An investment center is a responsibility center having revenues, expenses, and an appropriate investment base. When a firm evaluates an investment center, it looks at the rate of return it can earn on its investment base.

Decentralization is the dispersion of decision-making authority among individuals at lower levels of the organization. In other words, the extent of decentralization refers to the degree of control that segment managers have over the revenues, expenses, and assets of their segments. When a segment manager has control over these elements, the investment center concept can be applied to the segment. Thus, the more decentralized the decision-making is in an organization, the more applicable is the investment center concept to the segments of the company. The more centralized the decision-making is, the more likely responsibility centers are to be established as expense centers.

Therefore, typical investment centers are large, autonomous segments of large companies. The centers are often separated from one another by location, types of products, functions, and/or necessary management skills. Segments such as these often seem to be separate companies to an outside observer. But the investment center concept can be applied even in relatively small companies in which the segment managers have control over the revenues, expenses, and assets of their segments.

Let’s revisit GE’s segments: Power, Renewable Energy, Aviation, Healthcare, and Capital. In the annual report, GE summarizes financial and other operational data into three columns: consolidated, industrial (Power, Renewable Energy, Aviation, and Healthcare), and financial (Capital). Within each segment, GE identifies portfolios of investments. For instance, the Renewable Energy segment consists of the following portfolios: Onshore Wind, Grid Solutions Equipment and Services, Hydro Solutions, Offshore Wind, and Hybrid Solutions. Within each portfolio, GE owns businesses that are treated as sub-investment centers, and each is analyzed according to its contribution to both mission and profit. For instance, in late 2018, as part of a larger effort to sell off subsidiaries that were under-performing, General Electric sold a portion of its Power portfolio to American Industrial Partners. The company was called Current and had been established as a subsidiary in 2015 to focus on producing energy management systems. Although annual revenue for Current was reported at approximately $1 billion, it was either not a good fit, underperforming, or worth more as an investment to sell.

You can find more details on this in GE’s annual report.

Here is a video description of investment centers with more examples:

You can view the transcript for “Investment Center” here (opens in new window).

Now, check your understanding of investment centers.