Enager Industries

Enager Industries, Inc. write up Consultants Report Introduction Enager Industries, Inc. was a relatively young company that consisted of three divisions with discrete services and products. At the urging of chief financial officer Henry Hubbard, Enagers president, Carl Rand entirely, had decided to begin treating apiece division as an investment center, so as to be able to relate apiece divisions kale to the assets the division used to generate it profits. digest However, several issues arose regarding this executing evaluation regularity and opposite forethought supremacy choices.First of every, profitable peeled project at Consumer Products Division, whose sire was 13% calculated from Exhibit 3, could non get approved from upper management because it could non reach the pre-determined universal target return of at to the lowest degree 15 percent, even if all the divisions had completely different line of logical argument. This could potentially discourage produ ct development managers incentive to engage in smart projects. More importantly, the company could miss out the opportunity on new products in the long-run, although it might not check a large return right away in the short-run.Secondly, the president of the company, Carl Randall, was both puzzled and foiled at the discrepancies among the performance evaluation parameters of the company in 1993. Both ROA and staring(a) return dropped from 1992, term return on sales and return on owners equity increased. There were also discrepancies across different divisions, as overlord Service easily exceeded the 12% gross return target while other two divisions, especially the Industrial Product division had a ROA that was only 6. 9%.These discrepancies could increase the difficulties for the top management to chthonianstand the performance, then hindered managers ability to make good decisions. Last besides not least, general manager of Industrial Product Division was typeset much pre ssure by Randall, the president, because the division fell behind compared to the other two in terms of ROA. The divisional general manager argued that they could suffer achieved a higher ROA if they had older assets as Consumer Products Division did, yet Randall could not understand the relevance of the argument.This is not only a communication problem, but also an evaluation problem caused by the inappropriate treatment of the assets set that is used in calculating ROA. By analyzing the management problems menti sensationd above, in lav be concluded that these problems are the consequences of several management control mistakes, including monstrous target setting, inefficient method of performance evaluation, and problematic treatment of assets care for. nobble management of Enager should not set an identical goal for all the divisions since all the divisions engaged in distinct service or production.The nature of those distinct businesses certainly required different amoun t of assets to operate, and they would face different levels of competition, and they would certainly have different profit margins. Therefore, it was unreasonable only victimisation one single target return to evaluation all the new projects from all three divisions to determine if the projects were profitable. In the suit of clothes, McNeils proposal was rejected because it did not meet the 15% target return. However, the new project did have a favorable residual income and demonstrated the a return of 13%, which cigarette increase the EPS for the company.If any benchmark were to be set to evaluate the profitability of new projects, it should be carefully engineered according to specific situation that dejection be applied to specific division, with the comparison to other competitors in the pains or to past performance. For example, Enager potentiometer establish a standard be system based on historical and external information (including financial information, market inf ormation, etc) that can allows management to create a standard profit level.A standard hailing system can further allows cost and profit variance analysis, which can be a very mighty besidesl for management control later on. There were also too many confounding factors in calculating ROA in Enagers case. Firstly, using net book value of assets (as shown in Exhibit2) in calculating the ROA would for certain put those divisions with newer assets in disadvantage. With less depreciation, divisions with newer assets will have lower ROA referable to a larger denominator of assets value. The more reasonable way in this case is to use the fair market value, which can better represent the assets value in producing profit.Secondly, it is unreasonable to allocate corporate expenses and assets to certain divisions based on divisional revenue. Since each division had different services and products, revenue could not be the basis of allocating those corporate expenses and assets that did no t bound performance of each division. These confounding factors may be able to explain those discrepancies Randall was confused about. As such, the use of ROA in this case is an ineffective method of performance evaluation. good wordBased on the previous analysis, the solution to this case is to implement a new method of performance evaluation since ROA is such an ineffective method of performance evaluation. One selection worth perusing is to use the equilibrize pla scorecard method to evaluate division performance. Instead of measuring the performance only using financial data, equilibrize Scorecard methods requires business units to be assigned goals and then measured form the perspectives of financial, customer, internal business and designing and learning.For example, Enager can evaluate the divisions based on the quality of the products, level of innovation, employees theatrical role to the whole company, etc. Balanced Scorecard can be a very critical supplement to fi nancial data because it is part of dodge planning. The Industrial Products group may no longer be under evaluated because of less-than-perfect financial data. Essentially, a Balanced Scorecard method allows the manger to gain vigor the big picture on the strategic level.A Balanced Scorecard method can also promote balances among different strategies in an reason to achieve goal congruence, thus encouraging employees to act in the organizations best interest. Profitable new projects, like the one that McNeil had proposed, would have a chance of getting approved because it would benefit the company as a whole since it could increase Enagers EPS. Another advantage of implementing Balanced Score card is that it promotes comparability among different divisions with distinct line of business. contradictory ROA, Balanced Scorecard taken in to accounts of different perspective of the business into account, since the comprehensive value of the division is reflected in the Balanced Score c ard design. By implementing Balanced Score card method, the upper management of Enager can obtain a broad-base view of the company in terms of goals and strategy. Although it requires special work for executives to choose a mix of measurement that accurately reflect the critical factors that will determine the success of the company, it is a better alternative here than ROA as a performance evaluation method.