Raiborn/Kinney Chapter 14 question 51: Colson Manufacturing (Balance Scorecard, EVA) A) Why would the use of EVA discourage a high growth strategy?
Economic Value Added (EVA) => A measure of the extent to which income exceeds the dollar cost of capital. In essence, it is the value generated from funds invested in a business. It can be calculated as income minus (invested capital times the cost of capital percentage). This measure is an easy- to-understand method that recognises improvements in earning only to the extent that they exceed the cost of capital, however, for one critical flaw: EVA discourages growth.
The reason why EVA discourages high growth is because:
Divisions with high proportion of expenditures on intangibles such as research and development and employee skill enhancement will tend to show higher EVA than, say, divisions in which most expenditures is of a tangible nature where one can see and touch what the division acquired for these expenditures. This is why marketing divisions with heavy advertising and promotional expenditures, or large numbers of professional employees (whose human capital is not recorded on the balance sheet), will show unusually high EVA performance measures. B) Could the concept of Balance Scorecard (BSC) be used to encourage a higher growth rate
? Balance Scorecard (BSC)=> This was developed to communicate the multiple, linked objectives that companies must achieve to compete on the basis of capabilities and innovation, not just tangible physical assets. It reflects the organization’s mission and strategy from four (4) perspectives: financial, internal business, customer, and innovation and learning. TABLE 1 SHOWING THE 4 PERSPECTIVES Financial perspective (whether the strategies are contributing to bottom-line improvements) Customer perspective (managers identify customers and market segments in which the business will compete) Internal Business Process(executives identify the critical...
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