The May 2016 issue of the Beacon highlights the Simsree Consulting Club, emphasizing its mission to foster awareness and skills in management consulting among students through various activities. The document also provides an in-depth analysis of the telecommunications industry in India, noting its growth, market dynamics, and government initiatives aimed at enhancing the sector's potential. Additionally, it offers a brand analysis of Nike, showcasing its marketing strategies, brand positioning, and efforts to engage with diverse consumer segments.

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Contents
ABOUT US
OUR TEAM
INDUSTRY ANALYSIS
BRAND ANALYSIS
CASE ANALYSIS
CONCEPT OF THE MONTH:
EVA

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OUR PRESENCE
ABOUT US
VISION
The SIMCON - SIMSREE consulting club is an
initiative started in 2012 for those students in
pursuit of excellence in management consulting
and strategic management. Aimed at creating
awareness among the students about consultancy
as a discipline, the club strives to maintain strong
relations with top consultancy firms and provide
platform to craft highly skilled & competent
consultants from SIMSREE. The club is a resource
for information about consulting and a place for
students to obtain real-world consulting experience.
SIMCON provides an avenue of interaction among
faculty, students and alumni through competitions,
live projects, guest lectures, and conclaves. For
this purpose the club has also been publishing its
monthlynewsletter– BEACON (BE A CONSULTANT)
and maintains a FACEBOOK PAGE where latest
news and development in the consulting industry
are posted.
MISSION
To create awareness amongst the students
about consulting industry & its latest trends.
To maintain strong relations with top
consultancy firms.
To provide platform to craft highly skilled &
competent consultants from SIMSREE.
To provide exposure to students via
competitions, live projects, guest lectures &
conclaves.
Contributions invited:
To make this feature a successful effort, we seek continued involvement and contribution from our readers, that is YOU. We
invite articles, research papers, and trivia on themes related to consulting. Be it industry news, consulting trends, a joke, a
cartoon or feedback, we are eager to hear from you. So go ahead, do your research, pen down your thoughts and mail your
entries to simcon.simsree@gmail.com.
Best Regards,
SIMCON - SIMSREE CONSULTING CLUB

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OUR TEAM
ARPIT agrawal
ASHAYDHURI
HUZEFABODABHAIWALA
KARANCHOPRA
NAMANCHANDAK
praCHIKORE
SARANGKULKARNI
YOGESHMOHATA

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TELECOMMUNICATIONS
INDUSTRY ANALYSIS

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Industry Overview
India is world’s second largest telecommunications
market and has registered strong growth in the past
2 decades. The Indian telecom Industry is growing
rapidly and will contribute substantially to India’s
gross domestic product (GDP).
In past two decades, the Telecom industry has caught
the imagination of India by revolutionizing the way
people communicate, share information and helps
millions stay connected. This growth, however, has
and continues to be at the cost of the Climate, powered
by an unsustainable and inefficient model of energy
generation and usage. Simultaneously, this growth has
come at significant loss to the state exchequer, raising
fundamental questions on the future business and
operation model of the Telecom sector
These services are globally recognised as one of the
driving forces for overall economic development in a
nation. They are also major support services needed for
rapid growth and modernisation of various sectors of
the economy. The Government of India recognises this
fact and hence, has taken several major initiatives to
provideabusinessfriendlyenvironmentforcompanies
in this sector. Driven by 3G and 4G services, it is
expected that there will be huge machine-to-machine
(M2M) growth in India in 2016-17, according to
UST Global. There is also a lot of scope for growth
of M2M services in the government's ambitious US$
1.1 billion Smart City program The rapid strides in the
telecom sector have been facilitated by liberal policies
of the Government of India that provide easy market
access for telecom equipment and a fair regulatory
framework for offering telecom services at affordable
prices. According to a study by GSMA, India is all set
to become the fourth largest smartphone market by
2020.
Market Size
Driven by strong adoption of data consumption on
handheld devices, the total mobile services market
revenue in India is expected to touch US$ 37 bn in
FY-17, registering a Compound Annual Growth
Rate (CAGR) of 5.2 per cent between 2014 and 2017,
according to research firm IDC.
According to a study by GSMA, smartphones are
expected to account for two out of every three mobile
connections globally by 2020 making India the fourth
largest smartphone market.
The broadband services user-base in India is expected
to grow to 250 million connections by 2017, according
to GSMA and also India added the highest number of
net mobile phone subscriptions of 13 million during
the third quarter of FY-15.
International Data Corporation (IDC) predicts India
to overtake US as the second-largest smartphone
market globally by 2017 and to maintain high growth
rate over the next few years as people switch to
smartphones and gradually upgrade to 4G.
Source: TRAI Techsci Research
In spite of only 5 per cent increase in mobile
connections in 2015, overall expenditure on mobile
services in India is expected to increase to US$ 21.4
billion in 2015, led by 15 per cent growth in data
services expenditure, as per research firm Gartner.
The Indian telecom sector is expected to generate
four million direct and indirect jobs over the next five
years according to estimates by Randstad India. The
employment opportunities are expected to be created
due to combination of government’s efforts to increase
penetration in rural areas and the rapid increase in
smartphone sales and rising internet usage.
Source: CII report Telecom Sector 2015

