Chapter 17 Strategic Performance...

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Chapter 17Strategic Performance Measurement

LEARNING OBJECTIVES

Chapter 17 addresses the following learning objectives:

LO1 Discuss strategic decision makingLO2 Describe how financial and nonfinancial measures are used to evaluate organizations

performanceLO3 Explain the balanced scorecardLO4 Explain how the balanced scorecard is implementedLO5 Discuss how the balanced scorecard affects strategic management and incentivesLO6 Discuss the future direction of cost accounting

These learning objectives (LO1 through LO6) are cross-referenced in the textbook to individual exercises and problems.

© 2012 John Wiley and Sons Canada, Ltd.

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QUESTIONS

17.1 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.

17.2 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.

17.3 Financial perspective: Operating margin, Cost per mile per ton transportedCustomer perspective: Customer satisfaction surveys, market share, growth in return

customers, growth in new customersInternal business perspective: Percent on-time deliveries, number of complaints about

food damage from loading and unloadingLearning and growthperspective: Driver safety records (number of tickets or accidents),

driver training hours, number of process improvements annually.

17.4 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.

17.5 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.

17.6 Students answers will vary with this question but listed are some alternatives:Financial Perspective: decreases in the wholesale prices from the suppliers, lower costs

for members in the form of larger discounts from the service providers for the insurance and benefits.

Customer Perspective: increased number of customers at the independent stores compared to prior years, percentage of repeat customers at the local independent stores.

Internal Business Perspective: speed of delivering products purchased in bulk to the independent stores, reduction in the length of time it takes to respond to member concerns or issues.

Learning and Growth Perspective: increased services offered to the members, retention of members, increased membership, percent of increase in membership over prior years.

17.7 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


Chapter 17: Strategic Performance Measurement 196

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.

17.8 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.

17.9 Information from /McDonald’sand WENDY’S web site as of February 2012 (vision, mission, core values, or similar attributes) are referenced here, but cannot be reproduced in this Manual without permission:

Similarities between McDonald’s and Wendy’s vision, mission, and core values: Both companies focus heavily on people and their statements are quite broad describing overall corporate values.Both companies include profits, high quality food, commitment to their people, and giving back to the community in their value statements.

Differences between McDonald’s and Wendy’s vision, mission, and core values: A difference is that McDonald’s presents formal statements labelled“mission and values”Wendy’s does not present any statements having these titles, instead they give “Dave’s Values”. McDonald’sis committed to continuously improving their operations and enhancing the customers' experience. Wendy’s values do not mention customers specifically but they emphasise respect and integrity.

17.10 Student answers to this question will vary depending on the companies chosen. Here is an example of a response for Home Depot and Rona; however information from each company’s website cannot be reproduced in this manual without permission. Neither company include major strategies on their websites.

Similarities between Home Depot and RONA strategies: Both companies describe values to provide excellent customer service, initiative, and respect for employees.

Differences between Home Depot and RONA strategies:Home Depot’s values include respect for all people, giving back to the community, taking care of people and creating shareholder value whereas Rona’s values are not a specific on these topics. Rona’s values include unity which is not included in Home Depot’s values.

17.11 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, people, and others. They will also need to develop new internal sources of information that managers can use for decision making.

17.12 Accounting techniques continuously evolve. Sometimes new methods are developed, such as the Balanced Scorecard for strategic management, and sometimes new


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accounting rules are implemented, such as those issued by the Canadian Institute of Chartered Accountants (CICA) and implementation of IFRS. 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.

17.13 Two kinds of biases affect managers in their choice of nonfinancial performance measures. First, managers tend to pick measures with whichthey are more familiar. Second, they may pick measures with whichthey know they will be successful. For example, the manager of a car wash may choose number of cars washed instead of average revenue per car washed in an area that is growing in population.

17.14 When it is difficult to accurately measure customer satisfaction, more weight should be placed on measures such as market share and number of returns or complaints. Measurement error introduces uncertainty about the actual performance that is being measured. Market share is a more precise measure as would be number of returns or complains.

17.15 Performance targets are the goals that an organization or unit sets for specific types of performance. For example, a firm may set a profit margin goal of 2% for a particular year as a performance target. Targets increase the organization’s focus on results and assist managers in monitoring progress.

