Economic Value Added EVA an Term Paper

  • Length: 7 pages
  • Sources: 6
  • Subject: Business
  • Type: Term Paper
  • Paper: #3829808

Excerpt from Term Paper :

However, EVA is neither as perfect as claimed by its advocates, nor is it the only performance measure that suggests a path to a superior stock return" (emphasis added) (p. 319).

More importantly, though, while the economic value added measurement approach to financial performance may not be without its detractors, the scholarly literature is consistent in emphasizing the need for such initiatives for companies to remain competitive in an increasingly globalized marketplace today. For instance, in his recent essay, "Profit-Increasing Strategies," Tracy (2006) reports that there are a number of ways for most companies to add value to their product or service. "There are many strategies for generating sales, profitability and wealth in every industry," he advises. "Your ability as an entrepreneur to create a profitable business where no business existed before is the key to your success. In every market, it's usually true that 20% of the businesses earn 80% of the profits in their industry" (Tracy, 2006, p. 2).

The studies of companies to date concerning their ability to capture market share suggest that these companies have the following in features common:

Operational excellence. The company has developed the ability to produce its products and services at a cost substantially lower than its competitors.

Customer intimacy. The company has developed a close relationship with its customers based on an excellent knowledge of their customers' business.

Technological superiority. The company offers a product or service that's superior to that of its competitors (Tracy, 2006).

There are also a number of strategies that companies can follow to create additional value for their customers and additional profits for themselves, including the following:

Improve a product or service in some way so that it is better than that of a competitors, at the same or a lower price.

Produce or deliver a product or service to customers faster than competitors.

Produce a product or service cheaper than competitors, maintaining or increasing the same level of quality.

Offer better follow-up and support services than competitors in combination with a product or service.

Provide guarantees and warranties of satisfaction that are more extensive than those of competitors.

Make a product easier to acquire and more readily available than those of competitors.

Make the price and terms more attractive and convenient than those of competitors.

Include additional products and services with offerings, at the same price (Tracy, 2006).

While the experts may not agree on its efficacy as a measurement tool, the need for economic value added activities remains important for virtually any type of company today: "The key to creating profit has always been the same: It is to add value. Profit comes from adding value in some way, before your competitors do it. The number of ways you can add value to your product or service -- and to your customers -- is only limited by your imagination" (Tracy, 2006, p. 3).

Conclusion

The research showed that the economic value added is basically a measurement of the difference between a company's net operating income after taxes and its cost of capital of both equity and debt. Because every company's situation is unique, one financial measurement technique may be more appropriate than another, but the research also showed that there are some refinements to the EVA technique available that may make it more useful in certain circumstances. Finally, the review of the literature was clear in emphasizing that although there is a fundamental need for financial management techniques such as the economic value added approach for assessing organizational performance, the EVA is not the only such method available and it is not without is difficulties in implementation and administration.

References

Brewer, P.C., Chandra, G., & Hock, C.A. (1999). Economic value added (EVA): Its uses and limitations. SAM Advanced Management Journal, 64(2), 4.

Chen, S., & Dodd, J.L. (1997). Economic value added (EVA Super TM): An empirical examination of a new corporate performance measure. Journal of Managerial Issues, 9(3), 318.

Fletcher, H.D., & Smith, D.B. (2004). Managing for value: Developing a performance measurement system integrating economic value added and the balanced scorecard in trategic planning. Journal of Business Strategies, 21(1), 1.

Mcmenamin, J. (1999). Management: An introduction. London: Routledge.

Neely, A. (2002). Business performance measurement: Theory and practice.…

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