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Market Players
As on 17th April, 2016, the private access service
providers held 90.90% market share of the wireless
subscribers whereas BSNL and MTNL, the two PSU
access service providers, held only 9.10% market
share. Total No. of Wireline subscriber as of 17th April
2016 were 945million subscribers
The share of urban and rural subscribers in total
wireline subscribers were 79.90% and 20.10%
respectively at the end of October, 2015.
Wireless market share in terms of total subscribers
in India -Bharti Airtel is the market leader, with a
25.5 per cent share of total subscription, followed by
Vodafone (20.2 per cent share).
3. Bargaining Power of Buyers: High
The low differentiation between the services
provided by the telecom operators and low
cost of switching for retail customers backed
by Mobile Number Portability has resulted in
the services being treated by customers as a
commodity. Although the customers are price
takers in the market, their bargaining power is
moderate on account of the ease of switching.
The business customers will however find it
difficult to switch to alternative service provider.
4. Threat of Substitutes: Low to Moderate
With Emergence of wireless devices and other
technological break-through, the market share
of wireline companies has dwindled. Some of
the substitutes like IP telephone, Email and
Instant Messaging etc. Has also reduced the
volume of voice traffic of the wireless telecom
operators however there are no commercially
viable substitutes available as of now. Hence
threat of substitutes is low.
5. Intensity of Rivalry: High
The industry is highly fragmented with 15
players, such that there are as many as five-
six players in one region. With low product
and service differentiation, lower prices and
innovative services are means of attracting
new customers. This tends to drive the
margins and profits down. In addition the
high exit barriers in form of regulations and
specialized equipment have increased the
overall competition.
Investment Matrix
Foreign direct investment (FDI) in telecom sector
(including radio paging, cellular mobile, and basic
telephone services) during April-March 2013-14
stood at US$ 174 million, as per the Department of
Industrial Policy & Promotion (DIPP) data.
The FDI limit in telecom services was raised, subject
to the following conditions, to 100 % in July 2013:
• This is applicable in case of Basic, Cellular,
Global Mobile Personal Communications
Services (GMPCS), Unified Access Services,
V-Sat, Public Mobile Radio Trunked Services
(PMRTS), National/ International Long
Distance & other value added Services. FDI
of up to 100 per cent is also permitted for
infrastructure providers that offer dark fiber,
electronic mail and voice mail.
• FDI up to 49% is on the automatic route and
beyond that on the government route.
• The investment approval by Foreign
Investment Promotion Board shall envisage
Porter’s Five Force Analysis
1. The Threat of New Entrants: High
Huge barriers to entry in form of large
economies of scale, low product differentiation,
large capital requirements, heavy switching
cost to buyers, and unfavourable government
policies in form of high license costs, spectrum
usage charges, exit barriers etc. and presence of
6-7 players in each region dissuades new players
from entering the market.
2. Bargaining Power of Suppliers: Moderate
Although it might appear that the telecom
equipment suppliers have considerable
bargaining power over telecom operators, it
is not the case. Large number of equipment
manufacturers along with enough number of
vendors dilute the bargaining power.