17.16 A strategy map presents a visual summary of the strategic objectives for each of the perspectives of the balanced scorecard. These maps are a one-page picture of the most important parts of organizational strategy. Strategy maps are also used to communicate the objectives and strategic plans throughout the organization.



MULTIPLE CHOICE17.17 Which of the following is considered an adequate performance measure in the internal

process perspective of the balanced scorecard?a) Customer complaintsb) Number of repeat ordersc) Revenue per employeed) Revenue per product

Ans: D

17.18 A well-designed performance measurement system will include which measures?a) Measures related to the goals of the organization. b) Measures primarily focusing attention on immediate short-term concerns. c) Reasonably objective and easily quantified measures. d) both a) and c). e) all of a), b) and c).

Ans: D

17.19 Which of the following is an advantage of a balanced scorecard for evaluating a manager’s performance?a) It covers a range of activities over the short term.b) It covers a range of activities over the long term.c) It forces a company to consider the range of activities that lead to success, not

just short-term financial criteria.d) It is subject to manipulation.

Ans: C

17.20 Which of the following is considered an adequate performance measure in the learning and innovation perspective of the balanced scorecard?a) Cycle timeb) Employee turnoverc) Number of new customersd) Revenue growth

Ans: B

17.21 Which of the following is a disadvantage of a balanced scorecard for evaluating a manager’s performance?a) It forces a company to consider the range of activities and results that lead to success,

not just short-term financial criteria.b) It suggests to management that customers, learning and innovation, internal processes,

and income are all important.c) It is subject to manipulation.d) It covers a range of activities over both the long and short term.

Ans: C


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EXERCISES

17.22 Balanced Scorecard Measures for Financial Perspective - China Express

From the data given, the following measures could be used for the financial perspective:Operating margin = $10,450,200 - $9,927,690 = $522,510Return on investment = $522,510/$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)

= $391,883 - $501,610 = ($109,727)

17.23 Financial and Nonfinancial Measures

A. NB. NC. FD. FE. FF. NG. F (Could be N if measured in units)H. FI. NJ. F

17.24 Balanced Scorecard Measures for Customer Perspective - 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 performance.

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 Customer satisfaction because the administrators consider employers as customers, and their satisfaction surveys would 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.



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

17.25 Learning and Growth Perspective - Sparkman 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 now 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 researched.• The trend (growth rate) in number of new drugs that are on the market.

17.26 Balanced Scorecard Measures for Four Perspectives

A. IB. LC. FD. LE. FF. CG. IH. II. IJ. FK. FL. LM. IN. CO. LP. I


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17.27 Strategic Plans, Balanced Scorecard Measures for Not-for-Profit Organization - 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.



17.28 Balanced Scorecard Measures the Customer Service Quadrant – Carleton University

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

1. Student customer satisfaction rating:Calculation: student customer satisfaction rating can be calculated or determined

by having the students complete a survey indicating their level of satisfaction. The survey could be posted on the website to measure whether or not the students are reading the website. The survey can include questions that will be answered on a scale of very satisfied to very dissatisfied and it could also include some open ended questions to allow students to make other suggestions. The calculation would include a simple average of the student responses.

Advantage: an advantage of tracking satisfaction this way is that the administration could determine if the students are using the website. The scale questions are quick and easy to answer which would entice more students to complete the survey. The open ended questions would allow students to voice their opinions on other issues.

Disadvantage: a disadvantage to this form of measurement is that not all students will take the time to complete the survey. Students may feel that the open ended questions will take too much time and they won’t bother to answer them. This would lead the administration to believe that there are no other concerns when in fact students just are not taking the time to complete the survey. Open ended questions also require a lot of time to analyze the answers.

2. Employee customer satisfaction rating:Calculation: This measure assumes that a survey had been designed and that

customer responses have been obtained. If the survey includes numerical ratings of employee 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 anemployee customer satisfaction problem exists. Also, this is a direct measure of customer satisfaction—customers are asked about their experiences at the university.

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.

