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By measuring the value added over all costs, including the cost of capital, EVA measures in effect, the productivity of all factors of production (or the true economic costs produced by all resources used).
Until a business returns a profit that is greater than its cost of capital produced by all resources used, it operates at a loss. That is why EVA is growing in popularity.
EVA does not show by itself why a certain product or a certain service does not add value or what to do about it. It does show which products/services, operations or activities have unusually high productivity or add unusually high value.
It is recommended that businesses should focus on building value-added “Balanced Scorecards” in order to get a more holistic picture of businesses, which integrates quantifiable tangibles and non-quantifiable intangibles. Such a scorecard reflects on overall core competence and team effectiveness of the company. It helps in achieving the following six objectives:
• A good assessment tool for deployment of execution strategy across the value chain.
• A tool to measure and control the critical business processes.
• A communication tool to guide employees on priorities of business in simple terms.
• A management system highlighting the importance of non-financial measures.
• Metrics to construct Business Scorecard should be actionable, less in number, specific and result oriented.
• This tool should assign specific responsibility to teams-thereby creating an unambiguous linkage between strategy and execution.
DISCLAIMER: The views expressed in this Blog are my personal views/analysis. It does not represent views of any organization or group, for which I am doing consulting or employment. The purpose of this blog is academic and informative; and is not sale of any product or service. The author does not own responsibility (liability) for any information presented in this blog; as investment information tends to change rapidly.