Eva bsc together

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Solving the Measurement Puzzle
How EVA and the Balanced Scorecard Fit Together

Marcos Ampuero

Jesse Goranson

Jason Scott

About the Authors: Marcos Ampuero, Jesse Goranson, and Jason Scott all work within Ernst & Young’s management consulting practice, advising clients on matters of strategy. Mr. Ampuero is a Partner in the firm, and has led projects focused on business andmarketing strategy for general industry and financial services, change management, merger integration issues, and international business. He holds an MBA from Harvard Business School, and a doctorate in psychology from Princeton, where he taught for four years. Mr. Goranson, a manager, specializes in strategic measurement, primarily using the Balanced Scorecard methodology. He earned his BS and MSdegrees from MIT’s Sloan School of Business, and worked previously as a research analyst for the Federal Aviation Administration.

s shareholder activism intensifies, the primary questions that consume executives’ time are: “How is my business doing, and how do I know whether my decisions today will create long-term value?” Not surprisingly, executive interest in performance measurement has reacheda new peak. Rumors of the simplicity of measurement are grossly exaggerated, which may explain the profusion of powerful new concepts in this area. These days, it seems that everyone has a new measurement tool.1 In fact, executives have at their disposal EVA, MVA, TSR, and the Balanced Scorecard, among others.2 Advances in technology, while increasing measurement capability, have added confusionrather than lent clarity. Thus the question remains unanswered: how do I choose the conceptual framework that works best for my company? Shifting Paradigms of Value Arguably, two concepts have received the most attention in the press, thereby capturing executives’ imagination: Economic Value Added, or EVA, and the Balanced Scorecard. The number of articles mentioning either of the two concepts hasgrown exponentially from 1989 to 1997 (see Figure 2). Now virtually every major company in the US is at some stage of investigating or implementing EVA. Fortune magazine called it “today’s hottest financial product” and the key to creating wealth.3 Similarly, the Balanced Scorecard has grown in popularity since it first burst upon the management scene in 1993. It is estimated that 60 percent oflarge US corporations
A Blueprint for Change

A

Feedback Frenzy, pg. 11 Where Are They Now?, pg. 26

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Figure 1
Shifting Paradigms of Value 1920s
Dupont Model Return on Investment (ROI)

1970s
Earnings Per Share (EPS) Price/Equity Multiples

1980s
Market/Book Ratios Return on Equity Return on Net Assets (RONA) Cash Flow

1990s
Economic Value Added (EVA) EBITDA Market ValueAdded (MVA) Balanced Scorecard Total Shareholder Equity (TSR) Cash Flow Return on Investment (CFROI)

Figure 2
References to EVA and the Balanced Scorecard in a Sample of Prestigious Business Journals (1989–1997)
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use some version of a scorecard that integrates financial with non-financial measures.4 Many of the top most consistently successful companies (e.g., AlliedSignal, FederalExpress, General Electric, Wal-Mart, etc.) have adopted some form of balanced set of performance measures.5 While both methodologies can sharpen organizational focus, problems may occur when firms launch two parallel measurement initiatives with different champions. A Midwestern chemical company, for example, spent millions of dollars on an EVA initiative spearheaded by the CFO, while a similar amountwas earmarked for a Balanced Scorecard effort championed by the head of the largest operating group. Yet these initiatives never intersected with each other, created organizational confusion and frustration, and as a result, were never fully implemented. In this article we will investigate the question of whether the two measurement philosophies are reconcilable and, if so, how? EVA Redux EVA is...
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