TAILIEUCHUNG - Accounting for Managers Part 7

13 Performance Evaluation of Business Units. This chapter describes the methods by which the performance of divisions and their managers is evaluated. It builds on the foundation established in Chapter 2, which explained how divisionalized business structures have evolved to implement business strategy. | 13 Performance Evaluation of Business Units This chapter describes the methods by which the performance of divisions and their managers is evaluated. It builds on the foundation established in Chapter 2 which explained how divisionalized business structures have evolved to implement business strategy. We also consider controllability and the transfer pricing problem and introduce the theory of transaction cost economics. This chapter suggests that some techniques may provide an appearance rather than the reality of rational decision-making. The decentralized organization and divisional performance measurement The evaluation of new capital expenditure proposals is a key element in allocating resources by the whole organization see Chapter 12 . However a further aspect of strategy implementation is improving and maintaining divisional performance. Businesses may be organized in a centralized or decentralized manner. The centralized business is one in which most decisions are made at a head office level even though the business may be spread over a number of market segments and geographically diverse locations. Decentralization implies the devolution of authority to make decisions. Divisionalization adds to decentralization the concept of delegated profit responsibility Solomons 1965 . We introduced the notion of divisional structures and responsibility centres in Chapter 2. Divisionalization makes it easier for a company to diversify while retaining overall strategic direction and control. Performance improvement is encouraged by assigning individual responsibility for divisional performance typically linked to executive remuneration bonuses profit-sharing share options etc. . Shareholder value is the criterion for overall business success but divisional performance is the criterion for divisional success. However divisional performance measurement has also moved beyond financial measures to incorporate the drivers of financial results . non-financial performance

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