Divisional Performance Flashcards
Decentralisation?
Involves the delegation of some decision making responsibility from head office or senior management of an organisation to smaller strategic business units (SBUs) - for example BMW-AG
Level of decision making responsibility devolved may vary
Decentralisation benefits?
Uses local knowledge Time efficient - good responses to customers Trains managers Motivates managers Facilitates diversification Better supervision and control Quick decision making Offers objective measures of performance evaluation
Decentralisation drawbacks?
Can hinder coordination among SBUs
Can cause potential conflict between SBUs
Can have duplication of administrative duties in SBUs
There are certain activities where it is not possible
Waste of resources
Profit/investment centre advantages?
Encourages SBUs to be profit focused and align with group goals
Motivates managers
Encourages managers to think about the marketability of their activities and alternate ways to make profits
Head office/strategic managers have more time to spend on strategic issues
Cost/revenue centres?
Performance of cost/revenue centres is reviewed by evaluating budgeted performance eg. was more or less spent
Qualitative measures can and should be used also
Profit Centres?
Review of margins
Contribution/profit statements - what is controllable is key for managers
Qualitative Measures
Balanced Scorecard
Divisional overheads by area - advantages?
Larger branches - use more resources from head office and are required to support its operation
Criteria of floor area will remain constant over time and therefore easily to calculated the apportionment
Transparent basis of apportionment
Divisional overhead costs by area - drawbacks?
Just because a branch is bigger than another in terms of floor area - does not mean it will require more resources from head office Larger branches (in terms of floor area) have more employees and therefore may be able to run themselves more independently
Divisional overheads/costs by staff - advantages?
More employees a branch has the more time and resources are used by head office possibly
Branches may be more motivated to run themselves as efficiently as they can without taking on more staff than necessary
Transparent basis of apportion - understood by everyone
Divisional overheads/costs by staff - drawbacks?
Just because a branch has more employees than another does not mean it will require more resources from head office
Number of staff in high employee branches may be more independent than smaller branches in terms of support from head office but being charged with a higher cost
Return on Investment?
Common when evaluating performance of investment centres
Profit/Assets in %
ROI benefits?
Simple and intuitive
Widley used and well understood
Facilitates comparison between SBUs
Data required is readily available from accounting records
ROI drawbacks?
Single measure which fails to capture multi-dimensional performance
Provides a disincentive for new investment eg asset replacement
Managers may reject projects that exceed target ROI but reduce existing ROI
Residual Income?
Charge for the SBU less a charge for the investment in the unit
Charge = investment in SBU x minimum rate of return
RI is £ amount
Asset and profit measurement issues relating to ROI are also relevant to RI
RI benefits?
Encourages investment in projects which exceed minimum rate of return = when RI is positive
Company can vary desired rate of return to reflect different risk or asset types
Takes cost of capital into account