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the conditionality that the Company would
adhere to license Agreement.
• The FDI shall be subject to laws of India & not
the laws of the foreign countries
Some of the recent major investments:
• Reliance Communications Ltd, India’s fourth
largest mobile services provider, has agreed
to acquire Sistema Shyam TeleServices Ltd
(SSTL), the local unit of Russian company
Sistema JSFC, in a deal valued at Rs 4,500 crore
(US$ 687 million), which includes payments
to the government for spectrum allotted to
Sistema.
• Global telecom equipment makers like
Ericsson, Nokia Networks and Huawei are
looking forward to over US$ 1 billion revenue
opportunity as mobile phone operators in
India roll out high-speed broadband services
on the 4G LTE technology across the country.
• Foxconn, the world’s largest contract-
manufacturing firm for consumer electronics
and manufacturer for Apple products, has
signed a Memorandum of Understanding
(MoU) with Maharashtra state government to
invest US$ 5 billion over the next three years
for setting up a manufacturing unit between
Mumbai and Pune
Government Initiatives
The government has fast-tracked reforms in the
telecom sector and continues to be proactive in
providing room for growth for telecom companies.
Some major initiatives taken by the government are:
• TRAI has directed the telecom companies or
mobile operators to compensate the consumers
in the event of dropped calls with a view to
reduce the increasing number of dropped calls.
• With a view to encourage consolidation in the
telecom sector, the Government of India has
approved the rules for spectrum trading that
will allow telecom companies to buy and sell
rights to unused spectrum among themselves.
• The Central Government’s several initiatives
to promote manufacturing in the country,
such as ‘Make in India’ campaign appears to
have had a positive impact on mobile handsets
manufacturing in the country. Companies
like Samsung, Micromax and Spice had been
assembling handsets in the country already.
Xiaomi and Motorola, along with Lenovo have
also started assembly of smartphones in India.
Firms like HTC, Asus and Gionee too have
shown interest in setting up a manufacturing
base in the country.
• The Government of India plans to roll out
free high-speed wi-fi in 2,500 cities and towns
across the country over the next three years.
The program entails an investment of up to
Rs 7,000 crore (US$ 1.06 billion) and will be
implemented by state-owned Bharat Sanchar
Nigam Ltd (BSNL).
Future Outlook
India will emerge as a leading player in the virtual
world by having 700 million internet users of the
4.7 billion global users by 2025, as per a Microsoft
report. With the government’s favourable regulation
policies and 4G services hitting the market, the Indian
telecommunication sector is expected to witness fast
growth in the next few years.
References
IBEF, CCI Reports, Trai, DNB-Telecom industry

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NIKE
BRAND ANALYSIS

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Nike Inc. was founded in 1962 by Bill Bowerman and
Phil Knight as a partnership under the name, Blue
Ribbon Sports.. In existence for over 40 years, today,
Nike is the largest seller of apparel, athletic footwear,
and equipment in the world. Like many companies of
that era, Nike had a humble beginning.
Brand Awareness
• NIKE is an international brand that is
recognized everywhere by their trademark
“swoosh” logo.
• There is over 700 NIKE stores worldwide.
Value Proposition
NIKE, Inc. is the world’s leading innovator in athletic
footwear, apparel, equipment and accessories.
Their mission is quite simple:
"TO BRING INSPIRATION AND INNOVATION
TO EVERY ATHLETE* IN THE WORLD.
*IF YOU HAVE A BODY, YOU ARE AN ATHLETE."
NIKE.com
NIKE’s brand portfolio also includes several brands
developed or acquired by it. Most famous of them are
• ‘Jordan’ – targets basketball-related products
& named after basketball superstar Michael
Jordan
• ‘Hurley’ – youth-focused brand targeted at
action sports like surfing, skateboarding and
many more
• ‘Converse’ – a wholly owned subsidiary
brand dealing in apparel, casual sneakers, and
accessories
Lebron James x MVP Shoe
Segmentation
Nikefallsundernichemarketing.Theyhaveanarrowly
defined customer group seeking a distinctive mix of
benefits.Theirproductsaremainlyaimedatbothmenand
women looking for sports apparel. Nike promises their
customers comfort, reliability, style and performance.
Nike sports shoes are priced high. But
customers are willing to spend the extra
money for the quality and service they receive.
Nike pays top athletes in many different sports to
use their products and promote/advertise their
technology and design. Nike is the official kit
sponsor for the Indian cricket team for 5 years,
from 2006 till end of 2010. Nike beat Adidas and
Puma by bidding highest. Nike also sponsors
some of the leading clubs in world football, such as
Manchester United, Arsenal, FC Barcelona, Inter
Milan, Juventus, Shakhtar, Porto, Steaua, Red Star,
Club América, Aston Villa, Celtic and PSV Eindhoven.
Nike sponsors several of the world's top golf players,
including Tiger Woods, Trevor Immelman and Paul
Casey.
Targeting
• Broadly, NIKE has products for people from
all age-groups: right from newborns & kids to
teenagers, adults and even the old. For example,
any new revolutionary designed footwear is
generally released for all age groups. However,
its core focus is on people in the age group of
18-35 years old.
• By opening women’s-only stores in California,
Shanghai, etc., Nike has started expanding its
presence in the women apparel market because
of its untapped potential

