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
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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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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
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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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
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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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End of BSC Presentation
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