Sample Balanced Scorecard of Food Company by njn55387

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									                            Chapter 16
               Strategic Performance Measurement

Chapter 16 addresses the following questions:

   Q1 What is strategic decision making?
   Q2 How are financial and nonfinancial measures used to evaluate organizational
   Q3 What is a balanced scorecard?
   Q4 How is a balanced scorecard implemented?
   Q5 What are the strengths and weaknesses of the balanced scorecard?
   Q6 What is the future direction of cost accounting?

These learning questions (Q1 through Q6) are cross-referenced in the textbook to individual
exercises and problems.

The textbook uses a coding system to identify the complexity of individual requirements in the
exercises and problems.

Questions Having a Single Correct Answer:
     No Symbol    This question requires students to recall or apply knowledge as shown in the
          e       This question requires students to extend knowledge beyond the applications
                  shown in the textbook.

Open-ended questions are coded according to the skills described in Steps for Better Thinking
(Exhibit 1.10):
               Step 1 skills (Identifying)
               Step 2 skills (Exploring)
               Step 3 skills (Prioritizing)
               Step 4 skills (Envisioning)
16-2 Cost Management

16.1   Financial measures provide information measured in dollars or ratios of dollars.
       Examples are ROI, operating margin, total sales, and so on. Nonfinancial measures
       provide performance information about activities that cannot be measured in dollars.
       Examples would be defect rates, market share, and employee retention rates.

16.2   Four potential perspectives for a balanced scorecard are financial, customer-related,
       learning and growth, and internal business processes. These are related because success
       in learning and growth and internal business processes should increase customer
       satisfaction and finally financial performance.

16.3   Financial perspective: Operating margin, Cost per mile per ton transported
       Customer perspective: Customer satisfaction surveys, market share, growth in return
           customers, growth in new customers
       Internal business perspective: Percent on-time deliveries, number of complaints about
           food damage from loading and unloading
       Learning and growth perspective: Driver safety records (number of tickets or accidents),
           driver training hours, number of process improvements annually.

16.4   Core competencies are the organization’s strengths relative to competitors. The vision is
       the purpose of the organization. The strengths should support the purpose and values of
       the organization.

16.5   The sales force may increase satisfaction by reducing car prices, or directing potential
       customers to another dealership with lower prices to keep satisfaction ratings high. This
       would hurt financial performance. In addition, sales representatives might not apply
       pressure to close a sale when it might be appropriate to do so, because they may worry
       about the customer satisfaction ratings.

16.6   To implement a balanced scorecard, first clarify vision, core competencies, and
       strategies. Then these strategies are translated to the four perspectives of the balanced
       scorecard: financial, customer, internal business, and learning and growth. The scorecard
       is refined as it is communicated throughout the organization to link department and
       overall organizational strategies and objectives. At the department level, performance
       targets and action plans are established. Data is collected over time and performance is
       monitored using the performance measures selected by departments. Employees are
       rewarded after results are analyzed. The scorecard is refined for the next period.

16.7   Strategic decision making relates to decisions about the types of goods and services that
       organizations produce and the long-term methods that are developed to better compete.
       Strategic decision making relies on developing strategic operating plans and budgets that
       take advantage of an organization’s core competencies. The balanced scorecard provides
       a more formal method for managers to incorporate mission, vision, and core
       competencies into their strategic decision making.
                                              Chapter 16: Strategic Performance Measurement 16-3

        Information from WENDY’S web site as of September 2004 (vision, mission, core
        values, or similar attributes):1

        Our Mission
        Our guiding mission is to deliver superior quality products and services for our customers
        and communities through leadership, innovation and partnerships.

        Our Vision
        Our vision is to be the quality leader in everything we do.

        Our Core Values
        Our organization has a strategic vision focused on these core values:
           Quality - Freshly-made products and superior service are our passion; consistent
               excellence is our goal.
           Integrity - We keep our promises. All actions are guided by absolute honesty, fairness
               and respect for every individual.
           Leadership - We lead by example and encourage leadership qualities at all levels.
               Everyone has a role to play.
           People Focus - We believe our people are key to our success. We value all members
               of our diverse family for their individual contributions and their team
           Customer Satisfaction - Satisfying internal and external customers is the focus of
               everything we do.
           Continuous Improvement - Continuous improvement is how we think; innovative
               change provides competitive opportunities.
           Community Involvement - Giving back is our heritage. We actively participate and
               invest in the communities where we do business.
           Commitment to Stakeholders - We serve all stakeholders and, through balancing our
               responsibilities to all, we maximize value to each of them.

        Wendy’s also publishes ―Standards of Business Practices,‖ a 58-page document
        describing company guidelines for ethical behavior.

 Source: The ―Standards of Business Practices‖ can be downloaded at
16-4 Cost Management

        Information from MCDONALD’S web site as of September 2004 (vision, mission,
        core values, or similar attributes):

        Our Values2

        McDonald's People Promise
        For McDonald's to achieve our goal of being the world's best quick service restaurant
        experience, we must have the best experience for all McDonald's employees. So we
        formalized our beliefs into our People Vision and our People Promise.

                McDonald's People Vision
                Our People Vision defines what we strive to be as an employer.
                Simply put, we aspire to Be the Best Employer in Each Community Around
                the World.

                McDonald's People Promise
                To the 1.5 million people who work at McDonald's in 119 countries around the
                world, and to all future employees, we want you to know that:
                We Value You, Your Growth and Your Contributions.
                This is our People Promise.

        McDonald’s Corporate Responsibility
        Corporate responsibility is an important part of McDonald’s heritage. We have a long
        track record of industry leadership in community involvement, environmental protection,
        diversity, opportunity, and work with our suppliers to help improve their practices. We
        are committed to do still more to earn the trust of our customers and everyone else
        affected by our business.

                Note: McDonald’s publishes an annual corporate responsibility report.

        McDonald's Diversity
        McDonald's is the world's community restaurant. We are proud of our long-standing
        commitment to a workforce that is diverse. We believe in developing and maintaining a
        diverse workforce that will strengthen the McDonald's system.

        McDonald's World Children's Day
        Participating McDonald’s restaurants in more than 100 countries worldwide are gearing
        up for World Children’s Day at McDonald's 2003, an annual global fundraiser benefiting
        Ronald McDonald House Charities® (RMHC®) and local children’s causes.

        McDonald’s also publishes ―Standards of Business Conduct: The Promise of the Golden
        Arches,‖ a 24-page document describing company guidelines for ethical behavior.

  Sources:,, and The corporate responsibility report can be
downloaded at The Standards of Business Conduct
can be downloaded at
                                                 Chapter 16: Strategic Performance Measurement 16-5

          Similarities between McDonald’s and Wendy’s vision, mission, and core values:
          Both companies focus heavily on people—employees, customers, and community. Both
          companies also mention diversity and leadership. In addition, both companies post
          standards for ethical conduct. Another similarity is that both companies’ statements are
          quite broad; they describe overall corporate goals and values.

          Differences between McDonald’s and Wendy’s vision, mission, and core values: A
          difference is that Wendy’s presents formal statements labeled ―mission,‖ ―vision,‖ and
          ―core competencies.‖ McDonald’s does not present any statements having these titles.
          Instead, it refers to its ―People Promise,‖ ―Corporate Responsibility,‖ and ―Diversity.‖
          Another difference is in the focus on quality. Wendy’s mission, vision, and core values
          all emphasize the company’s focus on quality. McDonald’s does not refer explicitly to
          quality. In addition, McDonald’s mentions its work to improve the practices of suppliers,
          whereas Wendy’s does not mention its suppliers.

16.9      Student answers to this question will vary depending on the companies chosen. Here is
          an example of a response for Best Buy and Circuit City. The information shown below is
          taken from each company’s 2004 annual report. This source was chosen because each
          company provided information in its annual report about the past year’s successes and
          goals for the following year. This was the only source of information found on Circuit
          City’s web site about its strategies. Best Buy provided additional information about its
          strategies under ―Frequently Asked Questions‖ (FAQs) and under ―Presentations‖ in the
          Investors Relations section of its web site. Not surprisingly, companies do not always
          provide significant information about their strategies. For example, Best Buy stated in its
          FAQs that its marketing strategy could not be publicly disclosed because it is a
          competitive secret.

          Information about major strategies from BEST BUY’S 2004 annual report:3
          Fiscal 2004 Key Wins:
             Our company capitalized on many opportunities to increase shareholder value in
             fiscal 2004. Store, field and corporate teams worked closely together to get the right
             products to the stores and to sell them successfully. As a result, we gained market
             share and increased revenue and earnings. We also returned value to our shareholders
             by instituting our first cash dividend and reactivating our share buyback program. We
             are very optimistic about the continuing opportunities we see in fiscal 2005.

