Shareholder Value in Inustrial Sector

There are many ways to measure shareholder value (SV), but the Stern’s Economic Value Added (EVA) concept is the most widely used. EVA uses accounting information, measuring the level of return to shareholders after cost of capital is subtracted from the capital employed. To maximise shareholder value, management are increasingly forced to opt for capital investment decisions that yield the highest net present value (NPV) which will boost the return on capital employed. (ROCE)

When this knowledge is placed in the context of the industrial sectors, it becomes evident that implementing this performance measure, (alongside the increasing demands from shareholders for higher ROCE, typically 12-15%) (Citation needed) is having catastrophic effects on many UK and American industrial sectors over the last 20 years. The fact that it appears to be largely corporations in these nations is no coincidence, as it is these nations that prioritise maximisation of shareholder value. German companies seldom make more than 1% ROCE, similar to that of Japan, yet it is these companies that are recording higher sales, incurring lower costs and having increased satisfaction from customers, whereas American and UK manufacturing firms are lessening by the year. I argue that it is the quest for increasing shareholder value that has ultimately crippled US and UK car manufacturing firms by forcing them to concentrate on short term issues, ignore investment in non-tangible assets such as knowledge and skills, in line with M. Porter’s similar argument. (Grant 1995)

Eastern manufacturing companies such as Toyota have been investing in such skills, and by utilising the value and skill of their workers they have been able to implement innovative techniques such as JIT and TQM, resulting in boosted quality and lessened costs, giving them a true advantage over US and UK firms in the same industry.

Without question, the manufacturing of motor cars is a mature market, almost saturated. A recent survey illustrates just how so, with 600 millions cars on the globe in 2003 and 6.2 billion people.