Thecompany has used both RI and ROI in order to compare the performanceof divisions. ROI as a performance indicators help to compareperformance between departments. On the other hand, use of RI asperformance indicator contributes in reducing the conflict betweencompany’s goals and the goals of a division. RI is stated inPounds (or some other currency) rather than as a ratio. One divisionmay have high RI simply because it has a larger investment base,which produces higher revenues. Thus, division managers should beevaluated based on how effectively they increase RI from one periodto the next, perhaps in percentage growth, and not on how their RIcompares to other divisions. While these two measures provide anoverview of the performance of the divisions, they are not effectivein predicting the long-term performances of the divisions(Christopher, Anthony & Michael 2011).
Supportedby the analysis of RIO and RI, divisions can improve performancethrough use of a balanced scorecard, management by objectives (MBO)and program evaluation. These can be effective strategies foraligning organization goals and objectives to those of the respectivedivisions. In addition, use of total quality Management (TQM) canhelp a division to achieve the customer needs more effectively. ROIand RI are good performance indicators. However, they have thedisadvantages of lacking the capacity to help in predicting thefuture performance. Still they do not reflect the full picture of thedivision because performance is determined by the managerialperformance as well as economic performance (Christopher, Anthony &Michael 2011).
Thereare varying outcomes with the application of strategies formotivating division managers to improve performance. Managers’motivation strategy involving a fixed basic salary with noperformance-based bonuses offers no incentive for managers toincrease divisions RI or ROI. Secondly, a fixed basic salary withbonuses based on divisional RI is found to inspire managers to fosterteamwork aiming at achieving the divisional targets although it leadsto disparity among divisions in their achievement of the desired RI.Thirdly, a strategy involving low fixed income with bonuses based oncompanywide RI is found to promote sharing of corporate-wide assetsalthough it might lead to increasing administrative costs thus actingagainst the bonus scheme. Assessing performance using Economic AddedValue (EAV) is found to be the most appropriate strategy as it aimsat increasing shareholders wealth. The main advantage of EAV is thatit leads to congruence of divisional goals as well as corporate-widegoals. However, the fact that EVA is an absolute measure limits isusability in comparing division performance.
Christopher, S C, Anthony GH, Michael DS 2011 “Financial performancemeasures for strategic business units, and reward systems” inHandbookof Management Accounting Research.Elsevier, New York. PP 1- 37. Available from: ElsevierE-Book. [14 March 2015]