How Eva Can Help Turn Mid-Sized Firms into Large Companies
5 Pages Posted: 7 May 2004
Return ratios such as ROI are useful for evaluating prospective investments in individual projects, but they are not effective as after-the-fact measures of capital efficiency - they do not provide a benchmark, and they are not scaled according to the level of capital invested. The key to enabling single-product or single-market firms to make the transition to the next stage of corporate development is to decentralize authority not only for profits but also for capital spending decisions. EVA, unlike conventional accounting measures, provides the basis of a performance measurement system that will allow senior management to feel comfortable in entrusting capital allocation decisions to their operating heads. It can also help restore dynamism to large, bureaucratic companies that have lost their entrepreneurial spirit.
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