1. Strategy, Balanced Scorecard, and Strategic Profitability Analysis
Chapter 13
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2. Recognize which of two generic strategies a company is using.
Learning Objective 1
Recognize which of two generic
strategies a company is using.
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3. What is Strategy? Strategy describes how an organization matches
its own capabilities with the opportunities in the
marketplace to accomplish its overall objectives.
What is the focus of industry analysis?
Competitors
Potential entrants into the market
Equivalent products
Bargaining power of customers
Bargaining power of input suppliers
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4. 1. Product differentiation
Basic Strategies
Implementation of Strategy :
Management accountants design reports to help managers track progress in implementing strategy.
1. Product differentiation
2. Cost leadership
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5. The Balanced Scorecard
The scorecard measures an organization’s
performance from four perspectives:
Financial
Customer
Internal business processes
Learning and growth
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6. Identify what comprises
Learning Objective 2
Identify what comprises
reengineering.
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7. Reengineering Definition:
Reengineering is the fundamental rethinking and redesign of business processes to achieve improvements in critical measures of performance such as cost, quality, service,
speed, and customer satisfaction.
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8. Reengineering Example
Dallas Co. order delivery system:
Customers needs identified
Quantities to be shipped
matched against purchase order
Purchase order issued
Shipping documents sent
to Billing Department
Production scheduled
Manufacturing completed
Invoice issued
Finished goods to inventory
Customer payment follow up
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9. Reengineering Example
The following was determined:
Frequently, there is a long waiting time before production begins in the manufacturing department.
Sometimes items are held in inventory until a truck is available for shipment.
If the quantity shipped does not match the number of items requested by the customer, a special shipment must be scheduled.
Dallas discovered that the many transfers across departments slowed down the process and created delays.
A multifunctional team reengineered the order delivery process.
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10. Reengineering Example
A customer relationship manager is responsible for each customer.
Dallas will enter into long-term contracts with customers specifying quantities and prices.
The customer relationship manager will work with the customer and manufacturing to specify delivery schedules one month in advance.
The schedule of customer orders will be sent electronically to manufacturing.
Completed items will be shipped directly from the manufacturing plant to customer sites.
Each shipment will automatically trigger an invoice to be sent electronically to the customer.
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11. Present the four perspectives of the balanced scorecard.
Learning Objective 3
Present the four perspectives
of the balanced scorecard.
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12. Perspectives of Performance
1. Financial
2. Customer
3. Internal business process
4. Learning and growth
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13. Financial Perspective
Objective: Increase shareholder value
Measures: Increase in operating income
Initiatives:
Target
Performance
Actual
Performance
Manage costs of
unused capacity
$2,000,000
$2,100,000
Build strong customer
relationships
$3,000,000
$3,420,000
Build strong customer
relationships 6%
6.48%
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14. Increase customer focus
Customer Perspective
Objectives:
Increase market share & Increase customer satisfaction
Measures:
Market share & Customer satisfaction survey
Initiatives:
Target
Performance
Actual
Identify future needs
of customer
Identify new target
customer segments 6% 7
90% give top
two ratings
Increase customer focus
of sales organization 7% 8
87% give top
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15. Internal Business Process Perspective
Objectives: Improve manufacturing quality and productivity, Meet specified delivery dates
Measures: Yield, On-time delivery
Initiatives:
Target
Performance
Actual
Identify problems and
improve quality
Reengineer order
delivery process
78%
92%
79.3%
90%
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16. Learning and Growth Perspective
Objectives:
Align employee and organization goals, Improve manufacturing processes
Measures:
Employee satisfaction survey, Improvements in process controls
Initiatives:
Target
Performance
Actual
Employee
participation and
suggestion program
to build teamwork
Organize R&D/
manufacturing teams
to modify processes
80% of
employees
give top
two ratings 5
88% of
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17. Aligning the Balanced Scorecard to Strategy
Different strategies call for different scorecards.
What are some of the financial perspective measures?
Operating income
Revenue growth
Cost reduction is some areas
Return on investment
What are some of the customer perspective measures?
Market share
Customer satisfaction
Customer retention percentage
Time taken to fulfill customers requests
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18. Aligning the Balanced Scorecard to Strategy
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
Operations Process:
Yield Defect rates, Time taken to deliver product to customers, Percentage of on-time delivery, Percentage of on-time delivery, Setup time, Manufacturing downtime
Post-sales service:
Time taken to replace or repair defective products, Hours of customer training for using the product
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19. Aligning the Balanced Scorecard to Strategy
What are some of the 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
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20. Pitfalls When Implementing a Balanced Scorecard
What pitfalls should be avoided 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.
