Industrial Product Corporation

Industrial Product Corporation
Industrial Products Corporation (IPC) manufactured a variety of industrial products in more than a dozen divisions. Each division was run by a division manager and had its own balance sheet and income statement. The company made extensive use of long- and short-run planning programs, which includes budgets for sales, cost, expenditures and rate of return on investment. For many years the principal performance measure for division had been their rate of return on investment.
1. To what extent did Mr. Brandt influence the level of investment in each asset category?
Cash : Mr. Brandt could influence the amount to be paid in dividends, but he did not maintain the minimum level of cash that is safe to have at Baker division. During the last years, cash has gone far below the minimum amount.
Accounts receivable: Mr. Brandt was allowed to set his own terms for divisional sales, but in practice there are limitations to make it happen. This problem is because any changes in net 30 terms, will affect large portion of its corporation business. So in practice, not much could be done to influence the level of investment. However, Mr. Brandt could set a clear term of payment and fines so that the clients pay at the predetermined term.
Inventory: Mr. Brandt could reduce the amount of investment in inventory by using a system to manage the inventory more efficient and accurate.
Land, building and machinery: Mr. Brandt has the freedom to include what he wanted in his capital budgeting, but yet he did not invest in large expansion projects. He must consider about the return on investment if he wants to use the budget for miscellaneous expenditure.
2. ROI as a measure of divisional performance. Could it be improved?
First of all, we have to know how a good performance measure should do for managers:
provide incentive to the divisional manager to make decisions which are in the best interests of the overall company (goal congruence)
only include factors for which the manager (division) can be held accountable
recognise the long-term objectives as well as short-term objectives of the organization.
ROI is the benefit to the investor resulting from an investment of some resource. A high ROI means the investment gains compare favorably to investment cost. As a performance measure, ROI is used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. In purely economic terms, it is one way of considering profits in relation to capital invested.
However, ROI has limitations into two types: "technical" and "implementation." The first type is those conditions which cause incongruities between divisional objectives and company goals, and which result in motivating division managers to take uneconomic actions. The second type includes those conditions that result from the inability, under many circumstances, to evaluate accurately the profit performance of division managers.
Use Non-Financial Performance indicators
In recent years, the trend in performance measurement has been towards a broader view of performance, covering both financial and non-financial indicators. The most well-known of these approaches is the balanced scorecard. This approach attempts to overcome the following weaknesses of traditional performance measures, like ROI. The balanced scorecard approach to performance measurement offers several advantages:
it measures performance in a variety of ways, rather than relying on one figure
managers are unlikely to be able to distort the performance measure - bad performance is difficult to hide if multiple performance measures are used
it takes a long-term perspective of business performance
success in the four key areas should lead to the long-term success of the organization
it is flexible - what is measured can be changed over time to reflect changing priorities