Strategy and the Balanced

Scorecard

Based on Chapter 13, Cost Accounting,

12th ed.
Horngren et al., Edited and
Modified by C. Bailey

Introduction

This topic
explores the use of management

accounting information for implementing

and evaluating an organizations strategy.
shows how MA information helps strategic
initiatives:
productivity improvement
reengineering
downsizing.

What is Strategy?

Strategy describes how an

organization matches its own
capabilities with the opportunities in
the marketplace to accomplish its
overall objectives.
In formulating its strategy, an
organization must thoroughly
understand the industry in which it
operates.
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Understanding the
Industry

Industry analysis focuses on five

forces:
Competitors
Reducing prices of products is critical for

any industry to grow.

Competition today is severe along the
dimensions of price, timely delivery, and
quality.

Understanding the
Industry

Potential entrants into the market

Competition usually keeps profit margins

small.
Existing companies probably have lower
costs.
Existing companies also have the
advantage of close relationships with
customers.

Understanding the
Industry

Equivalent products
How easily can users substitute other

products (consider MS Windows!)

Bargaining power of customers

Customers may obtain the products from

other potential suppliers.

Understanding the
Industry

Bargaining power of input suppliers

Suppliers of high-quality materials can

demand higher prices.

Skilled engineers, technicians, and laborers
can demand higher wages.

Generic Strategies

Two generic strategies that

organizations
use are:
Product differentiation
Cost leadership

Product Differentiation

Customers perceive product/service

to be superior and unique relative to
competitors.
Hewlett Packard in the electronics industry
Merck in the pharmaceutical industry
Coca-Cola in the soft drinks industry
Others?

Cost Leadership

Achieving low costs relative to

competitors.
How?
Productivity and efficiency improvements
Elimination of waste
Tight cost control

Examples?
Dell, Bic

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Implementation of
Strategy

To be successful, a company must

formulate an effective strategy
implement it vigorously.

Management accountants play

important role
collecting meaningful data
designing reports to help managers track

progress in implementing strategy.

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The Balanced Scorecard

The balanced scorecard translates an

organizations mission and strategy
into a comprehensive set of
performance measures.
Does not focus solely on financial
objectives.
highlights nonfinancial objectives that an

organization must achieve to meet its [longterm] financial objectives.

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The Balanced Scorecard

Attempts to balance
financial and nonfinancial performance

measures
short-run and long-run performance in a
single report.

Why does the balanced scorecard

reduce managers emphasis on shortrun financial performance?

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The Balanced Scorecard

Reduces short-term emphasis

because:
nonfinancial and operational indicators

measure fundamental changes

financial benefits of these changes may not
appear in short-run earnings.
nonfinancial measures (leading indicators)
signal the prospect of creating economic
value in the future.

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Perspectives of the

Balanced
Scorecard

There are four perspectives of the

balanced scorecard:
1 Financial perspective
Customer perspective
Internal business process perspective
Learning and growth perspective

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Financial Perspective

Evaluates the profitability of the

strategy.
Focuses on how factors affect
income:
Growth (units sold, inputs need)
Price Recovery (higher prices, lower costs)
Productivity (efficiency of resource use)

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Financial Perspective

Objective:
Increase shareholder value
Sample Measures:
Increase in operating income
Revenue growth
Cost reduction is some areas
Return on investmentS A L E S

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Customer Perspective

Identifies the targeted market

segment and measures the
companys success in these
segments.

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What are some of the customer

perspective measures?

Market share
Customer satisfaction
Customer retention percentage
Time taken to fulfill customers
requests

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Internal Business

Process
Perspective

Focuses on internal operations

Create value for customers
Further the financial perspective by

increasing shareholder wealth.

Typical Objectives:
Improve manufacturing capability
Reduce delivery time to customers
Meet specified delivery dates

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What are some of the internal

business perspective measures?

Innovation Process
Manufacturing capabilities
Number of new products or services
New product development time
Number of new patents

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Internal business perspective

measures contd.

Operations Process
Yield
Defect rates
Time taken to deliver product to
customers
Percentage of on-time delivery
Setup time
Manufacturing downtime
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Internal business perspective

measures contd.

Post-sales service
Time taken to replace or repair
defective products
Hours of customer training for using
the product

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Learning and Growth Perspective

Emphasizes capabilities of
Employees
empowerment, training

Info systems

Typical Objectives:
Develop process skill
Empower work force
Enhance information system capabilities

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Some Learning and Growth

Perspective Measures

Employee education and skill level

Employee satisfaction scores
Employee turnover rates
Information system availability
Percentage of processes with
advanced controls

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Features of a Good

Balanced
Scorecard

It tells the story of a companys

strategy by articulating a sequence
of cause-and-effect relationships.
It assists in communicating the
strategy to all members of the
organization by translating the
strategy into a coherent and linked
set of measurable operational
targets.
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Features of a Good

Balanced
Scorecard

In for-profit companies, the balanced

scorecard places strong emphasis on
financial objectives and measures.
The scorecard limits the number of
measures used by identifying only
the most critical ones.
The scorecard highlights suboptimal
tradeoffs that managers may make.
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Pitfalls When Implementing

a
Balanced Scorecard

Dont assume the cause-and-effect

linkages to be precise.
Dont seek improvements across all
measures all the time.
Dont use only objective measures on
the scorecard.

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Pitfalls When Implementing

a
Balanced Scorecard

Dont fail to consider both costs and

benefits of initiatives such as
spending on information technology
and research and development.
Dont ignore nonfinancial measures
when evaluating managers and
employees.

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End of BSC Presentation

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