NEW DEVELOPMENTS IN CORPORATE PERFORMANCE EVALUATION By Prof Subhash Chander Dept of Commerce & Business Management Guru Nanak Dev University Amritsar

MEASURES OF CORPORATE PERFORMANCE Return on Sales (ROS) Return on Investment (ROI) Residual Income (RI) Economic Value Added (EVA) Market Value Added (MVA) Balanced Score Card

RESIDUAL INCOME INCOME – (REQUIRED RATE OF RETURN * INVESTMENT)

ECONOMIC VALUE ADDED(EVA) OPERATING CAPITAL INCOME - CHARGE AFTER TAX OPERATING INCOME AFTER TAX – [ WEIGHTED AVERAGE COST OF CAPITAL x (NET FIXED ASSETS + NET CURRENT ASSETS) ]

COMPANIES REPORTING EVA HUL Godrej Consumer Products Limited Infosys Technologies Ltd Satyam Computer Services Ltd Dr Reddy’s Lab Tata Steels

IMPLEMENTATION OF EVA IN GODREJ GROUP OF COMPANIES “EVA will be the main financial parameter by which we measure our performance. It will also be used in all capital expenditure decisions including acquisitions. We have just completed an exhaustive modular training on EVA and its application for all employees. The objective is to make all employees think like owners. This should be supported by an open-ended variable remuneration scheme.” C K Vaidya Executive Director (Corporate Personnel)

TRAINING FOR EVA AT GODREJ Training programme for employees was conducted by consultants from Stern Stewart Use of simulation techniques in training Four tier training : *Detailed training for top mgt & Internal Trainers by Stern Stewart *Detailed training for middle mgt by Internal Trainers *Basic training for other employees *Training and awareness of performance linked variable remuneration scheme

BOOH Factor in the implementation of EVA at Godrej Build --- Invest as long as returns exceed the cost of capital Optimise--- Reduce cost of capital by optimising capital structure Operate--- Improve the return on existing capital Harvest--- Divest capital when the returns fail to achieve the cost of capital

MARKET VALUE ADDED (MVA) COMPANY’S TOTAL MARKET VALUE - BOOK VALUE OR MV OF EQUITY + MV OF DEBT – BOOK VALUE OF EQUITY AND DEBT

M V OF A CO MVA BV OF A CO

B V OF A CO. VALUE LOST MV OF A CO.

BALANCED SCORE CARD FINANCIAL MEASURES NON-FINANCIAL MEASURES

BSC IS A PERFORMANCE MEASUREMENT TECHNIQUE DEVELOPED BY : ROBERT S KAPLAN AND DAVID NORTON PROFESSORS AT HARVARD BUSINESS SCHOOL IN 1992

FOUR PERSPECTIVES OF BSC FINANCIAL CUSTOMERS INTERNAL BUSINESS PROCESSES VISION & STRATEGY LEARNING & GROWTH

FINANCIAL: Revenue generated, ROS, ROI, RI, EVA, MVA CUSTOMERS: INTERNAL BUSINESS PROCESSES : Customer acquisition, Customer satisfaction & delight, Customer retention, Market share -Processes adopted to enhance EVA -Processes to serve the customer better e.g. Internal Value Chain LEARNING &GROWTH : Employees, Infrastructure, Systems

INTERNAL VALUE CHAIN CUSTOMER NEED IDENTIFIED Innovation cycle: -Identify the market -Create the product Operating cycle: -Build the product -Deliver the product Post sales services cycle: Service the customer CUSTOMER NEED FULFILLED