Benchmarking to economic value added: The case of Airways Corporation of New Zealand Limited
Abstract
Purpose
To describe and analyse the adoption of economic value added (EVA) income as a benchmark for setting pricing and other policies of a monopolistic state‐owned enterprise in the absence of normal benchmarking mechanisms.
Design/methodology/approach
By earning zero economic value added profits the enterprise earns its cost of capital and escapes claims of monopolistic pricing and possible regulation. To test the success of this policy the financial series of the enterprise are developed from the date of incorporation in 1989 along with the economic value added series. The normal accounting profits are compared with the value added results. The value added results are used as a proxy for the pricing and other operational decisions of the firm that are not directly observable. The validity of the economic value added approach to provide a suitable benchmark is examined.
Findings
Provides evidence that the enterprise was successful in avoiding charges of monopolistic pricing and subsequent regulation by linking pricing and other policies to its economic results. This was in a period when similar enterprises were regulate or threatened with regulation. The economic environment in the later years of the study have changed the goals of the enterprise.
Research limitations/implications
This is a case study, so the success of this New Zealand based enterprise in benchmarking its policies to economic value added cannot be generalised to other companies and environments.
Practical implications
Provides a useful way to benchmark profits where a monopoly position may attract regulation. It also provides a system of benchmarking if other industry information is not available.
Originality/value
This paper identifies a unique position where the objective was to minimise economic income, rather than the usual goal of income maximisation.
Keywords
Citation
Austin, L.M. (2005), "Benchmarking to economic value added: The case of Airways Corporation of New Zealand Limited", Benchmarking: An International Journal, Vol. 12 No. 2, pp. 138-150. https://doi.org/10.1108/14635770510593086
Publisher
:Emerald Group Publishing Limited
Copyright © 2005, Emerald Group Publishing Limited