Implementing Strategy: The Balanced Scorecard and the Value Chain

1. Chapter Two Implementing Strategy: The Balanced Scorecard and the Value Chain

2. Learning Objectives • Explain how to implement a competitive strategy by using Strengths-Weaknesses-Opportunities-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

3. 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”

4. 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)

5. SWOT Analysis • 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

6. Question When using SWOT analysis, which of the following would most likely be looked at in order to identify strengths and weaknesses of a firm? A) Barriers to entry B) Bargaining power of customers C) Pressure from substitute products D) Product lines

7. Question When using SWOT analysis, which of the following would most likely be looked at in order to identify opportunities and threats of a firm? A) Barriers to entry B) Management C) Operations D) Product lines

8. SWOT Analysis • Identification of critical success factors (CSFs) tied to strategy—for example: • Product innovation • Quality • Skill development • Identification of quantitative measures for the specified CSFs—for 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

9. Question Which one of the following financial critical success factors is measured by inventory turnover? A) Market value B) Sales C) Flexibility D) Liquidity E) Profitability

10. 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)

11. Question Skills or competencies that the firm employs especially well are called: A) SWOT B) core competencies C) the balanced scorecard D) sustainability

12. Question Which competitive strategy technique involves specializing a product or service to meet consumer needs, then conveying that uniqueness to consumers? A) Focus. B) Innovation. C) Cost Leadership. D) Differentiation.

13. Value-Chain Analysis • Means to reach the detail-level of analysis • 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) • Design to manufacturing to service after sale • Not all areas will get the same attention (identification of areas most important to the customer will determine the firm’s focus) • Goal = the most value at the lowest possible cost

14. 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)?

15. 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 • Is there any way to add value for the customer while reducing costs?

16. 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

17. Value-Chain Analysis in Computer Manufacturing (continued)

18. Results of Value-Chain Analysis

19. 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

20. Question The objective of the value chain analysis is to identify stages of the value chain where the firm can: A) Justify increases in the price of the product or service. B) Increase value to the customer or reduce cost. C) Sublet production to other producers. D) None of the above answers is correct.

21. 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 firm’s CSFs into four areas: • Financial perspective (financial measures) • Customer perspective (customer satisfaction) • Internal business process perspective (e.g., productivity and speed) • Learning and innovation (e.g., training and number of new patents or products)

22. The Balanced Scorecard (BSC) (continued) • Benefits • Means for implementing strategy • Means to achieve a desired organizational change in strategy • Can be used to determine management’s compensation and rewards • Coordinates efforts within the firm to achieve CSFs • Limitations • Nonfinancial information is subjective • Confidentiality must be insured for certain information • Must be adaptable and frequently updated • Costly and time-consuming to implement

23. The Balanced Scorecard (BSC) (continued) • A properly constructed BSC can be used to infer a company’s strategy • BSC → Strategy, rather than 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…

24. 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 value

25. Sustainability • The fifth perspective for many organizations • The balancing of short-term and long-term goals in all three dimensions of the company’s performance–economic, 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)

26. The BSC and Not-For-Profit (NFP) 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 reduced or value added on the value chain

27. Question Which of the following is a measure for the learning and innovative perspective of the balanced scorecard? A) Customer retention B) Selling expenses to sales ratio C) Training dollars per employee D) Order processing time

28. Question Which of the following is a measure of the financial performance perspective of the balanced scorecard? A) Customer satisfaction with speed of service B) Gross margin C) Number of new manufacturing processes developed D) Manufacturing defects

29. Question Which of the following is a measure of the financial performance perspective of the balanced scorecard? A) Customer satisfaction with speed of service B) Gross margin C) Number of new manufacturing processes developed D) Manufacturing defects

30. Question __________ is (are) the balancing of short-term and long-term goals in all three dimensions of the company's performance - economic, social, and environmental. A) Customer perspective B) A strategy map C) Sustainability D) The balanced scorecard

31. Question Which of the following would be an environmental performance indicator? A) Number of injuries B) Employee participation with Habitat for Humanity C) Number of training hours D) Toxic and nontoxic waste

32. The Role of Accounting 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 organization’s achievement of CSFs