Implementing Strategy: The Balanced Scorecard and the Value Chain

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Implementing Strategy The Balanced Scorecard
and the Value Chain
Chapter Two
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Learning Objectives

• Explain how to implement a competitive strategy
  by using Strengths-Weaknesses-Opportunities-Threat
  s (SWOT) Analysis
• Explain how to implement a competitive strategy
  by focusing on the execution of goals
• Explain how to implement a competitive strategy
  using value-chain analysis

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Learning Objectives (continued)

• Explain how to implement a competitive strategy
  using the Balanced Scorecard (BSC)
• Explain how to expand a conventional Balanced
  Scorecard (BSC) by integrating sustainability

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Implementing a Strategy

• There are two main competitive strategies
• cost leadership
• differentiation
• Once a firm chooses which strategy to follow,
  there are various means of implementation
• SWOT Analysis
• Focus on execution
• Value-chain analysis
• Balanced scorecard (BSC)

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SWOT Analysis

• Identification of critical success factors (CSFs)
  tied to strategyfor example
• Product innovation
• Quality
• Skill development
• Identification of quantitative measures for the
  specified CSFsfor example
• Number of design changes or new patents
• Number of defects or number of returns
• Number of training hours or amount of skill
  performance improvement

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SWOT Analysis (continued)

• The SWOT analysis has four areas
• S strengths/internal
• W weaknesses/internal
• O opportunities/external
• T threats/external

Look at product lines, management, RD,
manufacturing, marketing, and strategy
Look at barriers to entry, intensity of rivalry
among competitors, substitute goods, and
customer/supplier bargaining power
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Execution

• The CSFs a manager executes depend on the chosen
  strategy
• Cost leadership operational performance and
  quality
• Differentiation customer satisfaction and
  innovation
• Differentiated firms must pay close attention to
  marketing and product development
• Management accountants assist by gathering,
  analyzing, and reporting on relevant information
• Can be improved through benchmarking and total
  quality improvement (e.g., Malcolm Baldrige
  Quality Award)

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Value-Chain Analysis

• Means to reach the detail-level of analysis
• CSFs must be implemented in each and every phase
  of operations
• Helps a firm better understand its competitive
  advantage by analyzing what processes add value
  (processes that do not add value can be deleted
  or outsourced)
• Design to manufacturing to service after sale
• Not all areas will get the same attention
  (identification of areas most important to the
  customer will determine the firms focus)
• Goal the most value at the lowest possible cost

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Value-Chain Analysis

• Value-chain analysis has two steps
• Identify the value-chain activities at the
  smallest level possible
• Develop a competitive advantage by reducing cost
  or adding value
• To develop a competitive advantage, a firm must
  consider the following
• What is our competitive advantage (strategy)?
• Where can we add value for the customer?
• Where can we reduce costs?
• Are any of our processes linked (linkages
  exploited)?

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Example Value-Chain Analysis in Computer
Manufacturing

• Computer Intelligence Company (CIC) manufactures
  computers for small businesses
• The company has an excellent reputation for
  service and reliability as well as a growing
  customer list
• Is there any way to add value for the customer
  while reducing costs?

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Example Value-Chain Analysis in Computer
Manufacturing (continued)

• The company is considering two options
• Option One is to continue functioning as is
• Option Two includes two separate outsourcing
  decisions (a) the purchase or manufacture of
  parts, and (b) providing service internally or
  outsourcing it
• It is important to consider company strategy in
  outsourcing decisions

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Value-Chain Analysis in Computer Manufacturing
(continued)
Value Activity Option One Current Option Two Potential
Acquiring raw materials CIC is not involved at this step CIC is not involved at this step
Manufacturing computer chips and other parts CIC is not involved at this step cost is 200 CIC is not involved at this step cost is 200
Manufacturing components, some of which CIC can make CIC purchases 300 of parts for each unit CIC manufactures these units for 190 per unit plus 55,000 monthly
Assembling CICs costs are 250 CICs costs are 250
Marketing, distributing, and servicing CICs costs are 175,000 per month CIC contracts out these services for 130 per month
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Results of Value-Chain Analysis
Manufacturing Marketing, distributing, and servicing
Option One 600 x 300 180,000 175,000 per month
Option Two 600 x 190 55,000 169,000 78,000 per month
Savings with Option Two 11,000 97,000 per month
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Results of Value-Chain Analysis (continued)

