Implications Of Divisionalisation For GoGo Airlines' Low Cost Airline - Mega Saver Airways Essay.

GoGo Airline's parent company is planning to take a cautious approach in launching MegaSaver. In response to the concerns raised by several shareholders, the parent company is exploring the possibilities of dividing its airline business into two distinct departments and monitoring the working capital of the new airline to prevent any liquidity crises.

The parent company has requested that you prepare a report which can enable it to make an informed decision. You are required to include the following information in the report:

• Critical evaluation of the advantages and disadvantages of divisionalisation to the parent company
• Explanation of various techniques the parent company can use to measure the performance of the proposed divisions and divisional managers
• Explanation of the importance of non-financial measures in measuring performance
• Costs associated with various elements of working capital and
• Methods of controlling various elements of working capital

Advantages and Disadvantages of Divisionalisation for GoGo Airlines

The decision of divisionalisation taken by the parent company of GoGo Airlines in order to develop a low cost airline, Mega Saver Airways for the medium to long haul category may have both advantageous and disadvantageous implications on business. This is because GoGo Airlines already has a target group of customers who have till now received quality service from the airlines company and expect to do the same in the future, therefore developing a low cost airline by dividing the airline business may certainly have both positive and negative effects on the already existing business (Cowling 2013).

The decision of dividing the airline business may lead to decentralization of decision making process which might not be healthy for business given the present situation and condition. The divisional or the officer in charge might have been given the freedom to set the tone of the business, determine marketing strategies and other proceedings of the new extension which if done prudently may be advantageous but if poorly executed might be disastrous for the entire business. Another major disadvantage of divisionalisation that may affect GoGo Airlines is that the costs for running the common operations like the accounting department may rise. Moreover different segments in divisional accounting might face the issue of conflicts of interest (Carabott 2015).

However the advantages of divisionalisation that can be obtained by business is that decentralization of the decision making process might improve the quality of operations undertaken in the new extension of the airline business as the decision making process will be quick and accurate as because the information does not have to pass along such a long chain of hierarchy of authority.  Moreover GoGo Airlines would be able to compete further with the new low budget airlines that have popped up in the recent times. The old line of business would be able to hold the loyal and regular customers while the new line, Mega Savers would deal with the entirely new band of customers who are intent to fly at a cheaper rate (Kumar 2015).

The techniques that the parent company can employ in order to measure the performance of the divisional managers and the proposed divisions is that the parent company may develop a periodic reporting system that shall provide the required data to the management so that they can evaluate the performance of the concerned entities. The reporting system may essentially contain those items that are controllable by the divisional managers like the cost effective techniques employed, the strategies undertaken in order to compete with the fellow passenger airlines in order to measure their performance. The first economic component that effectively indicates the performance of a divisional manager or a proposed division is the divisional controllable profit (Klakegg and Shannon 2013). The divisional controllable profit constitutes of those revenues and expenses that may be influenced or can be controlled by a divisional manager. Therefore this particular profit does not consist of items such as central administrative expenses and fluctuations of the foreign exchange rate as they cannot be controlled by a divisional manager. Secondly the contribution of the division to the corporate profit and unallocated corporate sustaining overhead is another major indicator of the performance of the division (Atrill and McLaney 2015). The third indicator for measuring the performance of the divisional managers and the division as such is the divisional net income. Though this particular measure has perplexed outlook and is hard to justify, the main aim of this indicator is to measure the performance of the division as well as the divisional manager in comparison to the other firms that operate in the airline industry (Fadeyi et al., 2015).

Performance Indicators for Measuring Success of GoGo Airlines' Low Cost Airline

In order to measure the performance of the divisional managers or the proposed divisions, the adoption of only financial measures might result in dysfunctional consequences therefore it is very important to adopt non-financial measures along with financial measures to strike a balance in the process of gauging the performance of the proposed entities. An effective non-financial performance measurement tool is the balanced scorecard. The balanced scorecard aims to provide a number of performance measures that have been set or integrated in accordance to the strategic plan of the organization so that the higher level management can clearly understand the performance delivered by the concerned unit. Other non financial measures may include processes like the performance prism that also aim to evaluate an employee performance on the basis of his past records (Sabourin and Ayande 2015). The most suitable and worldwide accepted non-financial measure is the balanced scorecard method. This is because it aims to provide an all round overview of the company by looking at business from the perspective of a customer as to how a customer is benefitting from the services provided by the company; the inner proceedings of the business and the areas to excel; initiative taken in order to grow and improve and lastly the financial condition of the business. Therefore as it can be understood from the above discussion non-financial measures are equally important in measuring performance of an organization. As a matter of fact GoGo Airlines may adopt the balanced scorecard method in order to measure the non-financial performance of the divisional managers (Storey and Nyathi 2015).

