1. Strategy, Balanced Scorecard, and Strategic Profitability Analysis
Chapter 13

2. 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.

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

4. 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

5. 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

6. 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.

7. 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.

8. 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

9. 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.

10. 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

11. 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.

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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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.

22. 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.

23. 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.

24. 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.

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