Chapter Two

McGraw-Hill/Irwin

Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives
Explain how to implement a competitive

strategy by using Strengths-WeaknessesOpportunities-Threats (SWOT) Analysis

Explain how to implement a competitive

strategy by focusing on the execution of goals

Explain how to implement a competitive

strategy using value-chain analysis

2-2

Learning Objectives
(continued)
Explain how to implement a competitive

strategy using the Balanced Scorecard (BSC)

Explain how to expand a conventional

Balanced Scorecard (BSC) by integrating

sustainability

2-3

Implementing a Strategy
There are two main competitive

strategies:
cost leadership
differentiation

Once a firm chooses which strategy to

follow, there are various means of

implementation:
SWOT Analysis
Focus on execution
Value-chain analysis
Balanced scorecard (BSC)

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SWOT Analysis
Identification of critical success factors

(CSFs) tied to strategyfor example:

Product innovation
Quality
Skill development

Identification of quantitative measures

for the specified CSFsfor example:

Number of design changes or new patents

Number of defects or number of returns
Number of training hours or amount of skill

performance improvement

2-5

SWOT Analysis (continued)

The SWOT analysis has four areas:
S strengths/internal
W weaknesses/internal
O opportunities/external
T threats/external

Look at product lines,

management, R&D,
manufacturing, marketing,
and strategy
Look at barriers to entry,
intensity of rivalry among
competitors, substitute
goods, and
customer/supplier
bargaining power
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Execution
The CSFs a manager executes depend on the

chosen strategy
Cost leadership: operational performance and
quality
Differentiation: customer satisfaction and
innovation
Differentiated firms must pay close attention
to marketing and product development
Management accountants assist by gathering,
analyzing, and reporting on relevant information
Can be improved through benchmarking and
total quality improvement (e.g., Malcolm
Baldrige Quality Award)

2-7

Value-Chain
Analysis
An analysis for better understanding the

details of the organizations competitive

strategy
CSFs must be implemented in each and every
phase of operations

Helps a firm better understand its

competitive advantage by analyzing what

processes add value (processes that do not
add value can be deleted or outsourced)

Will include upstream (prior to

manufacturing or operations) and

downstream activities

2-8

Value-Chain
Analysis
Value-chain analysis has two steps:
Identify the value-chain activities at the
smallest level possible
Develop a competitive advantage by reducing
cost or adding value
To develop a competitive advantage, a

firm must consider the following:

What is our competitive advantage (strategy)?

Where can we add value for the customer?
Where can we reduce costs?
Are any of our processes linked (linkages

exploited)?

2-9

Example: Value-Chain
Analysis in Computer
Manufacturing
Computer Intelligence Company (CIC)

manufactures computers for small businesses

The company has an excellent reputation for

service and reliability as well as a growing

customer list: competes on differentiation
Is there any way to add value for the

customer while reducing costs?

2-10

Example: Value-Chain Analysis

in Computer Manufacturing
(continued)
The company is considering two

options:
Option One is to continue functioning as is
Option Two includes two separate

outsourcing decisions: (a) the purchase or

manufacture of parts, and (b) providing
service internally or outsourcing it

It is important to consider company

strategy in outsourcing decisions

2-11

Value-Chain Analysis in
Computer
Manufacturing (continued)
Value Activity

Option One Current

Option Two Potential

Acquiring raw
materials

CIC is not involved at

this step

CIC is not involved at

this step

Manufacturing
computer chips and
other parts

CIC is not involved at

this step; cost is $200

CIC is not involved at

this step; cost is $200

Manufacturing
components, some of
which CIC can make

CIC purchases $300 of

parts for each unit

CIC manufactures these

parts for $190 per unit
plus $55,000 monthly

Assembling

CICs costs are $250

CICs costs are $250

Marketing, distributing, CICs costs are

and servicing
$175,000 per month

CIC contracts out these

services for $130 per
month
2-12

Results of Value-Chain
Analysis
Manufacturing
Option One
Option Two
Savings with
Option Two

600 x $300 =
$180,000

Marketing,
distributing, and
servicing
$175,000 per month

600 x 190 +
$55,000 =
$169,000

$78,000 per month

$11,000

$97,000 per month

2-13

Results of Value-Chain Analysis

(continued)
CIC can save $108,000 ($11,000 + $97,000)

per month by manufacturing the parts and

contracting out marketing, distributing, and
servicing

The main factor driving the decision is

company strategy, which in this case is quality

and customer service
For a firm pursuing a differentiation strategy, the best

option is not necessarily the one which provides the

most savings (savings is a secondary consideration)
From a strategic viewpoint, Option One is preferred
over Option Two

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The Five Steps of Strategic

Decision Making for CIC
1. Determine the Strategic Issues Surrounding
2.
3.
4.

