Economic Value System (Eva) - the Vyaderm Parmaceuticals Case

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ECONOMIC VALUE SYSTEM (EVA) - THE VYADERM PARMACEUTICALS CASE Introduction In 1996, Vyaderm was geographically organized with 10 subsidiaries outside USA and 5 different business units in USA. Each SBU had its own income statement, Balance sheet and operating goals with no capital charge for assets on any of its SBU. In reality, many business units had incomplete balance sheets. Under the leadership of Mr. Thomas Finn, Ex-CEO, financial targets were laid down at corporate HQ and each manager in its own SBU were provided a great arrangement of freedom in implementation if they met Finn’s numbers without communiqué between businesses. But in order to redesign the corporate culture at Vyaderm, Mr. Maurice Vedrine in 1998 thought about introducing EVA globally into its businesses and base 100% of the bonuses to his 1000 managers on corporate EVA which would create a single EVA center. Vedrine, however, decided to reduce the number of 15 EVA centers to 4 and restructure the company along a sector structure. Thus, Vyaderm was redesigned into three global businesses run across four geographic regions. Each of the Vyaderm EVA centers had its own EVA targets and calculations. Bonuses were based 100% on corporate EVA while the information reports were rewarded on a mixture of corporate EVA, business unit EVA and team EVA goals. Why the introduction of EVA system at Vyaderm? To maximize firm value, a firm must earn more than its cost of capital. The third performance metric is in %, but captures the spirit of two important (and essentially similar) metrics: Residual income, and Economic Value Added (EVA). These differ only in certain details. Broadly speaking, EVA = Income – (Expected income) = Income – (Cost of Capital*Invested Capital). This is a dollar amount, not percentage; so larger firms will generally have higher EVA. In light of the above, Mr. Maurice Vedrine

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