2. Decision Facilitating
Activity – Based Decision Making
Decision Influencing
How to control & implement strategy?
Management Accounting II
How to reduce costs?
Value Engineering
Driver
Analysis
12
Activity
Analysis
12
Performance
Measure
12
How to improve decisions that add value?
Decision Making (DM)
Service
Department
Profitability
Responsibility
15
Balanced
Scorecard
13
Cost of
Quality
19
Delegation
&
Management
Control
Systems
22
Performance
Measurement &
Compensation
23
Ethics (1)
2
Process Value
Analysis (PVA)
Pricing
14
Product-
Mix
14
Customer
Profitability
14
Supplier
Profitability
14
Product design
14
Big Picture
3. Big Picture
Activity-based management Implementation Model
3
ABM Model
Systems Planning
Identify, Define, and
Classify Activities
Reduce
Costs
Improve
Decisions
Increase Profitability
ABC
1. Continuous improvement (PVA)
2. Product design (eg complexity drivers)
3. Improved decision making
4. Accurate cost info (VCA)(ABC)
a. Products (MA1)
b. Customers (eg setup drivers)
c. Suppliers
PVA
Assess Value Content of
Activities
Define Root Causes of
Each Activity
Establish Activity
Performance Measures
Search for Improvement
Opportunities
Part 1 – Week 2 Part 2 – Week 3
Assign Resource Cost to
Activities
Identify Cost Objects and
Define Activity Drivers
Calculate Activity Rates
Assign Costs to Cost
objects
Product design
Value engineering
Design
analysis
Functional
analysis
4. Big Picture
Activity-Based versus Strategic-Based Responsibility Accounting
4
Responsibility
Accounting
Financial-based
centers (Cost,
Revenue, Profit,
Investment)
Strategy-based
Responsibility accounting system translates the
strategy of the organization into operational
objectives and measures
Which one is bottom up/top down?
Activity-based
AB system adds a process perspective to the
financial perspective of the functional-based
responsibility accounting system.
6. 7
Communication Content, Management Control and the
Balanced Scorecard?
Strategy Alignment FWK
• Focusing
• Competitors
• Customers
Systems Thinking
• Visualizing
• Strategy Map
Measurement
• Formalizing
• Attributes
StrategicResponsibilitySystems
7. 8
Outcomes
• Empowerment
• Learning
• Fun place to work
• Low turnover
Outputs
• On-time delivery
• Less Errors
• Fast cycle time
• Cheques processed
• Customer return
• Word of mouth marketing
• What do we have to do
today?
• To get what we
want tomorrow?
StrategicResponsibilitySystems
Creatingalignmentwithnon-financialperformancemeasures
12. 13
Why are we doing this? – to help your firm become more successful
What do you mean by success?
Name some successful firms?
Strategy - Every firm has to have a plan that will lead to success?
Measurement - How to we measure progress towards success?
Strategy – How do firms succeed?
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Learning objective 1:
Recognize which of two
generic strategies a
company is using
… product differentiation
or cost leadership
1
14. 16
How do we implement strategy?
Strategy
Formulation
Strategy Execution
SCA
Competitors
Customer
Customer
Internal
Processes
Learning &
Growth
Strategy Map-Business Model
Benchmarking , Memory, Learning
Action Plans
MKT
OP
HRM
Rank Action Date
Initiatives
Measure
(KPI)
Target
Balanced Scorecard
Communicating
People controls
-Personnel
-Culture
Formulation of actions + targets
Action controls
-Behavioral Constraint (Locks)
-Preaction Reviews (Budget setting)
-Action Accountability (Standard operating
procedures)
-Redundancy
Formulation of targets + rewards
Results controls
-Measure
-Targets
-Rewards
HRM
MKT
OP
1. Focusing 2.Visualizing 3. Formalizing
MEASUREMENT
3. Formalizing
Cannot manage what you cannot measure
Aligning (role clarity)
Action controls
(dos and don’ts)
Results controls
(incentives)
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
15. 17
Basic Business Strategies
1. 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
Leads to brand loyalty and the willingness of customers to pay high prices
Example: A retailer of computers might offer on-
site repair service, a feature not offered by other
rivals in the local market.
