Strategy, Balanced Scorecard and Strategic Profitability Analysis

Strategy and the Balanced Scorecard

Based on Chapter 13, Cost Accounting, 12th ed.

Horngren et al., Edited and

Modified by C. Bailey

1

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.

2

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.

3

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.

4

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.

5

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.

6

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.

7

Generic Strategies

Two generic strategies that organizations use are:

Product differentiation

Cost leadership

8

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?

9

Cost Leadership

Achieving low costs relative to competitors.

How?

Productivity and efficiency improvements

Elimination of waste

Tight cost control

Examples?

Dell, Bic

10

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.

11

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.

12

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?

13

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.

14

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

Cost reduction is some areas

Return on investment

17

Customer Perspective

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

18

What are some of the customer perspective measures?

Market share

Customer satisfaction

Customer retention percentage

Time taken to fulfill customers requests

19

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

20

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

21

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

22

Internal business perspective measures contd.

Post-sales service

Time taken to replace or repair defective products

Hours of customer training for using the product

23

Learning and Growth Perspective

Emphasizes capabilities of

Employees

empowerment, training

Info systems

Typical Objectives:

Develop process skill

Empower work force

Enhance information system capabilities

24

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

25

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.

28

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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End of BSC Presentation

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