Presentation on theme: "Strategy, Balanced Scorecard, and Strategic Profitability Analysis"— Presentation transcript:
1 Strategy, Balanced Scorecard, and Strategic Profitability Analysis Based on Chapter 13, Cost Accounting, 12th ed.Horngren et al., Edited andModified 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 improvementreengineeringdownsizing.
3 Recognize which of two generic strategies a company is using Learning Objective 1Recognize 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:CompetitorsReducing 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 marketCompetition 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 productsHow easily can users substitute other products (consider MS Windows!)Bargaining power of customersCustomers may obtain the products from other potential suppliers.
8 Understanding the Industry Bargaining power of input suppliersSuppliers 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 differentiationCost leadership
10 Product Differentiation Customers perceive product/service to be superior and unique relative to competitors.Hewlett Packard in the electronics industryMerck in the pharmaceutical industryCoca-Cola in the soft drinks industryOthers?
11 Cost Leadership Achieving low costs relative to competitors. How? Productivity and efficiency improvementsElimination of wasteTight cost controlExamples?Dell, Bic
12 Implementation of Strategy To be successful, a company mustformulate an effective strategyimplement it vigorously.Management accountants play important rolecollecting meaningful datadesigning 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 perspectivesFinancial [sales, cost, etc.]Customer [mkt shre, growth, satisfaction]Internal business processes [innovation, impr]Learning and growth [skills, workforce]
15 The Balanced Scorecard Attempts to balancefinancial and nonfinancial performance measuresshort-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 changesfinancial 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 2Identify key aspects of reengineering
18 Quality ImprovementOne key element of a strategy to reduce costs is to improve quality, by…Reducing defectsImproving yields.
19 Quality Improvement What is needed to improve quality? Nonfinancial data aboutmanufacturing process parameters (e.g., time)implementation of advanced process control methodstraining of frontline workers in quality management techniquesempowering workforce to make timely decisions, continuously improve processes
20 ReengineeringExample of Ford Motor Company: Reducing Ordering Costs (HBR July-Aug. 1990)U.S. Accts. Payable in early 1980's employed > 500Set 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 ReengineeringOld 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 3Present the four perspectives of the balanced scorecard
24 Perspectives of the Balanced Scorecard There are four perspectives of the balanced scorecard:Financial perspectiveCustomer perspectiveInternal business process perspectiveLearning 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)
27 Aligning the Balanced Scorecard to Strategy What are some of the financial perspective measures?Operating incomeRevenue growthCost reduction is some areasReturn on investment
28 Customer PerspectiveIdentifies the targeted market segment and measures the company’s success in these segments.
29 What are some of the customer perspective measures? Market shareCustomer satisfactionCustomer retention percentageTime taken to fulfill customers requests
30 Internal Business Process Perspective Focuses on internal operationsCreate value for customersFurther the financial perspective by increasing shareholder wealth.Typical Objectives:Improve manufacturing capabilityReduce delivery time to customersMeet specified delivery dates
31 What are some of the internal business perspective measures? Innovation ProcessManufacturing capabilitiesNumber of new products or servicesNew product development timeNumber of new patents
32 Internal business perspective measures cont’d. Operations ProcessYieldDefect ratesTime taken to deliver product to customersPercentage of on-time deliverySetup timeManufacturing downtime
33 Internal business perspective measures cont’d. Post-sales serviceTime taken to replace or repair defective productsHours of customer training for using the product
34 Learning and Growth Perspective Emphasizes capabilities ofEmployeesempowerment, trainingInfo systemsTypical Objectives:Develop process skillEmpower work forceEnhance information system capabilities
35 Some Learning and Growth Perspective Measures Employee education and skill levelEmployee satisfaction scoresEmployee turnover ratesInformation system availabilityPercentage 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 4Analyze changes in operatingincome to evaluate strategy[We may do a case next week.]
41 Distinguish between engineered and discretionary costs Learning Objective 5Distinguish between engineeredand 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 CostsEngineered 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.
46 Relationships between Inputs and Outputs Engineered costs differ from discretionary costs along two key dimensionType of processdetailed, physically observable, and repetitiveLevel of uncertaintyhigher level of uncertainty about the relationship means less likely cause-and-effect exists