Moullin defined performance measurement as, “Performance measurement is evaluating how well organizations are managed and the value they deliver for customers and other stakeholders”. According to Kelvin, ‘When you can measure what you are speaking about and express it in numbers, you know something about it’. According to Anon, ‘You cannot manage what you cannot measure’. The Economic Value Added (EVA) framework developed by the Stern Stewart & Company is gradually replacing the traditional measures of financial performance due to its robustness and its immunity from "creative accounting".
Fortune magazine has called it "today's hottest financial idea and getting hotter" and management guru Peter Drucker referred to it as a measure of total factor productivity. The traditional measures for performance measurement, suffer from some serious limitations which are the main reason that these traditional methods based on earnings can’t be used as a reliable measure of performance measurement. Hence, there is the need of new approaches for the performance measurement which takes stakeholder’s perspective into consideration and shareholders wealth into consideration.
EVA is a better performance measurement tool and it has been proved in the research done on 10 companies in India. EVA has been compared with traditional techniques like ROI, ROE, EPS, NVA and MVA and the results are presented. Suggestive measures have also been given at the end and reference tables are also given. The research will e beneficial for academicians and people associated with finance.
Table of Contents
1. Introduction
2. Literature Review
3. The Analysis
4. Conclusion & Suggestions
Research Objectives and Focus
The primary objective of this study is to conduct a comparative analysis between Economic Value Added (EVA) and traditional performance measurement techniques to evaluate the operational efficiency and financial health of companies in the steel and petrochemicals industries in India.
- Comparison of traditional financial metrics (ROI, ROE, EPS, MVA) with modern EVA frameworks.
- Evaluation of shareholder wealth maximization across ten selected Indian companies.
- Assessment of the impact of cost of capital on real economic profit.
- Analysis of inter-firm and intra-firm performance differences in the steel and petrochemical sectors.
Excerpt from the Book
Meaning of Performance Measurement
Moullin defined performance measurement as, “Performance measurement is evaluating how well organizations are managed and the value they deliver for customers and other stakeholders”. Performance measurement is the ongoing monitoring and reporting of program accomplishments, particularly progress towards pre established goals. Performance measurement is the process whereby an organization establishes the parameters within which programs, investments, and acquisitions are reaching the desired results.
Objectives of Performance Measurement
Organizations measure their performance for numerous reasons. The main objectives of performance measurement in the organizations’ are as follows:
1. Improvement in the processes by continuous monitoring of the operations.
2. Planning and forecasting by serving as a progress check.
3. Meeting competition by identifying weak areas and addressing them to sharpen their competitive edge at the earliest.
4. Rewarding and motivating the employees who have excelled in achieving goals.
5. To help the organizations in complying with government regulations and standards such as anti pollution laws or international standards like ISO 9000.
Summary of Chapters
Introduction: This chapter defines the concept and objectives of performance measurement, laying the groundwork for comparing traditional and modern analytical tools.
Literature Review: This chapter reviews past research and academic studies regarding value-based management, specifically focusing on the evolution and application of Economic Value Added (EVA) in various industries.
The Analysis: This chapter presents a detailed empirical evaluation of ten selected companies in the steel and petrochemical industries using various traditional and modern performance parameters.
Conclusion & Suggestions: This chapter summarizes the findings of the study, highlighting the limitations of traditional measures and providing strategic recommendations for the implementation of EVA.
Keywords
Economic Value Added, EVA, Performance Measurement, Traditional Methods, ROI, Return on Equity, ROE, Market Value Added, MVA, Shareholder Wealth, Corporate Finance, Capital Employed, NOPAT, Indian Industry, Financial Analysis
Frequently Asked Questions
What is the core focus of this research?
This research primarily examines and compares traditional financial performance indicators against the Economic Value Added (EVA) framework to determine which provides a more accurate assessment of a company's financial health.
Which industries are analyzed in this study?
The study focuses on ten companies from the Indian steel and petrochemicals industries, chosen due to their growth potential and significance to the country's economy.
What is the primary objective of the work?
The main goal is to evaluate if traditional accounting-based metrics are sufficient for measuring performance, or if EVA offers a superior perspective by accounting for the cost of capital.
What methodology is employed for performance appraisal?
The research utilizes both traditional financial techniques (such as ROI, EPS, ROE, and MVA) and modern approaches (specifically EVA) to conduct a comparative analysis across multiple fiscal years.
What is covered in the main analysis section?
The analysis section provides detailed appraisals of individual companies, comparing their performance across various metrics and calculating industry-specific benchmarks.
Which concepts define this research?
The research is defined by key concepts such as shareholder wealth maximization, cost of capital, capital employed, and the divergence between reported accounting profit and true economic profit.
How does EVA differ from traditional metrics?
Unlike traditional earnings-based measures, EVA adjusts for the cost of capital, reflecting the true economic profit created or destroyed by a firm during a reporting period.
What conclusion does the author reach regarding traditional measures?
The author concludes that traditional measures often inflate performance results because they fail to subtract the cost of capital, whereas EVA provides a more rigorous and realistic picture of corporate financial health.
- Quote paper
- Dr. Shivani Gupta (Author), 2011, Performance Measurement: A Comparative Study of EVA and Traditional Performance Measurement Techniques, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/184720
