Reason 1: Steering failure in ROI

• Suppose of a SBU earning currently a return (ROI, ROIC, ROCE) of 30% and suppose that this SBU faces an investment opportunity producing a return of 20%
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  • Before investment: Capital 100, Operating profit 30, Capital cost 10%
  • ROI = 30/100 = 30% , EVA = 30 - (10% x 100) = 20
  • Investment´s capital requirement 20, return 20%/year: Thus increase in yearly operating profit is 20% x 20 = 4
  • After investment: Capital 100, Operating profit 30, Capital cost 10%
  • ROI = 34/100 = 28% , EVA = 34 - (10% x 120) = 22

• In this case decreasing ROI is good for the shareholders, thus ROI should not be maximised and therefore it is problematic controlling tool.

• Usually large corporations have at least some very profitable units and particularly these units are steered wrongly with ROI

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