Strategy, Balanced Scorecard, and
Strategic Profitability Analysis
Chapter 13
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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.
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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
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Basic Strategies
1. Product differentiation
2. Cost leadership
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Implementation of Strategy
Management accountants design reports
to help managers track progress in
implementing strategy.
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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
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Learning Objective 2
Identify what comprises
reengineering.
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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.
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Reengineering Example
Dallas Co. order delivery system:
Customers needs identified
Quantities to be shipped
matched against purchase order
Purchase order issued
Production scheduled
Shipping documents sent
to Billing Department
Manufacturing completed
Invoice issued
Finished goods to inventory
Customer payment follow up
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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.
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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.
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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.
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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.
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Learning Objective 3
Present the four perspectives
of the balanced scorecard.
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Perspectives of Performance
1. Financial
2. Customer
3. Internal business process
4. Learning and growth
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Financial Perspective
Objective:
Increase shareholder value
Measures:
Increase in operating income
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Financial Perspective
Initiatives:
Manage costs and
unused capacity
Build strong customer
relationships
Build strong customer
relationships
Target
Actual
Performance Performance
$2,000,000
$2,100,000
$3,000,000
$3,420,000
6%
6.48%
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Customer Perspective
Objectives:
Increase market share
Increase customer satisfaction
Measures:
Market share in communication
networks segment
Customer satisfaction survey
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Customer Perspective
Initiatives:
Target
Actual
Performance Performance
Identify future needs
6%
7%
of customer
Identify new target
7
8
customer segments
Increase customer focus 90% give top 87% give top
of sales organization two ratings two ratings
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Internal Business
Process Perspective
Objectives:
Improve manufacturing
quality and productivity
Meet specified delivery dates
Measures:
Yield
On-time delivery
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Internal Business
Process Perspective
Initiatives:
Identify problems and
improve quality
Reengineer order
delivery process
Target
Actual
Performance Performance
78%
79.3%
92%
90%
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Learning and Growth Perspective
Objectives:
Align employee and
organization goals
Improve manufacturing processes
Measures:
Employee satisfaction survey
Improvements in process controls
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Learning and Growth Perspective
Initiatives:
Employee
participation and
suggestion program
to build teamwork
Organize R&D/
manufacturing teams
to modify processes
Target
Actual
Performance Performance
80% of
88% of
employees
employees
give top
give top
two ratings two ratings
5
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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
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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
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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
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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
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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
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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
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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.
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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.
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Learning Objective 4
Analyze changes in operating
income to evaluate strategy.
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Evaluating the Success
of a Strategy
Assume the following operating incomes:
Year 2003
Revenues:
(1,000,000 × $26)
(1,100,000 × $24)
Expenses:
Materials
Other
Operating income
Year 2004
$26,000,000
$26,400,000
4,050,000
16,000,000
$ 5,950,000
3,631,320
16,000,000
$ 6,768,680
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Evaluating the Success
of a Strategy
How can the increase in operating
income of $818,680 be evaluated?
Growth
Price recovery
Productivity
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Growth Component
Assume that for 2003, Dallas produced
and sold 1,000,000 units at $26 per unit.
During the year 2004, Dallas produced
and sold 1,100,000 units at $24 per unit.
What is the revenue effect of growth?
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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) × $26 = $2,600,000 F
This component is favorable because
it increases operating income.
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Growth Component
Cost effect of growth component
=
Actual units of input or capacity that would
have been used in 2003 to produce year 2004
output assuming the same input-output
relationship that existed in 2003
– Actual units or capacity to produce 2003 output
Input prices in 2003
×
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Growth Component
To produce 1,100,000 units in 2004 compared
with the 1,000,000 units produced in 2003
(a 10% increase), Dallas would require a
proportional increase in direct materials.
Assume that 3,000,000 square centimeters of
materials were used to produce the 1,000,000
units in 2003 at a cost of $1.35
per square centimeter.
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Growth Component
Assume that manufacturing conversion costs,
selling and customer service costs and research
and development costs were $16,000,000
and remained stable during 2004.
What is the cost effect of the growth component?
3,000,000 × 110% = 3,300,000 centimeters
(3,300,000 – 3,000,000) × $1.35 = $405,000 U
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Operating Income and Growth
What is the net increase in operating income
as a result of growth?
Revenue effect of growth component $2,600,000 F
Cost effect of growth component
405,000 U
Increase in operating income
due to growth component
$2,195,000 F
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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?
($24 – $26) × 1,100,000 = $2,200,000 U
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Price-Recovery Component
Cost effect of price-recovery component
=
(Input prices in 2004 – Input prices in 2003)
×
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
Assume that in the year 2004, direct materials
costs were $1.31 per square centimeter.
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Price-Recovery Component
What is the cost effect of the
price-recovery component?
($1.31 – $1.35) × 3,300,000 = $132,000 F
What is the total effect on operating
income of the price-recovery component?
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Operating Income and
Price-Recovery Component
Revenue effect
of price-recovery component
$2,200,000 U
Cost effect
of price-recovery component
132,000 F
Decrease in operating income
due to price-recovery component $2,068,000 U
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Productivity Component
Productivity component
=
–
×
Actual units of inputs or capacity to
produce year 2004 output
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
Input prices in 2004
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Productivity Component
Assume that 2,772,000 actual square
centimeters of direct materials were
used in the year 2004.
Actual price was $1.31/square centimeter.
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Productivity Component
What is the productivity component of cost changes?
(2,772,000 – 3,300,000) × $1.31 = $691,680 F
There is a $691,680 increase in operating
income due to the productivity component.
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Change in Operating Income
Increase in operating income
$818,680
Growth
component
$2,195,000 F
Price-recovery
component
$2,068,000 U
Productivity
component
$691,680 F
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Learning Objective 5
Distinguish between engineered
and discretionary costs.
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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.
They can be variable or fixed in the short run.
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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.
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Relationships Between
Inputs and Outputs
Engineered costs differ from discretionary
costs along two key dimensions:
Type of process
Level of uncertainty
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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.
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Learning Objective 6
Identify unused capacity
and how to manage it.
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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
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End of Chapter 13
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