Divisional Performance Measurement: An Examination Of The Potential Explanatory Factors

Abstract

Surveys indicate that the majority of companies in the UK have adopted divisionalised organisational structure. The manner in which divisions are controlled and evaluated is therefore of considerable importance. However, much of the research relating to divisional performance measurement is approximately 20 years old. The management accounting literature distinguish between the economic performance of a division and the performance of its manager, advocating that the evaluation of a manager's performance should consist only of those factors under a manager's control. However, empirical evidence showed that companies tend to hold divisional managers responsible for uncontrollable factors (for the purpose of this research uncontrollable factors include three categories: (1) uncontrollable common resources costs; (2) economic and competitive conditions and (3) interdependencies among divisions). This research aims to explain the factors that lead to hold divisional managers responsible for uncontrollable items. In particular, the research addresses the following issues: 1. The extent to which companies use different measures to evaluate the economic performance of the divisions and the performance of divisional managers; 2. The nature and content of the performance measures that are used to evaluate divisional managers' performance; 3. The level of application of the controllability principle in terms of the above three categories of uncontrollable factors; 4. The role of the potential explanatory factors in explaining the observed practice. They include behavioural, institutional and organisational factors; and 5. The relative importance attached to non-financial performance measures that are used to evaluate divisional managers' performance. A postal questionnaire survey has undertaken to the UK-based divisionalised companies during April and May 2000. A total usable questionnaire was 124. The preliminary research findings identify many different levels of the application of the controllability principle. At one extreme some companies hold divisional managers responsible for all uncontrollable factors. At the other extreme some companies seek to hold divisional managers responsible only for controllable factors.