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Strategy, Balanced Scorecard, and Strategic Profitability Analysis. Based on Chapter 13, Cost Accounting, 12th ed. Horngren et al., Edited and Modified by C. Bailey. Introduction. This topic…
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Strategy, Balanced Scorecard, and Strategic Profitability Analysis Based on Chapter 13, Cost Accounting, 12th ed. Horngren et al., Edited and Modified by C. Bailey
Introduction • 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.
Learning Objective 1 Recognize which of two generic strategies a company is using
What is Strategy? • 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.
Understanding the Industry • Industry 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.
Understanding the Industry • 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.
Understanding the Industry • Equivalent products • How easily can users substitute other products (consider MS Windows!) • Bargaining power of customers • Customers may obtain the products from other potential suppliers.
Understanding the Industry • Bargaining power of input suppliers • Suppliers of high-quality materials can demand higher prices. • Skilled engineers, technicians, and laborers can demand higher wages.
Generic Strategies • Two generic strategies that organizations use are: • Product differentiation • Cost leadership
Product Differentiation • 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?
Cost Leadership • Achieving low costs relative to competitors. • How? • Productivity and efficiency improvements • Elimination of waste • Tight cost control • Examples? • Dell, Bic
Implementation of Strategy • 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.
The Balanced Scorecard • 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 [long-term] financial objectives.
The Balanced Scorecard • Four key perspectives • Financial [sales, cost, etc.] • Customer [mkt shre, growth, satisfaction] • Internal business processes [innovation, impr] • Learning and growth [skills, workforce]
The Balanced Scorecard • 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?
The Balanced Scorecard • 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.
Learning Objective 2 Identify key aspects of reengineering
Quality Improvement • One key element of a strategy to reduce costs is to improve quality, by… • Reducing defects • Improving yields.
Quality Improvement • What is needed to improve quality? • Nonfinancial data about • manufacturing process parameters (e.g., time) • implementation of advanced process control methods • training of frontline workers in quality management techniques • empowering workforce to make timely decisions, continuously improve processes
Reengineering • Example of Ford Motor Company: Reducing Ordering Costs(HBR July-Aug. 1990) • U.S. Accts. Payable in early 1980's employed > 500 • Set goal: Reduce by 20% to 400. • but . . .
Reengineering • Found that Mazda's AP dept had 4 people!! • Results of reengineering: • "Invoiceless processing": If goods match PO, clerk receives them, and pmt is made. (If don't match, reject shipment.)
Reengineering • Old procedures required acctg dept to match 14 data items on PO, receipt record, and invoice. • Head count cut 75%
Learning Objective 3 Present the four perspectives of the balanced scorecard
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
Financial Perspective • 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)
Financial Perspective • Objective: • Increase shareholder value • Sample Measures: • Increase in operating income • Revenue growth,
Aligning the Balanced Scorecard to Strategy • What are some of the financial perspective measures? • Operating income • Revenue growth • Cost reduction is some areas • Return on investment
Customer Perspective • Identifies the targeted market segment and measures the company’s success in these segments.
What are some of the customer perspective measures? • Market share • Customer satisfaction • Customer retention percentage • Time taken to fulfill customers requests
Internal Business Process Perspective • 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
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
Internal business perspective measures cont’d. • Operations Process • Yield • Defect rates • Time taken to deliver product to customers • Percentage of on-time delivery • Setup time • Manufacturing downtime
Internal business perspective measures cont’d. • Post-sales service • Time taken to replace or repair defective products • Hours of customer training for using the product
Learning and Growth Perspective • Emphasizes capabilities of • Employees • empowerment, training • Info systems • Typical Objectives: • Develop process skill • Empower work force • Enhance information system capabilities
Some 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
Features of a Good Balanced Scorecard • It tells the story of a company’s strategy by articulating a sequence of cause-and-effect 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.
Features of a Good Balanced Scorecard • 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.
Pitfalls When Implementing a Balanced Scorecard • 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.
Pitfalls When Implementing a Balanced Scorecard • 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.
Learning Objective 4 Analyze changes in operating income to evaluate strategy [We may do a case next week.]
Learning Objective 5 Distinguish between engineered and discretionary costs
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.
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 & customer-service costs are engineered, fixed in the short run.
Discretionary Costs • Two important features of discretionary costs: • They arise from periodic (usually yearly) decisions regarding the maximum amount to be incurred. • They have no clearly measurable cause-and effect relationship between output and resources used.
Discretionary Costs • Discretionary costs include: • Advertising • Executive training • Research and development • Health care • Legal resources • Public relations
Relationships between Inputs and Outputs • Engineered costs differ from discretionary costs along two key dimension • Type of process • detailed, physically observable, and repetitive • Level of uncertainty • higher level of uncertainty about the relationship means less likely cause-and-effect exists