Implementing Strategy: The Balanced Scorecard and the Value Chain

1. Chapter Two Implementing Strategy: The Balanced Scorecard and the Value Chain

2. Learning Objectives • 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 Objectives (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 a 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. SWOT Analysis (continued) • The SWOT analysis has four areas: • S – strengths/internal • W – weaknesses/internal • O – opportunities/external • T – threats/external 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 (continued) • 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)

13. Results of Value-Chain Analysis

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 Balanced Scorecard (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 Balanced Scorecard (BSC) (continued) • 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 Balanced Scorecard (BSC) (continued) • 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 • Management accountants assist management by gathering, analyzing, and reporting on relevant information

23. 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 • Sustainability builds on the conventional BSC by balancing short-term and long-term goals • Sustainability focuses on economic, social, and environmental issues