              We achieved revenue growth of 17 percent, to $24.5 billion, by opening 78 new
              stores and increasing comparable store sales by 7.1 percent.

              We increased earnings from continuing operations by 29 percent through a
              combination of higher revenue and growth in the operating income rate. This
              achievement brings the 10-year compound annual growth rate in earnings from
              continuing operations to 34 percent.

    Source: Best Buy, ―Fiscal 2004 Annual Report.‖
16-6 Cost Management

            Cost savings from our efficient enterprise initiative and gross profit rate gains helped
            fund the development and testing of our innovative customer centricity strategy in 32
            lab stores.

            Our customer satisfaction rating rose and we gained overall market share, driven by
            share growth in key product areas including computers, digital televisions, digital
            imaging products and entertainment software.

            Closer teamwork among our store, field and headquarters employees and the positive
            attitude of our workforce helped drive exceptional results throughout the year.

        Goals for 2005:
           Build our revenue by 11 to 13 percent through opening approximately 70 new stores
           and garnering strong comparable store sales gains; increase diluted earnings per share
           from continuing operations by 15 to 20 percent.

            Implement customer centricity in up to 110 additional stores in order to improve our
            service to our best customers; in addition, transform our corporate and field support
            teams to enable customer centricity.

            Increase efficiency by expanding our direct sourcing capability and re-engineering
            our supply chain and customer contact centers to be much more customer-driven.

            Expand the value-added services we can offer to customers, principally through the
            roll out of Geek Squad’s® rapid-response, in-store and in-home computer support
            task force to a total of approximately 45 markets.

            Create exclusive entertainment content for our customers and offer any format they
            prefer for enjoying that content.

            Enhance our capability to let customers enjoy their favorite content throughout their
            homes, cars and offices. Upgrade and renovate existing stores in key markets to
            ensure that we remain competitive in customer experience over the next decade.

        Information about major strategies from CIRCUIT CITY’S 2004 annual report: 4
        Fiscal 2004 Accomplishments
           Superstore openings. We relocated 18 stores, bringing to 38 the number of
           relocations over the past four years. We also built eight new stores, giving us a total
           of 50 incremental stores built over the past four years. Our new stores are easier to
           shop, with powerful and informative product displays, logical product adjacencies,
           greater product availability and shopping carts on the sales floor, as well as banks of
           cash registers for fast checkout. They are in vibrant shopping areas with broad
           consumer bases and high levels of consumer electronics expenditures.

 Source: Excerpts from Management Letter, ―Building a New Circuit City,‖ Circuit City Stores, Inc. Annual
Report 2004.
                                   Chapter 16: Strategic Performance Measurement 16-7

   Sale of the finance operations. We completed the sale of our bankcard finance
   operation to FleetBoston Financial and announced the planned sale of our private-
   label finance operation to Bank One Corporation. We expect that the two sales
   together will generate net cash proceeds totaling more than $600 million, simplify the
   investment analysis for our shareholders and remove the earnings volatility of these
   operations. We expect the Bank One relationship will generate an ongoing earnings
   contribution. Under the terms of a multi-year agreement, Bank One will offer private-
   label and co-branded credit cards to both new and existing customers. In addition to
   special financing programs for qualified customers, we expect to jointly develop and
   introduce new features, products and services.

   Growth at Sales originating from grew strongly
   throughout the year. These results reflect in part the tight integration between our
   Web site and our stores. We expect to take advantage of opportunities that would
   allow us to further grow Web sales. We took a step in that direction in early fiscal
   2005 when we signed an agreement to acquire the assets of MusicNow, Inc.
   MusicNow gives us the chance to deliver exciting digital content to Web customers.

   Cost and expense reductions. We also made structural changes focused on bringing
   costs and expenses in line with our revenues. Through workload elimination,
   consolidation of activities, process improvements, purchasing enhancements,
   outsourcing and a variety of other actions, we are making fundamental changes that
   will allow us to compete profitably.

Building a New Circuit City
   Driving sales. Over the next several years, many of our resources will go towards
   building stores that can support an industry-leading shopping experience. Since the
   beginning of fiscal 2001, we have relocated, fully remodeled or newly constructed
   131 stores. We believe that approximately one-third of our remaining stores would
   produce stronger returns if moved to better locations and that we can build
   approximately 100 stores in newly developed trade areas. We are committed to
   building in prime real estate locations. With that in mind, we expect to open 60 to 70
   new or relocated Superstores during fiscal 2005.

   We also will continue to refine our merchandise assortment and displays. In fiscal
   2004, we refixtured 222 stores, adding space for new video technologies. The flexible
   fixtures in these stores will facilitate the introduction of new products, as well as
   other merchandise assortment adjustments. At the end of fiscal 2004, we began to
   introduce exclusive, private-label merchandise brands, sourced by us directly from
   the manufacturers. On March 31, 2004, we announced that we signed a definitive
   agreement to acquire InterTAN, Inc., a leading retailer of both private-label and
   internationally branded products with headquarters in Canada, in a cash tender offer
   for $14 per InterTAN common share. We believe this transaction will bring to Circuit
   City a management team with extensive sourcing experience for private-label
   merchandise and creative in-store merchandising capabilities and enable us to
   accelerate the offering of private-label merchandise to our customers. It also allows
   us to enter Canada with a company that already has a proven retail format. We also
16-8 Cost Management

         believe the combination of the two companies will create inventory purchasing
         synergies for both.

         In fiscal 2004, we continued the move in our Superstores to compensation and
         staffing models that are consistent with the shopping behavior of today’s consumer.
         Our new operating model enables consumers to browse the store and shop on their
         own or receive assistance if they want it. It also helped generate approximately $130
         million in labor savings from comparable stores, further positioning us to compete in
         today’s climate. On the other hand, it meant that our store Associates worked through
         major changes during the fiscal year. In fiscal 2005, our focus will return to execution
         and the consistent delivery of outstanding customer service.

         For many consumers, the Web is an integral part of the shopping experience. Based
         on a mix of industry research, we believe that in calendar 2003 the percentage of
         consumer electronics sold online outpaced the average percentage of all retail
         products sold online. We are redesigning in fiscal 2005, introducing
         even better navigation tools, improved merchandise presentations and more Web-
         tailored promotions.

         Circuit City is changing, and we want consumers to know. Our research shows that
         our results are hampered by consumer perception of our stores. In fiscal 2005, our
         advertising will continue to emphasize the values and solutions we offer. In-store
         signage will mirror this focus.

         Improving operating margins. Although we are focused on increasing our sales, we
         also are developing cost and expense structures that we believe will support
         reasonable profitability at current sales levels. As we grow revenues, the operating
         margin would benefit further from these reduced costs and expenses.

         We believe that efforts such as the introduction of private-label brands, including
         those available through InterTAN; increased accessory sales; purchasing via reverse
         auctions and direct imports; and a continued strong focus on the efficiency of our
         service and distribution organizations will contribute to a more stable gross profit
         margin. We believe that the structural actions I mentioned earlier can help reduce
         expenses significantly. We will relentlessly pursue these and other improvements in
         fiscal 2005.

      Similarities between Best Buy and Circuit City strategies: Both companies describe
      strategies to increase sales and decrease costs. They both plan to increase sales through
      opening new stores, offering new products/services, improving customer services, and
      increasing sales at individual stores. To reduce costs, both companies plan to increase
      their gross profit margins and shift to more direct sourcing.

      Differences between Best Buy and Circuit City strategies: Best Buy’s strategies focus
      more on incremental improvement to existing operations, while Circuit City’s strategies
      appear to represent shifts in company vision and core competencies. For example, Best
      Buy is implementing new strategies to improve its profitability from individual customers
      and to reduce costs through greater company-wide teamwork. Circuit City is focusing on
                                           Chapter 16: Strategic Performance Measurement 16-9

       moving stores to better locations, selling its finance operations, consolidating work
       activities, outsourcing, enhancing its online store, and improving the flexibility of its
       merchandise offerings.

16.10 As the business environment becomes increasingly competitive and dynamic, demand
      will increase for relevant and useful information to help organizations succeed.
      Accountants will need to conduct research using many different sources of information
      from web sites, libraries, journals, other people, and others. They will also need to
      develop new internal sources of information that managers can use for decision making.