• CIC can save 108,000 (11,000 97,000) per
  month by manufacturing the parts and contracting
  out marketing, distributing, and servicing
• The main factor driving the decision is company
  strategy, which in this case is quality and
  customer service
• For a firm pursuing a differentiation strategy,
  the best option is not necessarily the one which
  provides the most savings (savings is a secondary
  consideration)
• From a strategic viewpoint, Option One is
  preferred over Option Two

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The Balanced Scorecard (BSC)

• A performance report based on a broad set of
  financial and nonfinancial measures that is
  crucial to understanding and implementing a
  strategy
• This report groups a firms CSFs into four areas
  
• Financial perspective (financial measures)
• Customer perspective (customer satisfaction)
• Internal business process perspective (e.g.,
  productivity and speed)
• Learning and innovation (e.g., training and
  number of new patents or products)

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The Balanced Scorecard (BSC) (continued)

• Benefits
• Means for implementing strategy
• Means to achieve a desired organizational change
  in strategy
• Can be used to determine managements
  compensation and rewards
• Coordinates efforts within the firm to achieve
  CSFs
• Limitations
• Nonfinancial information is subjective
• Confidentiality must be insured for certain
  information
• Must be adaptable and frequently updated
• Costly and time-consuming to implement

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The Balanced Scorecard (BSC) (continued)

• A properly constructed BSC can be used to infer a
  companys strategy
• BSC ? Strategy, rather than Strategy ? BSC
• The emphasis placed on each performance
  perspective reflects the strategy of the firm
• For a cost leader, the operations perspective
  might be the most important for a
  differentiator, the customer perspective

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Strategy Map

• A strategy map is a cause-and-effect diagram of
  the relationships embodied in a BSC
• Shows how the achievement of CSFs in one
  perspective should affect the achievement of
  goals in another perspective
• The financial perspective is the target in the
  strategy map because financial performance is the
  ultimate goal for most profit-seeking
  organizations
• Success in the other perspectives leads directly
  to improved financial performance and shareholder
  value

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Sustainability

• The fifth perspective for many organizations
• The balancing of short-term and long-term goals
  in all three dimensions of the companys
  performanceeconomic, social, and environmental
• Environmental reports use environmental
  performance indicators (EPIs) to measure
  sustainability
• These indicators are in three areas
• Operational (measure stresses to the
  environment/regulatory compliance issues)
• Management (try to reduce environmental effects)
• Environmental condition (measure environmental
  quality)

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The BSC and Not-For-Profit (NFP) Organizations

• Competitive strategy is different
• Must satisfy funding authorities, political
  leaders, and the general public
• The BSC can still be used to monitor CSFs related
  to internal processes, customer satisfaction,
  financial measures, and human resources measures
• Value-chain analysis can still be used to
  determine at what points costs can be reduced or
  value added on the value chain

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The Role of Accounting

• Three cost-management resources for implementing
  strategy are discussed in this chapter
• SWOT analysis provides a system and structure to
  identify CSFs
• Value-chain analysis builds on the CSFs by
  breaking them down into detailed activities
• The BSC provides a way to implement the detailed
  strategy developed through the previous two
  analyses it provides the processes for
  evaluating the organizations achievement of CSFs

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Chapter Summary

• Strengths-Weaknesses-Opportunities-Threats (SWOT)
  Analysis provides a system and structure in which
  to identify a firms critical success factors
  (CSFs)
• Execution of goals is important in implementing a
  strategy
• Execution depends on the competitive strategy a
  firm is pursuing
• Management accountants assist management by
  gathering, analyzing, and reporting on relevant
  information

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Chapter Summary (continued)

• Value-chain analysis builds on the CSFs
  identified in SWOT analysis by breaking them into
  detailed activities
• The balanced scorecard (BSC) provides the
  processes for evaluating a firms achievement of
  CSFs
• Sustainability builds on the conventional BSC by
  balancing short-term and long-term goals
• Sustainability focuses on economic, social, and
  environmental issues