2. 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
Leads to lower selling prices
Example: A company might redesign a product so
that fewer parts are needed, lowering production
costs and the costs of maintaining the product after
purchase.
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
16. Which product function offering
can we best compete with?
Price range
(HK$)
15,000-55,000
5,000-10,000
2,000-4,000
2,000-4000
18
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Basic Business Strategies
3. A focusing strategy
happens when a firm selects or
emphasizes a market or customer
segment in which to compete.
17. 19
Exercise – How do firms succeed?
List some cost leaders/differentiators that you know of
Why do you use a particular service?
Save money
Good quality service
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Commodities
Cost leadership business
Fast food? It is not because that it is cheap but how a firm competes
People go to a product and pay more (differentiation)
Different industries
21. Chipset, a integrated-circuits company produces a single
specialized product, CX1, a standard, high-performance microchip.
It can be used in multiple applications and enjoys a reputation for
superior features with flexible design to meet customers’ needs.
23
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Example: Cost Leadership Strategy – Chipset
22. 24
Example: Cost Leadership Strategy – Chipset
Chapter 12, p. 496
Chipset – 1. Why customers are
buying the CX1? 2. How can
Chipset beat its competitors?
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Attribute Rating
1 2
Customized chip design
53 4
Power and speed
Quality
Customer service
Scalability
Price
ProductAttributes
DesiredbyCustomers
Chipset
Visilog
- Price
- Quality
- Service
23. 25
LO1: Understand
customer preference
maps
LO1: Decide on a cost-
leadership strategy
(Chipset’s strategy)
LO1: Build internal
capabilities to achieve
cost leadership
LO3:Strategy implementation
-Balanced scorecard
LO4: Evaluating strategy
- Measurement
LO5: Management of
Capabilities
LO2:
Value engineering;
Process engineering
- Price
- Quality
- Service
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Example: Cost Leadership Strategy – Chipset
25. 28
Example: Building Internal Capabilities:
Quality Improvement and Reengineering at Chipset
When do we maximize the benefits of reengineering?
When the reengineered process cuts across functional lines.
Successful reengineering:
Changing roles + responsibilities
Eliminate non-value added activities & tasks
Using information technology
Developing employee skills Learning objective 2 :
Understand what
comprises reengineering
… redesigning business
processes to improve
performance by reducing
cost and improving
quality
2
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
26. 29
1. Manufacturing processes
- Engineering staff are skilled at making product & process
improvements
- Need real time data about manufacturing process parameters
- Must train and empower workers in quality management
techniques to help them identify the causes of defects and to
find ways to prevent them
2. Order delivery process
- New system – a customer relationship manager works closely
with the customer and with manufacturing to specify delivery
schedules for CX1 one month in advance of shipment.
Example: Building Internal Capabilities:
Quality Improvement and Reengineering at Chipset
- Price
- Quality
- Service
LO1: Build internal
capabilities to achieve
cost leadership
LO3:Strategy implementation
-Balanced scorecard
LO4: Evaluating strategy
- Measurement
LO1: Decide on a cost-
leadership strategy
(Chipset’s strategy)
LO2: Reengineering
Is the fundamental rethinking and
redesign of business processes to
achieve improvements in critical
measures of performance – cost,
quality speed, and customer
satisfaction.
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Successful reengineering:
Changing roles + responsibilities
Eliminate non-value added activities & tasks
Using information technology
Developing employee skills
Value
engineering;
Process
engineering
1: Understand customer
preference maps
31. Features of a good Balanced Scorecard - Benefits
Linking vision and strategy to employees’ everyday actions
Helps managers to manage the balance
between financial and non-financial measures
of cause and effect relations in the business system
between internal and external perspectives
Setting priorities: This helps organizational participants to understand the priorities – the
things that need to be done in order to create the right product or service to deliver value to the
customer.
Managing change: The balanced scorecard also helps to manage change by determining
the appropriate objectives and performance measures once the SCA and the strategy map of the
business has been formulated. This helps organizations to manage change by helping to align
participants’ attention, skills and effort towards the processes that matter for delivering value to the
customer.