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.
Don’t use too many measures.
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21. Analyze changes in operating income to evaluate strategy.
Learning Objective 4
Analyze changes in operating
income to evaluate strategy.
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22. Evaluating the Success of a Strategy
Assume the following operating incomes:
Year Year 2004
Revenues:
(1,000,000 × $26) $26,000,000
(1,100,000 × $24) $26,400,000
Expenses:
Materials ,050, ,631,320
Other ,000, ,000,000
Operating income $ 5,950,000 $ 6,768,680
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23. Evaluating the Success of a Strategy
How can the increase in operating income of $818,680 be evaluated?
Growth
Price recovery
Productivity
Growth Component:
For 2003, Dallas produced and sold 1,000,000 units at $26 per unit.
During the year 2004, Dallas produced and sold 1,100,000 units at $24 per unit.
What is the revenue effect of growth?
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24. 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 F
This component is favorable because
it increases operating income. = – ×
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25. Growth Component Cost effect of growth component
Actual units of input or capacity that would
have been used in 2003 to produce year 2004
output assuming the same input-output
relationship that existed in 2003
Actual units or capacity to produce 2003 output
Input prices in 2003 = – ×
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26. 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 a proportional increase in direct materials.
Assume that 3,000,000 square centimeters of materials were used to produce the 1,000,000 units in 2003 at a cost of $1.35 per square centimeter. Assume that manufacturing conversion costs, selling and customer service costs and research and development costs were $16,000,000 and remained stable during 2004.
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27. Growth Component What is the cost effect of the growth component?
3,000,000 × 110% = 3,300,000 square centimeters
(3,300,000 – 3,000,000) × $1.35 = $405,000 U
What is the net increase in operating income as a result of growth?
Revenue effect of growth component $2,600,000 F
Cost effect of growth component ,000 U
Increase in operating income due
to growth component $2,195,000 F
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28. Price-Recovery Component
Revenue effect of price-recovery component
= (Output price in 2004 – Output price in 2003)
× Actual units of output sold in 2004
What is the revenue effect of the price-recovery component?
($24 – $26) × 1,100,000 = $2,200,000 U
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29. Price-Recovery Component
Cost effect of price-recovery component
(Input prices in 2004 – Input prices in 2003)
Actual units of inputs or capacity that would
have been used to produce year 2004 output
assuming the same input-output relationship
that existed in 2003
Assume that in the year 2004, direct materials
costs were $1.31 per square centimeter. = ×
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30. Price-Recovery Component
What is the cost effect of the price-recovery component?
($1.31 – $1.35) × 3,300,000 = $132,000 F
What is the total effect on operating income of the price-recovery component?
Revenue effect
of price-recovery component $2,200,000 U
Cost effect
of price-recovery component ,000 F
Decrease in operating income
due to price-recovery component $2,068,000 U
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31. Productivity Component
Actual units of inputs or capacity to
produce year 2004 output
Input prices in 2004 = ×
Actual units of inputs or capacity
that would have been used to produce
year 2004 output assuming the same
input-output relationship that existed in 2003 –
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32. Productivity Component
Assume that 2,772,000 actual square centimeters of direct materials were used in the year 2004.
Actual price was $1.31/square centimeter.
What is the productivity component of cost changes?
(2,772,000 – 3,300,000) × $1.31 = $691,680 F
There is a $691,680 increase in operating income due to the productivity component.
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33. Change in Operating Income
Increase in operating income
$818,680
Growth
component
$2,195,000 F
Price-recovery
$2,068,000 U
Productivity
$691,680 F
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34. Distinguish between engineered and discretionary costs.
Learning Objective 5
Distinguish between engineered
and discretionary costs.
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35. Engineered Costs vs Discretionary Costs
Engineered costs result specifically from a clear cause-and-effect relationship between output and the resources needed to produce that output.
They can be variable or fixed in the short run.
Discretionary costs have two important features.
They arise from periodic (usually yearly) decisions regarding the maximum amount to be incurred.
They have no measurable cause-and-effect relationship between output and resources used.
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36. Relationships Between Inputs and Outputs
Engineered costs differ from discretionary costs along two key dimensions:
Type of process
Level of uncertainty
Engineered costs pertain to processes that are detailed, physically observable, and repetitive.
Discretionary costs are associated with processes that are sometimes called black boxes, because they are less precise and not well understood.
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37. Identify unused capacity
Learning Objective 6
Identify unused capacity
and how to manage it.
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38. Managing Unused Capacity
What actions can management take
when it identifies unused capacity?
Attempt to eliminate the unused capacity
Attempt to use the unused capacity to grow revenue
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