strategy bsc

Strategy and Balanced Scorecard

Strategic Profitability Analysis

What is Strategy?

Strategy describes how an organization matchesits own capabilities with the opportunities in themarketplace to accomplish its overall objectives.

Components of Strategy

What is the focus of industry analysis?Competitors

Potential entrants into the marketEquivalent products

Bargaining power of customersBargaining power of input suppliers

What is the focus of industry analysis?

Basic Strategies

1. Product differentiation2. Cost leadership

Recognize which of two genericstrategies a company is using.

Implementation of Strategy

Management accountants design reportsto help managers track progress in

implementing strategy.

The Balanced Scorecard

The scorecard measures an organization’sperformance from four perspectives:

1. Financial2. Customer3. Internal business processes4. Learning and growth

Reengineering

Reengineering is the fundamental rethinkingof business processes delivery to achieve

improvements in critical measures ofperformance such as cost, quality, service,

speed, and customer satisfaction.

Reengineering Example

Customers needs identified

Purchase order issued

Production scheduled

Manufacturing completed

Finished goods to inventory

Quantities to be shippedmatched against purchase order

Shipping documents sentto Billing Department

Invoice issued

Customer payment follow up

Dallas Co. order delivery system:


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.


If the quantity shipped does not match thenumber of items requested by the customer,

a special shipment must be scheduled.Dallas discovered that the many transfers

across departments slowed down theprocess and created delays.

A multifunctional team reengineered theorder delivery process.


A customer relationship manager is responsiblefor each customer.

Dallas will enter into long-term contracts withcustomers specifying quantities and prices.

The customer relationship manager will workwith the customer and manufacturing to specify

delivery schedules one month in advance.


The schedule of customer orders will be sentelectronically to manufacturing.

Completed items will be shipped directly fromthe manufacturing plant to customer sites.

Each shipment will automatically trigger aninvoice to be sent electronically to the customer.

The four perspectivesof the balanced scorecard.

Perspectives of Performance

1. Financial2. Customer3. Internal business process4. Learning and growth

Financial Perspective

Objective: Increase shareholder value

Measures: Increase in operating income

Financial Perspective

Initiatives: TargetPerformance

ActualPerformance

Manage costs andunused capacity

Build strong customerrelationships

Rs2,000,000

Rs3,000,000

6%Build strong customerrelationships

Rs2,100,000

Rs3,420,000

6.48%

Customer Perspective

Objectives: Increase market share

Measures: Market share in communication

networks segment Customer satisfaction survey

Increase customer satisfaction

Customer Perspective


ActualPerformance

Identify future needsof customer

Identify new targetcustomer segments

6%

7

90% give toptwo ratings

Increase customer focusof sales organization

7%

8

87% give toptwo ratings

Internal BusinessProcess Perspective

Objectives: Improve manufacturingquality and productivity

Measures: Yield

On-time delivery

Meet specified delivery dates

Internal BusinessProcess Perspective


ActualPerformance

Identify problems andimprove quality

Reengineer orderdelivery process

78%

92%

79.3%

90%

Learning and Growth Perspective

Objectives: Align employee andorganization goals

Measures: Employee satisfaction survey

Improvements in process controls

Improve manufacturing processes

Learning and Growth Perspective


ActualPerformance

Employeeparticipation and

suggestion programto build teamwork

Organize R&D/manufacturing teamsto modify processes

80% ofemployees

give toptwo ratings

5

88% ofemployees

give toptwo ratings

5

Aligning the BalancedScorecard to Strategy

Different strategies call for different scorecards.What are some of the financial

perspective measures?Operating incomeRevenue growth

Cost reduction is some areasReturn on investment


What are some of the customerperspective measures?

Market shareCustomer satisfaction

Customer retention percentageTime taken to fulfill customers requests


What are some of the internal businessperspective measures?Innovation Process:

Manufacturing capabilitiesNumber of new products or services

New product development timeNumber of new patents


Operations Process:Yield

Defect ratesTime taken to deliver product to customers

Percentage of on-time deliverySetup time

Manufacturing downtime


Post-sales service:Time taken to replace or repair

defective productsHours of customer training for

using the product


What are some of the learning and growthperspective measures?

Employee education and skill levelEmployee satisfaction scores

Employee turnover ratesInformation system availability

Percentage of processes with advanced controls

Pitfalls When Implementinga Balanced Scorecard

What pitfalls should be avoided whenimplementing a balanced scorecard?

1. Don’t assume the cause-and-effectlinkages to be precise.

2. Don’t seek improvements acrossall measures all the time.

3. Don’t use only objective measureson the scorecard.

Pitfalls When Implementinga Balanced Scorecard

4. Don’t fail to consider both costs and benefitsof initiatives such as spending on informationtechnology and research and development.

5. Don’t ignore nonfinancial measures whenevaluating managers and employees.

6. Don’t use too many measures.

Learning Objective 4

Analyze changes in operatingincome to evaluate strategy.

Evaluating the Successof a Strategy

Assume the following operating incomes: Year 2003 Year 2004

Revenues:(1,000,000 × Rs26) Rs26,000,000(1,100,000 × Rs24) Rs26,400,000

Expenses:Materials 4,050,000 3,631,320Other 16,000,000 16,000,000

Operating income Rs 5,950,000 Rs 6,768,680

Evaluating the Successof a Strategy

How can the increase in operatingincome of Rs818,680 be evaluated?

GrowthPrice recoveryProductivity

Growth Component

Revenue effect of growth component(Actual units of output sold in 2004Actual units of output sold in 2003)

Output price in 2003(1,100,000 – 1,000,000) × Rs26 = 2,600,000 F

This component is favorable becauseit increases operating income.

=–×

Price-Recovery Component

Revenue effect of price-recovery component= (Output price in 2004 – Output price in 2003)

× Actual units of output sold in 2004What is the revenue effect of the

price-recovery component?(Rs24 – Rs26) × 1,100,000 = Rs2,200,000 U

Productivity Component

Productivity componentActual units of inputs or capacity to

produce year 2004 output

Input prices in 2004

=

×

Actual units of inputs or capacitythat would have been used to produceyear 2004 output assuming the same

input-output relationship that existed in 2003

–

Change in Operating Income

Increase in operating incomeRS818,680

Growthcomponent2,195,000 F

Price-recoverycomponent

2,068,000 U

Productivitycomponent691,680 F

Learning Objective 5

Distinguish between engineeredand discretionary costs.

Engineered Costs

Engineered costs result specifically from a clearcause-and-effect relationship between output

and the resources needed to produce that output.They can be variable or fixed in the short run.

Discretionary Costs

Discretionary costs have two important features.They arise from periodic (usually yearly)

decisions regarding the maximumamount to be incurred.

They have no measurable cause-and-effectrelationship between output and resources used.

Relationships BetweenInputs and Outputs

Engineered costs differ from discretionarycosts along two key dimensions:

Type of processLevel of uncertainty

Relationships BetweenInputs and Outputs

Engineered costs pertain to processes that aredetailed, physically observable, and repetitive.

Discretionary costs are associated with processesthat are sometimes called black boxes, becausethey are less precise and not well understood.

Identify unused capacityand how to manage it.

Managing Unused Capacity

What actions can management takewhen it identifies unused capacity?

Attempt to eliminate the unused capacityAttempt to use the unused capacity to grow revenue