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Strategy and the Balanced Scorecard

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Strategy and the Balanced Scorecard Powered By Docstoc
					Based on Chapter 13, Cost Accounting, 12th ed.
                     Horngren et al., Edited and
                         Modified by C. Bailey




                                                   1
 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.




                                                     2
 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.



                                            3
 Industry  analysis focuses on five forces:
1   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.




                                                           4
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.




                                                        5
3   Equivalent products
    • How easily can users substitute other products
     (consider MS Windows!)
4   Bargaining power of customers
    • Customers may obtain the products from other
     potential suppliers.




                                                       6
5   Bargaining power of input suppliers
    • Suppliers of high-quality materials can demand
      higher prices.
    • Skilled engineers, technicians, and laborers can
      demand higher wages.




                                                         7
 Two    generic strategies that organizations
    use are:
1   Product differentiation
2   Cost leadership




                                                 8
 Customersperceive 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?




                                                  9
 Achieving low costs relative to
  competitors.
 How?
    • Productivity and efficiency improvements
    • Elimination of waste
    • Tight cost control
–   Examples?
    • Dell, Bic



                                                 10
 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.


                                               11
 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.

                                                  12
 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?


                                                     13
 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.




                                                     14
 Thereare four perspectives of the
 balanced scorecard:
  1 Financial perspective
  2 Customer perspective
  3 Internal business process perspective
  4 Learning and growth perspective




                                            15
 Evaluatesthe 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)




                                                  16
 Objective:
– Increase shareholder value
 Sample Measures:
– Increase in operating income
– Revenue growth
– Cost reduction is some areas
– Return on investment S SALE




                                 17
          the targeted market segment
 Identifies
 and measures the company’s success in
 these segments.




                                         18
–   Market share
–   Customer satisfaction
–   Customer retention percentage
–   Time taken to fulfill customers requests




                                               19
 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




                                                      20
– Innovation Process
 Manufacturing capabilities

 Number of new products or services

 New product development time

 Number of new patents




                                       21
– Operations Process
 Yield

 Defect rates

 Time taken to deliver product to

  customers
 Percentage of on-time delivery

 Setup time

 Manufacturing downtime




                                     22
– Post-sales service
 Time taken to replace or repair defective

  products
 Hours of customer training for using the

  product




                                              23
 Emphasizes     capabilities of
  • Employees
     empowerment, training
  • Info systems
 Typical   Objectives:
    Develop process skill
    Empower work force
    Enhance information system capabilities



                                               24
–   Employee education and skill level
–   Employee satisfaction scores
–   Employee turnover rates
–   Information system availability
–   Percentage of processes with advanced
    controls



                                            25
1   It tells the story of a company’s strategy
    by articulating a sequence of cause-and-
    effect relationships.
2   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.


                                                  26
3   In for-profit companies, the balanced
    scorecard places strong emphasis on
    financial objectives and measures.
4   The scorecard limits the number of
    measures used by identifying only the
    most critical ones.
5   The scorecard highlights suboptimal
    tradeoffs that managers may make.


                                            27
1   Don’t assume the cause-and-effect
    linkages to be precise.
2   Don’t seek improvements across all
    measures all the time.
3   Don’t use only objective measures on the
    scorecard.




                                               28
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.




                                               29
End of BSC Presentation




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