Financial planning in divisionalised companies

The problem of financial planning in Divisionalised companies may be seen as combining the models derived from economic analysis with the models of organisation theory. The major study of Bower following the studies of Aharoni, Williams and Scott, Cannon and Helliwell lends considerable weight to the need to generate an organisationally based theory of planning and control of resource allocation. The author writes in his introduction to "Financial Planning in Divisionalised Companies" that he is concerned here with the way a central head office of a divisionalised company may attempt to co-ordinate financial planning activities. Unhappily this focus on the problems of a head office (uninhabited) leads to a rather narrow control orientation toward the potential misdemeanours of divisional managers. The book begins with a brief discussion of the advantages and otherwise of divisionalisation, from a traditional rather than an analytic viewpoint. The accounting emphasis is underlined by the separation of divisional decisions into Operating and Investment. Much of the rest of the book is devoted to the derivation of appropriate rules for these decisions, assuming the wealth maximising hypothesis. The technical analysis for operating decisions starts with the division as an independent unit and discusses the general principles for output and product mix. Complicating factors of interdivisional transfers are introduced in a detailed and useful introduction from the perspective of Hirshleifer and Gould and then Ronen and McKinney. This first section is completed by a clear and helpful exposition of some.mathematical programming approaches for financial planning in a divisionalised company. The author reviews and evaluates several programming methods and argues, if a compromise between the needs of autonomy and control can be found, that such methods may come to prove their worth in practical application. The second part of the book is a neat cover of the familiar ground of investment appraisal and project selection. The author argues that residual income is no better than NPV or IRR as a tool selection and agrees with Lawson that a cash flow comparison provides a sound basis for post hoc evaluation even though overall optimality is not thereby assured. A review of the discount rate problem is followed by a brief excursion into the domain of uncertainty, through sensitivity analysis and portfolio construction only so far as it pertains to the processing of date. The divisionalisation of investment decision is considered and concluded by the view that companies must establish planning methods before there can be much useful discussion on the goal congruence of divisional and corporate decisions. The final chapter presents the results of a brief survey of the practice of divisionalisation in the U.K., and with a response from sixty three companies. Within the limitations of survey methods some comparisons are made with the American data of Solomons and Maurial and Anthony, especially the point that few firms in either country use marginal cost as the basis for transfer pricing. Similar results were found in the work of the Management Control Research Project at the Manchester Business School. The author concludes inter alia "the degree of autonomy (for divisional managers) is the key decision which each management needs to settle"; and "Probably the most urgently needed research in this field is that dealing with the measurement in terms of increases in wealth, of the benefits of divisional autonomy." This book is commended to students but practising managers might be inhibited by the rather academic style. ANTHONY J. BERRY