ACT 5733 Advanced

Managerial Accounting

Chapter 12 Strategy & The

Balanced Scorecard

ACT 5733 - Chapter 12 - Felo

Session Outline
Review Exam 1
Strategy introduction
Balanced Scorecard
Strategic analysis of operating income

ACT 5733 - Chapter 12 - Felo

Strategy
How can we create value for customers
while differentiating ourselves from
competitors?
Porters 5 forces
1. Competitors
2. Potential entrants
3. Equivalent products
4. Bargaining power of customers
5. Bargaining power of input suppliers

ACT 5733 - Chapter 12 - Felo

Basic Strategies
Product differentiation
1. Superior and unique products / services
2. Brand loyalty results in pricing power
3. Develop differentiation through R&D, brand
promotion, service, and being first to market
Cost leadership
1. Offer similar products, but at a lower price
2. Focus on productivity, elimination of waste,
and tight cost control

ACT 5733 - Chapter 12 - Felo

Balanced Scorecard
An integrated set of performance
measures derived from a units strategy
and that support the units strategy.
Translates mission and strategy into goals
and measures (or metrics)
Continuous improvement
Forward-looking measures

ACT 5733 - Chapter 12 - Felo

Common Characteristics
Financial - How do shareholders see us?

Customer - How do customers see us?

Internal - What must we excel at?

Learning and growth - Can we continue to

learn, improve, innovate, & create value?

ACT 5733 - Chapter 12 - Felo

Key Points
The performance measures used must be

relevant to the strategy of the unit

Strategy maps can be used to illustrate the

expected causal relationships

The BSC can be used to test managements

strategy (theory)

ACT 5733 - Chapter 12 - Felo

Financial Perspective
How do shareholders see us?
Approximately 5 metrics
Traditional metrics (EPS, CFO, etc.)
Revenue from new customers
Revenue from new products
Cost reduction

ACT 5733 - Chapter 12 - Felo

Customer Perspective
How do customers see us?
What is our value proposition?
Approximately 5 metrics
Customer satisfaction
Customer retention
Customer loyalty
New customers
Customer profitability (linked to ABC)
Market share
Wallet share (account share)

ACT 5733 - Chapter 12 - Felo

Internal Perspective
What must we excel at to achieve our
(financial and customer) goals?
How will we deliver our value proposition
to customers?
How will we achieve productivity
improvements for financial objectives?
Approximately 8-10 metrics

ACT 5733 - Chapter 12 - Felo

Principal Internal Processes
What processes have largest impact on

customer satisfaction?
Innovation processes

Operations processes

Post-sales service processes

Social and regulatory processes (all firms)

ACT 5733 - Chapter 12 - Felo

Innovation Processes
Create products and services to meet
customer needs
Focus is on identifying new markets
(including market attributes) and new
customers
Metrics may include market size, price
sensitivity (elasticity), time to market, target
costs, and R&D productivity

ACT 5733 - Chapter 12 - Felo

Operations Processes
Produce and deliver existing products and
services to customers
Focus is on efficient, consistent, & timely
delivery
Firms competing on cost focus here
Metrics may include efficiency measures,
down-time, supplier reliability, quality
measures, cycle time measures, and cost

ACT 5733 - Chapter 12 - Felo

Post-Sales Service Processes
Customer service after original sale or
delivery of goods and services
Attract customers, generate revenue, or
efficiently provide required services
Warranty and repairs
Training of customer employees
Billing and collection
Returns
Disposal costs

ACT 5733 - Chapter 12 - Felo

Social & Regulatory Processes
Environment

Health & safety

Employment practices

Community investment

ACT 5733 - Chapter 12 - Felo

Learning & Growth Perspective
Can we continue to learn, improve,
innovate, & create value?
What skills and capabilities must our
employees possess to achieve our
(financial, customer, & internal) objectives?
Do we have the infrastructure we need?
Approximately 5 metrics

ACT 5733 - Chapter 12 - Felo

Learning & Growth Metrics
Training spending
Employee retention
% employees with particular skill
Employee satisfaction
Technology deployment

ACT 5733 - Chapter 12 - Felo

Pitfalls of the BSC
Too many financial measures (not balanced)
Lack of forward-looking metrics
Metrics not aligned with strategy
Metrics not incorporated into performance
evaluation system
Senior management not committed

ACT 5733 - Chapter 12 - Felo

Pitfalls Continued
Over-acceptance of linkages
Inadequate participation across disciplines
Treating the BSC as a one-time event
BSC treated as a systems project
Lack of IS infrastructure

ACT 5733 - Chapter 12 - Felo

BSC for Nonprofits &
Government Organizations
Financial objectives are typically not the
ultimate goal of these organizations
However, the basic structure (strategy-
driven measures of performance linked
together) is still valid

ACT 5733 - Chapter 12 - Felo

Strategic Analysis of OI
Technique for comparing change in OI from
one period to another
Look at performance on product
differentiation, cost leadership, and growth
Changes in OI due to change in quantity sold,
changes in prices of inputs and outputs, and
changes in quantity of inputs used

ACT 5733 - Chapter 12 - Felo

Growth Component
Measures increase in revenue and costs
from selling more units in 2015 vs 2014
Primary focus is on the revenue effect
change in revenue from selling more units

ACT 5733 - Chapter 12 - Felo

Price-Recovery Component
Measures increase in revenue and costs
from changes in prices from 2014 to 2015
Primary focus is on revenue effect
change in revenue from increase in selling
price

ACT 5733 - Chapter 12 - Felo

Productivity Component
Measures changes in cost caused by
productivity changes from 2014 to 2015
Primary focus is on variable cost effect
change in cost due to improved productivity

ACT 5733 - Chapter 12 - Felo

Summary
Cost leadership strategy favorable
productivity (VC effect) and growth
components
Product differentiation strategy favorable
price-recovery (revenue effect) and growth
components

ACT 5733 - Chapter 12 - Felo