3. Customer satisfaction rating:Calculation: customer satisfaction rating can be calculated or determined by

having the customers complete a survey indicating their level of satisfaction. The survey can include questions that will be answered on a scale of very satisfied to very dissatisfied and it could also include some open ended


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questions to allow customers to make other suggestions. The calculation would include a simple average of the customer responses.

Advantage: an advantage of tracking satisfaction this way is that the administration could determine if the customerssatisfied with services provided. The scale questions are quick and easy to answer which would entice more customers to complete the survey. The open ended questions would allow customers to voice their opinions on other issues.

Disadvantage: a disadvantage to this form of measurement is that not all customers will take the time to complete the survey. Customers may feel that the open ended questions will take too much time and they won’t bother to answer them. This would lead the administration to believe that there are no other concerns when in fact customers just are not taking the time to complete the survey. Open ended questions also require a lot of time to analyze the answers.

17.29 Balanced Scorecard Measures for the Stewardship of Financial Resources – Carleton University

Full details of the stewardship of resources section of the balanced scorecard at Carleton University can be found on their website at http://www5.carleton.ca/finance-admin/strategic-planning/strategic-measures-and-initiatives/.

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

1. Annual, actual financial operating results for university compared to budgeted operating results:

Calculation: The calculation of this measure would be performed by subtracting actual results from budgeted results for all line items. The results would be indicated as either positive or negative and the administrators can determine which line items need more controls.

Objective: Provide effective stewardship of university resourcesNegative actual results compared to budgeted results would indicate what areas of finance need to be controlled tighter in future periods. If there are areas of great concern they could put the university at risk financially.

2. Successful delivery of Capital Programs:Calculation: to calculate this measure subtract the number of capital programs

deliveredon time and on budget last year from the number of capital programs deliveredon time and on budget this year and divide the result by the number of capital programs deliveredon time and on budget last year.

Objective: Provide effective stewardship of university resourcesIf capital programs are not delivered on time and on budget the university will not be able to deliver service planned to utilize those programs and will be short of funds for other programs.


http://www5.carleton.ca/finance-admin/strategic-planning/strategic-measures-and-initiatives/

http://www5.carleton.ca/finance-admin/strategic-planning/strategic-measures-and-initiatives/


3. Assign tasks and track accomplishments:Calculation: This measure can be calculated developing an action plan with

specific tasks, people assigned to each task. Regular meetings would then be held to track the accomplishment of each task. To calculate this measure divide the number of tasks assigned by the total number of task identified on the action plan and divide the number of tasks accomplished by the number of tasks identified on the action plan.

Objective: Provide effective stewardship of university resourcesBy assigning task and tracking accomplishments the action plan has a better chance of being completed. This will enable continuous improvement in the stewardship of resources only if the action plan is well thought out and has the necessary tasks.

4. Employee satisfaction rating (I’m encouraged to make suggestions):Calculation: to calculate this measure subtract the number of approved ideas

implemented this year from the number of approved ideas implemented last year and divide the result by the number of approved ideas implemented last year.

Objective: Provide effective stewardship of university resourcesThis measure tracks the number of approved ideas implemented but this may not be a good measure of employee satisfaction. If employees do not receive recognition or reward for their ideas they may actually have a lower level of satisfaction as a result of increased implementation of suggestions.

5. Emergency response strategy refinedCalculation: to calculate this measure,determine the percentage completion this

year less the percentage completion last year. Objective: Manage risks that affect the university

This measure is based on estimates of percentage of completion which is subject to bias. Failure to have a completed and updated emergency response strategy but the university at risk of not being able to effectively and efficiently respond when an emergency arises.

17.30 Balanced Scorecard Perspectives, Performance Objectives, and Measures - Holiday Resorts

A.I. a, e II. c, d, h, i, k III. b, fIV. g, j

B.a. 4b. 3, 14c. 13


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d. 11e. 1f. 7g. 9h. 10i. 2, 8, 14, 15j. 5, 12k. 6

17.31 Future Direction of Accounting Information - 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 CICA 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.



PROBLEMS

17.32 Balanced Scorecard and Implementation –Dr. 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 receivable.

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


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as the dental 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.

