Question

Return on investment has been used in the past, in the restaurant industry, as part of a restaurant manager's performance evaluation. For a company like Wendys, is this a viable measure of performance for its restaurant managers? Why or why not?

Be very detailed in your explanation and give examples

Answer 1

Return on investment IROI) = net income / capital invested.

For a company like Wendys, this is not a viable measure of performance for its restaurant managers.

This is because of the following reasons :

• The investment in each restaurant is determined by middle management in the corporate office, and not by the restaurant managers. As the investment in the restaurant is not decided by the managers, it is not fair to assess them based on ROI
• The investment in each restaurant depends on many different factors such as location, distance from other Wendy's outlets, population density etc. Some restaurants with high investments may be expected to have low ROI at initiation, but the company would still proceed to invest because it wants to reach a higher volume of customers or it wants to have a restaurant in a strategic location. Restaurants in some high density locations (for example, in malls) may naturally have higher ROI. Thus, it is not fair to compare restaurant managers based on ROI because of these biases in ROI
• The costs allocated to some restaurants may be higher due to factors such as distance. This is beyond the control of managers, and hence ROI is not an appropriate measure