16.11 Accounting techniques continuously evolve. Sometimes new methods are developed,
      such as the Balanced Scorecard for strategic management, and sometimes new
      accounting rules are implemented, such as those issued by the Financial Accounting
      Standards Board (FASB). Other times technological developments facilitate accounting
      practices. For example, prior to 1990 very few businesses used the reciprocal method
      (Chapter 8) to allocate support department costs because computers required a great deal
      of time and memory to perform linear programming. Several spreadsheet programs now
      offer linear programming capabilities, so now the reciprocal method is commonly used.
      It is also likely that new accounting techniques will be developed to match technological
      advances over time. Accountants need to understand their industry and new technologies
      to help their organizations choose the most efficient accounting and production methods.
16-10 Cost Management

16.12 China Express

      From the data given, the following measures could be used for the financial perspective:
             Operating margin = $522,510
             Return on investment = ($10,450,200 – $9,927,690)/$4,180,080 = 12.5%
             Residual income = $522,510 – (0.15*$4,180,080)
                = $522,510 - $627,012 = ($104,502)
             Economic value added = $391,883 – (0.12*$4,180,080) = $109,727

16.13 Financial and Nonfinancial Measures

      A.   N
      B.   N
      C.   F
      D.   F
      E.   F
      F.   N
      G.   F (Could be N if measured in units)
      H.   F
      I.   N
      J.   F

16.14 Flowing Wells High School

   A. Customer satisfaction because parents are considered the customers and school
      administrators are measuring how satisfied parents are with the high school’s

   B. This is an internal business related measure because it measures the performance of the
      high school.

   C. Customer satisfaction related because the administrators could consider future employers
      as customers. Changes in employment rate after graduation measures (with noise) the
      satisfaction of employers with Flowing Wells students. Economic conditions and other
      factors affect this rate, so it is an imperfect measure.

   D The administrators could consider employers as customers, and their satisfaction surveys
     would then reflect a potential measure of the customer perspective.

   E. This is not a customer perspective measure because it reflects many other factors in
      addition to satisfaction of employers with graduates.
                                         Chapter 16: Strategic Performance Measurement 16-11

   F. This measure reflects the performance of the high school but not the customer
      perspective, even though customers are probably interested in this rate.

   G. This measures internal performance.

   H. This measures internal performance

   I. This measures the learning and growth perspective

16.15 Markman Corporation

   A. Because so many years are spent in drug development, the results of current research,
      development, and testing will affect future financial performance, not current
      performance. If nonfinancial measures are used to reward employees, progress toward
      blockbuster drugs will be better monitored and rewarded.

   B. Following is an example of an objective. Students may have thought of others.

               Objective: To increase new drugs that have been developed, patented, tested and
               are no on the market compared to drugs in the first phase of research.

   C. Two measures are:
         The number of new drugs that are on the market divided by total number of drugs
         The trend (growth rate) in number of new drugs that are on the market.

16.16 Balanced Scorecard Measures

      A.   I
      B.   L
      C.   F
      D.   L
      E.   F
      F.   C
      G.   I
      H.   I
      I.   I
      J.   F
      K.   F
      L.   L
      M.   I
      N.   C
      O.   L
      P.   I
16-12 Cost Management

16.17 Students Care

   A. Vision is the purpose of the organization. For Students Care, the purpose is to send
      scholarship money to orphans in Africa. Core competencies are the organization’s
      strengths relative to competition. Students Care is a campus based organization run by
      students to raise funds for students. This is likely an advantage for raising funds from
      students compared to organizations managed by non-students. Strategies are the student’s
      long-term goals and include choosing an organizational structure – the number, types,
      and duties of officers – and the nature of the events that the organization will sponsor.
      Operating plans are the plans that students make for raising and disbursing funds over the
      next semester or year. These would include number and times of meetings, types of
      activities for each meeting, and fund raising events. Operating plans for this organization
      might include targets for the amount of funds the students hope to raise.

   B. Below are examples of advantages and disadvantages for each measure. Students may
      think of others.

          Tracking volunteer hours per week:
             Advantages: This measure is easy to track. If students are putting in good effort,
                 funds are likely to increase as hours increase. Volunteers have incentives to
                 put in more hours if they know that measure is being tracked.
             Disadvantages: Students could spend lots of hours raising funds, with little
                 results. They may count activities that are only peripherally connected to
                 fundraising as part of their hours spent. Does not provide incentives to
                 increase the overall amount of funds raised.

          Dollars collected per volunteer hour:
             Advantages: This measure focuses on the amount of funds raised instead of the
                 time spent in fund raising, so students have incentives to focus on projects that
                 result in more funds being raised. Students would be less likely to count
                 peripheral hours as time spent on fund-raising activities, so the measure might
                 be more accurate.
             Disadvantages: This measure does not track the amount of time students spend in
                 fund raising activities, and so they may minimize time spent, but maximize
                 dollars per hour, but spend very few hours fund raising. It does not provide
                 incentives to increase the overall amount of funds raised.

   C. Learning and growth measures should reflect both organizational and employee efforts to
      increase knowledge and develop skills. It is likely to be more difficult to find activities
      that might increase these within volunteer organizations because student time is limited
      and measuring changes in knowledge and skills are also difficult. Tracking hours
      students spend at workshops would be easy to measure and monitor and would not
      involve the organization’s time to set up. A disadvantage is that the quality of the
      workshops and the effort of students attending the workshop affect the benefits that the
      organization receives. It could be possible that some of the workshops address issues that
      are not relevant to Students Care.
                                          Chapter 16: Strategic Performance Measurement 16-13

16.18 University of California, Berkeley, Cashier’s Office

   A and B. Below are possible answers to these questions; students may think of others.

       1. Injury/illness rate:
              Calculation: The injury/illness rate may refer to the absolute number of injuries
                  or illnesses or to the number of injuries or illnesses as a percent of employees,
                  employee-days, or hours worked. Data for this measure might be available
                  from payroll records, which would indicate the number of employees, hours
                  worked, and days taken off for injury or illness. Alternatively, it could be
                  measured as the percentage of time lost because people are away from work
                  due to illness or injury.
              Advantage: An advantage of tracking this rate is that patterns may be discovered
                  over time and actions might be taken to reduce the number of incidents,
                  especially for injuries. For example, there may be more injuries when
                  students first return to school because the department is much busier.
              Disadvantage: A disadvantage is that injuries and illnesses are different, and if
                  the measure tracks both at once, managers may not understand the relationship
                  between injuries and congested work conditions, or some other cause of

       2. Expenditures as a percent of budget:
             Calculation: Expenditures as a percent of budget would be the cashier
                department’s actual costs divided by budgeted costs. This information should
                be readily available in the University’s financial accounting system. If this
                ratio = 100%, the department’s costs exactly equaled its budget.
             Advantage: An advantage of this measure is that managers will know at the end
                of the period whether costs are in control relative to the budget.
             Disadvantage: A disadvantage is the lack of incentive to come in under budget by
                improving processes.

       3. Percent of days that the office balanced within $1:
             Calculation: This measure assumes that a daily cash reconciliation is prepared,
                 which includes a comparison of calculated cash on hand with actual cash on
                 hand. If this reconciliation is prepared every work day, then the balanced
                 scorecard measure is simply the percent of days in which the difference
                 between actual and expected cash on hand is less than or equal to $1. This
                 measures the accuracy of cash handling and cash recordkeeping. If cashiers
                 are receiving and giving out correct amounts and are recording transactions
                 accurately, their tills will always balance.
             Advantage: This measure is important from a control standpoint, as well as from
                 a customer satisfaction standpoint. For control, it would be more difficult for
                 cashiers to steal small amounts of cash when this measure is monitored. For
                 customers, receiving the correct change is an important part of being satisfied
                 with cashier services.
             Disadvantage: A disadvantage is that two tills could be off by similar but
                 opposite amounts, and it would appear that no problem had occurred.
16-14 Cost Management

       4. Customer satisfaction survey:
             Calculation: This measure assumes that a survey had been designed and that
                customer responses have been obtained. If the survey includes numerical
                ratings of customer satisfaction, then the measure could be a simple average
                of the customer responses. The ratings could also be broken down by
                individual survey question.
             Advantage: An advantage is that managers can learn quickly whether a customer
                satisfaction problem exists. Also, this is a direct measure of customer
                satisfaction—customers are asked about their experiences with the cashier’s
             Disadvantage: A disadvantage is that the sample of customers who complete the
                survey might not be representative of the average customer. Also, the survey
                might not be designed to elicit the best information.

16.19 University of California, Berkeley, Physical Plant Director’s Office

   A and B. Below are possible answers to these questions; students may think of others.