17.33 Balanced Scorecard, Financial and Nonfinancial Measures - Dyggur Equipment

A. IB. CC. CD. F and IE. FF. F and IG. F and CH. C and II. C and IJ. LK. LL. LM. LN. IO. FP. LQ. LR. CS. CT. L and IU. I and CV.

1. I2. I and C3. I and C

17.34 Strategy, Balanced Scorecard Measures and Process - 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.



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 labour 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.


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17.35 Cumulative Exercise (Chapter 3): Wait time, strategy map, breakeven point, business risks - Urgent Care Clinic

[Note: This problem requires knowledge of breakeven analysis from Chapter 3.]

A. Below is an example of a strategy map. Students might think of other strategic objectives or make different linkages.

B. Nurse practitioner cost per day = $65 per hour * 8 hours per day = $520Breakeven point = $520/($55-$2) = 9.8, or 10 patients per day

C. Below are examples of business risks. Students may think of other risks.• If the information about patients turned away is inaccurate, the clinic may not

break even by hiring the nurse.• If patient visits do not increase above the current 10 who are turned away, the

nurse practitioner might have a lot of time without specific duties and have morale problems.

• Patients might insist on seeing a physician when the services of a nurse practitioner are appropriate for the type of care needed.

D. More information is needed to make the decision, for example information about competitors such as clinics in local pharmacy stores, information about population growth or decline in the area, whether the general standard of living is increasing or



decreasing, and whether most of the new patients have insurance that will help cover their charges.

17.36 Mission Statement, Strategy, Balanced Scorecard Implementation - 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.

Financial:• Maintain and improve operating margins.• Increase revenues.• Control costs

Customer perspective:• Increase market share.• Decrease product returns and complaints.• Increase customer satisfaction.

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.


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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 products returned and number of complaints are tracked and reported.

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.

17.37 Balanced Scorecard Measures – Dave’s BBQ

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 employees.

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 Dave’s BBQ 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.

17.38 Participative Strategic Planning Process and Benefits, Manager Behaviour - Quantum Computers

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

• 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 financial.

• Formulate strategy. Select an appropriate strategy to take advantage of existing and expected external environmental conditions and the firm’s internal strengths and weaknesses.


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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.

17.39 Balanced Scorecard, Strengths and Weaknesses - 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 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 evaluated.

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 chequebook 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• 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


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17.40 Cumulative Exercise (Chapters 4 and 7): ABC, ABM, customer profitability, keep or drop - Children’s Clothing Manufacturer

[Note: This problem requires application of knowledge from Chapters 4 and 7.]

A.Family Discount

Customers 150 25 Revenues 750,000$ 1,350,000$ Direct costs (DL and DM only) 375,000$ 625,000$ Delivery costs 41,400$ 21,000$ Returns 510 250 Change orders 136 2 Deliveries 345 35

Family DiscountRevenue per customer 5,000$ 54,000$ Revenue less direct costs per customer 2,500$ 29,000$ Distribution costs per customer 276$ 840$ Number of returns per customer 3.4 10.0 Change orders per customer 0.9 0.1 Number of deliveries per customer 2.3 1.4

B. Because we do not have information about the cost of returns or change orders, we need to examine the contribution per customer. For the Family Store customer, the new customer would need to bring in a contribution of $2,500 less the distribution costs of $276, or $2,224. A replacement for the Discount Retailer customer would need to bring in $29,000 less $840 in distribution costs, or $28,160.

C. A differentiated strategy would work if there are enough new discount stores to bring in a total contribution of $333,600 ($750,000 – $375,000 – $41,400). If new discount stores averaged $28,160, it would take 11.8, or 12 new stores, to make up for the 150 family-owned stores.

D. To reduce the number of change orders, the company could encourage customers to choose standard rather than customized products or to place larger orders of customized products. One way to encourage this change would be to charge higher prices for customized orders by charging a change order fee or increasing prices for customized products. Alternatively, the company could create two lines of clothing—one for Discount Retailers and another for Family Stores. The company may be able to significantly reduce or eliminate customized orders by selling a premium line to Family Stores. The company could also increase the lead time required for smaller-volume orders, allowing the company to more efficiently schedule smaller batches of product.



17.41 Strategies and Balanced Scorecard Measures for a Country - 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 applications.

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.

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


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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 U.S.

