
satisfaction in the end.
For successful running of corporations, all departments should work in harmony.
Management should ensure that innovative and profitable ideas suggested by individual
departments should be properly assessed and taken into consideration for greater
benefit of the company. For example, Joes proposal to enter into arrangement with large
retailer should be implemented. And Supply Chain unit should be given the responsibility
to draw a plan for effective implementation of this proposal.
The new incentive plan is a reasonable one. But the Finance & Administration
department should keep a close watch on how the new proposal phases out in the first
year of implementation. And further analysis of the new performance measurement and
incentive plan should be carried out after year-end results.
Finally, the R&D department should be decentralized. Each individual department should
have their own R&D and Control divisions. This would result in proper utilization of
expenses and resources. Each department will have the freedom to invest funds in R&D
as per the requirement of their product line. This will be more effective because each
department has more knowledge about its products and is also more aware about the
customer requirements and expectations. So, they can allocate their funds and design
their research accordingly.
The Control division should also be decentralized because individual divisions are in the
best position to assess the quality controls required to deliver the products as per the
expectations of the customers in their product line. Greater action and results control at
individual department level will result in more effective operations of processes.