       1. Injury/illness rate:
              Calculation: The injury/illness rate may refer to the absolute number of injuries
                  or illnesses or to the number of injuries or illnesses as a percent of employees,
                  employee-days, or hours worked. Data for this measure might be available
                  from payroll records, which would indicate the number of employees, hours
                  worked, and days taken off for injury or illness. Alternatively, it could be
                  measured as the percentage of time lost because people are away from work
                  due to illness or injury.
              Objective: Improve employee health and safety
                  The illness and injury rate would directly relate to employee health and safety.
                  If the director wants to improve health and safety, the performance target can
                  be a lower injury/illness rate than the current rate. However, injuries and
                  illnesses are different, and if the measure tracks both at once, managers may
                  not understand the relationship between injuries and congested work
                  conditions, or some other cause of injuries, and not be able to improve

       2. Turnover rate:
             Calculation: Turnover rate could be measured from departmental payroll records
                as the percent of employees who leave the department compared to the total
                number of employees at the beginning or end of the year.
             Objective: Meet and maintain staffing needs
                If the staff is satisfied with the working environment and the appropriate
                employees are employed each position, turnover rates should be low and the
                organization should be able to meet and maintain its staffing needs. The
                proportion of employees who leave may provide information about the quality
                of the work environment, the competitiveness of pay rates, and the
                opportunities for individual growth and advancement. Monitoring this
                                             Chapter 16: Strategic Performance Measurement 16-15

                      measure can improve these factors, which in turn can improve employee
                      satisfaction and performance, and also reduce turnover. In addition,
                      monitoring this measure could encourage human resources recruiters to hire
                      the person who best fits each position so that the probability of employee
                      retention and the quality of work are higher. However, this measure does not
                      provide information about the reasons why employees leave, which weakens
                      its value as a performance measure. The requirements for some positions
                      could change so that the fit between the employee and position is no longer

        3. Evaluation of training sessions:
              Calculation: This measure assumes that some type of survey or other
                  questionnaire is used to collect evaluations of training sessions, most likely
                  from students who attend training sessions. However, evaluations could also
                  be collected from instructors and from employee supervisors. If the survey
                  includes numerical ratings, then the measure could be a simple average of the
                  responses. The ratings could also be broken down by individual
                  survey/questionnaire question.
              Objective: Effective training programs
                  This measure would capture information about the perceived benefit from
                  training, which could help the organization evaluate the effectiveness of its
                  training programs. However, respondent perceptions about the effectiveness
                  of training could be biased measures of the training effectiveness. For
                  example, highly entertaining sessions might receive higher ratings, but do not
                  necessarily provide better training. In addition, the sample of respondents
                  who complete the survey might not be representative.

16.20 Holiday Resorts

        I.     a, e,
        II.    c, d, h, i, k
        III.   b, f, i
        IV.    g, j

        a.     4
        b.     3, 14
        c.     13
        d.     11
        e.     1
        f.     7
        g.     9
        h.     10
        i.     2, 8, 14, 15
        j.     12, 5
        k.     6
16-16 Cost Management

16.21 Future Career

   A. The answer to this exercise will depend on the student’s planned career path. The
      purpose is to encourage students to tie the concepts of financial and nonfinancial
      measures to their future careers. They should be able to list several financial and
      nonfinancial measures for any type of work.

   B. Again, the answer will depend on students’ planned career paths. Students should be able
      to list methods, such as flexible budgets and benchmark targets, which would be relevant
      for predicting future operations for their employer or clients.

   C. All students should list continuing professional education such as increasing the technical
      knowledge and ability to manipulate data using data bases and spreadsheets. Some
      students will consider annual education needs for FASB and tax updates. Others might
      identify learning related to skills that will become more important after the entry level,
      such as people management.

   D. As technology enables organizations to quickly manipulate data, the need for innovative
      data collection and analysis becomes a more central part of work. Bookkeeping
      responsibilities are now maintained by information systems, but the integrity of the
      systems needs to be continually monitored and improvements continuously made.
                                         Chapter 16: Strategic Performance Measurement 16-17

16.22 Mark Moreland

  A. The financial perspective is similar across organizations. Because this is a service
     industry, any financial measures relating to cost will likely measure the cost of clinical
     staff members.

     The customer perspective will relate to the dental patients and possibly also to insurance
     companies, who pay for dental services. The customer perspective is important to
     dentists because return business is probably most of their business.

     Internal business processes would include the ease with which patient appointments are
     booked, effective scheduling of staff, and effecting accounting practices, especially for
     billing and managing accounts receivables.

     Learning and growth would pertain to the dentists, who need to participate in continuing
     professional education to keep their licenses and dental procedures current, and staff
     members such as hygienists who are an important part of the patient care team.

  B. Patients could be surveyed either before they leave the office or by mail after the
     appointment date. The performance measure could be average patient satisfaction. In
     addition, the clinic may want to use waiting time as an important measure of customer
     satisfaction. If patients have to wait extended amounts of time, they will feel frustrated
     and may find a new clinic. Other measures could include tracking the proportion of
     patients who return for additional services, the number of patient complaints, and the
     number of return visits for problems with the original work.

  C. Financial perspective:
         Operating margin reflects the overall profitability of the dental clinic and reflects
            changes in both revenues and costs. Tracking operating margin will alert the
            dentists to potential problems with revenues or costs before the problems become
            too large.
         Bad debts or insurance adjustments. Some patients may not have the ability to
            pay and if the percentage of patients with these types of problems increases,
            operating margin will fall. Bad debts and insurance adjustments can also indicate
            problems with services or with billing processes.

     Customer perspective is addressed in Part B.

     Internal business processes:
          Days in accounts receivable. This measure is important because some customers
             may be very slow to pay, or unable to pay. The clinic needs to know immediately
             if there is a problem with receivables because it affects cash flows.
          Patient throughput, that is, the rate at which patients are treated. Throughput
             could be measured as an average number of patients treated per day, per week, or
             other time period. This measure reflects the use of fixed assets, such as the dental
16-18 Cost Management

               chairs and equipment. Also, staff members are likely paid by salary, so the more
               patients the dentist can see, the more profits the clinic receives.

        Learning and growth
            Number of continuing professional education hours would be a good measure for
               the dentists, so that they can be reminded to increase hours if they fall behind.
               Retaining licensure in this industry is extremely important.
            Training hours for staff members could be measured to keep staff up to date with
               the latest technology for this field.

16.23 Dyggur Equipment

   A.   I
   B.   C
   C.   C
   D.   F and I
   E.   F
   F.   F and I
   G.   F and C
   H.   C and I
   I.   C and I
   J.   L
   K.   L
   L.   L
   M.   L
   N.   I
   O.   F
   P.   L
   Q.   L
   R.   C
   S.   C
   T.   L and I
   U.   I and C
        1. I
        2. I and C
        3. I and C

16.24 Dyggur Equipment (continued)

   A. Advantages of weekend service: Because heavy equipment is expensive to purchase,
         contractors probably prefer to use it as often as possible during the week. Therefore,
         having weekend service would be an attractive alternative for them. It is possible that
         Dyggur will attract new customers with this strategy.
                                          Chapter 16: Strategic Performance Measurement 16-19

      Disadvantages: If Dyggur currently operates services during the week, customers may
         have all of their repairs and maintenance done on the weekend instead of during the
         week so that there will be excess capacity during the week, and service employees
         may need extra compensation to work weekends.

   B. Contribution margin per day might be a good financial performance measure because it
      takes into consideration both sales and variable costs.

      Nonfinancial measures could include average service time per vehicle, or a measure of
      labor time used that should encourage speedy service. In addition, a measure that tracks
      the number of customers with problems or complaints related to service should provide
      incentive for employees to spend enough time on each vehicle to prevent problems.

   C. After a year’s worth of data has been collected, operations can be analyzed and
      correlations developed to determine an optimal average service time per vehicle, or
      operating practices that help insure high quality service. For example, if quality
      problems are higher than preferred, a service inspector could be hired that would review
      all of the procedures used to service the vehicle with the service employee before the
      vehicle is returned to the owner. Problems that are uncovered during the review could be
      remedied if the balanced scorecard measures provide enough appropriate information
      about operations.

16.25 Squeezers Juice and Tea Company

   A. Here is a possible mission statement: Squeezers Juice and Tea Company produces the
      highest quality organic juices. We strive to satisfy customers who want organic juices
      and teas with outstanding taste.

      The preceding statement attempts to capture the essence of the company in as few words
      as possible. It used information in the problem to determine the company’s core values.

   B. The business’ strategies are to be the high quality, high priced juice and tea seller. The
      core competencies include knowledge of the specific exotic juice and tea drinks that sell
      well and knowledge of suppliers of unusual gourmet organic ingredients.

   C. There are many possible performance objectives for each of the four balanced scorecard
      perspectives. Below are examples.

          Maintain and improve operating margins.
          Increase revenues.

      Customer perspective:
          Increase market share.
          Decrease product returns and complaints.
          Increase customer satisfaction.
16-20 Cost Management

      Internal business processes
           Maintain high standards of cleanliness and quality.
           Monitor and increase throughput of product while maintaining quality.
           Continue to appeal to celebrities (could be considered internal business processes
              – advertising, or customer perspective)

      Learning and growth:
          Locate new suppliers continually.
          Reduce employee turnover to decrease threat of competitors getting information
             about the beverage recipes.