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Positioning
The Positioning statement of Nike is “For serious
athletes, Nike gives confidence that provides the
perfect shoe for every sport”.
Nike positions itself with, “Just do it.” Nike has waved
the just do it banner for over 20 years. They continue
to find new and amazing ways to say it repetitively
without boring their audience. Their position gives
them permission to express something that is
powerful. Just do it belongs to the customer—people
love that. To be able to just do it makes you want to
jump hurdles or sprint a marathon.
Marketing Campaigns
For years, Nike successfully relied on large print and
television advertising campaigns that celebrated a
single hit, whether it be one of their new products or
one of their sponsorees. The taglines “Just Do It” and
“Bo Knows” became synonymous with the Nike brand,
instantly recognizable. Now, however, Nike has moved
away from these types of advertisments. From 2009
to 2012, Nike’s spending on traditional advertising
dropped by 40% and decreased ever since, even as its
marketing budget grew to a company record of $2.4
billion. Where is all of that money going?
Answer: to advertising techniques that take
advantage of new technologies and that allow them to
communicate directly with their target audience—17-
year olds who spend 20% more on shoes than their
adult counterparts.
Margot vs. Lily
Nike launched 8 episode series called “Margot vs. Lily”
on YouTube, which focuses on a pair of interracial,
adopted sisters: one an athletic junkie with few social
skills and the other an outgoing woman who has little
interest in sporty pursuits.
The whimsical story focuses a bet placed between the
two sisters Margot must start a fitness channel and
get 1,000 followers, while Lily (who already runs a
popular video blog) is challenged to find three real
friends. Both girls struggle to achieve their goals.
The series is one of several ways that Nike is reaching
outtomillennial-agedwomen,acoregroupofshoppers
that have been persuaded to wear athletic gear not
just for activity, but also while out on the town. Nike
has free digital apps with training programs and tips,
running clubs, and a broader “Better For It” campaign
that aims to encourage women to get more involved in
sports. Nike also has a weekly newsletter targeted to
women, called “The Fix.”
Message of Defiance During the Financial Crisis of
Greece
Nike is weighing in on the Greek economic crisis with
a haunting new ad featuring four competitive athletes
from the debt-stricken country.
It's a visually arresting piece, set in desolate venues
from the 2004 Athens Olympics—expensive projects
that have fallen into disrepair, becoming symbols of
short-sighted government overspending in the years
leading up to the nation's current predicament.
In the ad, swimmer Eleni Hatzimitrou, Paralympic
runner Michalis Seitis, NBA player Giannis
Antetokounmpo and pole vaulter Nikoleta
Kyriakopulou prepare to ply their craft. A voiceover,
delivered in Greek, spits defiance as the tension builds.
"We will not be defined by circumstance," read the
English captions. "We will not be undone by what is
broken. We are more than our surroundings. We are
the makers of our fate."
The athletes take off as lightning crackles in the
background and war drums beat with enough drama
for a high-budget Hollywood movie based on an
ancient Greek myth.
Nike's classic tagline, "Just do it," follows as
Antetokounmpo lands after a crushing dunk.

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Nike’s Social Media Initiatives
In 2008, Nike created its Facebook account. Today,
Nike maintains a Facebook page for each sub-brand,
running product specific promotions, featuring events
in a particular sporting activity, and also providing
information on the latest game of endorsed athletes.
For example, a Facebook user who desires to know
more about the latest football shoes or game can turn
to Nike Football Facebook page.
Pairing up with Apple Inc. – a company known for its
innovative products, helped Nike by increasing brand
awareness and also reaching out to customers who
were still in two minds about choosing their brands
by bringing into its fold the Facebook fans of Apple.
The tie-up with Apple was Nike’s realization that most
runners will use iPods or iPhones to listen to music
while jogging. Apple’s iPhones and iPods thus came
pre-installed with Nike+ app. With this, iPhone/iPod
users can map out their running route and later share
it with their Facebook friends.
Digital Sport
Nike Digital Sport is a relatively new division at
Nike, launched in 2010 (the same year they spent
$800 million on nontraditional advertising), which
focuses on developing technology and devices that
enable users to track their personal fitness statistics.
The most well-known component of Digital Sport
is the Nike+ running sensor, which was developed
with Apple. The product has at least six million users.
Nike+ tracks athletic performance through a wireless
connection. Data is stored on the Nike website and
users can post and share their workout information
via Twitter and Facebook. It requires a Nike+ sensor,
Nike+-compatible footwear, and a Nike+ tracking
device. More recently, Nike has created the FuelBand,
which measures energy output.
References
Nike brand analysis, Brand strategy, Apparel division

