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. It takes time to see the investments made into an emerging market to come to fruition. Individual target returns assessed by corporate headquarters would work better in these emerging markets. Data unavailability also causes problem in performance measurement. Indonesia, instead of Viet Nam, got sales credit when products were supplied from Indonesia warehouses to Viet Nam customers. But solid quantitative measure of such shipments is not available. Finally, the difficulty in quantifying non-financial performance also contributes to the complexity of performance measurement. The innovative approach Viet Nam developed to cut distribution costs also benefited Indonesia and Philippines. But it is not straightforward to incorporate the benefit of such innovation into performance measurement.
2) Rank the three countries using each of the following measures of performance:
Profit, ROI and EVA
3) Write a one paragraph memo to Ms. Karleskint explaining which country performed best. Be sure to explain your reasoning.
Based upon Barrows current KPI, Indonesia would appear to be the best subdivision due to it having the highest profit and second best ROI. Base on the EVA calculation, which reduces distortion cause by historical cost accounting data and focuses on share holders value, the Philippines performs the best. However we should also note that these three countries are part of a new emerging market where large investment is often necessary in the early stage to drive growth. ROI, RI and EVA calculations are all short term outlooks and do not apply well in emerging markets because investment tends to be high and income low in the early stages of emerging markets. From a long term perspective, it appears that the Philippines performed the best based on growth, followed by Vietnam, and then last was Indonesia.
The Philippines had the highest growth in Total Current Assets (38% growth including a 33% growth in Accounts Receivable) and Total Shareholders Equity growth (10.6% growth including a 12.5% growth in Retained Earnings). Viet Nam grew its Total Current Assets by 25% with a 28% growth in Accounts Receivables. Indonesias growth of Current Assets was the lowest at 8% and the lowest Accounts Receivable growth of 12.5%. Indonesia is also sitting on the most amount of cash (which grew 20%) also has the lowest liabilities, which indicates it may not be properly investing to drive growth for the future. Another indicator of efforts to grow and expand market share is advertising expense. Indonesias advertising budget remained the same from 1997 to 1998.
This can be interpreted as trying to maximize the bottom line rather than trying to expand in an emerging market. During the same period of time, the advertising expenses for Philippines and Viet Nam increased by 18% and 60%, respectively. Finally, it is worth taking into consideration that Viet Nam deserves extra credit for developing an innovative approach to cut distribution costs. To better align performance measurement with business goals in future periods, Barrows should not use Profit, ROI, or even EVA as sole performance indicators. It must define the level of investment it wants its subdivision managers to pursue and take this into consideration when evaluating performance. Barrows should also implement methods to track quantitatively the amount of shipments to Viet Nam customers from Indonesia to have more accurate data for performance evaluation.
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