   D. There are many possible answers to this question. Below are examples.

      Financial perspective objective measures: To measure improvements in operating
         margin, operating margin is monitored. To measure increase in revenues, changes in
         revenues are reported.

      Customer perspective objective measures: To measure increases in market share, market
         share is monitored and reported. To measure decreases in product returns and
         complaints, number of product returned and number of complaints are tracked and

      Internal business perspective objective measures: To monitor cleanliness and quality,
          indices would need to be developed. To measure changes in throughput, the
          throughput rate would need to be monitored.

      Learning and growth perspective objective measures: To measure efforts in adding
         suppliers, the number of suppliers or number of new suppliers should be tracked and
         monitored. To measure efforts at reducing employee turnover, the turnover rate can
         be tracked and monitored.

   E. Operating margins and revenues are usually tracked by the accounting system, but
      change in revenue may need to be calculated. Market share may not be tracked.
      Squeezers may need to begin collecting such data by gathering information from industry
      publications or by hiring a consulting company to conduct surveys. Product returns and
      customer complaints are probably not tracked, so a new system will need to be put into
      place to measure this. Managers may need to explore different types of indices for
      cleanliness and quality, although the health department probably inspects on a regular
      basis. However, health department standards may be too low for Squeezers. There is
      probably no way to measure the number of celebrities using Squeezer products.
      However, the company could keep track of the number of times that Squeezer products
      appear in TV programs or movies. Employees may need to report such information so
      that it can be tracked. It is likely that some instances will be missed, so this measure may
      include considerable measurement error. Purchasing probably has information about
      suppliers and can track these numbers. Human resources can begin to track turnover
      rates if they do not already do so.
                                         Chapter 16: Strategic Performance Measurement 16-21

16.26 China Express

   A. The advantages of using a combination of measures for the finance and customer
      perspectives is that no one measure is likely to capture all important aspects of these
      perspectives. A combination of measures allows managers to track multiple attributes,
      which might also be associated with specific strategies or performance objectives for

      Disadvantages are that more measures need to be tracked, and employees could feel
      confused about the specific measures to which they should pay most attention.

   B. There are many possible answers to this question; here is an example. Because the health
      department ratings affect customer perceptions and volumes so strongly, some measure
      of cleanliness might influence customer satisfaction. For example, a manager might
      make a spot inspection daily, or weekly using standards similar to the health
      department’s, and give each outlet a rating. An advantage of this measure is that outlets
      will maintain a high degree of cleanliness and the health department should always find
      that the outlets meet its standards. A disadvantage is that employees may spend too much
      time cleaning when they could be doing other activities that affect customer satisfaction,
      such as filling salt and pepper shakers or giving customers more attention.

   C. There are many possible answers to this question; here are two examples. Another
      performance measure could be the number of return customers. Fast food businesses rely
      heavily on repeat customers and increasing the number of returning customers is likely to
      increase revenues and profitability. This measure may be difficult to track, though;
      cashiers might ask each customer if they had eaten at a China Express outlet before, but
      customers might not respond honestly. Another performance measure might be the
      percent change in sales at the store where the employee works. This data is already
      tracked, and it would encourage employees to focus their efforts on encouraging
      customers to spend more money.

16.27 Quantum Computers

   A. Several different functional areas should be discussed during the strategic planning
      process. This would include product research and development, production, marketing,
      and administrative support areas.

   B. Below are six factors that should be considered in a thorough strategic planning process
      to move a company such as Quantum Computers to another level of product
      development. Students may think of others.

             Define the mission of the organization. State the fundamental, unique purpose
              that sets the company apart from other firms of its type and identify the scope of
              its operation in product and market terms.
16-22 Cost Management

             Develop organizational objectives. State the specific aims that management seeks
              to achieve for the organization within a stated period of time. Objectives improve
              the effectiveness of the organization by providing direction, serving as standards
              for evaluating performance, and motivating members of the organization.
              Objectives can be short and long range, and internal and external.
             Evaluate current and projected risks and opportunities in the firm’s environment
              and business culture, including trends in the competitive, economic, demographic,
              social, technological, and regulatory areas.
             Assess the organizations’ strengths and weaknesses compared to those of other
              organizations. Identify the firm’s core competencies. Strengths, weaknesses,
              opportunities, threats (SWOT) analysis is a strategic planning tool that forces
              managers to identify internal strengths and weaknesses and assess them in relation
              to external opportunities and threats.
             Determine the total company resource constraints, including human, physical, and
             Formulate strategy. Select an appropriate strategy to take advantage of existing
              and expected external environmental conditions and the firm’s internal strengths
              and weaknesses.

   C. Quantum Computers can derive the following benefits from a participatory strategic
      planning process. Students may think of others.

             Exchange of ideas between participating managers leads to greater creativity,
              resulting in a better plan.
             Participation fosters increased teamwork, cohesiveness, communication, and
              cooperation among departments and managers.
             Communication will be improved, leading to better understanding of the overall
              mission and strategy and the potential contributions of each area to the
              organizational mission. This should contribute to improved goal congruence
              between operating areas and the overall goals of the firm.

   D. The managers who participate in the three-day offsite strategic planning meeting are
      more likely to do/feel the following. Students may think of others.

             Feel that they have been part of the process and be positive about the plan
             Be more motivated and committed to making the plan succeed because they had
              the opportunity to express their opinions and insights.
             Be more enthusiastic in communicating the plan to their subordinates.

16.28 Brewster House

   A. The following are potential benefits and costs of the balanced scorecard for Brewster
      House. Students may think of others.

      Benefits: Balanced scorecard performance measures could help Brewster House improve
         the quality and efficiency of its operations, by helping managers, employees, and
                                      Chapter 16: Strategic Performance Measurement 16-23

       volunteers focus on key indicators. If the organization operates more efficiently,
       donors are more confident that their donations are effective. In addition, a balanced
       scorecard could be used to help communicate the objectives and expectations of the
       organization to volunteers and donors.

   Costs: Setting up a balanced scorecard could require the organization to establish new
      records, which could take time away from the organization’s primary activities. In
      addition, the measures chosen by the accounting students may not be the best set of
      measures. Some of them might result in unintended consequences, for example the
      shelter may lose some of its volunteers if they believe that they cannot meet the
      organizations’ performance measure targets, or if they do not agree with those
      objectives and targets. Volunteers may also object to having their performance

B. There are many potential answers to this question. Below are examples.

   Financial perspective: Total amount of cash available (government and private grants
      and subsidies, and donations) per month compared to cash costs per month. If the
      shelter is using a checkbook approach to financial operations, a spreadsheet or
      bookkeeping software could be set up to track this information. It is highly likely that
      it is already being tracked, though.

   Customer perspective: Several choices can be considered for this perspective. If the
      Brewster House director views homeless people as customers, she may want to ask a
      random sample of the people staying overnight to complete a survey or answer some
      simple interview questions. If she views donors as customers because Brewster
      House helps them provide a social good for the community, then the director might
      want to survey donors about their satisfaction with services. These surveys would
      require the director to write the survey instrument, run a pilot study to determine
      whether the instrument gathered all of the necessary information for evaluation, and
      then develop the final instrument, use it, and evaluate the results.

   Internal business perspective: The director may want to monitor the percentage of funds
       used for administration compared to the percentage of funds used for providing
       shelter. This ratio is monitored by external agencies, such as the Better Business
       Bureau, and donors pay attention to these types of ratios when making decisions
       about their donations.

   Learning and growth perspective: The director and the volunteer staff would probably
      all benefit from further training. The director may want to learn more about fund
      raising or the business of running an organization. The volunteers may want to learn
      more about dealing with homeless people who are also mentally ill. Separate
      measures of training hours per employee/volunteer could be tracked.

C. Student answers will vary. The memo should be written in language that would be easily
   understood by a non-accountant manager, and it should include:

          Overview of major issues and recommendation
16-24 Cost Management

             Explanation of the purpose and use of a balanced scorecard
             Examples of a few key measures that might be used by Brewster House and how
              those measures might help the organization meet its objectives
             Description of the costs and benefits of a balanced scorecard for Brewster House
             Explanation of how factors were weighed in reaching a recommendation
             Major limitations or risks of the recommendation
             Identification of next steps

16.29 New Zealand

   A. There are many possible answers to this question. Here are several ideas for increasing
      the number of college graduates:
           The government could offer scholarships to students who might not attend college
             because of financial need.
           The government could pressure colleges to reduce their admissions standards so
             that more students were accepted to their programs.
           The government could launch an advertising campaign aimed at promoting
             college education.
           The government could provide special income tax incentives to individuals and
             businesses that incur college education costs.

   B. The answer to this part will depend on the idea chosen. Here is a possible answer for one
      of the ideas presented in Part A.

      Action plan: Increase scholarships to financially needy students.

      Pros: Scholarship money will mean that many needy students who are quite capable will
         be able to complete their education. This should increase the number of students
         getting college degrees.

