13 - 1 strategy, balanced scorecard, and strategic profitability analysis chapter 13
TRANSCRIPT
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Strategy, Balanced Scorecard, and Strategy, Balanced Scorecard, and Strategic Profitability AnalysisStrategic Profitability Analysis
Chapter 13Chapter 13
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IntroductionIntroduction
This chapter explores the use of management This chapter explores the use of management accounting information in the implementation accounting information in the implementation and evaluation of an organization’s strategy.and evaluation of an organization’s strategy.
The chapter also shows how management The chapter also shows how management accounting information helps strategic accounting information helps strategic initiatives, such as productivity improvement, initiatives, such as productivity improvement, reengineering, and downsizing.reengineering, and downsizing.
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Generic StrategiesGeneric Strategies
Two generic strategies that organizations Two generic strategies that organizations use are:use are:
1 Product differentiationProduct differentiation2 Cost leadershipCost leadership
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Product DifferentiationProduct Differentiation
Product differentiation refers to offering Product differentiation refers to offering products and services that are perceived by products and services that are perceived by customers as being superior and unique customers as being superior and unique relative to those of its competitors.relative to those of its competitors.
– Hewlett Packard in the electronics industryHewlett Packard in the electronics industry– Merck in the pharmaceutical industryMerck in the pharmaceutical industry– Coca-Cola in the soft drinks industryCoca-Cola in the soft drinks industry
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Cost LeadershipCost Leadership
Cost leadership is achieving low costs Cost leadership is achieving low costs relative to competitors.relative to competitors.
How does a company achieve low costs?How does a company achieve low costs?– Productivity and efficiency improvementsProductivity and efficiency improvements– Elimination of wasteElimination of waste– Tight cost controlTight cost control
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Implementation of StrategyImplementation of Strategy
To be successful, a company must both To be successful, a company must both formulate an effective strategy and formulate an effective strategy and implement it vigorously.implement it vigorously.
Management accountants have an important Management accountants have an important role to play in the implementation of strategy.role to play in the implementation of strategy.
This role is designing reports to help managers This role is designing reports to help managers track progress in implementing strategy.track progress in implementing strategy.
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The Balanced ScorecardThe Balanced Scorecard
The The balanced scorecard balanced scorecard translates an translates an organization’s mission and strategy into a organization’s mission and strategy into a comprehensive set of performance measures.comprehensive set of performance measures.
The balanced scorecard does not focus solely The balanced scorecard does not focus solely on achieving financial objectives.on achieving financial objectives.
It highlights the nonfinancial objectives that It highlights the nonfinancial objectives that an organization must achieve in order to meet an organization must achieve in order to meet its financial objectives.its financial objectives.
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Perspectives of the Perspectives of the Balanced ScorecardBalanced Scorecard
There are four perspectives of the balanced There are four perspectives of the balanced scorecard:scorecard:
1 Financial perspectiveFinancial perspective2 Customer perspectiveCustomer perspective3 Internal business process perspectiveInternal business process perspective4 Learning and growth perspective Learning and growth perspective
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Financial PerspectiveFinancial Perspective
This perspective evaluates the profitability This perspective evaluates the profitability of the strategy.of the strategy.
Naches’ key strategic initiatives are cost Naches’ key strategic initiatives are cost reduction relative to competitors and growth.reduction relative to competitors and growth.
The financial perspective focuses on how The financial perspective focuses on how much of operating income and return on much of operating income and return on capital employed results from reducing costs capital employed results from reducing costs and selling more units.and selling more units.
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Customer PerspectiveCustomer Perspective
This perspective identifies the targeted market This perspective identifies the targeted market segment and measures the company’s success segment and measures the company’s success in these segments.in these segments.
Objectives: Objectives: – Increase market shareIncrease market share– Increase customer satisfactionIncrease customer satisfaction
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Internal Business Internal Business Process PerspectiveProcess Perspective
This perspective focuses on internal operations This perspective focuses on internal operations that further both the customer perspective by that further both the customer perspective by creating value for customers and the financial creating value for customers and the financial perspective by increasing shareholder wealth.perspective by increasing shareholder wealth.
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Learning and Growth PerspectiveLearning and Growth Perspective
Objectives: Objectives: – Develop process skillDevelop process skill– Empower work forceEmpower work force– Enhance information system capabilitiesEnhance information system capabilities
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Aligning the Balanced Aligning the Balanced Scorecard to StrategyScorecard to Strategy
Different strategies call for different scorecards.Different strategies call for different scorecards. What are some of the financial perspective What are some of the financial perspective
measures?measures?– Operating incomeOperating income– Revenue growthRevenue growth– Cost reduction is some areasCost reduction is some areas– Return on investmentReturn on investment
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Aligning the Balanced Aligning the Balanced Scorecard to StrategyScorecard to Strategy
What are some of the customer perspective What are some of the customer perspective measures?measures?
