Harvard Case - Continuing Transformation of Asahi Glass: Implementing EVA
"Continuing Transformation of Asahi Glass: Implementing EVA" Harvard business case study is written by Mihir A. Desai, Masako Egawa, Yanjun Wang. It deals with the challenges in the field of Finance. The case study is 29 page(s) long and it was first published on : Oct 5, 2004
At Fern Fort University, we recommend that Asahi Glass (AGC) continue its transformation journey by fully embracing EVA (Economic Value Added) as a core performance metric. This means implementing EVA across all levels of the organization, integrating it into strategic decision-making, and using it to incentivize employees. This approach will drive shareholder value creation by aligning employee incentives with long-term profitability, fostering a culture of operational excellence, and optimizing resource allocation for sustainable growth.
2. Background
Asahi Glass, a leading global manufacturer of glass and related products, was facing challenges in the late 1990s. The company struggled with profitability, inefficient operations, and a lack of strategic direction. To address these issues, AGC embarked on a transformation journey, adopting the EVA framework as a key driver for change. The case study focuses on the implementation of EVA at AGC and its impact on the company's performance.
The main protagonists of the case study are:
- Toshiaki Arai: AGC's CEO, who championed the adoption of EVA and led the company's transformation.
- AGC's Management Team: Responsible for implementing EVA across the organization, including developing performance metrics, setting targets, and aligning employee incentives.
- AGC's Employees: The individuals who were directly impacted by the implementation of EVA and whose performance was measured against the new metric.
3. Analysis of the Case Study
This case study can be analyzed through the lens of strategic management, financial management, and organizational change management.
Strategic Management:
- Growth Strategy: AGC's adoption of EVA was a strategic decision to shift from a focus on sales growth to a focus on profitability and shareholder value creation. This aligns with the company's long-term vision of becoming a leading global player in the glass and related products industry.
- Competitive Advantage: By implementing EVA, AGC aimed to improve operational efficiency, reduce costs, and enhance product quality, thereby gaining a competitive advantage in the market.
- International Business: EVA helped AGC to expand its global footprint by providing a framework for evaluating investment opportunities in emerging markets and managing international operations effectively.
Financial Management:
- Financial Analysis: EVA provided AGC with a powerful tool for financial analysis, allowing the company to assess the profitability of its various business units, identify areas for improvement, and make informed investment decisions.
- Capital Budgeting: EVA was used to evaluate capital projects and investments, ensuring that they generated a positive return on investment and contributed to shareholder value creation.
- Financial Strategy: The adoption of EVA led to a shift in AGC's financial strategy, focusing on optimizing capital structure, managing debt effectively, and maximizing shareholder returns.
Organizational Change Management:
- Organizational Restructuring: The implementation of EVA required significant organizational restructuring, including the development of new performance metrics, alignment of employee incentives, and a shift in the company's culture.
- Decision Making: EVA provided a framework for decision-making at all levels of the organization, ensuring that decisions were aligned with the company's strategic goals and profitability objectives.
- Employee Engagement: The implementation of EVA required a high level of employee engagement, as it involved changing the way employees were measured and rewarded.
4. Recommendations
Based on the analysis of the case study, we recommend the following for AGC:
Full-Scale Implementation of EVA: While AGC made progress in adopting EVA, it needs to fully integrate it into all aspects of the business. This includes:
- Performance Measurement: EVA should be the primary metric for evaluating the performance of all business units and employees.
- Incentive Systems: Employee compensation and bonuses should be tied to EVA performance, aligning individual incentives with the company's overall profitability goals.
- Strategic Decision Making: All strategic decisions, including investments, acquisitions, and divestitures, should be evaluated based on their impact on EVA.
Continuous Improvement and Innovation: AGC should continue to leverage EVA to drive continuous improvement and innovation across the organization. This can be achieved through:
- Activity-Based Costing: Implementing activity-based costing to accurately track costs and identify opportunities for cost reduction.
- Technology and Analytics: Utilizing technology and analytics to improve operational efficiency, streamline processes, and enhance decision-making.
- Employee Empowerment: Empowering employees to identify and implement process improvements, fostering a culture of continuous improvement.
