Value-Chain Analysis in Computer Manufacturing (continued)2-*

Value ActivityOption One CurrentOption Two PotentialAcquiring raw materialsCIC is not involved at this stepCIC is not involved at this stepManufacturing computer chips and other partsCIC is not involved at this step; cost is $200CIC is not involved at this step; cost is $200Manufacturing components, some of which CIC can makeCIC purchases $300 of parts for each unitCIC manufactures these parts for $190 per unit plus $55,000 monthlyAssemblingCICs costs are $250CICs costs are $250Marketing, distributing, and servicingCICs costs are $175,000 per monthCIC contracts out these services for $130 per month

Results of Value-Chain Analysis2-*

ManufacturingMarketing, distributing, and servicingOption One600 x $300 = $180,000$175,000 per monthOption Two600 x 190 + $55,000 = $169,000$78,000 per monthSavings with Option Two$11,000$97,000 per month

Results of Value-Chain Analysis (continued)

CIC can save $108,000 ($11,000 + $97,000) per month by manufacturing the parts and contracting out marketing, distributing, and servicing

The main factor driving the decision is company strategy, which in this case is quality and customer serviceFor a firm pursuing a differentiation strategy, the best option is not necessarily the one which provides the most savings (savings is a secondary consideration)From a strategic viewpoint, Option One is preferred over Option Two

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The Five Steps of Strategic Decision Making for CIC Determine the Strategic Issues Surrounding the Problem: CIC competes on differentiationIdentify the Alternative Actions: two optionsObtain Information and Conduct Analyses of the Alternatives: calculate the relevant costsBased on Strategy and Analysis, Choose and Implement the Desired Alternative support CICs strategy, this is the key to the analysisProvide an On-going Evaluation of the Effectiveness of implementation in Step 4.

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The Balanced Scorecard (BSC)A performance report based on a broad set of financial and nonfinancial measures that is crucial to understanding and implementing a strategy

This report groups a firms CSFs into four areas: Financial perspective (financial measures)Customer perspective (customer satisfaction)Internal process perspective (e.g., productivity and speed)Learning and growth (e.g., training and number of new patents or products)

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The Balanced Scorecard (continued)BenefitsProvides a means for implementing strategyProvides a means to achieve a desired organizational change in strategyCan be used to determine managements compensation and rewardsAligns managers efforts with strategyCoordinates efforts within the firm to achieve CSFs

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The Balanced Scorecard (continued)A properly constructed BSC can be used to infer a companys strategy

BSC Strategy, and Strategy BSC

The emphasis placed on each performance perspective reflects the strategy of the firm

For a cost leader, the operations perspective might be the most important; for a differentiator, the customer perspective

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Strategy MapA strategy map is a cause-and-effect diagram of the relationships embodied in a BSC: Shows how the achievement of CSFs in one perspective should affect the achievement of goals in another perspectiveThe financial perspective is the target in the strategy map because financial performance is the ultimate goal for most profit-seeking organizationsSuccess in the other perspectives leads directly to improved financial performance and shareholder value

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An Example Strategy Map

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SustainabilityThe fifth perspective for many organizations

The balancing of short-term and long-term goals in all three dimensions of the companys performanceeconomic, social, and environmental:

Environmental reports use environmental performance indicators (EPIs) to measure sustainability

These indicators are in three areas:Operational (measure stresses to the environment/regulatory compliance issues)Management (try to reduce environmental effects)Environmental condition (measure environmental quality)

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Example Sustainability Scorecard

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The BSC and Not-For-Profit OrganizationsCompetitive strategy is different:

Must satisfy funding authorities, political leaders, and the general public

The BSC can still be used to monitor CSFs related to internal processes, customer satisfaction, financial measures, and human resources measures

Value-chain analysis can still be used to determine at what points costs can be reduced or value added on the value chain

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The Role of Cost ManagementThree cost-management resources for implementing strategy are discussed in this chapter:

SWOT analysis provides a system and structure to identify CSFs

Value-chain analysis builds on the CSFs by breaking them down into detailed activities

The BSC provides a way to implement the detailed strategy developed through the previous two analyses; it provides the processes for evaluating the organizations achievement of CSFs

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Strengths-Weaknesses-Opportunities-Threats (SWOT) Analysis provides a system and structure in which to identify a firms critical success factors (CSFs)

Execution of goals is important in implementing a strategy

Execution depends on the competitive strategy a firm is pursuing

Management accountants assist management by gathering, analyzing, and reporting on relevant information

Chapter Summary

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Chapter Summary (continued)Value-chain analysis builds on the CSFs identified in SWOT analysis by breaking them into detailed activities

The balanced scorecard (BSC) provides the processes for evaluating a firms achievement of CSFs

Sustainability builds on the conventional BSC by balancing short-term and long-term goals

Sustainability focuses on economic, social, and environmental issues