1. Modul ke: Fakultas Program Studi Management Cost Strategic Chapter 2 Implementing Strategy: The Balanced Scorecard and the Value Chain Ratih Puspa Dewi, SE, MM 02 EKONOMI AKUNTANSI

2. Learning Objective 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 Objective 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 To 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. 6 The SWOT analysis has four areas: – S – strengths/internal – W – weaknesses/internal – O – opportunities/external – T – threats/external SWOT Analysis (continued) 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 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 ActivityOption One – CurrentOption 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 AssemblingCIC’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. 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 190 + $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 Balance Score Card ( 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 Balance Score Card ( Cont) 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 Balance Score Card ( Cont 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

23. Chapter Summary Continued Management accountants assist management by gathering, analyzing, and reporting on relevant information 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

24. 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

25. Chapter Summary Continued Sustainability builds on the conventional BSC by balancing short-term and long-term goals Sustainability focuses on economic, social, and environmental issues

26. Terima Kasih Ratih Puspa Dewi, SE, MM