The Key Aspects of Successful Implementation of Economic Value Addition Model and the Determination of Economic Value Addition by Godrej Consumer Products Ltd

Abstract

Measuring the performance is vital for any organisation and this, in turn, will help in achieving further growth. The Economic Value Addition (EVA) model, developed by a New York–based consulting firm, Stern Steward Co., has been widely accepted and used by leading corporates in the world for measuring and evaluating the business strategies, capital projects and wealth addition for shareholders. The EVA model aims to measure the net operating profits generated by a corporate above its overall cost of capital. The application of EVA model for measuring corporate performance becomes important because the management has to quantify the wealth created for the shareholders who have taken the risk of investing their hard-earned savings in the equity. The EVA model facilitates better communication and helps in taking key decisions at various levels in the organisation. For successful application of EVA model, the top management should be committed and create the responsibility centre at various levels. Besides keeping the EVA calculations transparent and simple, a suitable training over the concept, methods and objectives of EVA should be arranged at various levels in the organisation. The activities that are determining and influencing the value addition should be exactly identified and focused upon. Aligning the interest of shareholders and employees will give better results. The EVA model warrants that each activity and investment should be purposeful and facilitate the value addition. Expansion by making heavy investment for the sake of incremental profits in the absence of value addition should be avoided. Efficient working capital management and creative marketing strategies to get rid of inventory can help to improve EVA. The aim is to achieve value addition and not just higher profit margin on sales. The value addition by each activity, department and division should be measurable. The decentralisation of authority and responsibility is a prerequisite for successful implementation of EVA model. The Godrej Consumer Products Ltd (GCPL) has successfully implemented EVA model and adopts the performance-linked variables incentive scheme which is based on EVA.