1. Implementing Strategy: The Balanced Scorecard and the Value Chain
Chapter Two
Implementing Strategy: The Balanced Scorecard and the Value Chain

2. 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

3. 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”

4. 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)

5. 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

6. SWOT Analysis (continued)
The SWOT analysis has four areas:
S – strengths/internal
W – weaknesses/internal
O – opportunities/external
T – threats/external
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

7. 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)

8. 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

9. 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)?

10. 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?

11. 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

12. 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
Manufacturing computer chips and other parts
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
Marketing, distributing, and servicing
CIC’s costs are $175,000 per month
CIC contracts out these services for $130 per month

13. Results of Value-Chain Analysis
Manufacturing
Marketing, distributing, and servicing
Option One
600 x $300 = $180,000
$175,000 per month
Option Two
600 x $55,000 = $169,000
$78,000 per month
Savings with Option Two
$11,000
$97,000 per month

14. 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

15. 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)

16. 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

17. 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…

18. 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

19. 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)

20. 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

21. 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

22. 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

23. 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