Strategy, Balanced Scorecard, and
Strategic Profitability Analysis
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 organization’s strategy.
– shows how MA information helps strategic
initiatives:
• productivity improvement
• reengineering
• downsizing.
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Learning Objective 1
Recognize which of two generic
strategies a company is using
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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

1
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
2
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
3
4
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
5
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

1
2
Two generic strategies that organizations
are:
Product differentiation
Cost leadership
use
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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
organization’s 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 [longterm] financial objectives.

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The Balanced Scorecard

1
2
3
4
Four key perspectives
Financial [sales, cost, etc.]
Customer [mkt shre, growth, satisfaction]
Internal business processes [innovation, impr]
Learning and growth [skills, workforce]
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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
manager’s 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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Learning Objective 2
Identify key aspects of
reengineering
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Quality Improvement

One key element of a strategy to reduce costs
is to improve quality, by…
– Reducing defects
– Improving yields.
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Quality Improvement

What is needed to improve quality?
– Nonfinancial data about
– manufacturing process parameters (e.g., time)
– implementation of advanced process control methods
–
–
training of frontline workers in quality
management techniques
empowering workforce to make timely
decisions, continuously improve processes
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Reengineering
Example of Ford Motor Company: Reducing
Ordering Costs
– U.S. Accts. Payable in early 1980's
employed > 500
– Set goal: Reduce by 20% to 400.
 but . . .

(HBR July-Aug. 1990)
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Reengineering
Found that Mazda's AP dept had 4 people!!
 Results of reengineering:
– "Invoiceless processing": If goods match
PO, clerk receives them, and pmt is made.
(If don't match, reject shipment.)

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Reengineering
Old procedures required acctg dept to match
14 data items on PO, receipt record, and
invoice.
 Head count cut 75%

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Learning Objective 3
Present the four perspectives
of the balanced scorecard
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Perspectives of the
Balanced Scorecard

1
2
3
4
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,

SALES
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Aligning the Balanced
Scorecard to Strategy

–
–
–
–
What are some of the financial perspective
measures?
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 company’s 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 cont’d.
–






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 cont’d.
–


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
1
2
It tells the story of a company’s 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
3
4
5
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
1
2
3
Don’t assume the cause-and-effect linkages to
be precise.
Don’t seek improvements across all measures
all the time.
Don’t use only objective measures on the
scorecard.
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Pitfalls When Implementing
a Balanced Scorecard
4
5
Don’t fail to consider both costs and benefits
of initiatives such as spending on information
technology and research and development.
Don’t ignore nonfinancial measures when
evaluating managers and employees.
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Learning Objective 4
Analyze changes in operating
income to evaluate strategy
[We may do a case next week.]
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Learning Objective 5
Distinguish between engineered
and discretionary costs
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Engineered and
Discretionary Costs
Fixed costs are tied to capacity.
 Fixed costs do not change automatically with
changes in the level of the cost driver.
 How can managers reduce capacity-based
fixed costs?
 The key is understanding and managing
unused capacity.

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Engineered Costs
Engineered costs result specifically from a
clear cause-and effect relationship between
output and the resources needed to produce
that output.
 Engineered costs can be variable or fixed in
the short run.
– Selling & customer-service costs are
engineered, fixed in the short run.

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Discretionary Costs

1
2
Two important features of discretionary costs:
They arise from periodic (usually yearly)
decisions regarding the maximum amount to
be incurred.
They have no clearly measurable cause-and
effect relationship between output and
resources used.
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Discretionary Costs

–
–
–
–
–
–
Discretionary costs include:
Advertising
Executive training
Research and development
Health care
Legal resources
Public relations
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Relationships between
Inputs and Outputs

Engineered costs differ from discretionary
costs along two key dimension
– Type of process
» detailed, physically observable, and repetitive
–
Level of uncertainty
» higher level of uncertainty about the relationship means
less likely cause-and-effect exists
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End of BSC Presentation
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