Tuesday 21 June 2011

The performance evaluation systems

The performance evaluation system is one the three legs of organisation architectures (i.e 3 legs of stools). To be successful in the competitive environment, the first thing that every firm need to consider is whether their 3 legs of stools are in balance.
To measure the performance of the firm, firstly, you need to classify the firm’s divisions into 5 centres (i.e. Cost Centre, Expense Centre, Profit Centre, Revenue Centre, and Investment Centre)
For now, we just focus on Cost Centre, Profit Centre, & Investment Centre.
Cost centre:
Task: Produce some output
Decision rights: Input mix (labour, materials, and outside services) used to produce the output
Evaluation: Efficiency in applying these inputs to produce output (i.e. use budgeted cost vs output.) Note: Quality must be easily observable and must be monitored
Profit Centre:
Task: Run a specified part of the business profitably.
Decision rights: Input mix, selling prices, marketing techniques, but nothing on the cost side
Evaluation: Profit (i.e use actual versus budget).
Investment Centre:
(this centre is quite similar to profit centre, but it has a power over the expenditures of the company):
Task: Run a specified part of the business, earning an adequate return on investment
Decision rights: Similar to profit centres but with additional decision rights for capital expenditures.
Evaluation: Using ROI, RI, & EVA

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