Strategy, Balanced Scorecard, and Strategic Profitability Analysis

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Strategy, Balanced Scorecard, andStrategic
Profitability Analysis

• Chapter 13

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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.
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What is Strategy?
What is the focus of industry analysis?
Competitors
Potential entrants into the market
Equivalent products
Bargaining power of customers
Bargaining power of input suppliers
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Basic Strategies
1. Product differentiation
2. Cost leadership
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Implementation of Strategy
Management accountants design reports to help
managers track progress in implementing strategy.
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The Balanced Scorecard
The scorecard measures an organizations performan
ce from four perspectives
1. Financial
2. Customer
3. Internal business processes
4. Learning and growth
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Learning Objective 2
Identify what comprises reengineering.
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Reengineering
Reengineering is the fundamental rethinking of
business processes delivery to achieve improvement
s in critical measures of performance such as
cost, quality, service, speed, and customer
satisfaction.
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Reengineering Example
Dallas Co. order delivery system
Customers needs identified
Quantities to be shipped matched against purchase
order
Purchase order issued
Shipping documents sent to Billing Department
Production scheduled
Manufacturing completed
Invoice issued
Finished goods to inventory
Customer payment follow up
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Reengineering Example
The following was determined
Frequently, there is a long waiting time
before production begins in the manufacturing
department.
Sometimes items are held in inventory until a
truck is available for shipment.
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Reengineering Example
If the quantity shipped does not match the number
of items requested by the customer, a special
shipment must be scheduled.
Dallas discovered that the many transfers across
departments slowed down the process and created
delays.
A multifunctional team reengineered the order
delivery process.
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Reengineering Example
A customer relationship manager is
responsible for each customer.
Dallas will enter into long-term contracts
with customers specifying quantities and prices.
The customer relationship manager will work with
the customer and manufacturing to
specify delivery schedules one month in advance.
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Reengineering Example
The schedule of customer orders will be
sent electronically to manufacturing.
Completed items will be shipped directly from the
manufacturing plant to customer sites.
Each shipment will automatically trigger
an invoice to be sent electronically to the
customer.
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Learning Objective 3
Present the four perspectives of the balanced
scorecard.
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Perspectives of Performance
1. Financial
2. Customer
3. Internal business process
4. Learning and growth
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Financial Perspective
Objective
Increase shareholder value
Measures
Increase in operating income
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Financial Perspective
Initiatives
Target Performance
Actual Performance
Manage costs and unused capacity
2,000,000
2,100,000
Build strong customer relationships
3,000,000
3,420,000
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Build strong customer relationships
6.48
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Customer Perspective
Objectives
Increase market share
Increase customer satisfaction
Measures
Market share in communication networks segment
Customer satisfaction survey
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Customer Perspective
Initiatives
Target Performance
Actual Performance
Identify future needs of customer
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Identify new target customer segments
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90 give top two ratings
Increase customer focus of sales organization
87 give top two ratings
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Internal BusinessProcess Perspective
Objectives
Improve manufacturing quality and productivity
Meet specified delivery dates
Measures
Yield
On-time delivery
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Internal BusinessProcess Perspective
Initiatives
Target Performance
Actual Performance
Identify problems and improve quality
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79.3
Reengineer order delivery process
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90
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Learning and Growth Perspective
Objectives
Align employee and organization goals
Improve manufacturing processes
Measures
Employee satisfaction survey
Improvements in process controls
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Learning and Growth Perspective
Initiatives
Target Performance
Actual Performance
Employee participation and suggestion program to
build teamwork
80 of employees give top two ratings
88 of employees give top two ratings
Organize RD/ manufacturing teams to modify
processes
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Aligning the BalancedScorecard to Strategy
Different strategies call for different
scorecards.
What are some of the financial perspective
measures?
Operating income
Revenue growth
Cost reduction is some areas
Return on investment
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Aligning the BalancedScorecard to Strategy
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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Aligning the BalancedScorecard to Strategy
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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Aligning the BalancedScorecard to Strategy
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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Aligning the BalancedScorecard to Strategy
Post-sales service
Time taken to replace or repair defective products
Hours of customer training for using the product
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Aligning the BalancedScorecard to Strategy
What are some of the 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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Pitfalls When Implementinga Balanced Scorecard
What pitfalls should be avoided when implementing
a balanced scorecard?
1. Dont assume the cause-and-effect linkages to
be precise.
2. Dont seek improvements across all measures
all the time.
3. Dont use only objective measures on the
scorecard.
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Pitfalls When Implementinga Balanced Scorecard
4. Dont fail to consider both costs and
benefits of initiatives such as spending on
information technology and research and
development.
5. Dont ignore nonfinancial measures
when evaluating managers and employees.
6. Dont use too many measures.
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Learning Objective 4
Analyze changes in operating income to evaluate
strategy.
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Evaluating the Successof a Strategy
Assume the following operating incomes
Year 2003 Year 2004 Revenues (1,00
0,000 26) 26,000,000 (1,100,000
24) 26,400,000 Expenses Materials
4,050,000 3,631,320 Other
16,000,000 16,000,000 Operating income
5,950,000 6,768,680
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Evaluating the Successof a Strategy
How can the increase in operating income of
818,680 be evaluated?
Growth
Price recovery
Productivity
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Growth Component
Assume that for 2003, Dallas produced and sold
1,000,000 units at 26 per unit.
During the year 2004, Dallas produced and sold
1,100,000 units at 24 per unit.
What is the revenue effect of growth?
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Growth Component
Revenue effect of growth component
(Actual units of output sold in 2004