5.

the Problem: CIC competes on differentiation

Identify the Alternative Actions: two options
Obtain Information and Conduct Analyses of
the Alternatives: calculate the relevant costs
Based on Strategy and Analysis, Choose and
Implement the Desired Alternative support
CICs strategy, this is the key to the analysis
Provide an On-going Evaluation of the
Effectiveness of implementation in Step 4.

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The Balanced Scorecard

(BSC)
A performance report based on a broad set

of financial and nonfinancial measures that

is crucial to understanding and
implementing a strategy
This report groups a firms CSFs into four

areas:
Financial perspective (financial measures)
Customer perspective (customer satisfaction)
Internal process perspective (e.g., productivity and

speed)
Learning and growth (e.g., training and number of

2-16

The Balanced Scorecard

(continued)
Benefits
Provides a means for implementing

strategy
Provides a means to achieve a desired
organizational change in strategy
Can be used to determine managements
compensation and rewards
Aligns managers efforts with strategy
Coordinates efforts within the firm to
achieve CSFs
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The Balanced Scorecard

(continued)
A properly constructed BSC can be used to

infer a companys strategy

BSC Strategy,

and Strategy BSC

The emphasis placed on each performance

perspective reflects the strategy of the firm

For a cost leader, the operations perspective might

be the most important; for a differentiator, the

customer perspective

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Strategy Map
A strategy map is a cause-and-effect
diagram of the relationships embodied
in a BSC:
Shows how the achievement of CSFs in one

perspective should affect the achievement of goals

in another perspective
The financial perspective is the target in the
strategy map because financial performance is the
ultimate goal for most profit-seeking organizations
Success in the other perspectives leads directly to
improved financial performance and shareholder

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An Example Strategy Map

2-20

Sustainabilit
y
The fifth perspective for many organizations
The balancing of short-term and long-term

goals in all three dimensions of the companys

performanceeconomic, social, and
environmental:
Environmental reports use environmental performance

indicators (EPIs) to measure sustainability

These indicators are in three areas:

Operational (measure stresses to the environment/regulatory
compliance issues)
Management (try to reduce environmental effects)
Environmental condition (measure environmental quality)
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Example Sustainability
Scorecard

2-22

The BSC and Not-ForProfit

Organizations
Competitive strategy is different:
Must satisfy funding authorities, political leaders,

and the general public

The BSC can still be used to monitor CSFs

related to internal processes, customer

satisfaction, financial measures, and human
resources measures
Value-chain analysis can still be used to

determine at what points costs can be

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The Role of Cost Management

Three cost-management resources for
implementing strategy are discussed in this
chapter:
SWOT analysis provides a system and structure to

identify CSFs

Value-chain analysis builds on the CSFs by breaking

them down into detailed activities

The BSC provides a way to implement the detailed

strategy developed through the previous two analyses;

it provides the processes for evaluating the
organizations achievement of CSFs
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Chapter Summary
Strengths-Weaknesses-Opportunities-Threats

(SWOT) Analysis provides a system and structure in

which to identify a firms critical success factors
(CSFs)

Execution of goals is important in implementing a

strategy

Execution depends on the competitive strategy a firm

is pursuing

Management accountants assist management by

gathering, analyzing, and reporting on relevant

information

2-25

Chapter Summary (continued)

Value-chain analysis builds on the CSFs identified in
SWOT analysis by breaking them into detailed activities
The balanced scorecard (BSC) provides the processes
for evaluating a firms achievement of CSFs
Sustainability builds on the conventional BSC by
balancing short-term and long-term goals
Sustainability focuses on economic, social, and
environmental issues
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