Post on 22-Dec-2015
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Strategy, Balanced Scorecard,and
Strategic Profitability Analysis
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StrategyStrategy specifies how an organization
matches its own capabilities with the opportunities in the marketplace to accomplish its objectives.
A thorough understanding of the industry is critical to implementing a successful strategy.
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Five Aspects of Industry Analysis1. Number and strength of competitors2. Potential entrants to the market3. Availability of equivalent products4. Bargaining power of customers5. Bargaining power of input suppliers
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Basic Business Strategies1. Product differentiation—an organization’s ability to
offer products or services perceived by its customers to be superior and unique relative to the products or services of its competitors
Leads to brand loyalty and the willingness of customers to pay high prices
2. Cost leadership—an organization’s ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control
Leads to lower selling prices
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Implementation of StrategyMany companies have introduced a balanced
scorecard to manage the implementation of their strategies.
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The Balanced ScorecardThe balanced scorecard translates an
organization’s mission and strategy into a set of performance measures that provides the framework for implementing its strategy.
It is called the balanced scorecard because it balances the use of financial and nonfinancial performance measures to evaluate performance.
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Balanced Scorecard Perspectives1. Financial2. Customer3. Internal business perspective4. Learning and growth
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The Financial PerspectiveEvaluates the profitability of the strategyUses the most objective measures in the
scorecardThe other three perspectives eventually feed
back into this dimension
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The Customer PerspectiveIdentifies targeted customer and market
segments and measures the company’s success in these segments
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The Internal Business Prospective Focuses on internal operations that create
value for customers that, in turn, furthers the financial perspective by increasing shareholder value
Includes three subprocesses:1. Innovation2. Operations3. Post-sales service
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The Learning and Growth PerspectiveIdentifies the capabilities the organization
must excel at to achieve superior internal processes that create value for customers and shareholders
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The Balanced Scorecard Flowchart
Financial CustomerInternal
BusinessProcess
Learning&
Growth
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BalancedScorecardIllustrated
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Strategy and the Balanced Scorecard, Illustrated
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Common Balanced Scorecard Measures
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Balanced Scorecard ImplementationMust have commitment and leadership from
top managementMust be communicated to all employees
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Features of a Good Balanced ScorecardTells the story of a firms strategy, articulating
a sequence of cause-and-effect relationships—the links among the various perspectives that describe how strategy will be implemented
Helps communicate the strategy to all members of the organization by translating the strategy into a coherent and linked set of understandable and measurable operational targets
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Features of a Good Balanced ScorecardMust motivate managers to take actions
that eventually result in improvements in financial performancePredominately applies to for-profit entities, but has
some application to not-for-profit entities as wellLimits the number of measures, identifying
only the most critical onesHighlights less-than-optimal trade-offs that
managers may make when they fail to consider operational and financial measures together
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Balanced Scorecard Implementation PitfallsManagers should not assume the cause-and-
effect linkages are precise: they are merely hypotheses.
Managers should not seek improvements across all of the measures all of the time.
Managers should not use only objective measures: subjective measures are important as well.
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Balanced Scorecard Implementation PitfallsManagers must include both costs and
benefits of initiatives placed in the balanced scorecard: costs are often overlooked.
Managers should not ignore nonfinancial measures when evaluating employees.
Managers should not use too many measures.
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Evaluating Strategy Strategic analysis of operating income—
three parts:1. Growth component—measures the change in
operating income attributable solely to the change in the quantity of output sold between the current and prior periods
2. Price-recovery component—measures the change in operating income attributable solely to changes in prices of inputs and outputs between the current and prior periods
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Evaluating Strategy Strategic analysis of operating income
3. Productivity component—measures the change in costs attributable to a change in the quantity of inputs between the current and prior periods
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Revenue Effect of Growth
RevenueEffect
ofGrowth
Actual Units of Output Sold in the Current Period
Actual Units of Output Sold in
the Prior Period
= X_Prior Period Selling Price
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Cost Effect of Growth for Variable Costs
Cost Effectof Growth
for VariableCosts
Units of Input Required to Produce Current Output in the Prior Period
Actual Units of Input Used to Produce Prior Period Output
= X_Prior Period Input Price
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Cost Effect of Growth for Fixed CostsAssuming adequate current capacity:
Actual Units of Capacity
in the Prior
Period
Actual Units of capacity in Prior Period to Produce Current Period Output
X
Prior Period Price
per unit of
capacity
CostEffect
OfGrowth
For FixedCosts
=
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Revenue Effect of Price Recovery
Prior Period Selling Price
Current Period Selling Price X
CurrentPeriod Units Sold
RevenueEffect
OfPrice-
Recovery
=
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Cost Effect of Price RecoveryVariable costs:
Prior Period Input Price
Current Period Input Price X
Units of Input
required to produce Current Period’s Output in the Prior Period
CostEffect
OfPrice-
Recovery for
Variable Costs
=
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Cost Effect of Price RecoveryFixed costs with adequate capacity
Prior Period Price per Unit
of Capacity
Current Period Price per Unit of Capacity
X
Actual Units of Capacity on
Prior Period to Produce Current
Period’s Output
CostEffect
OfPrice-
Recovery for Fixed
Costs
=
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Cost Effect of Productivity for Variable Costs
Units of Input Required to
Produce Current Period’s Output
in Prior Period
Actual Units of Input used to Produce Current Period Output
X Input Price in Current Period
CostEffect
OfProductivity for Variable
Costs
=
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Cost Effect of Productivity for Fixed CostsWith adequate capacity
Actual Units of Capacity in Prior
Period to Produce Current Period’s Output
Actual Units of Capacity in Current Period
XPrice Per Unit of
Capacity in Current Period
CostEffect
OfProductivity
for Fixed Costs
=
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Strategic Analysis of Profitability Illustrated
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The Management of CapacityManagers can reduce capacity-based fixed
costs by measuring and managing unused capacity.
Unused capacity is the amount of productive capacity available over and above the productive capacity employed to meet consumer demand in the current period.
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Analysis of Unused Capacity Two important features:
1. Engineered costs result from a cause-and-effect relationship between the cost driver and the resources used to produce that output.
2. Discretionary costs have two parts:1. They arise from periodic (annual) decisions
regarding the maximum amount to be incurred.2. They have no measurable cause-and-effect
relationship between output and resources used.
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Differences Between Engineered and Discretionary Costs Illustrated
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Managing Unused CapacityDownsizing (rightsizing) is an integrated
approach of configuring processes, products, and people to match costs to the activities that need to be performed to operate effectively and efficiently in the present and future.
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