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13 - 1 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Strategy, Balanced Scorecard, and Strategic Profitability Analysis Chapter 13 April 18, 2005
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13 - 2 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 1 Recognize which of two generic strategies a company is using.
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13 - 3 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster What is Strategy? Strategy describes how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its overall objectives. To do so requires a thorough understanding of the industry in which it operates.
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13 - 4 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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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13 - 5 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Basic Strategies 1. Product differentiation 2. Cost leadership
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13 - 6 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Product Differentiation l Products of services perceived to be superior and unique relative to its competitors l Achieved through innovative R & D, service and branding l Examples: Kleenex, Xerox, Coca Cola; Mercedes, Lexus; Prius
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13 - 7 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Cost Leadership l Lower costs relative to the competition l Achieved through productivity and efficiency improvements, tight cost control, unique sourcing of materials, etc. l Examples: Costco, Walmart; Honda, Dell, Home Depot;
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13 - 8 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Implementation of Strategy Management accountants design reports to help managers track progress in implementing strategy.
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13 - 9 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster The Balanced Scorecard The scorecard measures an organization’s performance from four perspectives: 1. Financial – reduce costs, sell more 2. Customer – satisfaction, market share 3. Internal business processes – manufacturing, quality, delivery, service and support 4. Learning and growth – employee, systems
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13 - 10 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 2 Identify what comprises reengineering.
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13 - 11 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Reengineering Reengineering is the fundamental rethinking of business processes to achieve improvements in critical measures of performance such as cost, quality, service, speed, and customer satisfaction.
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13 - 12 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Reengineering Example Customers needs identified Purchase order issued Production scheduled Manufacturing completed Finished goods to inventory Quantities to be shipped matched against purchase order Shipping documents sent to Billing Department Invoice issued Customer payment follow up Dallas Co. order delivery system:
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13 - 13 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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. There is no one person responsible for tracking and following up on a customer
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13 - 14 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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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13 - 15 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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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13 - 16 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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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13 - 17 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 3 Present the four perspectives of the balanced scorecard.
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13 - 18 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Perspectives of Performance 1. Financial 2. Customer 3. Internal business process 4. Learning and growth
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13 - 19 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Financial Perspective Objective: Increase shareholder value Measures: Increase in operating income
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13 - 20 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Financial Perspective Initiatives: Target Performance Actual Performance Manage costs and unused capacity - productivity Build strong customer relationships - profit $2,000,000 $3,000,000 6% Build strong customer relationships - growth $2,100,000 $3,420,000 6.48%
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13 - 21 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Customer Perspective Objectives: Increase market share Measures: Market share in communication networks segment Customer satisfaction survey Increase customer satisfaction
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13 - 22 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Customer Perspective Initiatives: Target Performance Actual Performance Increase market share, Needs of customers Identify new target customer segments 6% 7 90% give top two ratings Increase customer focus of sales organization 7% 8 87% gave top two ratings
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13 - 23 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Internal Business Process Perspective Objectives: Improve manufacturing quality and productivity Measures: Yield On-time delivery Meet specified delivery dates
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13 - 24 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Internal Business Process Perspective Initiatives: Target Performance Actual Performance Identify problems and improve quality, yield Reengineer order delivery process, on time delivery 78% 92% 79.3% 90%
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13 - 25 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning and Growth Perspective Objectives: Align employee and organization goals Measures: Employee satisfaction survey Improvements in process controls Improve manufacturing processes
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13 - 26 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning and Growth Perspective Initiatives: Target Performance Actual Performance Employee participation and suggestion program to build teamwork Organize R&D/ manufacturing teams to modify processes 80% of employees give top two ratings 5 88% of employees give top two ratings 5
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13 - 27 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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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13 - 28 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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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13 - 29 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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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13 - 30 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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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13 - 31 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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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13 - 32 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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 capability Processes with real time feedback
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13 - 33 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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; it will evolve 2. Don’t seek improvements across all measures all the time; may need tradeoffs 3. Don’t use only objective measures on the scorecard; subjective such as satisfaction
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13 - 34 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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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13 - 35 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 5 Downsizing and the management of excess capacity First, distinguish between engineered and discretionary costs.
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13 - 36 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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. Examples include direct material, labor and overhead. These costs are activity driven.
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13 - 37 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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. Examples include advertising, R & D, training, legal, human resources and public relations
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13 - 38 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 6 Identify unused capacity and how to manage it.
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13 - 39 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Managing Unused Capacity What actions can management take when it identifies unused capacity? Attempt to eliminate the unused capacity. Cutting processes, jobs can reduce morale Attempt to use the unused capacity to grow revenue A much better alternative
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13 - 40 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster End of Chapter 13
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