Transparency and Communication: AGC should ensure transparency and clear communication about the EVA framework and its impact on the organization. This includes:
- Regular Reporting: Providing regular reports to employees, investors, and other stakeholders on the company's EVA performance.
- Open Dialogue: Creating an open dialogue about EVA, addressing concerns, and fostering understanding of its benefits.
- Training and Development: Providing training and development programs to employees on the EVA framework and its application.
5. Basis of Recommendations
Our recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: Adopting EVA aligns with AGC's core competencies in manufacturing, technology, and innovation, and supports the company's mission of creating value for its stakeholders.
- External Customers and Internal Clients: By focusing on profitability, EVA helps AGC to deliver value to its customers and satisfy the needs of its internal clients, such as employees and investors.
- Competitors: EVA provides AGC with a competitive advantage by enabling the company to optimize its operations, reduce costs, and enhance product quality.
- Attractiveness ' Quantitative Measures: EVA is a powerful tool for measuring profitability and shareholder value creation, providing quantitative measures for evaluating the effectiveness of strategic decisions.
6. Conclusion
By fully embracing EVA and implementing it across all aspects of the organization, AGC can continue its transformation journey, drive shareholder value creation, and achieve its strategic goals. EVA provides a clear framework for aligning employee incentives, optimizing resource allocation, and fostering a culture of operational excellence.
7. Discussion
Other Alternatives:
- Return on Equity (ROE): While ROE is a widely used metric, it does not fully capture the cost of capital and may not be as effective as EVA in driving long-term profitability.
- Return on Assets (ROA): ROA is a useful metric for measuring asset utilization, but it does not account for the cost of capital, which is a key consideration for EVA.
Risks and Key Assumptions:
- Implementation Challenges: Implementing EVA effectively can be challenging, requiring significant organizational change, employee buy-in, and ongoing monitoring.
- Short-Term Focus: There is a risk that employees may focus on short-term EVA gains at the expense of long-term sustainability.
- External Factors: External factors, such as economic downturns or changes in government regulations, can impact EVA performance.
Options Grid:
| Option | Benefits | Risks |
|---|---|---|
| Full Implementation of EVA | Improved profitability, increased shareholder value, enhanced operational efficiency | Implementation challenges, short-term focus, external factors |
| Partial Implementation of EVA | Gradual transition, less disruptive | Limited impact, potential for inconsistency |
| Abandoning EVA | No significant change | Continued performance challenges, lack of clear direction |
8. Next Steps
To implement our recommendations, AGC should take the following steps:
- Develop a Comprehensive EVA Implementation Plan: This plan should outline the specific steps involved in implementing EVA across the organization, including performance measurement, incentive systems, and communication strategies.
- Establish a Dedicated EVA Team: A dedicated team should be responsible for overseeing the implementation of EVA, providing guidance, and monitoring progress.
- Pilot EVA in a Small Business Unit: Before implementing EVA across the entire organization, AGC should pilot it in a small business unit to test its effectiveness and identify any potential challenges.
- Communicate Effectively with Employees: AGC should communicate clearly and transparently with employees about the EVA framework, its benefits, and its impact on their performance.
- Continuously Monitor and Evaluate EVA Performance: AGC should continuously monitor and evaluate the performance of EVA, making adjustments as needed to ensure its effectiveness.
By taking these steps, AGC can successfully implement EVA and leverage its power to drive long-term profitability, shareholder value creation, and sustainable growth.
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Case Description
This case explores the use of EVA--economic value added--methodology at Asahi Glass. EVA is among the changes initiated by the CEO aimed at transforming Asahi Glass from a traditional Japanese company to a global firm. Other changes included a corporate reorganization into worldwide business groups, the appointment of non-Japanese managers to key positions, and corporate governance reforms. The EVA methodology was introduced to improve resource allocation across Asahi's numerous businesses around the world and to evaluate the managerial performance of top executives. It examines how the company calculated EVA and, in particular, how it calculated the weighted average cost of capital for its different businesses in different countries. Is Asahi Glass gaining benefits from the EVA methodology, and does it contribute to the transformation of Asahi Glass into a truly international firm?
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