GoGo Airlines according to its annual report has been incurring a rising working capital since 2014. The working capital of the airlines group has been $143,408 for the financial year of 2014 and then $270,429 and $353,667 for the next two financial years that is 2015 and 2016. This provides an overview into the liquidity position of the company. A positive working capital indicates a suitable liquidity position of the company. Working capital essentially refers to the capital that is utilized in the daily operations of business. It is the amount by which the current assets exceed the current liabilities. The working capital of GoGo Airlines may comprise of costs such as the costs incurred in continuation of the activities in order to maintain a higher degree of performance, reduction in the risk impact and in maintaining the credibility of the company. Therefore an increasing trend of working capital indicates that GoGo Airlines has enough resources in terms of working capital in order to face adversities or in facilitating the proposed division (Ir.gogoair.com, 2017).

Working capital generally includes the short term net assets like debtors, stocks and cash reduced by the current liabilities. Controlling the working capital means controlling current assets as well as current liabilities so that the insolvency risk can be minimized and the return on assets can be maximized. Even the profitable companies do not succeed if they do not have sufficient cash as the liabilities are paid off with cash and not with the profits (Baños-Caballero, García-Teruel and Martínez-Solano 2014). The main objectives of controlling the working capital is to assure that enough cash is available for –

• Meeting daily requirement of cash
• Paying the salaries and wages after it becoming due
• Paying off the creditors to assure the continuous supply of services and goods
• Assuring the long-term survival of the company

The following methods can be applied for controlling the working capital elements –

• Before allowing any credit to the new customer, his bank and trade references must be obtained. Further, their accounts shall be evaluated and analysed and reports regarding the court judgements against business, if any, shall be checked. The credit score of the debtor must be asked for the business that has credit rating (Mathuva 2015).
• The amount due from the trade creditors is a major component of working capital. However, the agreed limits of credit if exceeded by the company, the company will face issues like bad debts or uncollectible debts. Further, the collection shall be on time to ensure that the company has sufficient amount to pay off the liabilities.

Information related to managerial accounting delivers the data-driven input for the decisions that can be used to improve the decision making process for the long term period. Various techniques of management accounting for decision making are as follows –

• Activity based costing – once the business determines which product is to sell, it requires determination regarding to whom the products shall be sold. Through the activity based costing, the management can decide regarding the activities required for producing the goods (Chenhall and Moers 2015).
• Make or buy analysis – primary usage of the information related to managerial accounting is delivering the information associated with manufacturing. Through the buy or make analysis the analyst can determine the profitable choice. However, various other factors are there that must be taken into account before making any decisions.  
• Utilizing data - the primary use for the information related to managerial accounting delivers the data related to growth of the business. Further, the projections of the financial statements, budgets, balanced score cards are some of the examples of how information related to managerial accounting can be used for delivering information for assisting the management to guide (Otley and Emmanuel 2013).

References

Atrill, P. and McLaney, E., 2015. Management Accounting for Decision Makers (9^th Ed). Harlow: Pearson.

Baños-Caballero, S., García-Teruel, P.J. and Martínez-Solano, P., 2014. Working capital management, corporate performance, and financial constraints. Journal of Business Research, 67(3), pp.332-338.

Carabott, R., 2015. Performance measurement in divisionalised organisations: a study in local groups of companies (Master's thesis, University of Malta).

Chenhall, R.H. and Moers, F., 2015. The role of innovation in the evolution of management accounting and its integration into management control. Accounting, Organizations and Society, 47, pp.1-13.

Cowling, A., 2013. Developing a strategy. Managing Human Resources, p.5.

Fadeyi, O., ADEGBUYI, O., Oke, A.O. and Ajagbe, A.M., 2015. Review of Organizational Strategy and Structure (1962-2015).

Ir.gogoair.com. (2017). Available at: https://ir.gogoair.com/static-files/f772f23b-033e-4e44-a6a3-9bcaacd94cbf [Accessed 15 Nov. 2017].

Klakegg, O.J. and Shannon, D., 2013. BOARD OF DIRECTORS’RESPONSIBILITY FOR CONSTRUCTION PROJECTS. CONSTRUCTION ECONOMICS AND ORGANISATION 2013, p.257.

Kumar, D.P., 2015. An Analytical study on Mintzberg’s Framework: Managerial Roles. International Journal of Research in Management & Business Studies (IJRMBS), 2, pp.12-18.

Mathuva, D., 2015. The Influence of working capital management components on corporate profitability.

Otley, D. and Emmanuel, K.M.C., 2013. Readings in accounting for management control. Springer.

Sabourin, V. and Ayande, A., 2015. Better results in services: obstacles in transforming service organisations. International Journal of Strategic Change Management, 6(3-4), pp.213-237.

Storey, J. and Nyathi, N., 2015. Strategies and structures of MNCs from emerging economies. Handbook of Human Resource Management in Emerging Markets, p.68.