34
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
33. 40
3.Example:
Balanced
scorecard
- Chipset (P.501)
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Chipset, a integrated-circuits
company produces a single
specialized product, CX1, a
standard, high-performance
microchip. It can be used in
multiple applications and enjoys
a reputation for superior
features with flexible design to
meet customers’ needs.
Chipset’s manager implemented
the Balance Scorcard approach
to further its cost leadership
strategy: improve quality and
reengineer process.
34. Objectives Measures Initiatives
Target
perf.
Actual
perf.
Increase market
share
Market share in
market segment
Identify future needs
of customers
78% 79.3%
Increase
customer
satisfaction
No .of new
customers
Identify new target-
customer segments
1 1
Increase
customer
satisfaction
Customer-
satisfaction
ratings
Increase customer
focus of sales
organization
90% 87%
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
35. Objectives Measures Initiatives
Target
perf.
Actual
perf.
Improve
manufacturing
quality and
productivity
Yield
Identify root causes of
problems and improve
quality
78% 79.3%
Reduce delivery
time to customers
Order-delivery
time
Reengineer order-
delivery process
30 days
30
days
Improve
manufacturing
capability
% of processes
with advanced
controls
Organize R&D
/Manufacturing teams
to implement
advanced controls
75% 75%
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
36. Objectives Measures Initiatives
Target
perf.
Actual
perf.
Empower
workforce
% of workers
empowered to
manage processes
Have supervisors act
as coaches rather than
decision makers
85% 90%
Align
employees &
organization
goals
Employee-
satisfaction ratings
Employees
participation and
suggestions program
to build teamwork
80% 88%
Develop
process skills
% of workers
trained in process
and quality
management
Employee training
program
90% 92%
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
38. 45
Systems Thinking
Evaluating the success: Role of systems thinking
Which two perspectives provided the best feedback for
strategy execution?
If internal measure improved & external measure did not?
Poor causal link
If internal measure did not improve & external measure did improve?
Wrong Strategy
Market factors (out of control)
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
39. 46
Systems Thinking
What would success look like?
Use strategy map (systems thinking) to link long term success
(strategy) to daily operational success
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
41. Factors leading to failure of BSC
at Philips Lighting
Fishbone diagram
FAILUR
EUnreliable and
untimely
information
No clear link
to strategy
Information
overload
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
43. 50
Systems Thinking
Example: Fast food: map the following process and outcomes
T
Shareholder value
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Customer buying behavior
Sustained profitability
Employee satisfaction
Employee-added value
Customer satisfaction
Selection and staffing
44. 51
Systems Thinking
Example: Fast food: map the following process and outcomes
1.
2.
3.
1.
2.
3.
1.
2.
T
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
46. 53
Systems Thinking
Example: Fast food: map the following process and outcomes
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
T
Selection and staffing
Employee satisfaction
Employee-added value
47. 54
Systems Thinking
Example: Fast food: map the following process and outcomes
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
T
Customer satisfaction
Customer buying behavior
Sustained profitability
Shareholder value
51. 58
Measurement
Example: Which Measures Matter
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Supervision
Support
Fairness
New hires
Education
Work experience
Quality
Shopping experience
Timeliness
Growth
Earnings
Free cash flow
Each outlet
Over time
Better than competition
Empowerment
Accountability
Frequency
Retention
Referral
52. 59
Systems Thinking
Example: Fast food: map the following process and outcomes
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
T
Selection and staffing
Employee satisfaction
Employee-added value
53. 60
Systems Thinking
Example: Fast food: map the following process and outcomes
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
T
Customer satisfaction
Customer buying behavior
Sustained profitability
Shareholder value
55. Quality
Shopping experience
Timeliness
Frequency
Retention
Referral
Each outlet
Over time
Better than competition
Growth
Earnings
Free cash flow
Measurement
Example: Which Measures Matter
62
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Customer satisfaction
Customer buying behavior
Sustained profitability
Shareholder value
56. A Strategy Map describes what you
need to do to deliver competitive
advantage
• EXAMPLE – FAST FOOD RESTAYRANT
Financial
Customer
Internal
Business
Process
Learning &
Growth
Profit
Customer
Loyalty
Quality
Food
Fast
Service
Employee
Skills &
Attitude
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
57. Class Exercise
Strategic Themes (The “Strategies”!)
