Jennifer Baskiter is president and CEO of Plants&More, an Internet company that sells plants and flowers. The success of her startup Internet company has motivated her to expand and create two divisions. One division focuses on sales to the general public and the other focuses on business-to-business sales to hotels, restaurants and other firms that want plants and flowers for their businesses. She is considering using a return on investment as a means of evaluating her divisions and their managers. She has hired you as a compensation consultant. What issues or concerns would you raise regarding the use of ROI for evaluating the divisions and their managers?

Using Return on Investment (ROI) as a performance metric for evaluating divisions and managers can have several potential issues or concerns, especially in a diverse business structure like Jennifer Baskiter's Plants&More with multiple divisions.

Here are some key concerns:

Inherent Limitations of ROI:

Varying Division Characteristics: Different divisions might have varying cost structures, capital requirements or growth stages, making direct ROI comparisons challenging.

Impact of External Factors: External factors, like economic changes or market conditions could differently affect divisions, making it unfair to compare ROI directly.

Inadequate Reflection of Long-Term Value: ROI might incentivize short-term gains at the expense of long-term value creation or strategic investments that benefit the company in the long run.

Divisional Autonomy and Decision-Making:

Risk Aversion: Managers might become risk-averse to maintain or improve their ROI, avoiding potentially beneficial but risky investments.

Underinvestment in Growth Opportunities: Divisions focusing on long-term growth might appear less favorable if their investments take time to generate returns compared to divisions with quicker returns.

Interdivisional Dynamics and Cooperation:

Encouraging Divisional Silos: An exclusive focus on ROI might encourage divisions to act independently, hindering collaboration and synergy among divisions.

Inequitable Resource Allocation: Divisions focusing on the short-term with higher ROIs might receive more resources, while those investing for long-term growth might be disadvantaged.

Performance Measurement and Metrics:

Complexity and Accuracy of ROI Calculation: Different divisions might have complex cost structures or varying ways to calculate returns, making accurate ROI comparisons difficult.

Need for Additional Metrics: Sole reliance on ROI might overlook other crucial performance indicators such as customer satisfaction, innovation or market share.

Organizational Culture and Behavioral Impact:

Misaligned Incentives: Focusing solely on ROI might incentivize short-term gains rather than aligning with the broader organizational goals or customer satisfaction.

Managerial Stress and Pressure: Managers might feel excessive pressure to meet ROI targets, impacting decision-making and potentially leading to unethical practices to improve numbers.

Conclusion:

While ROI is a valuable metric, its exclusive use for evaluating divisions and managers might oversimplify a complex business environment and hinder the overall success of Plants&More. Implementing a balanced approach that considers multiple performance metrics aligned with strategic goals would be more effective in promoting sustainable growth and divisional success.