Barrows Consumer Products
1) What are some of the factors causing the problems in measuring performance in the Southeast Asia sector? Comparing the performance of divisions operating in different countries is difficult due to legal, political, social, economic and currency differences. Additionally companies in different countries may adopt different accounting standards, which makes the financial statement not comparable. Calculation on ROI, RI and EVA for subunits that operate in different countries needs to be adjusted for differences in inflation and changes in the exchange rates. Barrows currently uses two primary performance measures, Profit and ROI, for its established divisions in the U.S., Canada, Europe and Japan. It is misleading to rely only on these two figures to compare its new regional market in Southeast Asia with established divisions, as well as to compare countries within the Southeast Asia market. Using profit to compare performance is not ideal because Indonesia, The Philippines and Viet Nam have very different populations and economies. For example, Indonesia has the largest population of the three countries and a higher GDP/capita compared to the much smaller and poorer Viet Nam. Since the three countries have considerably different market sizes, their investment requirements are different. Thus ROI would be a better performance indicator. However, ROI has a major drawback: it provides incentive for managers to not invest in assets or technology that would drive longer-term growth. Given these countries were picked for their significant growth opportunities, a performance measurement based heavily on ROI presents a potential moral hazard for these country managers. They would “perform better” without increasing their assets. This is a short sighted approach and a product of a reward system that is based on short term results. Other noted problems:
Since ROI has a short term outlook, it does not work well in an emerging market....
Please join StudyMode to read the full document