1. Drive Sales through fantastic coffee
2. Improve loyalty by providing a great
customer experience
3. Improve margins by being an efficient
business
Format for a Strategic Theme –
Desired “Business” Outcome [by the means to achieve it]
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
58. Financial Results
Our Customers
Our Business Process
Our People
Increase Sales
Revenue
Increase
Operating Profit
Reduce
Operating Costs
as a % of Sales
Offer a Great
Coffee
Sensation!
Increase Customer
Loyalty – Get the
Customers to
Come Back!
Quick, Reliable &
Friendly, Service-
Don’t Keep
Customers Waiting
Serve Customers
Facilities Management
Supply Chain Management
Product Innovation
Standardize
the New Coffee
Making Process
Modernize the Look of
the Coffee Shop –
Refurbish With Glass &
Stainless
Buy a High-Tech
Italian Coffee
Machine
Change from Nescafe
Instant to an Expensive
Italian Blend
Move to
Purchasing Raw
Materials On-
Line
Improve Inventory
Management of Our
Raw Materials –
Cups, Milk etc
Train Staff to get a
Barista Qualification
At www.coffeeshop.com.au
Develop a
Customer-Focused
Culture
Train Staff to
Order On-Line
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
59. Financial Results
Our Customers
Our Business Process
Our People
Increase
Operating Profit
Reduce
Operating Costs
as a % of Sales
Offer a Great
Coffee
Sensation!
Increase Customer
Loyalty – Get the
Customers to
Come Back!
Quick, Reliable &
Friendly, Service-
Don’t Keep
Customers Waiting
Serve Customers
Facilities Management
Supply Chain Management
Product Innovation
Standardize
the New Coffee
Making Process
Modernize the Look of
the Coffee Shop –
Refurbish With Glass &
Stainless
Buy a High-Tech
Italian Coffee
Machine
Change from Nescafe
Instant to an Expensive
Italian Blend
Move to
Purchasing Raw
Materials On-
Line
Improve Inventory
Management of Our
Raw Materials –
Cups, Milk etc
Train Staff to get a
Barista Qualification
At www.coffeeshop.com.au
Develop a
Customer-Focused
Culture
Train Staff to
Order On-Line
Theme 1: Drive Sales
Through Fantastic
Coffee
Increase Sales
Revenue
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
60. Financial Results
Our Customers
Our Business Process
Our People
Increase
Operating Profit
Reduce
Operating Costs
as a % of Sales
Offer a Great
Coffee
Sensation!
Increase Customer
Loyalty – Get the
Customers to
Come Back!
Quick, Reliable &
Friendly, Service-
Don’t Keep
Customers Waiting
Serve Customers
Facilities Management
Supply Chain Management
Product Innovation
Standardize
the New Coffee
Making Process
Modernize the Look of
the Coffee Shop –
Refurbish With Glass &
Stainless
Buy a High-Tech
Italian Coffee
Machine
Change from Nescafe
Instant to an Expensive
Italian Blend
Move to
Purchasing Raw
Materials On-
Line
Improve Inventory
Management of Our
Raw Materials –
Cups, Milk etc
Train Staff to get a
Barista Qualification
At www.coffeeshop.com.au
Develop a
Customer-Focused
Culture
Train Staff to
Order On-Line
Theme 2: Improve Loyalty
by Providing a Great
Customer Experience
Increase Sales
Revenue
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
61. Financial Results
Our Customers
Our Business Process
Our People
Increase
Operating Profit
Reduce
Operating Costs
as a % of Sales
Offer a Great
Coffee
Sensation!
Increase Customer
Loyalty – Get the
Customers to
Come Back!
