1 INTRODUCTION

In the current era, most of the organisations operate in multiple countries. Sometimes

operations of a single company are so large that such businesses become multinational

corporations. In such instances, managing and accounting for such a diverse business

becomes very complicated and hence requires integration at all levels (Wang and Yang,

2003; Schlegel and Britzelmaier, 2011). The organisational structure becomes so

complicated that the top management finds it very difficult to directly control and operate

the company (Whittington, 2004; Siti-Nabihan and Scapens, 2005). That is when

companies divide themselves into divisions, and divisional managers then have the

authority to control and operate their division with great independence (Ciric and

Gracanin, 2010; Quattrone and Hopper, 2005). There are dangers of such

disvisionalisation as managers might stop working in the interest of the company but

instead engage in profit maximisation of just their division (Whittington, 2004; Siti-

Nabihan and Scapens, 2005).

The companies then put to use various performance measures related to divisions to

motivate divisional managers to perform tasks and make decisions that will be in favour

of the company and will benefit all the divisions as a whole (Nell, Ambos and

Schlegelmilch, 2011; Neely, 1999). For this research, the basic method of comparative

analysis of the existing literature will be used to assess the effectiveness of

performance measures to control divisional managers (Baye, Crocker and Ju, 1996).

There are various performance measures which can be financial and non-financial.
There are several reasons due to which performance measurement has gained much

popularity recently; the evolving nature of work, growing competition, innovation in

business, evolving organisational roles, increasing external demands and the impact of

information technology (Neely, 1999; Baker, 2000). Performance measures have now

evolved from just financial data and profit maximisation to other measures such as

innovation, some new patents developed, benchmarking etc. (Whittington, 2004; Siti-

Nabihan and Scapens, 2005). Whether the accounting systems or applied

measurements are essential in controlling divisional managers will be studied in the

following research (Lipe and Salterio, 2000; Chenhall, 1997).

2 AIMS OF THE RESEARCH PROJECT

This research paper will help evaluate different performance measures and their role in

motivating managers to pursue decisions; that will benefit the entire company. It will

focus on critically evaluating performance indicators while using real-life case studies to

understand the importance of performance measures in a company’s divisions (Wang

and Yang, 2003; Schlegel and Britzelmaier, 2011). The research paper will help

understand the extent to which financial and non-financial measures are practically

used to assess divisional managers’ performance. Lastly, the determinants and

effectiveness of performance measures will be assessed (Whittington, 2004; Siti-

Nabihan and Scapens, 2005).

3 WHY ORGANISATION DIVISIONALISE?

Divisionalisation occurs when managers of various business areas are given a degree

of authority and power over decision making that is, they are given autonomy to make

decisions without the approval or consent of the senior management. In other, simpler

words they are allowed to run their part of the business as if it is their own company

(Wang and Yang, 2003; Schlegel and Britzelmaier, 2011).

Decentralization, a term used hand in hand with divisionalisation is the sharing of

decision-making responsibility. Every business organisation decentralises its processes

to a certain extent; some decentralise more than others (Ciric and Gracanin, 2010;

Quattrone and Hopper, 2005). When the environment a company faces, becomes

complex and the size of the organisation increases, decentralisation occurs as an

essential response. In the practical world, it would be impossible for a single person to

run the entire business and make all the decisions on his own (Whittington, 2004; Siti-

Nabihan and Scapens, 2005). Even in small companies, senior management delegate

work to lower management to ease their own responsibilities (Lipe and Salterio, 2000;

Chenhall, 1997; Dury, 2004).

Furthermore, companies focus on divisionalisation to motivate employees for work and

give them a sense of ownership (Baye, Crocker and Ju, 1996). This increases the

productivity of workers and benefits the company as a whole. Companies also choose

to divisionalize to dilute power; that is to take away authority from a few people in the

upper management and share it with a greater number of people. This way the motives
of the shareholders are better achieved and efficiently met (Nell, Ambos and

Schlegelmilch, 2011; Neely, 1999).

