6 Implementation of Strategy Management accountants design reportsto help managers track progress inimplementing strategy.
7 The Balanced Scorecard The scorecard measures an organization’sperformance from four perspectives:1. Financial2. Customer3. Internal business processes4. Learning and growth
8 Identify what comprises Learning Objective 2Identify what comprisesreengineering.
9 Reengineering Reengineering is the fundamental rethinking of business processes delivery to achieveimprovements in critical measures ofperformance such as cost, quality, service,speed, and customer satisfaction.
10 Reengineering Example Dallas Co. order delivery system:Customers needs identifiedQuantities to be shippedmatched against purchase orderPurchase order issuedShipping documents sentto Billing DepartmentProduction scheduledManufacturing completedInvoice issuedFinished goods to inventoryCustomer payment follow up
11 Reengineering Example The following was determined:Frequently, there is a long waiting time beforeproduction begins in the manufacturing department.Sometimes items are held in inventory untila truck is available for shipment.
12 Reengineering Example If the quantity shipped does not match thenumber of items requested by the customer,a special shipment must be scheduled.Dallas discovered that the many transfersacross departments slowed down theprocess and created delays.A multifunctional team reengineered theorder delivery process.
13 Reengineering Example A customer relationship manager is responsiblefor each customer.Dallas will enter into long-term contracts withcustomers specifying quantities and prices.The customer relationship manager will workwith the customer and manufacturing to specifydelivery schedules one month in advance.
14 Reengineering Example The schedule of customer orders will be sentelectronically to manufacturing.Completed items will be shipped directly fromthe manufacturing plant to customer sites.Each shipment will automatically trigger aninvoice to be sent electronically to the customer.
15 Present the four perspectives of the balanced scorecard. Learning Objective 3Present the four perspectivesof the balanced scorecard.
16 Perspectives of Performance 1. Financial2. Customer3. Internal business process4. Learning and growth
17 Financial Perspective Objective:Increase shareholder valueMeasures:Increase in operating income
25 Aligning the Balanced Scorecard to Strategy Different strategies call for different scorecards.What are some of the financialperspective measures?Operating incomeRevenue growthCost reduction is some areasReturn on investment
26 Aligning the Balanced Scorecard to Strategy What are some of the customerperspective measures?Market shareCustomer satisfactionCustomer retention percentageTime taken to fulfill customers requests
27 Aligning the Balanced Scorecard to Strategy What are some of the internal businessperspective measures?Innovation Process:Manufacturing capabilitiesNumber of new products or servicesNew product development timeNumber of new patents
28 Aligning the Balanced Scorecard to Strategy Operations Process:YieldDefect ratesTime taken to deliver product to customersPercentage of on-time deliverySetup timeManufacturing downtime
29 Aligning the Balanced Scorecard to Strategy Post-sales service:Time taken to replace or repairdefective productsHours of customer training forusing the product
30 Aligning the Balanced Scorecard to Strategy What are some of the learning and growthperspective measures?Employee education and skill levelEmployee satisfaction scoresEmployee turnover ratesInformation system availabilityPercentage of processes with advanced controls
31 Pitfalls When Implementing a Balanced Scorecard What pitfalls should be avoided whenimplementing a balanced scorecard?1. Don’t assume the cause-and-effectlinkages to be precise.2. Don’t seek improvements acrossall measures all the time.3. Don’t use only objective measureson the scorecard.
32 Pitfalls When Implementing a Balanced Scorecard 4. Don’t fail to consider both costs and benefitsof initiatives such as spending on informationtechnology and research and development.5. Don’t ignore nonfinancial measures whenevaluating managers and employees.6. Don’t use too many measures.
33 Analyze changes in operating income to evaluate strategy. Learning Objective 4Analyze changes in operatingincome to evaluate strategy.
34 Evaluating the Success of a Strategy Assume the following operating incomes:Year Year 2004Revenues:(1,000,000 × $26) $26,000,000(1,100,000 × $24) $26,400,000Expenses:Materials ,050, ,631,320Other ,000, ,000,000Operating income $ 5,950,000 $ 6,768,680
35 Evaluating the Success of a Strategy How can the increase in operatingincome of $818,680 be evaluated?GrowthPrice recoveryProductivity
36 Growth Component Assume that for 2003, Dallas produced and sold 1,000,000 units at $26 per unit.During the year 2004, Dallas producedand sold 1,100,000 units at $24 per unit.What is the revenue effect of growth?
