Strategy and Balanced Scorecard Strategic Profitability Analysis
What is Strategy? Strategy describes how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its overall objectives.
Components of 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 What is the focus of industry analysis?
Basic Strategies 1. Product differentiation 2. Cost leadership Recognize which of two generic strategies a company is using.
Implementation of Strategy Management accountants design reports to help managers track progress in implementing strategy.
The Balanced Scorecard The scorecard measures an organization’s performance from four perspectives: 1. Financial 2. Customer 3. Internal business processes 4. Learning and growth
Reengineering Reengineering is the fundamental rethinking of business processes delivery to achieve improvements in critical measures of performance 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 shipped matched against purchase order Shipping documents sent to Billing Department Invoice issued Customer payment follow up Dallas Co. order delivery system:
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.
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 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 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.
The four perspectives of the balanced scorecard.
Perspectives of Performance 1. Financial 2. Customer 3. Internal business process 4. Learning and growth
Financial Perspective Objective: Increase shareholder value Measures: Increase in operating income
Customer Perspective Objectives: Increase market share Measures: Market share in communication networks segment Customer satisfaction survey Increase customer satisfaction
Customer Perspective Initiatives: Target Performance Actual Performance Identify future needs of customer Identify new target customer segments 6% 7 90% give top two ratings Increase customer focus of sales organization 7% 8 87% give top two ratings
Internal Business Process Perspective Objectives: Improve manufacturing quality and productivity Measures: Yield On-time delivery Meet specified delivery dates
Internal Business Process Perspective Initiatives: Target Performance Actual Performance Identify problems and improve quality Reengineer order delivery process 78% 92% 79.3% 90%
Learning and Growth Perspective Objectives: Align employee and organization goals Measures: Employee satisfaction survey Improvements in process controls Improve manufacturing processes
Learning and Growth Perspective Initiatives: Target Performance Actual Performance Employee participation and suggestion program to build teamwork Organize R&D/ manufacturing teams to modify processes 80% of employees give top two ratings 5 88% of employees give top two ratings 5
Aligning the Balanced Scorecard 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 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 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 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 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 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
Pitfalls When Implementing a Balanced Scorecard What pitfalls should be avoided when implementing a balanced scorecard? 1. Don’t assume the cause-and-effect linkages to be precise. 2. Don’t seek improvements across all measures all the time. 3. Don’t use only objective measures on the scorecard.
Pitfalls When Implementing a 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 4 Analyze changes in operating income to evaluate strategy.
Evaluating the Success of 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 3,631,320 Other 16,000,000 16,000,000 Operating income Rs 5,950,000 Rs 6,768,680
Evaluating the Success of a Strategy How can the increase in operating income of Rs818,680 be evaluated? Growth Price recovery Productivity
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) × Rs26 = 2,600,000 F This component is favorable because it 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 2004 What is the revenue effect of the price-recovery component? (Rs24 – Rs26) × 1,100,000 = Rs2,200,000 U
Productivity Component Productivity component Actual units of inputs or capacity to produce year 2004 output Input prices in 2004 = × 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 –
Change in Operating Income Increase in operating income RS818,680 Growth component 2,195,000 F Price-recovery component 2,068,000 U Productivity component 691,680 F
Learning Objective 5 Distinguish between engineered and discretionary 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.
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.
Relationships Between Inputs and Outputs Engineered costs differ from discretionary costs along two key dimensions: Type of process Level of uncertainty
Relationships Between Inputs 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.
Identify unused capacity and how to manage it.
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