Chapter Two
Implementing Strategy: The
Balanced Scorecard and the
Value Chain
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Learning Objectives
• Explain how to implement a competitive strategy by
using Strengths-Weaknesses-Opportunities-Threats
(SWOT) Analysis
• Explain how to implement a competitive strategy by
focusing on the execution of goals
• Explain how to implement a competitive strategy
using value-chain analysis
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Learning Objectives
(continued)
• Explain how to implement a competitive strategy
using the Balanced Scorecard (BSC)
• Explain how to expand a conventional Balanced
Scorecard (BSC) by integrating “sustainability”
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Implementing a Strategy
• There are two main competitive strategies:
– cost leadership
– differentiation
• Once a firm chooses which strategy to follow,
there are various means of implementation:
–
–
–
–
SWOT Analysis
Focus on execution
Value-chain analysis
Balanced scorecard (BSC)
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SWOT Analysis
• Identification of critical success factors (CSFs)
tied to strategy—for example:
– Product innovation
– Quality
– Skill development
• Identification of quantitative measures for the
specified CSFs—for example:
– Number of design changes or new patents
– Number of defects or number of returns
– Number of training hours or amount of skill
performance improvement
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SWOT Analysis
(continued)
• The SWOT analysis has four areas:
–
–
–
–
S – strengths/internal
W – weaknesses/internal
O – opportunities/external
T – threats/external
Blocher,Stout,Cokins,Chen, Cost Management 4e
Look at product lines,
management, R&D,
manufacturing, marketing,
and strategy
Look at barriers to entry,
intensity of rivalry among
competitors, substitute
goods, and
customer/supplier
bargaining power
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Execution
• The CSFs a manager executes depend on the
chosen strategy
– Cost leadership: operational performance and quality
– Differentiation: customer satisfaction and innovation
• Differentiated firms must pay close attention to
marketing and product development
– Management accountants assist by gathering,
analyzing, and reporting on relevant information
• Can be improved through benchmarking and total
quality improvement (e.g., Malcolm Baldrige Quality
Award)
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Value-Chain Analysis
• Means to reach the detail-level of analysis
– CSFs must be implemented in each and every phase of
operations
• Helps a firm better understand its competitive
advantage by analyzing what processes add value
(processes that do not add value can be deleted or
outsourced)
• Design to manufacturing to service after sale
– Not all areas will get the same attention (identification of
areas most important to the customer will determine the
firm’s focus)
– Goal = the most value at the lowest possible cost
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Value-Chain Analysis
• Value-chain analysis has two steps:
– Identify the value-chain activities at the smallest level
possible
– Develop a competitive advantage by reducing cost
or adding value
• To develop a competitive advantage, a firm
must consider the following:
–
–
–
–
What is our competitive advantage (strategy)?
Where can we add value for the customer?
Where can we reduce costs?
Are any of our processes linked (linkages exploited)?
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Example: Value-Chain Analysis
in Computer Manufacturing
• Computer Intelligence Company (CIC)
manufactures computers for small businesses
• The company has an excellent reputation for
service and reliability as well as a growing
customer list
• Is there any way to add value for the customer
while reducing costs?
