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The Purpose of Performance Evaluation

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Strengthening Valencia’ s accountability by implementing a direct sales strategy could be an area for consideration. The sales strategy would be to establish alternate markets. Niessen Apparel would remain Peru’ s captive customer for the US market while they would be given the freedom to pursue other markets with supervisory control of the parent. This would give a two-fold benefit: firstly, idle capacity can be productively employed and secondly responsibility for meeting profitability numbers can be squarely fixed. However, there would remain two problems for such a strategy to work, assuming of course that investment funds, in terms of staffing and monitoring, are available.

One: bridging the cultural gap. The Americans would need adequate assurances of air-tight controls that protect their investments, i.e. an element of trust has to be built. Two: normalization of the intra-company transfer price. The cultural problem could probably be addressed by installing an executive interface between Niessen Peru and the parent. Possibly, a native US American of Peruvian descent with experience in the apparel industry who would be able to bridge the cultural gaps between both sides. Normalizing the transfer price would be much more complex.

Firstly, the US manager’ s resistance would have to counter. In ‘ real’ terms price fixing would have gained them only marginal savings on their tax burden (back of the envelope calculations). The fact is the US marketing manager has ‘ dressed’ up his sales numbers to protect himself from criticism. The pricing rationale should be adjusted to present an equitable formula that would fair to the Peruvian operation as well as be at an optimal price point to enjoy the tax benefits.

Tackling the issue of exchange rate volatility, there seem to be many divergent thoughts on how to arrive at a ‘ common numeraire’ to evaluate performance. Jacque and Vaaler (2001) argue for an Economic Value Added framework (EVA ) while at the same time they cite Abdallah, et al (p. 826) recommending using a different set of metrics for measuring foreign operations.    

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