Chapter 12

Decentralization and Performance Evaluation

Learning Objectives

  1. List and explain the advantages and disadvantages of decentralization.
  2. Explain why companies evaluate the performance of subunits and subunit managers.
  3. Identify cost centers, profit centers, and investment centers.
  4. Calculate and interpret return on investment (ROI).
  5. Explain why using a measure of profit to evaluate performance can lead to overinvestment and why using a measure of return on investment (ROI) can lead to underinvestment.
  6. Calculate and interpret residual income (RI) and economic value added (EVA).
  7. Explain the potential benefits of using a balanced scorecard to assess performance.
  8. Discuss how a strategy map can be used to communicate the linkages among the measures in a balanced scorecard.
  9. Discuss the key items related to a successful balanced scorecard.


Action Industries is a diversified corporation whose divisions manufacture office products, home products, janitorial supplies, storage containers, and a variety of plastic products.

At a recent meeting of the board of directors of Action Industries, Bill Stern, president and CEO, rose to address board members. “As I'm sure you know,” he began, “Marie Greco is doing a really superb job as manager of our Home Products division. Five years ...

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