4 PERKS OF DIVISIONALISATION

As mentioned above; there are some convincing reasons due to which the company

chooses to create divisions. This decision results in several benefits for the company as

follows (Wang and Yang, 2003; Schlegel and Britzelmaier, 2011):

 By creating divisions within the company, an organisation breaks itself into more

manageable units and hence it enables the manager to make decisions quickly

and effectively. It gives division managers a closer control over the day to day

businesses and hence, performance booms up (Ciric and Gracanin, 2010;

Quattrone and Hopper, 2005).

 As pointed out earlier, divisionalisation develops a sense of ownership and

motivation among the managers. Managers feel more involved and responsible

for the part of the business they are looking after. Therefore, there is an

enhancement in the productivity of the business are, and improvements are seen

in the efforts of division managers to fulfil the business motives (Whittington,

2004; Siti-Nabihan and Scapens, 2005).

 The quality of decisions made by the company increases. As the local managers

are much well informed about their business area conditions, they make an

informed decision. Furthermore, a personal incentive of improving the division’s

 performance develops that enable them to make the decisions that are in the

division’s best interest (Lipe and Salterio, 2000; Chenhall, 1997; Dury, 2004).

 It relaxes the top management and releases them from a tedious work of looking

after and involving in small day-to-day operations of each business area. It

provides them with time to evaluate the business performance better and devote

them to more in-depth strategic planning (Nell, Ambos and Schlegelmilch, 2011;

Neely, 1999).

 Most importantly, divisions provide a ground for training for the management.

This training will be valuable in making them secure a higher position in the top

management in their professional career. It will enhance their experience and

polish their managerial skills in an easier and much-relaxed environment as

opposed to that in a complex organisational structure (Baye, Crocker and Ju,

1996).

5 DANGERS OF DIVISIONALISATION

Where there are benefits, there are also several costs of dividing up a business (Wang

and Yang, 2003; Schlegel and Britzelmaier, 2011).

 Often divisional managers make decisions that are in the best interest of their

decision but do not benefit the entire company. That is when optimal decisions

are not made and there is lack of common goals. This leads to the problem of

coordination among different divisions (Ciric and Gracanin, 2010; Quattrone and

Hopper, 2005).
  It is argued that a cost of operating different divisions is much higher than

operating a centralised organisation. Setting transfer prices or the cost of setting

up head offices is often very complicated and results in inefficiency (Nell, Ambos

and Schlegelmilch, 2011; Neely, 1999).

 There is an obvious loss of control of the top management as they might not be

aware of the decisions that are being made by the divisional manager. This

although can be rectified through an efficient reporting and monitoring system

(Whittington, 2004; Siti-Nabihan and Scapens, 2005).

 Considered as the crucial objective of this research paper, a genuine problem of

controllability arises due to divisionalisation. Many factors are not in the control of

divisional managers; these may have an impact on the performance of the

division and will be extremely difficult to determine the controllable and

uncontrollable factors (Ciric and Gracanin, 2010; Quattrone and Hopper, 2005).

6 USE OF PERFORMANCE MEASUREMENT TO CONTROL DIVISIONAL MANAGERS

As concluded earlier, divisionalisation results in a number of problems. The most

important one of these is the excessive power given to divisional managers. Since

divisional managers are given power and authority to run day-to-day business, it

becomes nearly impossible for the top management to control and look over them. This

can result in eliminating the entire benefit of divisionalisation; integrating the company to

work towards a common goal (Nell, Ambos and Schlegelmilch, 2011; Neely, 1999).
The only viable way to assess and control the performance of divisional managers is to

set a number of measures that help evaluate their performance on a regular basis

(Wang and Yang, 2003; Schlegel and Britzelmaier, 2011). These performance

measures help the top management in determining whether the divisional managers are

working in the best interest of the company. If they are managing their division efficiently

and can also be treated as a medium to communicate the performance targets and the

top management’s expectations regarding their performance (Ciric and Gracanin, 2010;

Quattrone and Hopper, 2005).

It is highly important that performance measures are developed well. It should be well

linked to every business function and area (Lipe and Salterio, 2000; Chenhall, 1997;

Dury, 2004). For example, if profit maximisation will be the only performance measure

to evaluate a manager’s performance, he/she may use the least effective or low-quality

products to achieve the target. The divisional manager’s entire focus will be on just

making profits and hence he/she will compromise on ethics, standards and efficiency.