Quick, Reliable &
Friendly, Service-
Don’t Keep
Customers Waiting
Serve Customers
Facilities Management
Supply Chain Management
Product Innovation
Standardize
the New Coffee
Making Process
Modernize the Look of
the Coffee Shop –
Refurbish With Glass &
Stainless
Buy a High-Tech
Italian Coffee
Machine
Change from Nescafe
Instant to an Expensive
Italian Blend
Move to
Purchasing Raw
Materials On-
Line
Improve Inventory
Management of Our
Raw Materials –
Cups, Milk etc
Train Staff to get a
Barista Qualification
At www.coffeeshop.com.au
Develop a
Customer-Focused
Culture
Train Staff to
Order On-Line
Theme 3: Improve Margins
by Being an Efficient
Business
Increase Sales
Revenue
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
62. Financial Results
Our Customers
Our Business Process
Our People
Increase Sales
Revenue
Increase
Operating Profit
Reduce
Operating Costs
as a % of Sales
Offer a Great
Coffee
Sensation!
Increase Customer
Loyalty – Get the
Customers to
Come Back!
Quick, Reliable &
Friendly, Service-
Don’t Keep
Customers Waiting
Serve Customers
Facilities Management
Supply Chain Management
Product Innovation
Standardize
the New Coffee
Making Process
Modernize the Look of
the Coffee Shop –
Refurbish With Glass &
Stainless
Buy a High-Tech
Italian Coffee
Machine
Change from Nescafe
Instant to an Expensive
Italian Blend
Move to
Purchasing Raw
Materials On-
Line
Improve Inventory
Management of Our
Raw Materials –
Cups, Milk etc
Train Staff to get a
Barista Qualification
At www.coffeeshop.com.au
Develop a
Customer-Focused
Culture
Train Staff to
Order On-Line
Strategy Map
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
63. Financial Results
Our Customers
Our Business Process
Our People
Increase Sales
Revenue
Increase
Operating Profit Reduce
Operating Costs
as a % of Sales
Offer a Great
Coffee
Sensation!
Increase Customer
Loyalty – Get the
Customers to
Come Back!
Quick, Reliable &
Friendly, Service-
Don’t Keep
Customers Waiting
Serve Customers
Facilities Management
Supply Chain Management
Product Innovation
Standardize
the New Coffee
Making Process
Modernize the Look of
the Coffee Shop –
Refurbish With Glass &
Stainless
Buy a High-Tech
Italian Coffee
Machine
Change from Nescafe
Instant to an Expensive
Italian Blend
Move to
Purchasing Raw
Materials On-
Line
Improve Inventory
Management of Our
Raw Materials –
Cups, Milk etc
Train Staff to get a
Barista Qualification
At www.coffeeshop.com.au
Develop a
Customer-Focused
Culture
Train Staff to
Order On-Line
Sales x Product
Expenses/Sales %
Service Quality Index
NOPAT
Net Operating Profit
After TaxCustomer Satisfaction
Survey Result
Sales Repeat
Customers/Total Sales %
Non-Conformances to
Standardized Coffee
Making Process
Install Italian Coffee
Machine (Y/N?)
Cleanliness Index
% Progress
Barrista Training
Staff Satisfaction Survey
% Staff Trained On-Line Ordering
Number & Type of
Stockouts
Refurbishment Project
(On Time, On Budget, On
Spec)
% Materials Ordered
On-Line
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
65. 72
4.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.
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
Productivity Component – measures the change in costs attributable to a
change in the quantity of inputs between the current and prior periods
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Learning objective 4 :
Analyze changes in
operating income to evaluate
strategy
… growth, price, recovery,
and productivity
4How Accounting Can
Help Manage
Strategy?
66. 73
NON-FINANCIAL MEASURES
BIG DECISIONS
—ALLOCATE RESOURCES
FEEDBACK
CEO
CFO
CIO
CUSTOMER INTERNAL
PROCESS
LEARNING + GROWTH
FINANCIAL MEASURES
TRAINING
GET
ATTENTION
4. Evaluating Strategy
Decision Relevance of Financial and Non-Financial
Measures inside the Firm
INVEST
MENT
68. 75
Strategic Analysis of Operating Income
Cost leadership Product differentiation
Growth √ √
Price √
Productivity √
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Other accounting measures to support cost leadership?
Manage costs through
Value engineering, Activity based costing, Activity based budgeting
Other measures to support differentiation?
