Case Scenario:
Strategic Performance Measurement
Johnson Supply Company is a large retailer of office supplies. It is organized into six re¬gional divisions, five within the United States, and one international division. The firm is growing steadily, with the greatest growth in the international division. Johnson evaluates each division as a profit SBU. Revenues and direct costs of the divisions are traced to each division using a centralized accounting system. The various support departments, including human resources, information technology, accounting, and marketing, are treated as cost SBUs and the costs are allocated to the divisions on the basis of sales revenues. The international division has cash, receivables, payables, and other invest¬ments in foreign currencies. As a result, this division experiences occasional significant losses and gains due to fluctuations in the value of foreign currencies. Based on the idea that these effects are uncontrollable, the effects of currency changes on the international division is retained in a single home-office account and is not traced to the division. Similarly, taxes paid by this division to other countries is pooled in a home office account and is not traced to it.
Because of rapidly increasing costs in the information technology (IT) department, Johnson's top management is considering changing this department to a profit SBU. It would set prices for its services, and the user divisions could choose to purchase these services from IT or from a vendor outside the firm. The manager of IT is upset at the idea, and has told top management that this move would eventually create chaotic and ineffec¬tive information services within the firm.
Question 1. Should Johnson's six divisions be treated as profit SBUs or some other type of strategic performance measurement system? Explain.
Question 2. Comment on the firm's decision not to trace currency gains and losses and foreign tax expense to the international division.
Question 3. Comment on the firm's consideration of changing the IT department from a cost SBU to a profit SBU. What are the likely effects on the firm and on the IT department?