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.1

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

• “Education Statistics of New Zealand” available at http://www.educationcounts.govt.nz/publications/ece/2507.

• Ministry of Education, “Statement of Intent 2011/12 – 2016/17” dated 18/05/2011, available at http://www.minedu.govt.nz/theMinistry/PublicationsAndResources/StatementOfIntent/SOI2011/~/media/MinEdu/Files/TheMinistry/2011StatementOfIntent/SOI2011Priority3.pdf

• Ministry of Education, “Tertiary Education Report: Creating a Wider Youth Guarantee” dated 28/09/2011, updated July 30, 2004, available at http://www.minedu.govt.nz/~/media/MinEdu/Files/TheMinistry/TertiaryBudget2011/11CreatingAWiderYouthGuaranteeEntitlementProgrammeDesign.pdf

1 “Definition of Education in New Zealand,” available at www.wordiq.com/definition/Education_in_New_Zealand.© 2012 John Wiley and Sons Canada, Ltd.


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.

17.42 Strategy, Balanced Scorecard for Organization and Employee - 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.

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


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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) $134,000Expenses ($35,000 + $55,000) 90,000

Operating margin $ 44,000

Mark could also track the cost per dog for kennelling 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 kennel, 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 favourably 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.

17.43 Balanced Scorecard Variances - Hardware Store

A.Average sale...............................................................Financial



Average variable cost per sale...................................FinancialAverage customer wait time at counter.....................CustomerAverage customer wait time on the sales floor..........CustomerShipping cost per order..............................................Financial or internalTotal returns...............................................................Customer or financialTotal revenue.............................................................FinancialTotal labour cost........................................................Financial or internalUtilities cost...............................................................Financial or internalNumber of items outofstock.......................................CustomerEmployee 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 prices.

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 labour 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.

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 incidence.


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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, managers 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 labour cost. A labour 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 on the sales floor. 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, labour 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.

17.44 Performance Measures, Variance - Fast Food Store

A.Average sale...............................................................FinancialAverage variable cost per sale...................................FinancialAverage kilogram of food waste per day...................InternalAverage customer wait time at counter.....................Customer or internalAverage customer wait time at window.....................Customer or internalAverage number of cars in wait line..........................Customer or internalAverage customers per hour......................................InternalTotal revenue.............................................................FinancialTotal labour cost........................................................Financial or internal



Utilities cost...............................................................Financial or internalEmployee 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 increased. This could occur because the economy improved, prices increased, or the product mix changed.

Average variable cost per sale increased. This could be due to a change in the product mix, such as more food and less beverage. It could be due to an increase in vendor prices, or an increase in waste, or an increase in the quantity of food delivered per serving.

Average kilograms of food waste per day decreased. This could occur because employees were being more careful with the food. It could also occur because lower-quality (i.e., less fresh) food was served to customers.

Average customer wait time at the counter increased from 3 minutes to 3.2 minutes. This could occur because customers on average ordered more food and fewer beverages per order (i.e., a change in the product mix). Or, it could be due to slower-working employees.

Average customer time at the window increased from 1.5 to 2 minutes. This could occur because customers on average ordered more food and fewer beverages per order (i.e., a change in the product mix). Or, it could be due to slower-working employees.

Average customers per hour decreased from 45 to 43. This could be due to a change in the economy, competitors’ actions, or a change in food habits for a large group of individuals, or to the longer wait times.

Total revenue increased. This could occur because of a good economy, decreased competition, or a change in consumer preferences (i.e., product mix).

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

Utilities costs increased. This could be due to higher utility rates or to relatively more inclement weather that required more heating or cooling.

Employee turnover decreased. This could occur if the company had a smaller number of employees close to retirement age or waiting to go to college. Turnover could also decrease if the company paid higher wages than competitors or if employee screening procedures were improved.

