STRATEGIC MANAGEMENT

Evaluation and control

Primary measures of divisional and functional performance and international
measurement issue

To: Getnet A.(PHD candidate)

By: Eyerusalem Balcha
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• Responsibility Centers
Control systems can be established to monitor specific
functions, projects, or divisions.
Budgets are one type of control system that is typically used
to control the financial indicators of performance.
Responsibility centers are used to isolate a unit so that it
can be evaluated separately from the rest of the
corporation. Each responsibility center, therefore, has its
own budget and is evaluated on its use of budgeted
resources. It is headed by the manager responsible for the
center’s performance
Responsibility center cont.…

• The center uses resources (measured in terms of

costs or expenses) to produce a service or a product
(measured in terms of volume or revenues).
Major types of responsibility center
There are 5 major types of responsibility centers
determined by the way the corporation’s control system
measures these resources and services or products.
1. Standard cost centers: Standard (expected
cost )centers are primarily used in manufacturing
facilities.
- are computed for each operation on the basis of
historical data.
- In evaluating the center’s performance, its total
standard costs are multiplied by the units produced.
The result is the expected cost of production, which is
then compared to the actual cost of production.
Major types of responsibility center
cont.…
2. Revenue centers: With revenue centers, production,
usually in terms of unit or dollar sales, is measured
without consideration of resource costs (for example,
salaries).
- The center is thus judged in terms of effectiveness
rather than efficiency.
- The effectiveness of a sales region, for example, is
determined by comparing its actual sales to its
projected or previous year’s sales. Profits are not
considered because sales departments have very
limited influence over the cost of the products they
sell.
Major types of responsibility center
cont.…
3. Expense centers: Resources are measured in dollars,
without consideration for service or product costs. Thus
budgets will have been prepared for engineered expenses
(costs that can be calculated) and for discretionary
expenses (costs that can be only estimated).
- Expense centers are administrative, service, and research
departments. They cost a company money, but they only
indirectly contribute to revenues.
4. Profit centers: Performance is measured in terms of the
difference between revenues (which measure
production)and expenditures(which measure resources).
Major types of responsibility center
cont.…
- Is typically established when ever an
organizational unit has control over both its
resources and its products or services. By having
such centers, a company can be organized into
divisions of separate product lines. The manager of
each division is given autonomy to the extent that
he or she is able to keep profits at a satisfactory (or
better) level.
Major types of responsibility center
cont.…
• Some organizational units that are not usually
considered potentially autonomous can, for the
purpose of profit center evaluations, be made so.
• A manufacturing department, for example, can be
converted from a standard cost center (or expense
center) into a profit center; it is allowed to charge a
transfer price for each product it “sells” to the sales
department. The difference between the
manufacturing cost per unit and the agreed-upon
transfer price is the unit’s “profit.
Major types of responsibility center
cont.…
• Transfer pricing is commonly used in vertically
integrated corporations and can work well when a
price can be easily determined for a designated
amount of product.
• When a price cannot be set easily, however, the
relative bargaining power of the centers, rather
than strategic considerations, tends to influence
the agreed-up on price.
5. Investment centers: An investment center’s
performance is measured in terms of the difference
between its resources and its services or products.
Major types of responsibility center
cont.…
• The most widely used measure of investment center
performance is ROI.
• One problem with using responsibility centers, however, is
that the separation needed to measure and evaluate a
division’s performance can diminish the level of cooperation
among divisions that is needed to attain synergy for the
corporation as a whole.
Using Benchmarking to Evaluate
Performance
• According to Xerox Corporation, the company that pioneered this
concept in the United States, Benchmarking is “the continual
process of measuring products, services, and practices against the
toughest competitors or those companies recognized as industry
leaders.”
• Benchmarking, an increasingly popular program, is based on the
concept that it makes no sense to reinvent something that someone
else is already using. It involves openly learning how others do
something better than one’s own company so that the company not
only can imitate, but perhaps even improve on its techniques.
Steps in Bench marking
• The benchmarking process usually involves the
following steps:
1. Identify the area or process to be examined. It
should be an activity that has the potential to
determine a business unit’s competitive advantage.
2. Find behavioral and output measures of the area or
process and obtain measurements.
3. Select an accessible set of competitors and best-in-
class companies against which to benchmark. These
may very often be companies that are in completely
different industries, but perform similar activities.
Steps in Bench marking cont.….
4. Calculate the differences among the company’s
performance measurements and those of the best-
in-class and determine why the differences exist.
5. Develop tactical programs for closing
performance gaps.
6. Implement the programs and then compare the
resulting new measurements with those of the
best-in-class companies.
INTERNATIONAL MEASUREMENT ISSUES
• The three most widely used techniques for international
performance evaluation are ROI, budget analysis, and historical
comparisons.
• In one study, 95% of the corporate officers interviewed stated that
they use the same evaluation techniques for foreign and domestic
operations.
• Rate of return was mentioned as the single most important
measure. However, ROI can cause problems when it is applied to
international operations: Because of foreign currencies, different
accounting systems, different rates of inflation, different tax laws,
and the use of transfer pricing, both the net income figure and the
investment base may be seriously distorted.
INTERNATIONAL MEASUREMENT ISSUES
cont.…..
• Among the most important barriers to international trade are
the different standards for products and services. There are at
least three categories of standards: - safety/environmental,
energy efficiency, and testing procedures.
INTERNATIONAL MEASUREMENT
ISSUES cont.…..
• An important issue in international trade is
counterfeiting/piracy. Firms in developing nations around the
world make money by making counterfeit/pirated copies of
well-known name-brand products and selling them globally as
well as locally.
• Authorities in international business recommend that the
control and reward systems used by a global MNC be different
from those used by a multi domestic MNC.
INTERNATIONAL MEASUREMENT ISSUES
cont.…..
• A multi domestic MNC should use loose controls on its foreign
units. The management of each geographic unit should be given
considerable operational latitude, but it should be expected to
meet some performance targets.
• Because profit and ROI measures are often unreliable in
international operations, it is recommended that the MNC’s top
management, in this instance, emphasize budgets and non-financial
measures of performance such as market share, productivity, public
image, employee morale, and relations with the host country
government.
INTERNATIONAL MEASUREMENT
ISSUES cont.…..
• Multiple measures should be used to differentiate between
the worth of the subsidiary and the performance of its
management.
• A global MNC, however, needs tight controls over its many
units. To reduce costs and gain competitive advantage, it is
trying to spread the manufacturing and marketing operations
of a few fairly uniform products around the world.
Thank you !