Focus on non-financial measures
Lead indicators of long term customer value
Measures of innovation for long term sustainable differentiation
How Accounting Can
Help Manage
Strategy?
69. Example: Strategic Analysis of Operating Income
2012 2013
1. Units of CX1 produced and sold 1,000,000 1,150,000
2. Selling price $23 $22
3. Direct materials (square centimeters of silicon wafers) 3,000,000 2,900,000
4. Direct material cost per square centimeter $1.40 $1.50
5. Manufacturing processing capacity (in square centimeters of silicon
wafer) 3,750,000 3,500,000
6. Conversion costs (all manufacturing costs other than direct material
costs) $16,050,000 $15,225,000
7. Conversion cost per unit of capacity (Row 6 ÷ Row 5) $4.28 $4.35
Chipset’s data for 2012 and 2013 follow:
77
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
70. Example: Strategic Analysis of Operating Income
2012 2013
Revenues
($23 per unit x 1,000,000 units; $22per unit x 1,150,000 units) $23,000,000 $25,300,000
Costs
Direct material costs
($1.40/sq.cm x 3,000,000 sq.cm; $1.50/sq.cm x 2,900,000 sq.cm)
4,200,000 4,350,000
Conversion costs
($4.28/sq.cm x 3,750,000 sq.cm; $4.35/sq.cm x 3,500,000 sq.cm)
16,050,000 15,225,000
Total costs 20,250,000 19,575,000
Operating income $2,750,000 $5,725,000
Change in operating income $2,975,000 F
Chipset’s asset structure is very similar in 2012 and 2013. Operating income
for each year is as follows:
78
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
72. 80
Example: Revenue Effect of Growth
Actual Units of
Output Sold in
the Prior
Period
Actual Units of
Output Sold in
the Current
Period
X
Current
Period
Selling
Price
Revenue
Effect
Of
Growth
=
= (1,150,000 units - 1,000,000 units) X $23 per unit
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Revenue Effect:
Easy!
Prior
73. 81
Example: Cost Effect of Growth for Variable Costs
Actual Units of
Input used
to produce
Prior Period
Output
Units of Input
required to
produce Current
Output in the
Prior Period
X
Current
Period
Input
Price
Cost
Effect
Of
Growth
For
Variable
Costs
=
Cost effect of
growth for
direct materials
= (3,000,000 sq.cm. x
1,150,000 units
- 3,000,000 sq.cm.)
X $1.40 per
sq.cm.
1,000,000 units
= (3,450,000sq.cm. - 3,000,000 sq.cm.) X $1.40 per sq.cm. = $630,000 U
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Cost Effect:
Keeping productivity constant – what should DM cost you in the
second period?
Prior
74. Example: Cost Effect of Growth for Fixed Costs
Assuming Adequate Current Capacity:
Actual Units
of Capacity
in the
Prior
Period
Actual Units of
capacity in
Prior Period to
Produce Current
Period Output
X
Prior
Period
Price
per unit
of
capacity
Cost
Effect
Of
Growth
For
Fixed
Costs
=
Cost effect of
growth for
conversion cost
= (3,750,000 sq.cm. - 3,750,000 sq.cm.) X $4.28 per sq.cm. = $0
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
82
82
Cost Effect:
Doesn’t change because no additional capacity (eg employees) were
needed to produce the current period output
75. 83
Example: Cost Effect of Growth for Fixed Costs
Assuming Inadequate Current Capacity:
Actual
Units
of Capacity
in the
Prior
Period
Units of
Capacity
required to
produce Current
Period Output in
the Prior Period
X
Prior
Period
Price
per unit
of
capacity
Cost
Effect
Of
Growth
For
Fixed
Costs
=
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Inadequate Capacity Effect:
Fixed Costs don’t change because no additional capacity (eg
employees) were needed to produce the current period output
77. 85
Example: Revenue Effect of Price Recovery
Prior Period
Selling Price
Current Period
Selling Price
X
Current
Period
Units
Sold
Revenue
Effect
Of
Price-
Recovery
=
= ($22 per units - $23 per unit) X 1,150,000 units
= $1,150,000 U
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Price recovery:
How good is your
negotiation/pricing power?
