Harvard Case - Vyaderm Pharmaceuticals: The EVA Decision
"Vyaderm Pharmaceuticals: The EVA Decision" Harvard business case study is written by Robert Simons, Indra A. Reinbergs. It deals with the challenges in the field of Accounting. The case study is 15 page(s) long and it was first published on : Oct 4, 2000
At Fern Fort University, we recommend Vyaderm Pharmaceuticals adopt an EVA (Economic Value Added) performance measurement system as a key driver of its strategic decision-making process. This will require a comprehensive overhaul of their current accounting and performance measurement systems, encompassing changes to cost accounting, financial reporting, and employee incentives. By implementing EVA, Vyaderm can move beyond traditional financial metrics like net income and focus on creating long-term shareholder value.
2. Background
Vyaderm Pharmaceuticals is a growing pharmaceutical company facing significant challenges in its quest for profitability. The company, operating in a highly competitive market, is struggling to meet its financial targets despite strong sales growth. The case study highlights the company's reliance on traditional financial metrics like net income, which fail to capture the true cost of capital employed in the business. This lack of a comprehensive performance measurement system is hindering Vyaderm's ability to make informed strategic decisions.
The main protagonists in this case are the CEO, who is pushing for change, and the CFO, who is resistant to adopting a new performance measurement system. This internal conflict underscores the challenges of implementing change within an organization, especially when it involves altering established accounting procedures and policies.
3. Analysis of the Case Study
The case study presents a classic example of a company struggling to align its financial performance with its strategic goals. Vyaderm's reliance on traditional financial metrics like net income fails to capture the true cost of capital employed in the business. This leads to a misallocation of resources and hinders the company's ability to make informed strategic decisions.
To understand the situation better, we can apply a framework that considers both financial and operational aspects of the business. This framework can be based on the following elements:
- Financial Analysis: Analyze Vyaderm's financial statements, including the balance sheet, income statement, and cash flow statement. This analysis will help identify key financial ratios and trends that can inform the decision-making process.
- Cost Accounting: Evaluate Vyaderm's current cost accounting system, including its cost allocation methods and the accuracy of its cost data. This analysis will help identify areas where costs can be reduced and profitability improved.
- Activity-Based Costing: Consider implementing an activity-based costing (ABC) system to more accurately allocate costs to products and services. ABC can help identify hidden costs and provide a more accurate view of the true cost of doing business.
- Performance Measurement: Evaluate Vyaderm's current performance measurement system, including its key performance indicators (KPIs) and the effectiveness of its incentive programs. This analysis will help identify opportunities to improve the alignment of employee incentives with the company's strategic goals.
- Strategic Analysis: Analyze Vyaderm's competitive landscape, including its market share, customer base, and competitive advantages. This analysis will help identify opportunities for growth and expansion.
4. Recommendations
To address Vyaderm's challenges and improve its profitability, we recommend the following:
- Adopt an EVA performance measurement system: EVA is a value-based performance metric that measures the true economic profit generated by a business. It takes into account the cost of capital employed in the business and provides a more accurate picture of the company's financial performance.
- Implement an activity-based costing system: ABC will help Vyaderm more accurately allocate costs to products and services, providing a more accurate view of the true cost of doing business. This will enable the company to make more informed pricing decisions and identify opportunities for cost reduction.
- Realign employee incentives: Vyaderm should align employee incentives with the company's EVA performance goals. This will encourage employees to focus on activities that create economic value for the company.
- Improve communication and transparency: The company should improve communication with employees about the new performance measurement system and its implications. This will help build buy-in and ensure that employees understand how their actions contribute to the company's financial success.
- Develop a comprehensive change management plan: Implementing a new performance measurement system requires significant change management. Vyaderm should develop a comprehensive plan that outlines the steps involved in the transition, including training, communication, and support for employees.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: Adopting EVA aligns with Vyaderm's mission of creating shareholder value. EVA provides a more accurate measure of the company's financial performance and encourages employees to focus on activities that create long-term value.
- External customers and internal clients: By improving the company's financial performance, Vyaderm can better serve its external customers and internal clients. EVA will help the company make more informed decisions about pricing, product development, and resource allocation.
- Competitors: Adopting EVA will help Vyaderm stay competitive in a rapidly changing market. EVA provides a more accurate measure of the company's financial performance and allows for better resource allocation, enabling Vyaderm to compete effectively with its rivals.
- Attractiveness ' quantitative measures if applicable (e.g., NPV, ROI, break-even, payback): While the case study does not provide specific financial data, the implementation of EVA will likely lead to improved profitability, increased shareholder value, and a stronger financial position for the company.
- Assumptions: These recommendations are based on the assumption that Vyaderm is committed to improving its financial performance and creating long-term shareholder value. The company must also be willing to invest in the necessary resources to implement the recommended changes.
6. Conclusion
By adopting an EVA performance measurement system, implementing an activity-based costing system, realigning employee incentives, improving communication and transparency, and developing a comprehensive change management plan, Vyaderm Pharmaceuticals can improve its financial performance, create long-term shareholder value, and achieve its strategic goals.
7. Discussion
Other alternatives to adopting EVA include continuing to use traditional financial metrics like net income or adopting a different performance measurement system, such as balanced scorecard. However, these alternatives have limitations. Traditional financial metrics fail to capture the true cost of capital employed in the business, while balanced scorecard can be complex to implement and maintain.
The key risks associated with adopting EVA include resistance to change from employees, the cost of implementing the new system, and the need for ongoing monitoring and adjustment. The key assumptions underlying these recommendations are that Vyaderm is committed to improving its financial performance, is willing to invest in the necessary resources to implement the recommended changes, and has a strong leadership team that can drive the change process.
8. Next Steps
To implement these recommendations, Vyaderm should take the following steps:
- Develop a detailed implementation plan: This plan should outline the specific steps involved in adopting EVA, implementing ABC, realigning employee incentives, improving communication and transparency, and developing a comprehensive change management plan.
- Secure buy-in from key stakeholders: This includes the CEO, CFO, and other senior management team members. It is also important to secure buy-in from employees.
- Develop a communication strategy: This strategy should outline how the company will communicate the changes to employees, customers, and investors.
- Provide training and support to employees: Employees will need training on the new performance measurement system and its implications. The company should also provide ongoing support to employees during the transition.
- Monitor and evaluate the results: Vyaderm should monitor the results of the changes and make adjustments as needed. This will help ensure that the new performance measurement system is achieving the desired results.
By taking these steps, Vyaderm Pharmaceuticals can successfully implement an EVA performance measurement system and achieve its strategic goals.
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Case Description
In 2016, the new CEO of Vyaderm Pharmaceuticals introduces an Economic Value Added (EVA) program to focus the company on long-term shareholder value. The EVA program consists of three elements: EVA centers (business units), EVA drivers (operational practices that improve EVA results), and an EVA-based incentive program for bonus-eligible managers. Over the next two years, the implementation of the program runs into several stumbling blocks, including resistance from regional managers, who push for line of sight EVA drivers; the difficulty of managing a large number of EVA centers; and unexpected bonus adjustments due to poor EVA performance. The decision point focuses on the competitive situation in a business unit where the sudden exit of a competitor produces an unexpected one-time windfall in earnings. Vyaderm's top managers struggle with the question of whether to adjust the EVA results to prevent demoralizing managers in future years when EVA results are likely to decline.
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