Actual units of output sold in 2003)

Output price in 2003

(1,100,000 1,000,000) 26 2,600,000 F
This component is favorable because it increases
operating income.
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Growth Component
Cost effect of growth component
Actual units of input or capacity that would
have been used in 2003 to produce year 2004
output assuming the same input-output
relationship that existed in 2003

Actual units or capacity to produce 2003 output

Input prices in 2003

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Growth Component
To produce 1,100,000 units in 2004 compared with
the 1,000,000 units produced in 2003 (a 10
increase), Dallas would require a proportional
increase in direct materials.
Assume that 3,000,000 square centimeters
of materials were used to produce the
1,000,000 units in 2003 at a cost of 1.35 per
square centimeter.
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Growth Component
Assume that manufacturing conversion
costs, selling and customer service costs and
research and development costs were
16,000,000 and remained stable during 2004.
What is the cost effect of the growth component?
3,000,000 110 3,300,000 centimeters
(3,300,000 3,000,000) 1.35 405,000 U
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Operating Income and Growth
What is the net increase in operating income as
a result of growth?
Revenue effect of growth component 2,600,000
F Cost effect of growth component 405,000
U Increase in operating income due to growth
component 2,195,000 F
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Price-Recovery Component
Revenue effect of price-recovery component
(Output price in 2004 Output price in 2003)
Actual units of output sold in 2004
What is the revenue effect of the price-recovery
component?
(24 26) 1,100,000 2,200,000 U
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Price-Recovery Component
Cost effect of price-recovery component
(Input prices in 2004 Input prices in 2003)

Actual units of inputs or capacity that
would have been used to produce year 2004
output assuming the same input-output
relationship that existed in 2003

Assume that in the year 2004, direct
materials costs were 1.31 per square centimeter.
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Price-Recovery Component
What is the cost effect of the price-recovery
component?
(1.31 1.35) 3,300,000 132,000 F
What is the total effect on operating income of
the price-recovery component?
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Operating Income andPrice-Recovery Component
Revenue effect of price-recovery
component 2,200,000 U Cost effect of
price-recovery component 132,000
F Decrease in operating income due to
price-recovery component 2,068,000 U
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Productivity Component
Productivity component
Actual units of inputs or capacity to produce
year 2004 output

Actual units of inputs or capacity that would
have been used to produce year 2004 output
assuming the same input-output relationship that
existed in 2003

Input prices in 2004

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Productivity Component
Assume that 2,772,000 actual square centimeters
of direct materials were used in the year 2004.
Actual price was 1.31/square centimeter.
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Productivity Component
What is the productivity component of cost
changes?
(2,772,000 3,300,000) 1.31 691,680 F
There is a 691,680 increase in operating income
due to the productivity component.
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Change in Operating Income
Increase in operating income 818,680
Growth component 2,195,000 F
Price-recovery component 2,068,000 U
Productivity component 691,680 F
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Learning Objective 5
Distinguish between engineered and discretionary
costs.
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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.
They can be variable or fixed in the short run.
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Discretionary Costs
Discretionary costs have two important features.
They arise from periodic (usually
yearly) decisions regarding the maximum amount to
be incurred.
They have no measurable cause-and-effect relations
hip between output and resources used.
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Relationships BetweenInputs and Outputs
Engineered costs differ from discretionary costs
along two key dimensions
Type of process
Level of uncertainty
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Relationships BetweenInputs and Outputs
Engineered costs pertain to processes that
are detailed, physically observable, and
repetitive.
Discretionary costs are associated with
processes that are sometimes called black boxes,
because they are less precise and not well
understood.
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Learning Objective 6
Identify unused capacity and how to manage it.
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Managing Unused Capacity
What actions can management take when it
identifies unused capacity?
Attempt to eliminate the unused capacity
Attempt to use the unused capacity to grow revenue
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End of Chapter 13