In the modern world, organisations now operate a decentralised structure which helps to foster productivity and ease of doing business. By having a decentralised structure, the various firm that makes up the organisation is responsible for their performance and ensuring that whatever they do aligns with the overall goals of the organisation, termed goal congruence or uniformity of objectives. Divisionalisation is an organisational structure that has been adopted to ensure that the organisation unit works together to ensure an aligned goal. With a decentralised structure, each division is responsible for making decisions that affect the financial performance of the division as those performances will be measured at intervals to reward whichever division that is meeting set organisational standards.
By decentralising the structure of an organisation, it provides more time for the central office or headquarters to focus on strategic issues that can further boost the organisation’s general performance. Also, it gives various divisional managers the sense of belonging to be involved in decision-making that affects the division they supervise, which in turn contributes to the organisation’s strategic decision. Also, it makes more sense for division managers to make decisions about activities affecting those they work with as they are closer to the people doing the actual work instead of having decisions to be imposed by the leadership from the organisational headquarters which will not be motivating enough to the working environment.
With the power entrusted to these divisions by the headquarters, it is therefore imperative that there will be a form of monitoring and evaluation to ensure that the performance aligns with expectations. The method of evaluating these performances is a function of the type of division or responsibility centres that is been dealt with. A division could be a cost centre, a profit centre or an investment centre. Each of these categories of division has a different approach to performance evaluation.
For cost centres, it implies that only cost accrues to such a division and in such cases to measure the financial performance of such a division, we make use of variance analysis, which basically compares the budget cost to be incurred by the division with the actual cost incurred by such division. The associated variance will be interpreted based on the variance analysis.
In addition to just incurring costs, we also have divisions that are meant to generate revenue while incurring those costs which provides what we termed as profit. These are called profit centres. For this category of division, the absolute profit will be used for the performance evaluation. This will be measured against the standard or benchmark set by the headquarters to understand how well a division has performed.
Finally, investment centres are responsible for making their own profits also, however they must do this in relation to their investments in assets utilised to generate those profits. This speaks to the level of efficiency in using the assets to generate profits. For this category of division, their performance is evaluated with the concept of return on capital employed (ROCE) while comparing with the benchmark set by the firm.
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