      Cons: Scholarship money that is provided only to the neediest students might mean that
         some capable students who do not qualify for scholarships based on need are unhappy
         with the system and do not apply for admission. This proposal also costs the
         government the amount of money granted in scholarships, plus the cost of processing

   C. There are many possible answers to this question. Here are several ideas for increasing
      the number of high school graduates:

             High school students may need incentives to stay in school. A program that
              combines educational information about the benefits of a college education and
              the offer of college scholarships to students who graduate from high school might
              increase the graduation rate.
             Standards could be lowered so that students would stay in school and graduate.
             Alternative schools could be organized to help students at risk succeed.
                                                 Chapter 16: Strategic Performance Measurement 16-25

      D. The answer to this part will depend on the idea chosen. Here is a possible answer for one
         of the ideas presented in Part C.

          Action plan: Provide information about the benefits of college and college scholarships
          to all students who graduate from high school

          Pros: Direct financial incentives might be successful in encouraging high school students
             to graduate, and the educational information might help high school students
             understand why more education is desirable.

          Cons: This program could be very expensive to the government, and it might not have a
             large effect on high school graduation rates.

      E. The purpose of this question is to provide students with an opportunity to explore two
         major aspects of performance measurement in a real-world setting: (1) uncertainties and
         issues in setting goals, and (2) difficulties in measuring performance. The setting—
         establishment of target graduation rates—is familiar to students. This familiarity should
         improve their ability to identify and discuss issues. However, U.S. students will learn
         that the school system and terminology in New Zealand are slightly different than in the

          College education in New Zealand is often referred to as tertiary education. School in
          New Zealand is required only for students aged 6 to 16, but most students begin at age 5.
          Thus, the last required year of schooling is referred to as secondary school Year 11. Year
          13 corresponds in student age with the U.S. senior year in high school. During 2002,
          New Zealand adopted a qualification system called the National Certificate of Education
          Achievement (NCEA). The country previously used a system in which educational
          progress during secondary school was identified by ―Forms‖; this terminology is still
          found in some education reports. Here is a brief summary of secondary school levels for
          New Zealand.5

                      Year 9 (Form 3)
                      Year 10 (Form 4)
                      Year 11 (Form 5)              Most students sit for NCEA Level 1
                      Year 12 (Form 6)              Most students sit for NCEA Level 2
                      Year 13 (Form 7)              Most students sit for NCEA Level 3

          The following publications provide statistics about New Zealand graduation rates in
          recent years. Students may wish to use these data to help them identify appropriate
          graduation rates.

                 Statistics New Zealand, ―Learning,‖ available at
                 Ministry of Education, ―School Leavers (2003),‖ updated August 17, 2004,
                  available at

    ―Definition of Education in New Zealand,‖ available at
16-26 Cost Management

             Ministry of Education, ―Pathways in Tertiary Education 1998-2002, updated July
              30, 2004, available at

      Here are some of the issues and information that students should consider before they
      attempt to draw conclusions about graduation rates.

              Uncertainties and issues in setting goals: Before students consider identifying
              specific graduation rate goals, they need to decide how they would like to define
              graduation rates. A quick review of the three publications listed above would
              make it clear that there are at least two major issues to consider in defining the
              graduation rate goals. First, should the goals be set in terms of full completion, or
              should different goals be set for different levels of completion? For example, the
              country could establish one overall goal for completion of Year 13 and the NCEA
              Level 3 exam, plus one overall goal for completion of an undergraduate tertiary
              degree program. Alternatively, the country could establish goals for different
              levels of secondary and tertiary education. Second, should a single goal be
              established for the country as a whole, or should different goals be established for
              different subpopulations, such as Maori and Pasifika students or non-traditional-
              age students?

              Difficulties in measuring performance: When evaluating educational progress, it
              is always difficult to define how progress should be measured. For example, in
              tertiary education a decision must also be made about the timeframe for
              measuring completion. Some students attend college only part-time; should
              graduation be defined in terms of number of years of education, number of
              courses, or some other attribute? Is performance necessarily poor if some
              students take longer than others to complete a degree? In addition, a typical
              assumption is that completion of a certain year in school, level exam, or degree is
              an appropriate measure of educational achievement. However, questions always
              arise about the appropriateness of any particular exam or program design. Which
              measures would be most consistent with the country’s overall goals?

      Once students have clarified desirable types of graduation rates, they need to consider
      how to set targets. This is the same problem a company faces when establishing targets
      for performance in a balanced scorecard. One way is to set targets based on some
      absolute goal. Another way is to seek continuous improvement by beginning with
      current rates and targeting percentage increases. Still another method is to seek
      improvement compared to other countries. Students should explain the method they used
      and link their recommendations to New Zealand’s goals.

16.30 Dane Champions

   A. Dane Champions’ strategy is product differentiation. The company wants to be known
      for dogs with outstanding lineage from both health and temperament perspectives.
                                     Chapter 16: Strategic Performance Measurement 16-27

B. There are multiple answers to this question. Below are examples of answers that take
   advantage of the data given in the problem.

   Financial perspective: The operating margin could be used to reflect Champions’
      abilities to show and sell dogs so that revenues are maximized while costs are
      controlled. The current operating margin is:

              Revenues ($24,000 + $110,000)                 $134,000
              Expenses ($35,000 + $55,000)                    90,000
                 Operating margin                           $ 44,000

       Mark could also track the cost per dog for kenneling or cost per show when he is on
       the road. In addition, revenues could be tracked separately and monitored for growth.

   Customer perspective: Puppy owners’ average satisfaction indicates the level of
      satisfaction for current puppy owners. Satisfied owners will be repeat customers and
      may tell their friends about the kennels, so sales will likely increase. Number of
      puppies returned also gives an indication of customer satisfaction. Puppies are only
      returned when owners are not satisfied.

   Internal processes: Training time spent to prepare dogs for both homes and shows is a
       measure of internal processes. For this measure, likely an optimal range exists,
       whereby puppies are trained well enough to succeed at home and in shows, but
       excessive training has not been done. Mark may want to analyze correlation statistics
       for changes in training hours and show results or number of puppies returned to
       identify the optimal range for training time.

   Learning and growth perspective: Number of champions compared to number of dogs
      shown would provide information about the company’s ability to identify and train
      dogs that will succeed in the show ring. Trips to dog shows may need to be added to
      this group of measures and number of wins per trip could be monitored to insure that
      an adequate number of trips are being taken, but that most trips result in wins.

C. There are many possible answers to this question; here are examples.

   Arguments for: The student may respond favorably to a balanced scorecard because it
      focuses attention on his or her work, and Mark may give praise or a bonus when
      scorecard results are positive. If Mark is concerned about the number of hours spent
      in cleaning, he could develop a bonus measure that would encourage quick clean-up
      while retaining the current level of cleanliness. This may mean that he has to pay a
      little bit more, so the decision depends on whether the benefits from faster cleanup
      outweigh the costs.

   Arguments against: The student could feel that Mark is unfairly monitoring his or her
      work and either quit or slow down.
16-28 Cost Management

16.31 Hardware Store

        Average sale ...............................................................Financial
        Average variable cost per sale ...................................Financial
        Average customer wait time at register .....................Customer
        Average customer wait time on the floor ...................Customer
        Shipping cost per order ..............................................Financial or internal
        Total returns ...............................................................Customer or financial
        Total revenue .............................................................Financial
        Total labor cost ..........................................................Financial or internal
        Utilities cost ...............................................................Financial or internal
        Number of out-of-stock items ....................................Customer
        Employee turnover .....................................................Learning and growth

   B. There are many possible reasons for the changes in performance. Below are examples of
      reasons; students may think of others.

        Average sale decreased. This could occur due to a general decline in the economy. It
           could also occur if sales at the store emphasized low-priced items.

        Average variable cost per sale remained the same.

        Average customer wait time at the counter remained the same.

        Average wait time for help on the floor decreased. This could have occurred because
           more employees were hired to work the floor, or because of a decline in the number
           of customers.

        Shipping cost per order declined. This could occur if fewer items or less heavy items
           were shipped. Or, the store might have found a shipping company that charged lower

        Total returns increased. This might not be significant if total sales had also increased, but
           sales decreased. The increase in returns could have occurred if floor employees were
           giving poor product advice. It could also occur if the store received an unusual
           amount of defective products from a particular supplier.

        Total revenue decreased. This could occur because of a bad economy, increased
           competition, or a change in consumer preferences.

        Total labor costs increased. The company hired more workers, increased its pay rates, or
           incurred more overtime cost.

