The EVA Challenge: Implementing Value-Added Change in an ...

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42 The EVA Challenge the resources necessary to support product development and commercialization. The third group of companies—those that embrace the discipline that we have called “best total solution” and focus on customer results and relationship management—will adopt a segmentation based on geography or on customer or industry groups. In all three groups of companies, those that create the greatest value tend to place capital decisions at the level in the organization where there is the best information to make that assessment. That goal reinforces the benefits of decentralization. Decentralized decision rights, as they are commonly called, are not all that is needed, as was persuasively demonstrated by the work of Michael C. Jensen and the late William H. Meckling in their seminal article, “Specific and General Knowledge and Organizational Structure,” published in the Journal of Applied Corporate Finance in its summer 1995 issue. The authors demonstrated that it is not enough simply to delegate decision rights to managers possessing the requisite knowledge to make the right choices. Like other mortals, managers are to a large degree motivated by their own selfinterest, and thus a variety of controls and incentives are necessary to insure that managers consistently act in the interests of the firm. In sum, the article concluded that organizations must establish “internal rules of the game” that not only distribute decision rights to the appropriate people but also impose control mechanisms consisting of “a performance measurement and evaluation system and a reward and punishment system.” Jensen’s and Meckling’s ideas were subsequently expounded and elaborated in a textbook, Managerial Economics and Organizational Architecture published in 1997 by James Brickley, Clifford Smith, and Jerold Zimmerman (hereinafter, “BS&Z”). For a firm to achieve optimal success, the BS&Z book characterizes the three key elements of organizational architecture in these terms: “(1) the assignment of decision rights within the company; (2) the methods of
The Need for a Winning Strategy and Organization 43 rewarding individuals; and (3) the structure of systems to evaluate the performance of both individuals and business units.” The authors draw an analogy between these components and a threelegged stool. All three legs must be designed so that the stool is in balance. Modifying any of these elements without consideration of the other two will most likely contribute to the deterioration of the firm’s value. The BS&Z model starts with the premise that successful firms assign decision rights in ways that effectively link that authority with the information needed to exercise it. At the same time, the organizational architecture must ensure that there are appropriate systems in place to evaluate performance and provide rewards to motivate the desired behavior of individuals. As we have observed before, the business environment in which a firm operates shapes its strategy, structure, and assignment of decision rights. And the firm’s strategy, in combination with its organizational architecture, motivates value-creating behavior by individuals. Figure 3.1 is a version of the BS&Z model. We have customized it for use by those firms which are committed to the integration of the EVA discipline into their organizations. Drawing further on the BS&Z book, we now discuss each of the three elements of organizational architecture and the considerable challenge faced by companies that are attempting to integrate EVA into their firms while keeping the three-legged stool in balance. The firm must first resolve the issue of structural configuration. EVA centers are unique in that they require the broadest grant of decision rights relative to the panoply of sub-unit decision assignments. Let us look at those various sub-units first. 1. Cost centers call for the assignment of decision rights to produce a specified output with the greatest efficiency (i.e., the lowest cost). A critical determinant of cost centers is getting the optimal mix of inputs (labor, materials, and purchased services).
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Page 4 and 5: Advance Comments on The EVA Challen
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Page 9 and 10: Chapter 1 The Problem Back in the e
Page 11 and 12: The Problem 3 for systems to get ma
Page 13 and 14: The Problem 5 for a building, but i
Page 15 and 16: The Problem 7 Not only does EPS dis
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Page 21 and 22: The Problem 13 few years. Forstmann
Page 23 and 24: Chapter 2 The Solution What is Econ
Page 25 and 26: The Solution 17 There is a signific
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Page 31 and 32: The Solution 23 capital, Tate & Lyl
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Page 71 and 72: Value Creation Capital Structure
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92 The EVA Challenge but the reduct
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94 The EVA Challenge We now move on
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96 The EVA Challenge employees, man
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98 The EVA Challenge 3,500. The thr
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100 The EVA Challenge with economic
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102 The EVA Challenge November 1998
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104 The EVA Challenge their drawbac
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106 The EVA Challenge to establish
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108 The EVA Challenge It is helpful
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110 The EVA Challenge Managing for
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112 The EVA Challenge After a coffe
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114 The EVA Challenge EVA 101, the
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116 The EVA Challenge facilitator t
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118 The EVA Challenge The classroom
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Herman Miller—Continental North A
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122 The EVA Challenge in an organiz
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124 The EVA Challenge In the modern
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126 The EVA Challenge efficiencies
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128 The EVA Challenge A company tha
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130 The EVA Challenge units and imp
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132 The EVA Challenge Witter’s re
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134 The EVA Challenge $70.8125 eigh
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136 The EVA Challenge companies wer
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138 The EVA Challenge design, manuf
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140 The EVA Challenge you can lose
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142 The EVA Challenge Allen-Bradley
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144 The EVA Challenge Disadvantages
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Chapter 9 EVA Incentives We revert
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EVA Incentives 149 EVA incentive pl
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EVA Incentives 151 For a typical di
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EVA Incentives 153 bonus by 10, div
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EVA Incentives 155 these approaches
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EVA Incentives 157 quarters of the
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Chapter 10 How EVA Can Fail What mo
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How EVA Can Fail 161 created by a d
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How EVA Can Fail 163 Stern Stewart
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How EVA Can Fail 165 pay. Monetary
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Chapter 11 New Frontiers: Real Opti
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New Frontiers: Real Options and For
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180 The EVA Challenge conflict betw
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182 The EVA Challenge Question 2. W
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184 The EVA Challenge managers will
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186 The EVA Challenge Question 6. M
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188 The EVA Challenge framework suf
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190 The EVA Challenge problems ofte
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192 The EVA Challenge Only after th
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194 The EVA Challenge followed by a
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196 The EVA Challenge There are two
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198 The EVA Challenge floor, the fi
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200 The EVA Challenge Consider the
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202 The EVA Challenge 5. Provide bo
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204 The EVA Challenge degree, but t
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206 The EVA Challenge annual sales
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Epilogue EVA and the “New Economy
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EVA and the “New Economy” 211 W
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EVA and the “New Economy” 213 b
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EVA and the “New Economy” 215 a
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EVA and the “New Economy” 217 d
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EVA and the “New Economy” 219 i
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EVA and the “New Economy” 221 h
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EVA and the “New Economy” 223 L
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EVA and the “New Economy” 225 W
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EVA and the “New Economy” 227 O
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EVA and the “New Economy” 229 a
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EVA and the “New Economy” 231 o
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Acknowledgments This project has be
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Acknowledgments 235 monitoring mana
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Acknowledgments 237 Approximately s
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Acknowledgments 239 business and pr
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Acknowledgments 241 seemingly insur
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Acknowledgments 243 assignments to
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246 Index Competitive positions (Po
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248 Index Incentive plans based on
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250 Index Takeover artists, 11 Tate
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