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MTV
BRAND ANALYSIS
CADBURY
CASE STUDY ANALYSIS

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Introduction to Case
Cadbury is a brand which almost everyone knows.
Even after completion of more than 100 years, the
brand is into hearts of many people & it also leaves a
significant mark amidst all the competition. Cadbury
stands tall in food product sector. Cadbury is world’s
leader in chocolates and it is also one of the topmost
FMCG brands in India. Cadbury decided to enter
Indian market in 1948. Cadbury India began its
operations in India by importing chocolates. On
19th July 1948 Cadbury was incorporated in India.
Cadbury has a share of over 67% in the market, which
is the highest Cadbury brand share globally. Cadbury
now has 5 manufacturing units all over India.
Cadbury operates in India with following categories
of products: Chocolate, Confectionery, Beverages,
Biscuits and Candy.
Cadbury was performing very well since its
incorporation in India But, suddenly in 2003 Cadbury
came across a problem of worms.
In 2003, just a month before Diwali few instances
of worms in its Dairy Milk Bars were reported in
Maharashtra. In eight outlets across Maharashtra
worms were found. In October 2003, customers in
Mumbai complained about finding worms in Cadbury
Dairy Milk Bars.
Problems Faced by Cadbury
When these worms were found in some of the
dairy milk bars, Maharashtra Food and Drugs
Administration responded quickly to this case and
it seized the stocks of chocolate bars which were
manufactured in Cadbury’s Pune Plant.
Cadbury in defense issued a statement where it
mentioned that problem of worms was not at the
manufacturing stage but the problem arose due to
poor storage facility by the retailers.
FDA denied the statement made by Cadbury. FDA
Commissioner Uttam Khobragade came up with a
statement saying “It was presumed that worms got into
it at the storage level, but then what about the packing
- packaging was not proper or airtight, either ways it's
a manufacturing defect with unhygienic conditions or
improper packaging.”
Then there were many allegations and counter
allegations between Cadbury and FDA. Due to this
event reputation of Cadbury was hampered. Cadbury
sales went down by 30% which they had expected to
increase by 15% due to negative publicity.
For the first time, Cadbury’s Advertisements went off
air for one and a half months after the Diwali due to
this controversy

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Recovery Strategy
Project Vishwas
Cadbury was losing on its sales and also reputation
was being hampered. So, recovering from this type of
situation was a challenge for Cadbury. In the month of
October only Cadbury launched Public Relations (PR)
campaign ‘Vishwas' which was an education initiative
covering 190,000 retailers in key states.
Project Vishwas, a three-pronged program that
addressed the trade, consumers, media and employees.
The project incorporated the following measures:
For Trade
• A retail monitoring and education program
was launched in which quality checks at over
50,000 retail outlets and educated 190,000
wholesalers and retailers was done regarding
storage requirements.
• A press ad regarding 'Facts about Cadbury'
was also published by Cadbury nationally
in 55 trade publications which were about
channel members taking remedial measures in
the company.
• Posters and leaflets on the issue were also
distributed to retailers, encouraging them to
share them with consumers.
• Cadbury also linked the trade with response
cell through a toll-free number and an email id
to let them contact the company directly.
For Media
• The point-of-view of a company was explained
to media, media was also given updates
about actions initiated by the company, and
encouraged to share them with consumers.
• The company instituted a media desk and
diligentlyansweredeverymediaquery,friendly
or not. The company's managing director urged
media to assure consumers that Cadbury was
safe to eat, but that consumers exercise the
usual care in purchasing a chocolate that they
exercise in purchasing a food item.
• Furthermore, it also promised to implement
packaging changes within two months to
ensure against poor storage. Cadbury's MD
andkeyspokespersonshadone-to-onesessions
with 31 media editors as part of an 'Outreach'
program initiated in November 2003.
For Employees
• Employees were also briefed about actions
taken through meetings with senior managers
and email updates from the MD.
Change in Packaging
January 2004, the company launched a new double
packaging that was able to wrap even the smallest 13
gm chocolate in an aluminum foil, heat-sealed for
complete protection from all sides and further encased
in a poly flow pack. The over-engineered pack, the
first of its kind in India, cost a lot to a company, but
fulfilled the company's promise to consumers and
media. By investing up to Rs 15 crore (Rs 150 million)
on imported machinery, Cadbury's revamped the
packaging of Dairy Milk. The metallic poly-flow was
costlier by 10-15 per cent, but Cadbury didn't hike the
pack price.
The new packaging was launched in a media
conference. In a conference comparison kits were
distributed. These kits were useful in comparing old
packs and new packs. A video with packaging and
factory shots for television coverage was also launched.
Ad Campaign
Just after changing packaging Cadbury roped in
Amitabh Bachchan as a brand ambassador. From the
month January to March 2004, Cadbury came up
with a strong Ad campaign which helped them to get
back the consumer confidence. During this period
Advertising expenses went up by 15% but it really
helped Cadbury to get back its reputation.
Current Situation
After that Incident Cadbury now takes great care of all
the products they have. Cadbury is currently leading
the market in chocolates segment. Market share of the
Cadbury Dairy Milk is around 35% in India. Cadbury
has not faced any controversy related to products after
that incident.
References
Economic Times, Rediff

