Explain the long-term benefits Samentech Inc. could gain if it adopts a more effective evaluation strategy for its business unit leaders.
Financial Reporting and SBU Performance
Samentech Inc. operates in the highly competitive agribusiness industry. Recently, rising fuel costs have added a significant financial burden to day- to-day operations, and top management has become increasingly concerned about the financial performance of several of its business units. Business unit performance and the performance of the unit managers is evaluated using the financial information in the “Segment Reporting” section of Samentech’s annual report. Samentech uses this approach to evaluation because it knows that the information is audited and therefore accurate.
Some key executives have noticed that many business unit leaders seem unwilling to cooperate and coordinate with other business units; difficulties have arisen for example in convincing unit managers to share certain services when the result would be to reduce total costs to the company. A recent example is the failure of the unit managers to agree to share the services of an insurance firm that offered lower rates if all units used the same insurance policy; some unit managers wanted to maintain individual insurance coverage for their units so that they had maximum flexibility in choosing the terms of the coverage.
Moreover, the financial performance of many units and for Samentech overall has been behind industry averages, and the firm’s stock price has been declining as well. These issues were largely ignored in recent years because there were “more important issues” at hand. But the pace of decline in stock price has alarmed Frank Ramirez, the CFO of Samentech Inc., who believes that the lack- luster performance of many of the business units may be due to inadequacies in the company’s performance measurement system.
Required: Mr. Ramirez asks you to help him prepare a report for top management in which you
1. Explain why Samentech Inc. should or should not use information from the company’s annual financial report to evaluate leaders of business units.
2. Provide a proposed new evaluation plan for business unit leaders.
