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Balanced Scorecard Model
Financial Perspective
Customer Perspective
Internal BusinessProcess Perspective
Learning & GrowthPerspective
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Balanced Scorecard Components
Financial Perspective Customer Perspective Internal Business Process Perspective Learning and Growth Perspective
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The Measures
Approximately 5-7 per section Link the measures…cause & effect Include outcomes and drivers Strategic measures become part of the bal.
scorecard; control system measures become “critical success factors” (or everyday measures)
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Balanced Scorecard Success
Employee level Link with Compensation Include leading and lagging indicators
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Features of a Good Balanced Scorecard
It tells a story. It helps communicate a strategy. It preserves a financial focus. It provides for metric focus. It highlights sub-optimal tradeoffs.
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Balanced Scorecard Pitfalls
Failure to allow the scorecard to evolve. Emphasizing across the board improvement. Focus on only objective measures. Failure to focus on both costs and benefits. Failure to include non-financial measures in
evaluating employees.
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Economic Value-added Analysis--EVA®
Measurement Alternative for Shareholder Value
Elements
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A Little Bit of History
Residual income measures have been around for over 100 years in academic literature.
Stern Stewart & Co. introduced the formal concept of EVA® about 10 years ago.
Fortune Magazine put EVA® on the map in a September 1993 article.
A whole slew of offspring have followed. SVA from Andersen Consulting Other variations of Economic Value Added
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EVA™ Testimonials
“Only EVA® gives a real picture of value creation. Accounting benchmarks just don’t do the job.” Robert Boldt, Calpers.
EVA® correlates better with stock performance than EPS. Fortune Magazine study.
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EVA® Benefits
Objective evaluation Easy tool for strategic decision support Common shareholder & management focus Consistent measurement tool Improves on-going operating decisions Provides basis for common incentive-pay
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EVA® Risks
May be subjective in implementation. Singular reliance on EVA® may be misleading.
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Let’s Define EVA®
When the Cost of Capital is less thanthe Operating Income from that Capital, you create EVA®!!!
“Stuff” Generates Income
Capital Buys “Stuff”
Sources of Capital-Debt-Equity
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EVA® Elements
Cost of Debt Financing Cost of Equity Financing Components of Capital Adjusted Net Operating Income
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Cost of Debt Financing
Interest Expense After-tax Impact Consider all Debt, Excluding A/P
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Cost of Equity Financing
Shareholder Hurdle Rate Price Appreciation Dividend Rate “Six Percentage Point” Rule
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Components of Capital
Net Working Capital Net Long-lived Tangible Assets R & D Spending Employee Development Spending
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Adjusted Net Operating Income
Substitute R&D and Employee Development Costs with Annual Amort.
Use Net Income from Continuing Operations Adj. Net Op. Income Minus Cost of
Financing Equals Economic Value Added
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EVA® Uses
Planning Tool Business Unit Evaluation Incentive Compensation Base Merger and Acquisition Analysis Capital Asset Analysis
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Ways to Raise EVA®
Increase Profits Reduce Capital Spending Reduce Investment in Working Capital Increase High-margin Capital Investments