Ball: EVA Driving the World's Leading Can Manufacturer (A) Custom Case Solution & Analysis

1. Evidence Brief: Ball Corporation EVA Implementation

Financial Metrics

• WACC: Ball calculated its weighted average cost of capital at approximately 9 percent to 10 percent during the mid 1990s.
• Capital Intensity: The beverage can industry requires significant investment; a single high speed manufacturing line costs between 25 million and 40 million dollars.
• EVA Formula: Net Operating Profit After Tax (NOPAT) minus (Capital multiplied by Cost of Capital).
• Historical Performance: Prior to 1991, Ball operated as a conglomerate with inconsistent returns. After adopting EVA, the stock price outperformed the S and P 500 by over 300 percent between 1993 and 2002.
• Debt Levels: Significant debt was incurred for the 1998 Reynolds Metals acquisition, totaling approximately 1 billion dollars.

Operational Facts

• Portfolio Shift: Ball divested its legacy glass business in 1996 and spun off its Alltrista consumer products division to focus on metal packaging and aerospace.
• Acquisition Strategy: Purchased Reynolds Metals beverage can business in 1998 for 746 million dollars, making Ball the largest North American manufacturer.
• Compensation Structure: Incentive plans for over 500 managers were tied directly to EVA improvement rather than traditional accounting profit or volume.
• Asset Management: Implementation of EVA led to the closure of underperforming plants and the optimization of inventory levels to reduce capital charges.

Stakeholder Positions

• George Sissel (CEO): Championed the shift from a family managed conglomerate to a professionalized, value focused organization.
• R. David Hoover (CFO/COO): The primary architect of the EVA framework; insisted on financial rigor as the primary language of the company.
• Plant Managers: Initially skeptical of the complexity of EVA calculations but became supporters as the link between capital efficiency and bonuses became clear.
• Institutional Investors: Shifted from viewing Ball as a stagnant conglomerate to a disciplined packaging leader.

Information Gaps

• The specific depreciation schedules used for calculating the capital base in the aerospace division versus the packaging division.
• The precise tax rate adjustments applied to NOPAT across different international jurisdictions.
• The impact of EVA on long term R and D spending in the aerospace segment compared to industry peers.

2. Strategic Analysis

Core Strategic Question

• How can a capital intensive company in a mature, low growth industry generate superior shareholder returns while avoiding the traps of diversification and volume based expansion?

Structural Analysis

The metal packaging industry is characterized by high capital barriers and intense rivalry. Using the Value Chain lens, Ball identified that its primary competitive advantage lay not in proprietary technology, but in capital allocation efficiency. Porter's Five Forces reveal a buyer group (beverage giants) with immense power; therefore, Ball cannot rely on price increases. Profitability must come from internal discipline. The adoption of EVA serves as a strategic filter to ensure that every dollar of capital invested generates a return exceeding the 9 percent cost of capital. This structural shift moved Ball from a volume chaser to a value creator.

Strategic Options

Preliminary Recommendation

Ball must pursue the Disciplined M and A path. In a mature industry like beverage cans, scale is necessary for cost leadership. However, this scale must be filtered through EVA. The Reynolds acquisition is the correct model: it provides market leadership while the EVA framework forces the management team to aggressively strip out excess capital and optimize the combined footprint to cover the increased cost of capital from the acquisition debt.

3. Implementation Roadmap

Critical Path

• Month 1-3: Standardize EVA reporting across all newly acquired Reynolds facilities. Establish the baseline capital charge for each plant.
• Month 4-6: Align incentive compensation for Reynolds management with the Ball EVA model. Shift focus from cases produced to capital returned.
• Month 7-12: Execute a capital audit. Identify and sell underutilized assets or excess inventory at acquired sites to immediately reduce the capital base.

Key Constraints

• Calculation Complexity: Managers may struggle to understand how their daily actions impact NOPAT minus capital charge. Simplification of the metric into actionable drivers like inventory days and machine uptime is required.
• Culture Clash: Reynolds managers likely operated under a volume-based or EBITDA-based culture. Resistance to a capital charge penalty is the primary behavioral risk.

Risk-Adjusted Implementation Strategy

To mitigate the risk of operational paralysis during the EVA rollout, Ball should utilize a phased bonus transition. In the first year of an acquisition, 50 percent of the bonus should remain tied to traditional metrics, transitioning to 100 percent EVA by year three. This provides a learning window. Additionally, a capital expense (CapEx) contingency fund must be maintained. While EVA discourages unnecessary spending, the company must ensure that essential maintenance is not deferred to artificially inflate short term EVA scores.

4. Executive Review and BLUF

BLUF

Ball Corporation successfully transitioned from a mediocre conglomerate to a high performance packaging leader by adopting Economic Value Added (EVA) as its primary operating philosophy. This was not a mere accounting change but a cultural transformation that aligned management incentives with shareholder interests. By charging managers for the capital they use, Ball forced a divestiture of low return assets (Glass) and provided a rigorous framework for accretive acquisitions (Reynolds). The strategy is proven: sustainable value in mature industries is found in capital discipline, not growth for the sake of scale. Approval for continued expansion under this framework is recommended.

Dangerous Assumption

The analysis assumes that the cost of capital (WACC) remains stable at 9 to 10 percent. If interest rates rise significantly or the risk profile of the packaging industry shifts, the hurdle rate for EVA could render currently profitable plants value-destructive overnight, forcing unplanned closures.

Unaddressed Risks

• Innovation Starvation: The heavy penalty on capital investment inherent in EVA may discourage long term R and D projects that do not show immediate NOPAT gains, specifically in the Aerospace segment.
• Customer Concentration: While EVA optimizes internal operations, it does not mitigate the risk of a major beverage customer (e.g., Coca-Cola or Pepsi) insourcing can production or switching to alternative materials like plastic or glass.

Unconsidered Alternative

The team did not fully evaluate a Total Cost of Ownership (TCO) strategy for customers. Instead of focusing solely on internal capital efficiency, Ball could invest in downstream integration—managing the filling and logistics for customers. This would increase capital intensity but could create higher switching costs and pricing power that EVA alone does not address.

VERDICT: APPROVED FOR LEADERSHIP REVIEW