Question

The Jackson Corporation is a large manufacturing company where each division is viewed as an investment center and has virtually complete autonomy for product development, marketing, and production. Performance of division managers is evaluated periodically by senior corporate management. Divisional return on investment is the sole criterion used in performance evaluation under current corporate policy. Corporate management believes return on investment is an adequate measure because it incorporates quantitative information form the divisional income statement and balance sheet in the analysis.

              Some division managers complained that a single criterion for performance evaluation is insufficient and ineffective. These managers have compiled a list of criteria that they believe should be used in evaluating division managers’ performance. The criteria include profitability, market position, productivity, product leadership, employee development, employee attitudes, public responsibility, and balance between short-range and long-range goals.

Questions

1. Jackson management believes that return on investment is an adequate criterion to evaluate division management performance. Discuss the shortcomings or possible inconsistencies of using return on investment as the sole criterion to evaluate divisional management performance.
2. Discuss the advantages of using multiple criteria versus a single criterion to evaluate divisional management performance.
3. Describe the problems or disadvantages which can be associated with the implementation of the multiple performance criteria measurement system suggested to Jackson Corporation by its division managers.

Answer 1

A) Shortcomings of return on investments :

• There is no such agreement of rate of return which is optimum. This genuinely discourage the managers when according to them rate which is set is not appropriate.
• This does not give the required details needed for allocations properly which requires various data concerning costs and sales.
• Assets which are used jointly, their valuation is not straight to fvarious other find, sometimes it creates confusions.
• Various other factors which are as important as these rates are not given much attentions, which contribute equally to the growth of any organization.
• Generally it leads to taking decisions which are not profitable for long run, may be they are just giving good rate of return at current time. And because of that various other factors are neglected.

B) Advantages of multiple criteria :

• Using multiple criteria makes the decision making process more open and explicit. Using different criteria brings more than one solution and people can freely discuss among them the best to select among all alternatives. People participate openly into the discussions.
• Among different criteria, one which is selected can be adjusted according to the situation and accordingly changes can be made in order to make the best decisions.
• Using multiple criteria gives the option of creating different alternatives and evaluating all and selecting the best of those alternatives.This helps in taking a decision which is best and also cannot be changed with other in case any problem occurs. In short one has options to choose from in multiple criteria method.
• It also becomes a mode of communicating between people and parties and hence a healthy discussion would lead to good decision making.
• In this method performance is measured by experts. They analyze all the factors for coming to conclusions properly.
• It leads to have a keen judgement on all criteria and properly evaluating each one's value.

C) The major problems with the multiple criteria is that:

• At times it becomes hard to think what decision is to be taken, as there are different criteria and one option which fits into one criteria does not necessarily fit into other criteria.
• This may happen the there are not exact set parameters for certain criteria to judge which is more profitable over another. And this may cause problem is wrong selection is done.
• Sometimes weighting one over other and giving ranks is not easily determined and this causes difficulties.