1. Strategy, Balanced Scorecard, and Strategic Profitability Analysis
Based on Chapter 13, Cost Accounting, 12th ed.
Horngren et al., Edited and
Modified by C. Bailey

2. Introduction This topic…
explores the use of management accounting information for implementing and evaluating an organization’s strategy.
shows how MA information helps strategic initiatives:
productivity improvement
reengineering
downsizing.

3. Recognize which of two generic strategies a company is using
Learning Objective 1
Recognize which of two generic strategies a company is using

4. What is Strategy?
Strategy describes how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its overall objectives.
In formulating its strategy, an organization must thoroughly understand the industry in which it operates.

5. Understanding the Industry
Industry analysis focuses on five forces:
Competitors
Reducing prices of products is critical for any industry to grow.
Competition today is severe along the dimensions of price, timely delivery, and quality.

6. Understanding the Industry
Potential entrants into the market
Competition usually keeps profit margins small.
Existing companies probably have lower costs.
Existing companies also have the advantage of close relationships with customers.

7. Understanding the Industry
Equivalent products
How easily can users substitute other products (consider MS Windows!)
Bargaining power of customers
Customers may obtain the products from other potential suppliers.

8. Understanding the Industry
Bargaining power of input suppliers
Suppliers of high-quality materials can demand higher prices.
Skilled engineers, technicians, and laborers can demand higher wages.

9. Generic Strategies Two generic strategies that organizations use are:
Product differentiation
Cost leadership

10. Product Differentiation
Customers perceive product/service to be superior and unique relative to competitors.
Hewlett Packard in the electronics industry
Merck in the pharmaceutical industry
Coca-Cola in the soft drinks industry
Others?

11. Cost Leadership Achieving low costs relative to competitors. How?
Productivity and efficiency improvements
Elimination of waste
Tight cost control
Examples?
Dell, Bic

12. Implementation of Strategy
To be successful, a company must
formulate an effective strategy
implement it vigorously.
Management accountants play important role
collecting meaningful data
designing reports to help managers track progress in implementing strategy.

13. The Balanced Scorecard
The balanced scorecard translates an organization’s mission and strategy into a comprehensive set of performance measures.
Does not focus solely on financial objectives.
highlights nonfinancial objectives that an organization must achieve to meet its [long-term] financial objectives.

14. The Balanced Scorecard
Four key perspectives
Financial [sales, cost, etc.]
Customer [mkt shre, growth, satisfaction]
Internal business processes [innovation, impr]
Learning and growth [skills, workforce]

15. The Balanced Scorecard
Attempts to balance
financial and nonfinancial performance measures
short-run and long-run performance in a single report.
Why does the balanced scorecard reduce manager’s emphasis on short-run financial performance?

16. The Balanced Scorecard
Reduces short-term emphasis because:
nonfinancial and operational indicators measure fundamental changes
financial benefits of these changes may not appear in short-run earnings.
nonfinancial measures (leading indicators) signal the prospect of creating economic value in the future.

17. Identify key aspects of reengineering
Learning Objective 2
Identify key aspects of reengineering

18. Quality Improvement
One key element of a strategy to reduce costs is to improve quality, by…
Reducing defects
Improving yields.

19. Quality Improvement What is needed to improve quality?
Nonfinancial data about
manufacturing process parameters (e.g., time)
implementation of advanced process control methods
training of frontline workers in quality management techniques
empowering workforce to make timely decisions, continuously improve processes

20. Reengineering
Example of Ford Motor Company: Reducing Ordering Costs (HBR July-Aug. 1990)
U.S. Accts. Payable in early 1980's employed > 500
Set goal: Reduce by 20% to 400.
but . . .

21. Reengineering Found that Mazda's AP dept had 4 people!!
Results of reengineering:
"Invoiceless processing": If goods match PO, clerk receives them, and pmt is made. (If don't match, reject shipment.)

