Strategy,%20Balanced%20Scorecard,%20and%20Strategic%20Profitability%20Analysis

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Strategy, Balanced Scorecard, and Strategic
Profitability Analysis

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

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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.

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Learning Objective 1

• Recognize which of two generic strategies a
  company is using

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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.

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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.

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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.

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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.

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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.

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Generic Strategies

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

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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?

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Cost Leadership

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

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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.

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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.

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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

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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?

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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.

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Learning Objective 2

• Identify key aspects of reengineering

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Quality Improvement

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

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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

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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 . . .

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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.)

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Reengineering

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

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Learning Objective 3

• Present the four perspectives of the
  balanced scorecard

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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

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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)

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Financial Perspective

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

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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

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Customer Perspective

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

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What are some of the customer perspective
measures?

• Market share
• Customer satisfaction
• Customer retention percentage
• Time taken to fulfill customers requests

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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

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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

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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

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Internal business perspective measures contd.

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

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Learning and Growth Perspective

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

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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

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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.

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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.

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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.

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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.

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Learning Objective 4

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

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Learning Objective 5

• Distinguish between engineered
• and discretionary costs

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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.

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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.

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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.

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Discretionary Costs

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

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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

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End of BSC Presentation