John S. Shiely continues to expand a turnaround at Briggs & Stratton Corp. that was begun by integrating a business philosophy based on Economic Value Added (EVA). The essential principle of EVA analysis is that a company only makes economic profit if the company earns more than the cost of its capital.
The results: EVA has helped the company achieve an impressive record of producing economic profits. Briggs & Stratton has made money every year since the late 1980s. For the fiscal year ending June 30 net income is predicted to grow 32%. Revenue is at record levels ($1.6 billion). Exports account for 25% of sales, and this U.S. producer expects to continue to undercut foreign competition even in some new market sectors. In 2001 Shiely documented those metrics of success by co-authoring "The EVA Challenge: Implementing Value-Added Change in an Organization" (2001, John Wiley & Sons Inc.).
IndustryWeek senior technology editor John Teresko recently talked with Shiely about EVA and its role in the turnaround that started at Briggs & Stratton in 1989.
IW: How do you define the EVA philosophy?
Shiely: EVA is both a measure of the true economic performance of a company and a strategy for creating shareholder wealth. EVA succeeds by changing corporate priorities and behavior throughout a company, right down to the shop floor. Properly implemented, EVA frees the measurement of corporate performance from the vagaries of accounting conventions and aligns the interests of managers with those of shareholders, ending the all too common conflicts of interest.
IW: What are the elements of EVA?
Shiely: An EVA program comprises three parts: a measurement system, an incentive system and a system of financial management. In measuring performance, for example, EVA's key ingredient is the recognition of a capital charge -- the cost of capital in a company, in a division, in a branch store or in a product. Research shows that companies using EVA outperform competitors of comparable market capitalization by an average 49% over a five-year period, as measured by total return to shareholders.
IW: How has EVA been applied to Briggs & Stratton?
Shiely: We began by returning our manufacturing focus to high volume business and began treating our people as owners. Back in 1989 we had to recover from a mistaken effort of trying to be all things to all people. For example, we began making a line of premium engines, but found that we couldn't make any money because the volume was too low. Step two of the recovery process was splitting the business into six divisions that serve as EVA centers. In addition to managing costs, the general managers of the divisions became responsible for managing their capital assets according to EVA principles. The third piece of the turnaround puzzle was the economic discipline, the full EVA program with EVA incentives, EVA training, using EVA metrics to measure new products, acquisitions and joint ventures. By 1992 the company was beginning to earn the cost of capital and that has continued for 10 of the past 11 years. That's quite an achievement because only between 30%-40% of companies earn the cost of capital in any given year.
IW: How does EVA impact capital equipment expenditures -- the plant floor investments?
Shiely: What we're trying to do is make our people owners by training them to view the world as owners do. We want them to learn to invest money in the business the way they do in their personal lives. The idea is to apply the same principles of economic analysis. That means that budgets are not a mandatory license to spend. For example the first year we put EVA in, we had a capital spending program of about $70 million and by requiring EVA justification, the analysis authorized only $47 million. A similar thing will happen this year with expenditures falling $10 million under budget. Under conventional [non-EVA] budget regimes, people will find a place to spend that money. Without EVA, that [spending] will tend to happen even if the capital investment isn't needed.
IW: How was the premium-priced engine project resolved? Shiely: Mitsubishi now makes and brands this low volume engine line for us. If we had an EVA program when we decided to enter this premium market we could have avoided not only the $70 million we invested in production equipment, but also monthly losses of $1 million. That engine project should have been earning $10 million annually, but instead yearly losses were $12 million.
IW: What challenges confront managements who want to implement EVA?
Shiely: The challenges include unions who are not active in the value creation process and investors who focus on accounting earnings and ignore the higher correlation between economic profit and the value of the business. What unions ought to do is implement EVA incentive programs and get rich! Ideally all the corporate constituencies -- the customers, the employees, the communities where a company is located -- can help with the EVA value creation process.