1. Based on Chapter 13, Cost Accounting, 12th ed. Horngren et al., Edited and Modified by C. Bailey 1

2.  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. 2

3.  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. 3

4.  Industry analysis focuses on five forces: 1 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. 4

5. 2 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. 5

6. 3 Equivalent products How easily can users substitute other products (consider MS Windows!) 4 Bargaining power of customers Customers may obtain the products from other potential suppliers. 6

7. 5 Bargaining power of input suppliers Suppliers of high-quality materials can demand higher prices. Skilled engineers, technicians, and laborers can demand higher wages. 7

8.  Two generic strategies that organizations use are: 1 Product differentiation 2 Cost leadership 8

9.  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? 9

10.  Achieving low costs relative to competitors.  How? Productivity and efficiency improvements Elimination of waste Tight cost control – Examples? Dell, Bic 10

11.  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. 11

12.  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. 12

13.  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? 13

14.  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. 14

15.  There are four perspectives of the balanced scorecard: 1 Financial perspective 2 Customer perspective 3 Internal business process perspective 4 Learning and growth perspective 15

16.  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) 16

17.  Objective: – Increase shareholder value  Sample Measures: – Increase in operating income – Revenue growth – Cost reduction is some areas – Return on investment 17

18.  Identifies the targeted market segment and measures the company’s success in these segments. 18

19. – Market share – Customer satisfaction – Customer retention percentage – Time taken to fulfill customers requests 19

20.  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 20

21. – Innovation Process u Manufacturing capabilities u Number of new products or services u New product development time u Number of new patents 21

22. – Operations Process u Yield u Defect rates u Time taken to deliver product to customers u Percentage of on-time delivery u Setup time u Manufacturing downtime 22

23. – Post-sales service u Time taken to replace or repair defective products u Hours of customer training for using the product 23

24.  Emphasizes capabilities of Employees  empowerment, training Info systems  Typical Objectives:  Develop process skill  Empower work force  Enhance information system capabilities 24

25. – Employee education and skill level – Employee satisfaction scores – Employee turnover rates – Information system availability – Percentage of processes with advanced controls 25

26. 1 It tells the story of a company’s strategy by articulating a sequence of cause-and- effect relationships. 2 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. 26

27. 3 In for-profit companies, the balanced scorecard places strong emphasis on financial objectives and measures. 4 The scorecard limits the number of measures used by identifying only the most critical ones. 5 The scorecard highlights suboptimal tradeoffs that managers may make. 27

28. 1 Don’t assume the cause-and-effect linkages to be precise. 2 Don’t seek improvements across all measures all the time. 3 Don’t use only objective measures on the scorecard. 28

29. 4 Don’t fail to consider both costs and benefits of initiatives such as spending on information technology and research and development. 5 Don’t ignore nonfinancial measures when evaluating managers and employees. 29

30. End of BSC Presentation 30