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Strategy, Balanced Scorecard, and Strategic Profitability Analysis

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Strategy and the Balanced Scorecard. Based on Chapter 13, Cost Accounting, 12th ed. Horngren et al., Edited and . Modified by C. Bailey – PowerPoint PPT presentation

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Title: Strategy, Balanced Scorecard, and Strategic Profitability Analysis


1
Strategy, Balanced Scorecard, and Strategic
Profitability Analysis
  • Based on Chapter 13, Cost Accounting, 12th ed.
  • Horngren et al., Edited and
  • Modified by C. Bailey

2
Introduction
  • 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.

3
Learning Objective 1
  • Recognize 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
  • 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.

6
Understanding 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.

7
Understanding 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.

8
Understanding 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.

9
Generic Strategies
  • Two generic strategies that organizations use
    are
  • Product differentiation
  • Cost leadership

10
Product 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?

11
Cost Leadership
  • Achieving low costs relative to competitors.
  • How?
  • Productivity and efficiency improvements
  • Elimination of waste
  • Tight cost control
  • Examples?
  • Dell, Bic

12
Implementation 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.

13
The 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.

14
The Balanced Scorecard
  • Four key perspectives
  • Financial sales, cost, etc.
  • Customer mkt shre, growth, satisfaction
  • Internal business processes innovation, impr
  • Learning and growth skills, workforce

15
The 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?

16
The 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.

17
Learning Objective 2
  • Identify key aspects of reengineering

18
Quality Improvement
  • One key element of a strategy to reduce costs is
    to improve quality, by
  • Reducing defects
  • Improving yields.

19
Quality 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

20
Reengineering
  • 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 . . .

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
Reengineering
  • Old procedures required acctg dept to match 14
    data items on PO, receipt record, and invoice.
  • Head count cut 75

23
Learning Objective 3
  • Present the four perspectives of the
    balanced scorecard

24
Perspectives of the Balanced Scorecard
  • There are four perspectives of the balanced
    scorecard
  • Financial perspective
  • Customer perspective
  • Internal business process perspective
  • Learning 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)

26
Financial Perspective
  • Objective
  • Increase shareholder value
  • Sample Measures
  • Increase in operating income
  • Revenue growth,

27
Aligning 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

28
Customer Perspective
  • Identifies the targeted market segment and
    measures the companys success in these segments.

29
What are some of the customer perspective
measures?
  • Market share
  • Customer satisfaction
  • Customer retention percentage
  • Time taken to fulfill customers requests

30
Internal 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

31
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

32
Internal 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

33
Internal business perspective measures contd.
  • Post-sales service
  • Time taken to replace or repair defective
    products
  • Hours of customer training for using the product

34
Learning and Growth Perspective
  • Emphasizes capabilities of
  • Employees
  • empowerment, training
  • Info systems
  • Typical Objectives
  • Develop process skill
  • Empower work force
  • Enhance information system capabilities

35
Some 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

36
Features 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.

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
  • 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.

39
Pitfalls 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.

40
Learning Objective 4
  • Analyze changes in operating
  • income to evaluate strategy
  • We may do a case next week.

41
Learning Objective 5
  • Distinguish between engineered
  • and 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 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.

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.

45
Discretionary Costs
  • Discretionary costs include
  • Advertising
  • Executive training
  • Research and development
  • Health care
  • Legal resources
  • Public relations

46
Relationships 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

47
End of BSC Presentation
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