Strategy, Balanced Scorecard,
and
Strategic Profitability Analysis
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Strategy
 Strategy specifies how an organization matches its
own capabilities with the opportunities in the
marketplace to accomplish its objectives.
 A thorough understanding of the industry is critical to
implementing a successful strategy.
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Five Aspects of Industry Analysis
1.
2.
3.
4.
5.
Number and strength of competitors
Potential entrants to the market
Availability of equivalent products
Bargaining power of customers
Bargaining power of input suppliers
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Basic Business Strategies
Product differentiation—an organization’s ability to offer
products or services perceived by its customers to be superior
and unique relative to the products or services of its
competitors
1.

Leads to brand loyalty and the willingness of customers to pay
high prices
Cost leadership—an organization’s ability to achieve lower
costs relative to competitors through productivity and
efficiency improvements, elimination of waste, and tight cost
control
2.

Leads to lower selling prices
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Implementation of Strategy
 Many companies have introduced a balanced
scorecard to manage the implementation of their
strategies.
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The Balanced Scorecard
 The balanced scorecard translates an organization’s
mission and strategy into a set of performance
measures that provides the framework for
implementing its strategy.
 It is called the balanced scorecard because it balances
the use of financial and nonfinancial performance
measures to evaluate performance.
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Balanced Scorecard Perspectives
1.
2.
3.
4.
Financial
Customer
Internal business perspective
Learning and growth
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The Financial Perspective
 Evaluates the profitability of the strategy
 Uses the most objective measures in the scorecard
 The other three perspectives eventually feed back into
this dimension
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The Customer Perspective
 Identifies targeted customer and market segments and
measures the company’s success in these segments
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The Internal Business Prospective


Focuses on internal operations that create value for
customers that, in turn, furthers the financial
perspective by increasing shareholder value
Includes three subprocesses:
Innovation
2. Operations
3. Post-sales service
1.
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The Learning and Growth Perspective
 Identifies the capabilities the organization must excel
at to achieve superior internal processes that create
value for customers and shareholders
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The Balanced Scorecard Flowchart
Financial
Customer
Internal
Business
Process
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Learning
&
Growth
Balanced
Scorecard
Illustrated
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Strategy
and the
Balanced
Scorecard,
Illustrated
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Common Balanced Scorecard
Measures
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Balanced Scorecard Implementation
 Must have commitment and leadership from top
management
 Must be communicated to all employees
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Features of a Good
Balanced Scorecard
 Tells the story of a firms strategy, articulating a
sequence of cause-and-effect relationships—the
links among the various perspectives that describe
how strategy will be implemented
 Helps communicate the strategy to all members of
the organization by translating the strategy into a
coherent and linked set of understandable and
measurable operational targets
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Features of a Good
Balanced Scorecard
 Must motivate managers to take actions that
eventually result in improvements in financial
performance
 Predominately applies to for-profit entities, but has some
application to not-for-profit entities as well
 Limits the number of measures, identifying only the
most critical ones
 Highlights less-than-optimal trade-offs that
managers may make when they fail to consider
operational and financial measures together
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Balanced Scorecard Implementation Pitfalls
 Managers should not assume the cause-and-effect
linkages are precise: they are merely hypotheses.
 Managers should not seek improvements across all of
the measures all of the time.
 Managers should not use only objective measures:
subjective measures are important as well.
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Balanced Scorecard Implementation Pitfalls
 Managers must include both costs and benefits of
initiatives placed in the balanced scorecard: costs are
often overlooked.
 Managers should not ignore nonfinancial measures
when evaluating employees.
 Managers should not use too many measures.
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Evaluating Strategy

Strategic analysis of operating income—three parts:
Growth component—measures the change in
operating income attributable solely to the change in
the quantity of output sold between the current and
prior periods
2. Price-recovery component—measures the change in
operating income attributable solely to changes in
prices of inputs and outputs between the current and
prior periods
1.
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Evaluating Strategy