– Market shareMarket share– Customer satisfactionCustomer satisfaction– Customer retention percentageCustomer retention percentage– Time taken to fulfill customers requestsTime taken to fulfill customers requests
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Aligning the Balanced Aligning the Balanced Scorecard to StrategyScorecard to Strategy
What are some of the internal business What are some of the internal business perspective measures?perspective measures?
– Innovation ProcessInnovation Process Manufacturing capabilitiesManufacturing capabilities Number of new products or servicesNumber of new products or services New product development timeNew product development time Number of new patentsNumber of new patents
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Aligning the Balanced Aligning the Balanced Scorecard to StrategyScorecard to Strategy
– Operations ProcessOperations Process YieldYield Defect ratesDefect rates Time taken to deliver product to customersTime taken to deliver product to customers Percentage of on-time deliveryPercentage of on-time delivery Setup timeSetup time Manufacturing downtimeManufacturing downtime
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Aligning the Balanced Aligning the Balanced Scorecard to StrategyScorecard to Strategy
– Post-sales servicePost-sales service Time taken to replace or repair defective Time taken to replace or repair defective
productsproducts Hours of customer training for using the Hours of customer training for using the
productproduct
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Aligning the Balanced Aligning the Balanced Scorecard to StrategyScorecard to Strategy
What are some of the learning and growth What are some of the learning and growth perspective measures?perspective measures?
– Employee education and skill levelEmployee education and skill level– Employee satisfaction scoresEmployee satisfaction scores– Employee turnover ratesEmployee turnover rates– Information system availabilityInformation system availability– Percentage of processes with advanced controlsPercentage of processes with advanced controls
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Change in Operating IncomeChange in Operating Income
Increase in operating incomeIncrease in operating income$818,680 $818,680
GrowthGrowthcomponentcomponent
$2,195,000 F$2,195,000 F
Price-recoveryPrice-recoverycomponentcomponent
$2,068,000 U$2,068,000 U
ProductivityProductivitycomponentcomponent $691,680 F$691,680 F
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Managing Unused CapacityManaging Unused Capacity
What actions can management take when it What actions can management take when it identifies unused capacity?identifies unused capacity?
– attempt to eliminate the unused capacityattempt to eliminate the unused capacity– attempt to use the unused capacity to grow attempt to use the unused capacity to grow
revenuerevenue
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Identifying Unused CapacityIdentifying Unused Capacity
Identifying unused capacity is easier for Identifying unused capacity is easier for engineered costs than for discretionary costs.engineered costs than for discretionary costs.
The absence of a cause-and-effect relationship The absence of a cause-and-effect relationship makes identifying unused capacity for makes identifying unused capacity for discretionary costs much more difficult.discretionary costs much more difficult.
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Engineered and Engineered and Discretionary CostsDiscretionary Costs
Fixed costs are tied to capacity.Fixed costs are tied to capacity. Fixed costs do not change automatically with Fixed costs do not change automatically with
changes in the level of the cost driver.changes in the level of the cost driver. How can managers reduce capacity-based How can managers reduce capacity-based
fixed costs?fixed costs? The key is understanding and managing The key is understanding and managing
unused capacity.unused capacity.
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Engineered CostsEngineered Costs
Engineered costs result specifically from a Engineered costs result specifically from a clear cause-and effect relationship between clear cause-and effect relationship between output and the resources needed to produce output and the resources needed to produce that output.that output.
Engineered costs can be variable or fixed in Engineered costs can be variable or fixed in the short run.the short run.
Selling and customer-service costs are Selling and customer-service costs are engineered costs that are fixed in the short run.engineered costs that are fixed in the short run.
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Discretionary CostsDiscretionary Costs
Two important features of discretionary costs:Two important features of discretionary costs:1 Discretionary costs arise from periodic Discretionary costs arise from periodic
(usually yearly) decisions regarding the (usually yearly) decisions regarding the maximum amount to be incurred.maximum amount to be incurred.
2 Discretionary costs have no clearly measurable Discretionary costs have no clearly measurable cause-and effect relationship between output cause-and effect relationship between output and resources used.and resources used.
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Discretionary CostsDiscretionary Costs
Discretionary costs include:Discretionary costs include:– AdvertisingAdvertising– Executive trainingExecutive training– Research and developmentResearch and development– Health careHealth care– Legal resourcesLegal resources– Public relationsPublic relations