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Example: Value-Chain Analysis in
Computer Manufacturing (continued)
• The company is considering two options:
– Option One is to continue functioning as is
– Option Two includes two separate outsourcing
decisions: (a) the purchase or manufacture of
parts, and (b) providing service internally or
outsourcing it
• It is important to consider company strategy
in outsourcing decisions
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Value-Chain Analysis in Computer
Manufacturing (continued)
Value Activity
Option One – Current
Option Two – Potential
Acquiring raw
materials
CIC is not involved at
this step
CIC is not involved at
this step
Manufacturing
computer chips and
other parts
CIC is not involved at
this step; cost is $200
CIC is not involved at
this step; cost is $200
Manufacturing
components, some of
which CIC can make
CIC purchases $300 of
parts for each unit
CIC manufactures these
units for $190 per unit
plus $55,000 monthly
Assembling
CIC’s costs are $250
CIC’s costs are $250
Marketing, distributing, CIC’s costs are
and servicing
$175,000 per month
Blocher,Stout,Cokins,Chen, Cost Management 4e
CIC contracts out these
services for $130 per
month
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Results of
Value-Chain Analysis
Manufacturing
Option One
Option Two
Savings with
Option Two
600 x $300 =
$180,000
Marketing,
distributing, and
servicing
$175,000 per month
600 x 190 +
$55,000 =
$169,000
$78,000 per month
$11,000
$97,000 per month
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Results of Value-Chain Analysis
(continued)
• CIC can save $108,000 ($11,000 + $97,000) per
month by manufacturing the parts and contracting
out marketing, distributing, and servicing
• The main factor driving the decision is company
strategy, which in this case is quality and
customer service
– For a firm pursuing a differentiation strategy, the best
option is not necessarily the one which provides the
most savings (savings is a secondary consideration)
– From a strategic viewpoint, Option One is preferred
over Option Two
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The Balanced Scorecard (BSC)
• A performance report based on a broad set of
financial and nonfinancial measures that is crucial
to understanding and implementing a strategy
• This report groups a firm’s CSFs into four areas:
– Financial perspective (financial measures)
– Customer perspective (customer satisfaction)
– Internal business process perspective (e.g., productivity
and speed)
– Learning and innovation (e.g., training and number of
new patents or products)
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The Balanced Scorecard (BSC) (continued)
• Benefits
– Means for implementing strategy
– Means to achieve a desired organizational change in
strategy
– Can be used to determine management’s
compensation and rewards
– Coordinates efforts within the firm to achieve CSFs
• Limitations
–
–
–
–
Nonfinancial information is subjective
Confidentiality must be insured for certain information
Must be adaptable and frequently updated
Costly and time-consuming to implement
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The Balanced Scorecard
(BSC) (continued)
• A properly constructed BSC can be used to infer a
company’s strategy
– BSC → Strategy, rather than Strategy → BSC
• The emphasis placed on each performance
perspective reflects the strategy of the firm
– For a cost leader, the operations perspective might be the
most important; for a differentiator, the customer
perspective…
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Strategy Map
A strategy map is a cause-and-effect diagram of
the relationships embodied in a BSC:
– Shows how the achievement of CSFs in one perspective
should affect the achievement of goals in another
perspective
– The financial perspective is the target in the strategy map
because financial performance is the ultimate goal for
most profit-seeking organizations
– Success in the other perspectives leads directly to
improved financial performance and shareholder value
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Sustainability
• The fifth perspective for many organizations
• The balancing of short-term and long-term goals in
all three dimensions of the company’s
performance–economic, social, and environmental:
– Environmental reports use environmental performance
indicators (EPIs) to measure sustainability
– These indicators are in three areas:
• Operational (measure stresses to the environment/regulatory
compliance issues)
• Management (try to reduce environmental effects)
• Environmental condition (measure environmental quality)
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The BSC and Not-For-Profit
(NFP) Organizations
• Competitive strategy is different:
– Must satisfy funding authorities, political leaders, and the
general public
• The BSC can still be used to monitor CSFs related
to internal processes, customer satisfaction,
financial measures, and human resources measures
• Value-chain analysis can still be used to determine
at what points costs can be reduced or value added
on the value chain
Blocher,Stout,Cokins,Chen, Cost Management 4e
©The McGraw-Hill Companies 2008
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The Role of Accounting
Three cost-management resources for implementing
strategy are discussed in this chapter:
– SWOT analysis provides a system and structure to
identify CSFs
– Value-chain analysis builds on the CSFs by breaking
them down into detailed activities
– The BSC provides a way to implement the detailed
strategy developed through the previous two analyses; it
provides the processes for evaluating the organization’s
achievement of CSFs
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©The McGraw-Hill Companies 2008
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Chapter Summary
• Strengths-Weaknesses-Opportunities-Threats (SWOT)
Analysis provides a system and structure in which to
identify a firm’s critical success factors (CSFs)
• Execution of goals is important in implementing a
strategy
• Execution depends on the competitive strategy a firm
is pursuing
• Management accountants assist management by
gathering, analyzing, and reporting on relevant
information
Blocher,Stout,Cokins,Chen, Cost Management 4e
©The McGraw-Hill Companies 2008
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Chapter Summary (continued)
• Value-chain analysis builds on the CSFs identified in
SWOT analysis by breaking them into detailed activities
• The balanced scorecard (BSC) provides the processes
for evaluating a firm’s achievement of CSFs
• Sustainability builds on the conventional BSC by
balancing short-term and long-term goals
• Sustainability focuses on economic, social, and
environmental issues
Blocher,Stout,Cokins,Chen, Cost Management 4e
©The McGraw-Hill Companies 2008