37 Growth Component = – × Revenue effect of growth component (Actual units of output sold in 2004–Actual units of output sold in 2003)×Output price in 2003(1,100,000 – 1,000,000) × $26 = $2,600,000 FThis component is favorable becauseit increases operating income.
38 Growth Component = – × Cost effect of growth component Actual units of input or capacity that wouldhave been used in 2003 to produce year 2004output assuming the same input-outputrelationship that existed in 2003–Actual units or capacity to produce 2003 output×Input prices in 2003
39 Growth Component To produce 1,100,000 units in 2004 compared with the 1,000,000 units produced in 2003(a 10% increase), Dallas would require aproportional increase in direct materials.Assume that 3,000,000 square centimeters ofmaterials were used to produce the 1,000,000units in 2003 at a cost of $1.35per square centimeter.
40 Growth Component Assume that manufacturing conversion costs, selling and customer service costs and researchand development costs were $16,000,000and remained stable during 2004.What is the cost effect of the growth component?3,000,000 × 110% = 3,300,000 centimeters(3,300,000 – 3,000,000) × $1.35 = $405,000 U
41 Operating Income and Growth What is the net increase in operating incomeas a result of growth?Revenue effect of growth component $2,600,000 FCost effect of growth component ,000 UIncrease in operating incomedue to growth component $2,195,000 F
42 Price-Recovery Component Revenue effect of price-recovery component= (Output price in 2004 – Output price in 2003)× Actual units of output sold in 2004What is the revenue effect of theprice-recovery component?($24 – $26) × 1,100,000 = $2,200,000 U
43 Price-Recovery Component Cost effect of price-recovery component=(Input prices in 2004 – Input prices in 2003)×Actual units of inputs or capacity that wouldhave been used to produce year 2004 outputassuming the same input-output relationshipthat existed in 2003Assume that in the year 2004, direct materialscosts were $1.31 per square centimeter.
44 Price-Recovery Component What is the cost effect of theprice-recovery component?($1.31 – $1.35) × 3,300,000 = $132,000 FWhat is the total effect on operatingincome of the price-recovery component?
45 Operating Income and Price-Recovery Component Revenue effectof price-recovery component $2,200,000 UCost effectof price-recovery component ,000 FDecrease in operating incomedue to price-recovery component $2,068,000 U
46 Productivity Component =Actual units of inputs or capacity toproduce year 2004 output–Actual units of inputs or capacitythat would have been used to produceyear 2004 output assuming the sameinput-output relationship that existed in 2003×Input prices in 2004
47 Productivity Component Assume that 2,772,000 actual squarecentimeters of direct materials wereused in the year 2004.Actual price was $1.31/square centimeter.
48 Productivity Component What is the productivity component of cost changes?(2,772,000 – 3,300,000) × $1.31 = $691,680 FThere is a $691,680 increase in operatingincome due to the productivity component.
49 Change in Operating Income Increase in operating income$818,680Growthcomponent$2,195,000 FPrice-recoverycomponent$2,068,000 UProductivitycomponent$691,680 F
50 Distinguish between engineered and discretionary costs. Learning Objective 5Distinguish between engineeredand discretionary costs.
51 Engineered Costs Engineered costs result specifically from a clear cause-and-effect relationship between outputand the resources needed to produce that output.They can be variable or fixed in the short run.
52 Discretionary Costs Discretionary costs have two important features. They arise from periodic (usually yearly)decisions regarding the maximumamount to be incurred.They have no measurable cause-and-effectrelationship between output and resources used.
53 Relationships Between Inputs and Outputs Engineered costs differ from discretionarycosts along two key dimensions:Type of processLevel of uncertainty
54 Relationships Between Inputs and Outputs Engineered costs pertain to processes that aredetailed, physically observable, and repetitive.Discretionary costs are associated with processesthat are sometimes called black boxes, becausethey are less precise and not well understood.
55 Identify unused capacity Learning Objective 6Identify unused capacityand how to manage it.
56 Managing Unused Capacity What actions can management takewhen it identifies unused capacity?Attempt to eliminate the unused capacityAttempt to use the unused capacity to grow revenue