Strategy, Balanced Scorecard, and Strategic Profitability Analysis Chapter 13

Introduction This chapter explores the use of management accounting information in the implementation and evaluation of an organization’s strategy. The chapter also shows how management accounting information helps strategic initiatives, such as productivity improvement, reengineering, and downsizing.

Generic Strategies Two generic strategies that organizations use are: Product differentiation Cost leadership

Product Differentiation Product differentiation refers to offering products and services that are perceived by customers as being superior and unique relative to those of its competitors. Hewlett Packard in the electronics industry Merck in the pharmaceutical industry Coca-Cola in the soft drinks industry

Cost Leadership Cost leadership is achieving low costs relative to competitors. How does a company achieve low costs? Productivity and efficiency improvements Elimination of waste Tight cost control

Implementation of Strategy To be successful, a company must both formulate an effective strategy and implement it vigorously. Management accountants have an important role to play in the implementation of strategy. This role is designing reports to help managers track progress in implementing strategy.

The Balanced Scorecard The balanced scorecard translates an organization’s mission and strategy into a comprehensive set of performance measures. The balanced scorecard does not focus solely on achieving financial objectives. It highlights the nonfinancial objectives that an organization must achieve in order to meet its financial objectives.

Perspectives of the Balanced Scorecard There are four perspectives of the balanced scorecard: Financial perspective Customer perspective Internal business process perspective Learning and growth perspective

Financial Perspective This perspective evaluates the profitability of the strategy. Naches’ key strategic initiatives are cost reduction relative to competitors and growth. The financial perspective focuses on how much of operating income and return on capital employed results from reducing costs and selling more units.

Customer Perspective This perspective identifies the targeted market segment and measures the company’s success in these segments. Objectives: Increase market share Increase customer satisfaction

Internal Business Process Perspective This perspective focuses on internal operations that further both the customer perspective by creating value for customers and the financial perspective by increasing shareholder wealth.

Learning and Growth Perspective Objectives: Develop process skill Empower work force Enhance information system capabilities

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

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

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

Identifying Unused Capacity Identifying unused capacity is easier for engineered costs than for discretionary costs. The absence of a cause-and-effect relationship makes identifying unused capacity for discretionary costs much more difficult.

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.

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 and customer-service costs are engineered costs that are fixed in the short run.

Discretionary Costs Two important features of discretionary costs: Discretionary costs arise from periodic (usually yearly) decisions regarding the maximum amount to be incurred. Discretionary costs have no clearly measurable cause-and effect relationship between output and resources used.

Discretionary Costs Discretionary costs include: Advertising Executive training Research and development Health care Legal resources Public relations