        Utilities costs increased. This could be due to higher rates or to relatively more inclement
            weather that required more heating or cooling.
                                          Chapter 16: Strategic Performance Measurement 16-29

      Items out of stock increased. This could occur because the stores do not carefully track
          inventory or have optical character readers that track inventories. Alternatively,
          maybe the store does have such capabilities but no one has time or takes
          responsibility for the task of keeping stock up to date and on the shelves. They might
          also have launched a plan to reduce total inventory levels, increasing the out-of-stock

      Employee turnover increased. This could occur if the company had a number of
        employees close to retirement age or waiting to go to college. Turnover could also
        increase if the company fails to pay competitive rates or if employees are not properly
        screened prior to hiring.

   C. There is no single answer to this question; here is an example of an appropriate answer.
      Because operating margins depend on revenues, managers may want to investigate the
      decline in average sale. They may want to know if advertising campaigns were related to
      this problem or if it was driven by factors external to the firm, such as a bad economy. If
      there have been changes in advertising, managers will want to determine how best to
      advertise. If the changes are economy related, there may be little that managers can do.
      Because the company has been focusing on reducing wait time, manager likely want to
      examine wait time on the floor to see if changes in wait time affect changes in
      profitability. Managers may want to investigate the reduction in shipping costs to reward
      responsible employees and also to check that quality of service has not deteriorated in
      any way. Managers may want to investigate the increase in labor cost. A labor rate
      change could explain the variance, and then no further action would be needed.
      However, it is possible that employees have been overscheduled to reduce waiting time.
      The turnover rate increase may or may not be important to investigate. If employees are
      retiring, no problems exist. However, if effective clerks are leaving for better
      opportunities, future sales could be affected.

   D. The results suggest that the company has been successful in reducing its wait time.
      However, these results do not support a belief that decreasing wait time should increase
      sales. In addition, the managers cannot know for sure the cause of the downturn in
      revenues. It is possible that revenues would have decreased even more if the average
      wait had remained at 3 minutes.

   E. It appears that the hardware store emphasized the strategy of reducing customer wait
      times. However, labor costs and total returns are higher than last year. It is possible that
      these are related to increasing the number of employees on the floor to reduce wait time.
      Perhaps the floor people are not well trained and give poor advice when customers buy
      products. Or, the floor employees convince customers to buy products that they do not
      need and later return. By tracking the reasons for returns, these problems can be
      analyzed and corrected.

16.32 Frieda’s Fizz

   A. Frieda’s Fizz managers cannot be certain that the set of measures they have chosen is the
      best set because they cannot know for certain whether the measures accurately reflect the
16-30 Cost Management

      objectives that were developed. The managers do not know whether their ability to track
      performance measures leads to accurate measurement, and they do not know whether
      there would be a better performance measure that has not been considered. In addition,
      there may be measures that were considered that would be better but are expensive to
      track. Managers may not have chosen the best measures, but the most convenient
      measures, or biased measures that demonstrate their strengths rather than weaknesses.
      Students may have thought of other uncertainties that affect an organization’s ability to
      select appropriate measures.

   B.1 and B.2.
      Financial perspective:
          Strengths: All three measures reflect some aspect of financial performance. In
              addition, the level of monitoring goes from more micro (direct and overhead costs
              per case) to the more macro (return on investment).
          Weaknesses: The cost measures may be inaccurate if the company’s accounting
              system fails to accurately assign costs to products. In addition, ROI can be
              manipulated and includes incentives that may not be good for the long-term
              prospects of the organization.
          Conclusion: The set of financial performance measures appears to be reasonable if
              the managers wish to focus primarily on cost control and are not concerned about
              possible suboptimal decisions or manipulations from use of ROI. However,
              economic value added (EVA, see Chapter 15) may be a better measure than ROI
              because it can be adjusted to minimize incentives that promote suboptimal
              behavior. In addition, none of these measures analyze sales (except indirectly
              through operating income), which are also an important part of profitability. The
              managers might also considering adding a measure for some aspect of sales;
              however, this might not be needed because a sales growth measure is included in
              the customer perspective.

      Customer perspective:
         Strengths: These measures reflect several aspects relating to customer satisfaction, an
             important perspective for this organization. These measures also move from
             micro (customer complaints and a product quality index) to macro (percentage
             sales growth). As customer complaints fall, sales should increase, increasing
             profitability. Similarly as the quality index increases, customer complaints should
             be reduced, although only the complaints regarding freshness and possibly taste.
             Percentage sales growth should increase profitability and provide evidence that
             the company is producing a high quality product that meets consumer demands.
         Weaknesses: Some customers complain in hopes of receiving free products. Some
             customers do not complain when a problem arises; they just stop buying the
             product. The quality index may not reflect the taste of the beverage or whether
             there are foreign objects in the products, both of which greatly affect customer
             satisfaction translating to sales volumes. Percentage sales growth may not
             increase profitability if product contribution margins are low.
         Conclusion: This set of measures is reasonable if the managers wish to focus
             primarily on product quality and sales growth. However, the managers may wish
             to focus on additional aspects of the customer perspective, particularly as the
                                      Chapter 16: Strategic Performance Measurement 16-31

           company begins to expand. For example, the managers may wish to monitor
           customer satisfaction with the ordering system, delivery, or customer service.

   Internal business process perspective:
       Strengths: These measures would be important in cost-efficient production, and also
           provide an indication of how effectively capacity is being utilized.
       Weaknesses: The ratio of plant production hours to total available time is designed to
           measure the extent to which the plant is productive versus idle. However, this
           measure might encourage inefficient use of productive capacity (although this
           concern is at least partially offset by the second measure, which addresses volume
           of output). The throughput measure could encourage overproduction or lower-
           quality production. A focus on waste and scrap might draw manager and
           employee attention away from costs that are more significant, such as raw
           materials and direct labor.
       Conclusion: This set of measures is reasonable if the managers wish to focus
           primarily on plant utilization and control of waste and scrap costs. However,
           other internal process measures may be more important, such as the number of
           times beverages are back-ordered. In addition, some measures might relate to
           quality, such as the length of time beverage waits to be shipped or the amount of
           time spent in shipping.

   Learning and growth perspective:
      Strengths: Monitoring injuries would encourage managers and employees to improve
          workplace safety, which would improve employee well-being as well as reduce
          costs from health care and lost work time. Monitoring training hours would
          improve employee abilities to perform their jobs and provide greater opportunities
          for individual advancement. Monitoring community volunteer hours would
          encourage employees to participate more actively in projects that benefit the
          community, enhancing the quality of the community as well as the company’s
      Weaknesses: Training hours does not measure the quality or training or results from
          increased training. Number of community volunteer hours really does not relate
          to the organization’s vision. Either the vision or the measure needs to be changed.
      Conclusion: This set of measures is reasonable assuming that the managers do not
          wish to develop new products or encourage other innovations.

C. Pros:
       By definition, a balanced scorecard is a set of financial and nonfinancial measures
         relating to the company’s mission, strategies, and critical success factors. When
         the scorecard is implemented correctly with information relevant to good decision
         making, measurement of company efficiency and success should be much
         improved. The company will have a better understanding of what its customers
         and investors need and want, the business practices at which it excels, and a better
         understanding of potential internal improvements.

          When a balanced scorecard is implemented, monitoring will be increased and
           improved. Every part of the business needs to be examined to ensure that the
           actual current operating performance aligns properly with long-term strategies
16-32 Cost Management

             The balanced scorecard helps in evaluating overall performance and can lead to
              corrective action when needed. If every part of the business is monitored more
              closely, employees are likely to exert more effort because they know that they are
              being observed.

          If the balanced scorecard is not implemented well, there will be little
            improvement of operations.

             Sometimes it may take several years before the full benefits of the scorecard are
              realized. Because the financial returns are not immediate, people may become
              frustrated at the perceived lack of results.

             If the system is not implemented well, then the activities of the company will not
              be monitored effectively. If performance measures do not relate to the vision,
              strategies, and objectives, even effective monitoring may not lead to

             Employees may resent being more closely monitored. They may feel that
              managers do not trust them and that they are doing their jobs incorrectly. Some
              measures may result in unintended consequences, such as an emphasis on
              customer satisfaction that results in higher costs than benefits.

   D. The current balanced scorecard is likely to help the managers meet the organizational
      vision, but a few of the measures do not relate well to the company vision, such as
      number of community volunteer hours per employee. Either the vision should be
      changed, or this item may not need to be measured and monitored. There may be other
      measures more related to maintaining high quality through the upcoming growth phase
      that would be better for Frieda’s Fizz. The success of the balanced scorecard also
      depends on the support it receives throughout the organization.

   E. There is no one answer to this part. Sample solutions and a discussion of typical student
      responses will be included in assessment guidance on the Instructor’s web site for the
      textbook (available at

16.33 Corporate Social Responsibility

   A. The answer to this question will vary. For some students, social responsibility may not
      enter their consumer decisions. For others, social responsibility may guide their
      decisions. The purpose of this question is to encourage students to consider their own
      responsibility for economic support of company behavior.

