Title: Strategy,%20Balanced%20Scorecard,%20and%20Strategic%20Profitability%20Analysis
1Strategy, Balanced Scorecard, and Strategic
Profitability Analysis
- Based on Chapter 13, Cost Accounting, 12th ed.
- Horngren et al., Edited and
- Modified by C. Bailey
2Introduction
- This topic
- explores the use of management accounting
information for implementing and evaluating an
organizations strategy. - shows how MA information helps strategic
initiatives - productivity improvement
- reengineering
- downsizing.
3Learning Objective 1
- Recognize which of two generic strategies a
company is using
4What 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.
5Understanding 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.
6Understanding 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.
7Understanding 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.
8Understanding 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.
9Generic Strategies
- Two generic strategies that organizations use
are - Product differentiation
- Cost leadership
10Product 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?
11Cost Leadership
- Achieving low costs relative to competitors.
- How?
- Productivity and efficiency improvements
- Elimination of waste
- Tight cost control
- Examples?
- Dell, Bic
12Implementation 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.
13The Balanced Scorecard
- The balanced scorecard translates an
organizations 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.
14The Balanced Scorecard
- Four key perspectives
- Financial sales, cost, etc.
- Customer mkt shre, growth, satisfaction
- Internal business processes innovation, impr
- Learning and growth skills, workforce
15The 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 managers
emphasis on short-run financial performance?
16The 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.
17Learning Objective 2
- Identify key aspects of reengineering
18Quality Improvement
- One key element of a strategy to reduce costs is
to improve quality, by - Reducing defects
- Improving yields.
19Quality 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
20Reengineering
- Example of Ford Motor Company Reducing Ordering
Costs (HBR July-Aug. 1990) - U.S. Accts. Payable in early 1980's employed gt
500 - Set goal Reduce by 20 to 400.
- but . . .
21Reengineering
- 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.)
22Reengineering
- Old procedures required acctg dept to match 14
data items on PO, receipt record, and invoice. - Head count cut 75
23Learning Objective 3
- Present the four perspectives of the
balanced scorecard
24Perspectives of the Balanced Scorecard
- There are four perspectives of the balanced
scorecard - Financial perspective
- Customer perspective
- Internal business process perspective
- Learning and growth perspective
25Financial 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)
26Financial Perspective
- Objective
- Increase shareholder value
- Sample Measures
- Increase in operating income
- Revenue growth,
27Aligning 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
28Customer Perspective
- Identifies the targeted market segment and
measures the companys success in these segments.
29What are some of the customer perspective
measures?
- Market share
- Customer satisfaction
- Customer retention percentage
- Time taken to fulfill customers requests
30Internal 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
31What 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
32Internal business perspective measures contd.
- Operations Process
- Yield
- Defect rates
- Time taken to deliver product to customers
- Percentage of on-time delivery
- Setup time
- Manufacturing downtime
33Internal business perspective measures contd.
- Post-sales service
- Time taken to replace or repair defective
products - Hours of customer training for using the product
34Learning and Growth Perspective
- Emphasizes capabilities of
- Employees
- empowerment, training
- Info systems
- Typical Objectives
- Develop process skill
- Empower work force
- Enhance information system capabilities
35Some 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
36Features of a Good Balanced Scorecard
- It tells the story of a companys 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.
37Features 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.
38Pitfalls When Implementing a Balanced
Scorecard
- Dont assume the cause-and-effect linkages to
be precise. - Dont seek improvements across all measures all
the time. - Dont use only objective measures on the
scorecard.
39Pitfalls When Implementing a Balanced
Scorecard
- Dont fail to consider both costs and benefits of
initiatives such as spending on information
technology and research and development. - Dont ignore nonfinancial measures when
evaluating managers and employees.
40Learning Objective 4
- Analyze changes in operating
- income to evaluate strategy
- We may do a case next week.
41Learning Objective 5
- Distinguish between engineered
- and discretionary costs
42Engineered 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.
43Engineered 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.
44Discretionary 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.
45Discretionary Costs
- Discretionary costs include
- Advertising
- Executive training
- Research and development
- Health care
- Legal resources
- Public relations
46Relationships 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 -
47End of BSC Presentation