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 increase in average sale. They may want to know if advertising campaigns were successful or if it was driven by factors external to the firm, such as the economy or


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changes made by competitors. If there have been changes in advertising, managers will want to continue with the current campaign. If the changes are economy- or competitor-related, there may be little that managers can do. The increase in variable cost should be investigated to determine whether it was due to increases in prices or quality, or whether more food than usual was provided for each order. Managers may want to investigate the reduction in waste to reward responsible employees and also to verify that quality of service has not deteriorated. Because the company has been focusing on reducing wait time, managers likely want to investigate whether changes in wait time affected the average number of customers per hour. Managers are unlikely to investigate the increase in labour cost because the amount is not large relative to the overall cost (about 1%). The turnover rate decrease may or may not be important to investigate. If employees are enjoying work and loyal to the company, no problems exist. If something about employee management has changed and this trend continues, managers may want to be sure that the change continues.

D. The results suggest that customer preferences may have changed toward more expensive food items. In addition, some customers may not be returning because of the increased wait times. Since the strategy is low-cost food with a high quality eating experience, the wait could negatively affect some customers’ eating experience. The managers may want to examine the average contribution margin per sale for both months. The drop in customers per hour reduces income less than the higher average sale and better contribution margin ratio. Of course, the company would be better off if average customers per hour would return to the July level.



MINI-CASES

17.45 Evaluate Balanced Scorecard Design - 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 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 16) may be a better measure than ROI because it can be adjusted to minimize incentives that promote suboptimal behaviour. 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


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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 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 labour.

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 beverages wait 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 reputation.

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

• 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.

Cons:• 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 improvements.

• 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 www.wiley.com/canada/eldenburg).


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17.46 Corporate Social Responsibility, Monitoring Measures

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 behaviour.

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 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 Starbucks), 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 behaviour. 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 coffee is produced. When selecting coffee producers for outsourcing, Starbucks 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 Starbucks believes it would be particularly expensive to monitor their operations.

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

• Average worker pay: This measure could be used to evaluate whether worker pay meets at least a minimum acceptable level. The company might collect this data by surveying all of the local competing suppliers’ farms in the region or attempting to access the average pay using government documentation from the region. They could also check with the government to determine if that particular government has a minimum wage regulation. These average wages could also be compared to the average wage of workers in other industries in the same geographical are.

• 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 injury. This data would be collected in the same manner as the average pay discussed above.



• Average hours per employee per day worked: This measure would indicate whether workers’ hours are reasonable. Data collection would be performed in the same manner as discussed above, surveying competing suppliers’ farm employees, surveying employees working in other industries in the region, and checking for maximum working hours stipulated in government labour laws.

• Average age of workers, and the range of ages (youngest to oldest): These measures would allow evaluation of whether young workers are exploited. Collection of this data would be performed in the same manner as above, surveying the competition and workers in other industries, and checking the government statistics for that region.

• Number of injuries: This measure would allow monitoring of the safety of workplace operations. The data for this measure would be collected by surveying local hospitals and doctors’ offices to determine if records are maintained that provide details with regards to work related injuries.

F. There is no one answer to this part. Here are some of the issues that students might discuss: Starbucks needs to weigh the costs of its social responsibility initiatives with benefits, such as increase consumer sales from customers 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 workers. Starbucks manufacturing line employees may want conditions to be similar in all plants that produce Starbuckscoffee out of a sense of fairness. Starbucks 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 Starbucks to achieve lower costs, which would encourage the company to purchase from suppliers with less favourable 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?

17.47 Strategic Planning, SWOT Analysis, Continuous Improvement

A. 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


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are discussed in Part D.1 below.) When a corporation and its managers are uncertain of what their strengths, weaknesses, opportunities, and threats this will lead to uncertainties about the organizations core competencies and strategies.

B.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 competencies.

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 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.

D.1. The feedback loops in Exhibit 17.1—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 17.3 refers to the use of feedback specifically for comparing actual results to plans. The feedback loop in Exhibit 17.7 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.

E. The process of developing the balanced scorecard is never complete because it is an iterative process. A balanced scorecard is developed and implemented then data will be collected and analyzed to monitor performance. The current balanced scorecard will be re-evaluated and changed as appropriate. Periodically, the balanced scorecard design will be reconsidered. As the company grows and changes so will the balanced scorecard.