Strategic analysis of operating income
3.
Productivity component—measures the change in
costs attributable to a change in the quantity of inputs
between the current and prior periods
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Revenue Effect of Growth
Revenue
Effect
=
of
Growth
Actual Units of
Output Sold in _
the Current
Period
Actual Units of
Output Sold in
the Prior
Period
Effect of growth upon revenue if price were
unchanged.
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Prior
X Period
Selling
Price
Cost Effect of Growth for
Variable Costs
Cost Effect
of Growth
for Variable
Costs
=
Units of Input
Required to Produce _
Current Output in the
Prior Period
Actual Units of
Input Used to
Produce Prior
Period Output
X
Prior
Period
Input
Price
Change in inputs assuming last period’s efficiency
and price.
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Cost Effect of Growth for
Fixed Costs
 Assuming adequate current capacity:
Cost
Effect
Of
Growth
For
Fixed
Costs
=
Actual Units of
capacity in
Prior Period to
Produce Current
Period Output
Actual Units
of Capacity
in the
Prior
Period
X
Prior
Period
Price
per unit
of
capacity
Note: This is zero assuming there was enough capacity last period to
have produced this period’s output. If not, calculations are “beyond the
scope of the book.”
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Revenue Effect of Price Recovery
Revenue
Effect
Of
PriceRecovery
=
Current Period
Selling Price
Prior Period
Selling Price
X
Change in selling price times current units sold.
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Current
Period
Units
Sold
Cost Effect of Price Recovery
 Variable costs:
Cost
Effect
Of
PriceRecovery
for
Variable
Costs
=
Current Period
Input Price
Prior Period
Input Price
X
Units of
Input
required to
produce
Current
Period’s
Output in
the Prior
Period
Change in input price times units required this period
assuming last period’s efficiency.
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Cost Effect of Price Recovery
 Fixed costs with adequate capacity
Cost
Effect
Of
PriceRecovery
for Fixed
Costs
=
Current Period
Price per Unit
of Capacity
Prior Period
Price per Unit
of Capacity
X
Actual Units of
Capacity on
Prior Period to
Produce
Current
Period’s Output
Change in per-unit cost of capacity, times last period’s capacity.
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Cost Effect of Productivity for Variable Costs
Cost
Effect
Of
Productivity
for Variable
Costs
=
Actual Units of
Input used to
Produce
Current Period
Output
Units of Input
Required to
Produce Current X
Period’s Output
in Prior Period
Input Price in
Current Period
Inputs used compared to what would have been need at last year’s
usage rate, times current price. Note similarity to labor and material
efficiency variances.
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Cost Effect of Productivity for
Fixed Costs
 With adequate capacity
Cost
Effect
Of
Productivity
for Fixed
Costs
=
Actual
Units of
Capacity in
Current
Period
Actual Units of
Capacity in Prior
Price Per Unit of
Period to X
Capacity in
Produce Current
Current Period
Period’s Output
Change in capacity, at current cost per unit of capacity.
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Strategic Analysis of Profitability
Illustrated
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The Management of Capacity
 Managers can reduce capacity-based fixed costs by
measuring and managing unused capacity.
 Unused capacity is the amount of productive capacity
available over and above the productive capacity
employed to meet consumer demand in the current
period.
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Analysis of Unused Capacity

Two important features:
Engineered costs result from a cause-and-effect
relationship between the cost driver and the resources
used to produce that output.
2. Discretionary costs have two parts:
1.
1.
2.
They arise from periodic (annual) decisions regarding the
maximum amount to be incurred.
They have no measurable cause-and-effect relationship
between output and resources used.
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Differences Between Engineered
and Discretionary Costs Illustrated
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Managing Unused Capacity
 Downsizing (rightsizing) is an integrated approach of
configuring processes, products, and people to match
costs to the activities that need to be performed to
operate effectively and efficiently in the present and
future.
© 2012 Pearson Prentice Hall. All rights reserved.
© 2012 Pearson Prentice Hall. All rights reserved.