This approach will not be beneficial for the whole company but will result desirable

outcome for the division. In the long run, it will be hazardous for the business. It can

also prove to be harmful to the divisional manager in the long run but with such

measures in practice, managers tend to focus more on short-term goals and

achievements (Nell, Ambos and Schlegelmilch, 2011; Neely, 1999). Therefore, it is

essential to design a variety of performance measures for each business area. One of

the measures might deal with profitability and the other with quality assurance. This will

also help in making the organisation goal congruent and encourage managers to make

decisions that benefit the entire organisation. Therefore, alongside financial

performances, non-financial indicators are also of great value (Whittington, 2004; Siti-

Nabihan and Scapens, 2005).

7 DIFFERENT KINDS OF PERFORMANCE MEASURES

It is well established just one kind of performance measure is not enough to assess a

manager’s performance (Lipe and Salterio, 2000; Chenhall, 1997; Dury, 2004).

Performance measures can be divided into two broad categories; financial and non-

financial. The results are then showcased in the balanced score-cards that evaluate the

performance of the managers (Whittington, 2004; Siti-Nabihan and Scapens, 2005).

7.1 FINANCIAL

7.1.1 Return on Investment

Some companies choose to focus on the return on investments rather than just focusing

on the overall division’s profits. The ROI shows the profit as the percentage of the

overall investment made in a division. The investment is mainly the assets controlled by

the divisional manager (Wang and Yang, 2003; Schlegel and Britzelmaier, 2011). ROI is

a good measure for comparing the business to the industry and showcases the success

of the company’s investment policy (Ciric and Gracanin, 2010; Quattrone and Hopper,

2005). However, some problems exist with the use of ROI. There can be instances

where the divisional ROI can be made better by compromising the company’s overall

returns (Drury, 2004; Whittington, 2004; Siti-Nabihan and Scapens, 2005).

In the present era, almost all the major companies within the United States – that have

been decentralised – capitalises upon return on investment in form or another to use it

as a tool for measuring the performance of divisional managers (Whittington, 2004; Siti-

Nabihan and Scapens, 2005). In some of the cases, however, can trigger the divisional

managers to takes steps that are against the overall interest of the company (Ciric and

Gracanin, 2010; Quattrone and Hopper, 2005). This is because the performance

management systems based on ROI have a tendency to manage the performance of

divisions in a manner that is inconsistent with that of the overall performance of the

company (Wang and Yang, 2003; Schlegel and Britzelmaier, 2011).

It can, therefore, be a case that a decision taken by the divisional manager of the

company may have a negative impact on the overall performance of the company but

may occur positively at the end of the division (Wang and Yang, 2003; Schlegel and

Britzelmaier, 2011). Apart from that, the issues associated with the inconsistencies

between the objectives of the company and the objectives of the division may also

make this tool an ineffective measure of performance for divisional manners. Hence it

shall be used with a compendium of other performance indicators (Nell, Ambos and

Schlegelmilch, 2011; Neely, 1999; Dearden, 2015).

7.1.2 The Residual Income

As previously mentioned, there are a certain factors that cannot be controlled by the

divisional managers. Therefore, the concept of residual income is used where only the

controllable income is accounted for. It helps evaluate the economic performance of the

division better (Wang and Yang, 2003; Schlegel and Britzelmaier, 2011). Residual

Income is more flexible and allows different risk-adjusted capital costs. However, it
cannot be used to compare the performances of other divisions of different sizes

(Bromwich and Walker, 1998; Ciric and Gracanin, 2010; Quattrone and Hopper, 2005).

7.1.3 The Economic Value-Added

To assess a company’s long-term performance, it is important to evaluate the division’s

EVA. It focuses on measuring performance based on the value created by each

division. However, direct measures are not possible to determine. Also, a firms value is

affected by a number of uncontrollable factors that are not in the manager’s hand

(Whittington, 2004; Siti-Nabihan and Scapens, 2005).