17.48 Integrating Across the Curriculum — Management and Marketing: SWOT analysis

A. Here are a few of Triple 4’s strengths; students may think of others. Triple 4’s main strength relative to competitors is its membership growth. There is power in numbers and the membership has grown from 74 members in 1998 to 520 members in 2007. This increased membership allows them to purchase from suppliers in bulk and as a result they can reduce purchasing costs for their members overall. Another strength, although this is not touched on in the chapter, is that generally consumers prefer buying locally where they know the owners and can receive personalized service. If the stores can maintain reasonable resale prices for their products, the customers will continue to patronize the small independent stores. Triple 4 has been able to provide personal, store-specific services which is very important to its members.

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 manage inventories and plan product promotions. The company is non-union, allowing it to incur significantly lower labour costs than other retailers, who are typically unionized.

B. Here are several weaknesses of Triple 4. Although they are large in numbers, stores like Wal-Mart will always be bigger. It is impossible for them to try and compete with the volume Wal-Mart purchases. Companies such as Wal-Mart and other large retailers have corporate investment that Triple 4 does not have access to. They must rely on the members who are small, independent business owners. The small independent stores could never conceive of offering the variety that stores like Wal-Mart offer their customers. In fact, Wal-Mart is likely to sell products at prices that are below the variety


231 Cost Management

store’s cost, and they even offer some products at below their costs just to entice the customers to the large stores in the first place.

C. Triple 4 has been able to increase the variety and quality of services they can offer their membership to include products such as life and property insurance, dental benefits, and debit/credit card services to name a few. If they continue to grow they can continue to expand these service and product offerings enticing yet more members into their association and allowing them to negotiate even greater savings. An opportunity that has been developing over the past few years is the increased gas prices in Canada. If customers find they have to pay too much in gas to drive an hour to the nearest Wal-Mart store, they may consider staying locally to make their purchases. This is an opportunity for the independent stores to increase their advertising to “buy local” and entice the consumers away from the large retailers.

D. Although Triple 4 is enjoying increased buying and negotiating power from their increased membership, there is concern that they will not be able to continue to offer the personalized, store-specific services that the members find so rewarding and valuable. If this happens the members will become unhappy with the association and may choose to withdraw from membership. This would reduce the association’s buying and negotiating power and reduce the value of the organization completely.

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.

17.49 Balanced Scorecard, Strategy, Performance Measures – Large Hardware Store

A.Perspective

Average sale FinancialAverage variable cost per sale FinancialAverage customer wait time at counter CustomerAverage wait time for sales floor help CustomerTotal returns Customer or financialTotal revenue FinancialTotal labour cost Financial or internalUtilities cost Financial or internalNumber of out-of-stock items CustomerEmployee turnover Learning and growth

B. There are many possible reasons for the changes in performance. Below are several examples. You may have thought of different reasons.

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 saleremained the same.

Average customer wait time at the counterremained the same.

Average wait time for sales 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.

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, a change in consumer preferences, or poor purchasing decisions.

Total labour costs increased. The company might have 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.

Items out of stock increased. This could occur because the stores do not carefully track inventories, either electronically or manually. The company might also have launched a plan to reduce total inventory levels, increasing the out-of-stock incidence.

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, is not responsive to employee needs, 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 however changes in wait times have not materialized and sales have declined. Managers may want to investigate the increase in turnover rate. If a larger proportion of employees are retiring or leaving for college, managers may need to plan more proactively for turnover. However, if effective clerks are leaving for better opportunities or because they are unhappy with the working conditions at the store, future sales could be affected.

D. The results suggest that efforts to reduce wait time were not successful and in addition total revenues have declined. The managers cannot know for sure the cause of the


233 Cost Management

downturn in revenues and the managers need to investigate if the lack of reduction in wait times is correlated with the decline in total revenues.

E. It appears that the store emphasized the strategy of reducing customer wait times. However, total returns are higher than last year and total labour costs are higher. 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. In addition total revenue has declined nearly 16%. This is a serious problem that needs to be addressed.

F.

Future targetsAverage sale IncreaseAverage variable cost per sale Restore quality

and maintain costs

Average customer wait time at counter

Maintain or decrease

Average wait time for sales floor help

Maintain or decrease

Total returns Decrease as % of sales

Total revenue IncreaseTotal labour cost MaintainUtilities cost ExternalNumber of out-of-stock items Decrease Employee turnover Decrease


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