Transcript Strategy, Balanced Scorecard and Strategic Profitability

Based on Chapter 13, Cost Accounting, 12th ed.
Horngren et al., Edited and
Modified by C. Bailey
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 This
topic…
• explores the use of management accounting
information for implementing and evaluating an
organization’s strategy.
• shows how MA information helps strategic
initiatives:
 productivity improvement
 reengineering
 downsizing.
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 Strategy
describes how an organization
matches its own capabilities with the
opportunities in the marketplace to
accomplish its overall objectives.
 In formulating its strategy, an
organization must thoroughly understand
the industry in which it operates.
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 Industry
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analysis focuses on five forces:
Competitors
• Reducing prices of products is critical for any
industry to grow.
• Competition today is severe along the
dimensions of price, timely delivery, and quality.
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2
Potential entrants into the market
• Competition usually keeps profit margins small.
• Existing companies probably have lower costs.
• Existing companies also have the advantage of
close relationships with customers.
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3
Equivalent products
• How easily can users substitute other products
(consider MS Windows!)
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Bargaining power of customers
• Customers may obtain the products from other
potential suppliers.
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Bargaining power of input suppliers
• Suppliers of high-quality materials can demand
higher prices.
• Skilled engineers, technicians, and laborers can
demand higher wages.
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 Two
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generic strategies that organizations
use are:
Product differentiation
Cost leadership
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 Customers
perceive product/service to
be superior and unique relative to
competitors.
• Hewlett Packard in the electronics industry
• Merck in the pharmaceutical industry
• Coca-Cola in the soft drinks industry
• Others?
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 Achieving
low costs relative to
competitors.
 How?
• Productivity and efficiency improvements
• Elimination of waste
• Tight cost control
–
Examples?
• Dell, Bic
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 To
be successful, a company must
• formulate an effective strategy
• implement it vigorously.
 Management
accountants play important
role
• collecting meaningful data
• designing reports to help managers track
progress in implementing strategy.
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 The
balanced scorecard translates an
organization’s mission and strategy into a
comprehensive set of performance
measures.
 Does not focus solely on financial
objectives.
• highlights nonfinancial objectives that an
organization must achieve to meet its [longterm] financial objectives.
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 Attempts
to balance
• financial and nonfinancial performance
measures
• short-run and long-run performance in a single
report.
 Why
does the balanced scorecard
reduce manager’s emphasis on short-run
financial performance?
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 Reduces
short-term emphasis because:
• nonfinancial and operational indicators measure
fundamental changes
• financial benefits of these changes may not
appear in short-run earnings.
• nonfinancial measures (leading indicators)
signal the prospect of creating economic value
in the future.
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 There
are four perspectives of the
balanced scorecard:
1 Financial perspective
2 Customer perspective
3 Internal business process perspective
4 Learning and growth perspective
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 Evaluates
the profitability of the strategy.
 Focuses on how factors affect income:
• Growth (units sold, inputs need)
• Price Recovery (higher prices, lower costs)
• Productivity (efficiency of resource use)
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 Objective:
Increase shareholder value
 Sample Measures:
– Increase in operating income
– Revenue growth
– Cost reduction is some areas
– Return on investment SALES
–
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 Identifies
the targeted market segment
and measures the company’s success in
these segments.
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–
–
–
–
Market share
Customer satisfaction
Customer retention percentage
Time taken to fulfill customers requests
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 Focuses
on internal operations
• Create value for customers
• Further the financial perspective by increasing
shareholder wealth.
 Typical
Objectives:
• Improve manufacturing capability
• Reduce delivery time to customers
• Meet specified delivery dates
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Innovation Process
 Manufacturing capabilities
 Number of new products or services
 New product development time
 Number of new patents
–
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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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Post-sales service
 Time taken to replace or repair defective
products
 Hours of customer training for using the
product
–
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 Emphasizes
capabilities of
• Employees
 empowerment, training
• Info systems
 Typical
Objectives:
 Develop process skill
 Empower work force
 Enhance information system capabilities
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–
–
–
–
–
Employee education and skill level
Employee satisfaction scores
Employee turnover rates
Information system availability
Percentage of processes with advanced
controls
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It tells the story of a company’s strategy
by articulating a sequence of cause-andeffect relationships.
It assists in communicating the strategy to
all members of the organization by
translating the strategy into a coherent
and linked set of measurable operational
targets.
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In for-profit companies, the balanced
scorecard places strong emphasis on
financial objectives and measures.
The scorecard limits the number of
measures used by identifying only the
most critical ones.
The scorecard highlights suboptimal
tradeoffs that managers may make.
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Don’t assume the cause-and-effect
linkages to be precise.
Don’t seek improvements across all
measures all the time.
Don’t use only objective measures on the
scorecard.
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Don’t fail to consider both costs and
benefits of initiatives such as spending
on information technology and research
and development.
Don’t ignore nonfinancial measures when
evaluating managers and employees.
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End of BSC Presentation
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