22. Reengineering
Old procedures required acctg dept to match 14 data items on PO, receipt record, and invoice.
Head count cut 75%

23. Present the four perspectives of the balanced scorecard
Learning Objective 3
Present the four perspectives of the balanced scorecard

24. Perspectives of the Balanced Scorecard
There are four perspectives of the balanced scorecard:
Financial perspective
Customer perspective
Internal business process perspective
Learning and growth perspective

25. Financial Perspective
Evaluates the profitability of the strategy.
Focuses on how factors affect income:
Growth (units sold, inputs need)
Price Recovery (higher prices, lower costs)
Productivity (efficiency of resource use)

26. Financial Perspective
Objective:
Increase shareholder value
Sample Measures:
Increase in operating income
Revenue growth,

27. Aligning the Balanced Scorecard to Strategy
What are some of the financial perspective measures?
Operating income
Revenue growth
Cost reduction is some areas
Return on investment

28. Customer Perspective
Identifies the targeted market segment and measures the company’s success in these segments.

29. What are some of the customer perspective measures?
Market share
Customer satisfaction
Customer retention percentage
Time taken to fulfill customers requests

30. Internal Business Process Perspective
Focuses on internal operations
Create value for customers
Further the financial perspective by increasing shareholder wealth.
Typical Objectives:
Improve manufacturing capability
Reduce delivery time to customers
Meet specified delivery dates

31. What are some of the internal business perspective measures?
Innovation Process
Manufacturing capabilities
Number of new products or services
New product development time
Number of new patents

32. Internal business perspective measures cont’d.
Operations Process
Yield
Defect rates
Time taken to deliver product to customers
Percentage of on-time delivery
Setup time
Manufacturing downtime

33. Internal business perspective measures cont’d.
Post-sales service
Time taken to replace or repair defective products
Hours of customer training for using the product

34. Learning and Growth Perspective
Emphasizes capabilities of
Employees
empowerment, training
Info systems
Typical Objectives:
Develop process skill
Empower work force
Enhance information system capabilities

35. Some Learning and Growth Perspective Measures
Employee education and skill level
Employee satisfaction scores
Employee turnover rates
Information system availability
Percentage of processes with advanced controls

36. Features of a Good Balanced Scorecard
It tells the story of a company’s strategy by articulating a sequence of cause-and-effect relationships.
It assists in communicating the strategy to all members of the organization by translating the strategy into a coherent and linked set of measurable operational targets.

37. Features of a Good Balanced Scorecard
In for-profit companies, the balanced scorecard places strong emphasis on financial objectives and measures.
The scorecard limits the number of measures used by identifying only the most critical ones.
The scorecard highlights suboptimal tradeoffs that managers may make.

38. Pitfalls When Implementing a Balanced Scorecard
Don’t assume the cause-and-effect linkages to be precise.
Don’t seek improvements across all measures all the time.
Don’t use only objective measures on the scorecard.

39. Pitfalls When Implementing a Balanced Scorecard
Don’t fail to consider both costs and benefits of initiatives such as spending on information technology and research and development.
Don’t ignore nonfinancial measures when evaluating managers and employees.

40. Analyze changes in operating income to evaluate strategy
Learning Objective 4
Analyze changes in operating
income to evaluate strategy
[We may do a case next week.]

41. Distinguish between engineered and discretionary costs
Learning Objective 5
Distinguish between engineered
and discretionary costs

42. Engineered and Discretionary Costs
Fixed costs are tied to capacity.
Fixed costs do not change automatically with changes in the level of the cost driver.
How can managers reduce capacity-based fixed costs?
The key is understanding and managing unused capacity.

43. Engineered Costs
Engineered costs result specifically from a clear cause-and effect relationship between output and the resources needed to produce that output.
Engineered costs can be variable or fixed in the short run.
Selling & customer-service costs are engineered, fixed in the short run.

44. Discretionary Costs Two important features of discretionary costs:
They arise from periodic (usually yearly) decisions regarding the maximum amount to be incurred.
They have no clearly measurable cause-and effect relationship between output and resources used.

45. Discretionary Costs Discretionary costs include: Advertising
Executive training
Research and development
Health care
Legal resources
Public relations

46. Relationships between Inputs and Outputs
Engineered costs differ from discretionary costs along two key dimension
Type of process
detailed, physically observable, and repetitive
Level of uncertainty
higher level of uncertainty about the relationship means less likely cause-and-effect exists

47. End of BSC Presentation