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EVA
CONCEPT OF THE MONTH

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EVA: A Beguiling Solution
A lot of companies chase growth in earnings per
share, only to find themselves employing too much
capital at too low a rate of return and thereby eroding
shareholder value. Economic Value Added offers a
beguiling solution: an easy-to-understand measure
that recognizes improvements in earnings only to the
extent that they exceed the cost of the capital employed
to secure them.
A very sensible solution but with only one critical
flaw that EVA discourages growth. These conceptual
problems have been there all along and now the
empirical evidence is beginning to mount. At this
point of time when renewing growth represents the
major competitive challenge facing most companies,
reliance on EVA can become a major problem to
building shareholder value. Fortunately, there are
other better alternatives to evaluate a company.
The value assigned to a company by financial market
reflects its prospects for profitability and growth. A
change in value is driven by a change in expectations
for one or both. CEOs naturally seek to influence
shareholder value. Therefore, the trick is to pick the
right metric. A metric that tracks the market valuation
process closely and is fairly simple and intuitive.
EVA is simple and easy to understand and to calculate.
But at a cost: it tracks actual market valuations rather
poorly and introduces three fundamental distortions
into managers’ decisions:
1. EVA is biased against new assets. EVA shares the bias
againstnewassetsofallconventionalaccounting-based
measures. When an investment is made, its complete
cost hits the capital charge, and EVA is artificially
low. As the investment depreciates, the capital charge
declines proportionally. At maturity, EVA is artificially
high. Inflation worsens this tendency, since EVA
recognizes its impact on earnings but ignores its
impact on the replacement cost of assets.
This has the perverse effect of penalizing managers
who bet on growth by investing. Except for the rare
case where an investment has an immediate payback,
growth-oriented managers take a short-term EVA hit.
2. EVA encourages managers to milk the business. It’s
evenworsethanpunishingpro-growthbehaviour,EVA
rewards antigrowth behaviour. Investing aggressively
at rates of return exceeding the cost of capital may be
the preferred way to move the EVA needle. But one
quickly learns that the easier way, at least in the short
term, is to reduce assets faster than earnings to milk
the business.
Pursued long enough, say three to five years, this
strategy creates an EVA trap. Lack of investment can
leave managers with such a depreciated asset base that
any new investment will have a huge negative impact
on EVA. The disincentive—whether to grow or to
renew with more productive assets—compounds over
time.
Little surprise, then, that the record of long time EVA
converts is one of delivering enhanced returns but not
long-term growth in the capital base. Indeed, several
have experienced growth rates in their asset bases
close to zero and well below those of their peers.
3. EVA is biased in favour of large, low-return
businesses. EVA is a marginal measure: it represents
the incremental earnings above a base level set by
the cost of capital employed. This makes EVA heavily
biased by size. Large businesses that earn returns only
slightly above the cost of capital can have bigger EVAs
than smaller businesses earning much higher returns.
What’s more, the rate of change in EVA is accentuated
for businesses whose historical performance hovers
around the cost of capital. Small improvements in the
performance of a marginal business generate large

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VOLUME 04BEACON
May 2016
16
ISSUE 05
percentage gains in EVA.
This makes EVA a poor metric for comparing
businesses, whether to benchmark performance
against peers or to allocate resources across a
company’s portfolio. Because EVA sends misleading
signals about the relative attractiveness of businesses,
companies that rely on it run the risk of growing the
wrong ones.
References
BCG Perspectives