Managerial Economics and Performance management

Detailed SWOT analysis of the applied EVA model

Introduction

A registered trade mark symbol that calculates the economic profit by a specific method of the Stern Stewart Co . is referred to as Economic Value Added or EVA . It is necessary for any business to earn the profit in such a way that , besides the coverage of the costs associated with the capital , it should be able to create a surplus for the growth of the business . In other words , EVA or the economic value added is , earning the profits over or above

the cost of the capital . There exist many traditional methods to measure the corporate performance . EVA is a new measure of corporate surplus and it should be shared between the management , employees and share holders . In contrast to the traditional profit that is available to the share holders , EVA is a clear surplus and the companies use EVA as an indicator of performance . EVA is also used as a basis to the compensation of the executive . To derive the surplus , cost of the capital is deducted from the profit after the tax and before the interest

EVA NOPAT- WACC X Capital employed

NOPAT is the net operating profit before interest and after tax

WACC is weighted average cost of the capital

Capital employed net block trading investment net current assets

There is no need to adopt subjective assumption when profit and cost of the capital are identified . Capital Assets Pricing Model or CAPM is the basis for the derivation of the cost of equity , and CAPM is traditionally used by the founders of the EVA . EVA is a powerful tool for the measurement of the performance . It is an argument that if company is a better performer for its share holders , it can also become a better performer for all of its stakeholders

SWOT analysis

It is necessary to generate a frame work of strategic alternatives after analyzing the situation . It is the important to analyze the strengths weaknesses , opportunities and threats as applied to the EVA model in the present situation

Strengths

Companies use EVA not only to evaluate the performance but also use the EVA as a basic thing to determine the incentive pay . There exists a tension between the measure of performance that has a correlation with the wealth of the share holder and the minimum influence on the random fluctuation in the stock market . The resolution of this tension is difficult with the performance measures which are based on accounting (Easton .P , Harris .T , and Ohlson .J , 1992 . According to Stewart and Bennet (1994 , the EVA is a powerful management tool that has international acceptance as the standard of corporate governance . EVA is the integrated frame work of the financial management and incentive compensation . The legitimacy of the principles of macroeconomics and the principles of the corporate finance are justified by the EVA . The EVA helps to focus the energies and resources for the creation of values that are sustainable for the companies , employees...