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Strategy, Balanced Scorecard, and Strategic Profitability Analysis. Chapter 13. April 18, 2005. Learning Objective 1. Recognize which of two generic strategies a company is using. What is Strategy?. Strategy describes how an organization matches

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learning objective 1
Learning Objective 1

Recognize which of two generic

strategies a company is using.

what is strategy
What is Strategy?

Strategy describes how an organization matches

its own capabilities with the opportunities in the

marketplace to accomplish its overall objectives.

To do so requires a thorough understanding of the

industry in which it operates.

what is strategy4
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

basic strategies
Basic Strategies

1. Product differentiation

2. Cost leadership

product differentiation
Product Differentiation
  • Products of services perceived to be superior and unique relative to its competitors
  • Achieved through innovative R & D, service and branding
  • Examples: Kleenex, Xerox, Coca Cola; Mercedes, Lexus; Prius
cost leadership
Cost Leadership
  • Lower costs relative to the competition
  • Achieved through productivity and efficiency improvements, tight cost control, unique sourcing of materials, etc.
  • Examples: Costco, Walmart; Honda, Dell, Home Depot;
implementation of strategy
Implementation of Strategy

Management accountants design reports

to help managers track progress in

implementing strategy.

the balanced scorecard
The Balanced Scorecard

The scorecard measures an organization’s

performance from four perspectives:

1. Financial – reduce costs, sell more

2. Customer – satisfaction, market share

3. Internal business processes – manufacturing,

quality, delivery, service and support

4. Learning and growth – employee, systems

learning objective 2
Learning Objective 2

Identify what comprises

reengineering.

reengineering
Reengineering

Reengineering is the fundamental rethinking

of business processes to achieve

improvements in critical measures of

performance such as cost, quality, service,

speed, and customer satisfaction.

reengineering example
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

reengineering example13
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.

There is no one person responsible for tracking and following up on a customer

reengineering example14
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.

reengineering example15
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.

reengineering example16
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.

learning objective 3
Learning Objective 3

Present the four perspectives

of the balanced scorecard.

perspectives of performance
Perspectives of Performance

1. Financial

2. Customer

3. Internal business process

4. Learning and growth

financial perspective
Financial Perspective

Objective:

Increase shareholder value

Measures:

Increase in operating income

financial perspective20
Financial Perspective

Initiatives:

Target

Performance

Actual

Performance

Manage costs and unused

capacity - productivity

$2,000,000

$2,100,000

Build strong customer

relationships - profit

$3,000,000

$3,420,000

Build strong customer

relationships - growth

6%

6.48%

customer perspective
Customer Perspective

Objectives:

Increase market share

Increase customer satisfaction

Measures:

Market share in communication

networks segment

Customer satisfaction survey

customer perspective22
Customer Perspective

Initiatives:

Target

Performance

Actual

Performance

Increase market share,

Needs of customers

6%

7%

Identify new target

customer segments

7

8

Increase customer focus

of sales organization

90% give top

two ratings

87% gave top

two ratings

internal business process perspective
Internal BusinessProcess Perspective

Objectives:

Improve manufacturing

quality and productivity

Meet specified delivery dates

Measures:

Yield

On-time delivery

internal business process perspective24
Internal BusinessProcess Perspective

Initiatives:

Target

Performance

Actual

Performance

Identify problems and

improve quality, yield

78%

79.3%

Reengineer order delivery

process, on time delivery

92%

90%

learning and growth perspective
Learning and Growth Perspective

Objectives:

Align employee and

organization goals

Improve manufacturing processes

Measures:

Employee satisfaction survey

Improvements in process controls

learning and growth perspective26
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 R&D/

manufacturing teams

to modify processes

5

5

aligning the balanced scorecard to strategy
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

aligning the balanced scorecard to strategy28
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

aligning the balanced scorecard to strategy29
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

aligning the balanced scorecard to strategy30
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

aligning the balanced scorecard to strategy31
Aligning the BalancedScorecard to Strategy

Post-sales service:

Time taken to replace or repair

defective products

Hours of customer training for

using the product

aligning the balanced scorecard to strategy32
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 capability

Processes with real time feedback

pitfalls when implementing a balanced scorecard
Pitfalls When Implementinga Balanced Scorecard

What pitfalls should be avoided when

implementing a balanced scorecard?

1. Don’t assume the cause-and-effect

linkages to be precise; it will evolve

2. Don’t seek improvements across all

measures all the time; may need tradeoffs

3. Don’t use only objective measures on the

scorecard; subjective such as satisfaction

pitfalls when implementing a balanced scorecard34
Pitfalls When Implementinga Balanced Scorecard

4. Don’t fail to consider both costs and benefits

of initiatives such as spending on information

technology and research and development.

5. Don’t ignore nonfinancial measures when

evaluating managers and employees.

6. Don’t use too many measures.

learning objective 5
Learning Objective 5

Downsizing and the management

of excess capacity

First, distinguish between engineered

and discretionary costs.

engineered costs
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.

Examples include direct material, labor and

overhead. These costs are activity driven.

discretionary costs
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

relationship between output and resources used.

Examples include advertising, R & D, training,

legal, human resources and public relations

learning objective 6
Learning Objective 6

Identify unused capacity

and how to manage it.

managing unused capacity
Managing Unused Capacity

What actions can management take

when it identifies unused capacity?

Attempt to eliminate the unused capacity.

Cutting processes, jobs can reduce morale

Attempt to use the unused capacity to grow revenue

A much better alternative