Lego's Performance Measures
Performance measurement is a process for collecting and reporting information regarding the performance of an individual, group or organizations. There are various methods to measure the business performance, including financially and non-financially.
The traditional financial measures include some ratios like average return rate (ARR), return on investment (ROI), residual income (RI), and earnings per share (EPS). In the case, we can find LEGO’s financial measures in exhibit 1. From 2006 to 2010, LEGO’s profit and assets had a gradual increase, the margin, ROE, and ROI also increased year by year, which show that LEGO performed well during the period. However, these traditional measures results mainly based on historical figures, which is difficult to establish relationship between managers’ actions and the reported financial results. Moreover, these measures are open to manipulation, which may not reflect the real performance of LEGO. Additionally, due to lack of comparability across companies, it’s hard to identify the real performance of LEGO.
The improved financial measurement, like economic value added (EVA) can reduce above limitations. EVA is a financial performance method to calculate the true economic profit of a corporation. EVA can be calculated as net operating after taxes profit minus a charge for the opportunity cost of the capital invested. Unlike Market-based measures, such as MVA, EVA can be calculated at divisional (strategic business unit) level. Unlike stock measures, EVA is a flow and can be used for performance evaluation over time. Unlike accounting profit, such as EBIT, and EPS, EVA is economic and is based on the idea that a business must cover both operating costs and the capital costs. EVA can give LEGO’s managers better information and incentive managers