   B. Consumers cannot know the conditions under which the products they purchase are
      manufactured, and it is generally impossible to personally investigate working conditions.
      Not only would personal investigation be expensive, but access to production facilities
                                      Chapter 16: Strategic Performance Measurement 16-33

   may be limited and outsiders may not be able to observe everyday practices. Consumers
   could gain at least some information by clarifying where the products they purchase are
   manufactured, investigating companies’ outsource practices (such as those published by
   Nike), and learning about common workplace problems in various parts of the world.
   They can also determine whether any third parties monitor and report on working
   conditions where products are manufactured.

C. Even the companies that outsource cannot know for certain the conditions in the
   manufacturing plant. It is likely that when people from corporate headquarters visit, all
   managers and employees are on their best behavior. False documentation might be
   provided for working hours, pay, and injury rates. Employees may be reticent to divulge
   workplace problems because they fear getting fired.

D. Compliance monitoring costs are the costs to observe conditions in the manufacturing
   plants where Nike shoes are produced. When selecting manufacturers for outsourcing,
   Nike considers the amount of monitoring needed and the costs for that monitoring in their
   purchasing decisions. In other words, the monitoring costs are added to other purchase
   costs in evaluating total costs for purchasing from each supplier. Potential outsource
   partners are likely to be rejected if Nike believes it would be particularly expensive to
   monitor their operations.

E. Here are some measures the company could monitor. Students may have thought of

          Average worker pay: This measure could be used to evaluate whether worker pay
           meets at least a minimum acceptable level.

          Average worker benefits: This measure could be used to evaluate whether
           workers receive at least a minimum acceptable level of benefits such as
           unemployment insurance, health care, and compensation for time lost due to

          Average hours per employee per day worked: This measure would indicate
           whether workers’ hours are reasonable.

          Average age of workers, and the range of ages (youngest to oldest): These
           measures would allow evaluation of whether young workers are exploited.

          Number of injuries: This measure would allow monitoring of the safety of
           workplace operations.

F. There is no one answer to this part. Here are some of the issues that students might
   discuss: Nike needs to weigh the costs of its social responsibility initiatives with
   benefits, such as increase consumer sales from customer who care about such factors,
   aligning corporate actions with corporate values, and so on. The weight placed on social
   responsibility versus increased profits will depend on the viewpoint of the stakeholder.
   Some shareholders may prefer increased profits and not value actions taken to protect
16-34 Cost Management

      workers. Nike manufacturing line employees may want conditions to be similar in all
      plants that produce Nike products out of a sense of fairness. Nike officers and board of
      director members may put more weight on profits, or they may put more weight on social
      responsibility, depending on their viewpoints. Some customers might place pressure on
      Nike to achieve lower costs, which would encourage the company to purchase from
      suppliers with less favorable working conditions. Other customers are willing to pay a
      higher price to cover the costs of more socially acceptable suppliers.

      Students also need to consider whether it is possible to clearly define the ―best‖ choice
      from a socially responsibility standpoint. What level of wages, work hours, and benefits
      is acceptable? Should the level of working conditions vary from country to country?
      Does it matter whether a supplier provides better working conditions than other
      employers in a location, if its working conditions are inferior to those in other countries?
                                           Chapter 16: Strategic Performance Measurement 16-35

16.34 Focus on Professional Competency: Strategic/Critical Thinking

   A. Organizational vision is the core purpose of the organization and shapes the current
      organization and its future. The organizational vision communicates to employees and
      other stakeholders the overall direction of operations. Core competencies are the
      strengths of the organization relative to competitors. Core competencies are based partly
      on existing strengths and partly on strengths that managers choose to develop.
      Organizational strategies are developed around core competencies. These tactics guide
      long-term decisions, such as products offered, methods of production, distribution
      channels used, focus on research and development, and so on. Operating plans put into
      action the organizational strategies in the short term. (The feedback loops are discussed
      in Part D.1 below.)

        1. By definition, an organization’s core competencies are its strengths relative to
           competitors. Thus, uncertainties about the strengths, weaknesses, opportunities, and
           threats automatically lead to uncertainties about core competencies. For example,
           managers may believe that their company has a competitive advantage because it sells
           a market-leading product. However, another company could be developing a new,
           competing product that could quickly take away market share. New competition
           could lead the managers to reconsider the company’s strengths and, therefore, its core

        2. Strategic information consists of knowledge, facts, data, or factors that help managers
           plan, implement, or monitor the organization’s vision, core competencies, and
           strategies. Examples of strategic information include competitive sales data, reports
           about strategic actions planned or taken by other companies, analyses of future
           economic trends, and evaluations of technological feasibility.

           a. When identifying core competencies, managers need strategic information to help
              them distinguish their organization’s strengths relative to competitors.

           b. Before managers choose strategies, they must analyze strategic information about
              existing conditions as well as future trends and opportunities.

           c. Balanced scorecard measures should provide managers with information that is
              strategically important. Therefore, the measures should be developed after
              considering the types of strategic information that would help managers monitor
              and improve operations.

   C. Financial measures provide information in dollars or ratios of dollars, whereas
      nonfinancial measures provide information that cannot be measured in dollars or ratios of
      dollars. A combination of financial and nonfinancial measures is usually more consistent
      with an organization’s long-term goals than financial measures alone, and can often
      provide information earlier than a financial measure. For example, managers may wish
16-36 Cost Management

        to increase customer satisfaction, which in the long term is expected to increase product
        sales. Nonfinancial measures of customer satisfaction such as survey responses or
        product return rates could be used to monitor progress and identify potential problems.
        Such nonfinancial measures might also identify problems earlier than a financial measure
        such as sales or sales growth. At the same time, increases in customer satisfaction may
        not always lead to improved financial performance for the organization. Thus, the
        combination of financial and nonfinancial measures provides better information than
        either type of measure alone.

        1. The feedback loops in Exhibit 16.1—measuring, monitoring, and motivating—help
           managers learn whether plans are met or need to be changed to either take advantage
           of new opportunities or respond to problems. Employees within the organization are
           motivated to help achieve goals because actual performance is measured and
           monitored against plans. The feedback loop in Exhibit 16.4 refers to the use of
           feedback specifically for comparing actual results to plans. The feedback loop in
           Exhibit 16.9 indicates that an important aspect of balanced scorecard implementation
           is the use of prior results to refine and improve the process.

        2. The process of developing a balanced scorecard is never complete because the
           business environment continues to evolve, calling for new strategies and operating
           plans. In addition, the balanced scorecard is based on the idea of continuous
           improvement. The design and use of the balanced scorecard is never ―perfect;‖ it can
           always be improved.

16.35 Integrating Across the Curriculum: Management and Marketing

   A. Wal-Mart has numerous strengths relative to competitors. Here are a few; students may
      think of others. Wal-Mart is the largest retail company in the world, giving it significant
      power in negotiations with suppliers. This power allows the company to achieve lower
      costs than competitors, which in turn allows it to offer lower prices. It also relies less
      than many other retailers on discretionary goods, giving it an advantage during economic
      downturns. Wal-Mart uses technology better than most retailers, allowing it to analyze
      point-of-sale data to more efficiently manager inventories and plan product promotions.
      The company is nonunion, allowing it to incur significantly lower labor costs than other
      retailers, who are typically unionized.

   B. Here are several weaknesses of a family-owned variety store relative to a Wal-Mart;
      students may think of others. The variety store is most likely be much smaller, so it will
      be unable to offer the wide variety of merchandise offered at Wal-Mart. Merchandise
      prices at the variety store will probably be higher than at Wal-Mart because the owners
      will be unable to buy products at the same low costs. In fact, Wal-Mart is likely to sell
      products at prices that are below the variety store’s cost.

   C. Wal-Mart appears to be currently expanding into new countries and into urban locations.
      It continues to develop new technologies, such as radio frequency identification (RFID).
                                      Chapter 16: Strategic Performance Measurement 16-37

   The company’s dominant buyer position allows it to continuously negotiate better prices
   from vendors.

D. Wal-Mart faces potentially higher costs as it moves into new locations, experiences
   renewed unionization attempts, and addresses sex discrimination claims. Negative
   publicity related to the company’s emphasis on imports and the resulting loss of U.S. jobs
   could also lead to higher costs through loss of favorable import terms. The company’s
   managers might also become overly confident in long-term success, which could prevent
   them from recognizing and responding appropriately to future threats.

E. A balanced scorecard can be designed to explicitly measure and monitor an
   organization’s strengths, weaknesses, opportunities, and threats. In turn, this measuring
   and monitoring would help managers determine whether the organization is benefiting
   sufficiently from its strengths and opportunities, and it can also help managers monitor
   and respond to the effects of weaknesses and threats.

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