7.2 NON-FINANCIAL

In order to exercise greater control over the divisional managers, top management

exercises various non-financial performance measures. These include maintaining

targets to control the cost, quality, delivery, inspection and handling of products. A

number of resources wasted and the time used to create goods, is a good measure of

evaluating the efficiency of the production department (Lipe and Salterio, 2000;

Chenhall, 1997; Dury, 2004). It is also recommended to focus on the improvement of

internal processes and decision making. Various KPIs that record the employee

satisfaction of line managers and those operating below the divisional manager can be

assessed (Baye, Crocker and Ju, 1996). The retention ratio used by the Human

Resource department of the company can also help assess the performance of the

divisional manager in keeping the team active. Companies often strive to evaluate

themselves on the basis of future goals. They asses from their managers’ performance

if they will be able to create future value for the company (Nell, Ambos and

Schlegelmilch, 2011; Neely, 1999; Dearden, 2015).

Divisional managers help maintain the competitive position of the business by

innovating and learning new skills (Wang and Yang, 2003; Schlegel and Britzelmaier,

2011). The non-financial performance indicators consist of skills such as technological

leadership, manufacturing learning and the time taken to market the product (Ciric and

Gracanin, 2010; Quattrone and Hopper, 2005). Many companies assess the

performance of their managers through the customer relationship and supplier

partnership; they create through their division. These are some basic factors that help

top management assess the performance of managers and simultaneously keep control

over the managers (Whittington, 2004; Siti-Nabihan and Scapens, 2005).

8 LIMITATIONS OF FINANCIAL PERFORMANCE MEASURES

To critically evaluate the impact of performance measures, it is essential to list down the

limitations of these measures. There are some key areas that the financial performance

measures fail to encompass (Nell, Ambos and Schlegelmilch, 2011; Neely, 1999;

Dearden, 2015);

1. Financial indicators are more focused on short-term periods. These encourage

managers to work on short-term goals (Whittington, 2004; Siti-Nabihan and

Scapens, 2005).

2. These indicators are not proactive; they focus on the results after a time-period

and are not precautionary (Ciric and Gracanin, 2010; Quattrone and Hopper,

2005).
 3. They create poor estimates for the future performance as the dependency on

historical costs is too high (Wang and Yang, 2003; Schlegel and Britzelmaier,

2011).

The abovementioned problems became the reason for the introduction of EVA and

balance card score-sheets. These helped overcome the shortcomings of the financial

performance measures (Lipe and Salterio, 2000; Chenhall, 1997; Dury, 2004).

9 WHAT MAKES A GOOD PERFORMANCE MEASURE?

After profoundly assessing the performance indicators, their limitations and uses, it can

be concluded that a reasonable performance measure should include the following

(Wang and Yang, 2003; Schlegel and Britzelmaier, 2011):

1. The performance measure should provide the divisional manager with incentives

to make viable and concrete decisions for the company. This will help converge

the company’s and the division’s goal together (Whittington, 2004; Siti-Nabihan

and Scapens, 2005).

2. The performance measure should only contain accountability for factors that are

in control of the divisional manager. Otherwise, it will be unfair for the manager to

complete the given targets (Lipe and Salterio, 2000; Chenhall, 1997; Dury, 2004).

3. Performance measures should contain a long-term objectivity to them. They

should focus on creating long-term goals for the company rather than just

focusing on short-term profit making (Baye, Crocker and Ju, 1996).

An example of this could be the individual scorecard based performance management

approach that is used by Shell (Ciric and Gracanin, 2010; Quattrone and Hopper, 2005).
On the basis of this approach the company provides 30% of the bonus to the divisional

managers by the performance depicted by their scorecards, thereby appreciating the

individual efforts of the managers (Chartered Institute of Management Accountants,

2006).

10 CONCLUSION

It can be concluded from the above discussion that for effective control over the

divisional managers, it is essential to design effective performance measures. Divisional

managers can be held responsible for the tasks they are assigned and are in their

control. This will enable the top management to control the divisional managers better.

Control can only be achieved if the performance measures are designed well. As

mentioned they should focus on long-term goals and integrate the company into one

unit. The purpose of divisionalisation will be ruined if top management and the divisional

managers will work towards different goals.

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