78. 86
Example: Cost Effect of Price Recovery
Variable Costs:
Prior Period
Input Price
Current Period
Input Price
X
Units of
Input
required to
produce
Current
Period’s
Output in
the Prior
Period
Cost
Effect
Of
Price-
Recovery
for
Variable
Costs
=
Cost effect of
price
recovery for
direct
materials
= ($1.50 per sq.cm. - $1.40 per sq.cm.) X 3,450,000 sq. = $345,000U
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Price recovery:
How good is your negotiation/pricing power?
This is the unit price effect due to increase in unit costs?
79. 87
Fixed Costs with Adequate Capacity
Prior Period
Price per Unit
of Capacity
Current Period
Price per Unit
of Capacity
X
Actual Units of
Capacity on
Prior Period to
Produce
Current
Period’s Output
Cost
Effect
Of
Price-
Recovery
for Fixed
Costs
=
Example: Cost Effect of Price Recovery
Conversion costs: ($4.35 per sq.cm. - $4.28 per sq.cm.) X 3,750,000 sq. cm. = $262,500 U
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Price recovery:
How good is your negotiation/pricing power?
This is the unit price effect due to increase in unit costs?
80. 88
Fixed Costs without Adequate Capacity
Prior Period
Price per Unit
of Capacity
Current Period
Price per Unit
of Capacity
X
Units of
Capacity
Required to
Produce Current
Period’s Output
in the Prior
Period
Cost
Effect
Of
Price-
Recovery
for Fixed
Costs
=
Example: Cost Effect of Price Recovery
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
82. 90
Example: Cost Effect of Productivity for Variable Costs
Units of Input
Required to
Produce Current
Period’s Output
in Prior Period
Actual Units of
Input used to
Produce
Current Period
Output
X Input Price in
Current Period
Cost
Effect
Of
Productivity
for Variable
Costs
=
Cost effect of
productivity of
direct materials
= (2,900,000 sq.cm. - 3,450,000 sq.cm.) X $1.50 per sq.cm.
= 550,000 sq.cm. x $1.50 per sq.cm. = $825,000 F
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Efficiency:
How good is your
production process?
83. 91
Example: Cost Effect of Productivity for Fixed Costs
With Adequate Capacity
Actual Units of
Capacity in Prior
Period to
Produce Current
Period’s Output
Actual
Units of
Capacity in
Current
Period
X
Price Per Unit of
Capacity in
Current Period
Cost
Effect
Of
Productivity
for Fixed
Costs
=
Conversion costs: (3,500,000 sq.cm. - 3,750,000sq.cm.) X $4.35 per sq. cm. = $1,087,500 F
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Efficiency:
How efficient is your
capacity?
84. 92
Example: Cost Effect of Productivity for Fixed Costs
Without Adequate Capacity
Units of Capacity
Required to
Produce Current
Period’s Output in
the Prior Period
Actual
Units of
Capacity in
Current
Period
X
Price Per Unit of
Capacity in
Current Period
Cost
Effect
Of
Productivity
for Fixed
Costs
=
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
87. Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Example: Strategic Analysis of Profitability - Chipset
Revenues 2012 G 2013 P E 2013
= growth of 15% Units produced
Units produced 1,000,000 1,150,000 1,150,000
27 27 25
27,000,000 31,050,000 28,750,000
4,050,000 (2,300,000)
1. What are the
two types of
variances for
revenues?
What are the
variances telling
management?
88. Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Example: Strategic Analysis of Profitability - Chipset
Costs 2012 G 2013 P E 2013
For growth of 15% should have req 3450000 sq cm Actual
Materials costs 3,000,000 3,450,000 3,450,000 2,900,000
1.40 1.40 1.50 1.50
4,200,000 4,830,000 5,175,000 4,350,000
630,000 345,000 (825,000)
1. What are the two
types of variances for
ordinary standard
costing analysis?
2. Where does the
third variance come
from?
Growth Price Productivity
89. Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Example: Strategic Analysis of Profitability - Chipset
Costs 2012 G 2013 P E 2013
Actual units of capacity in prior period to produce current periods output
Fixed Conversion costs 3,750,000 3,750,000 3,750,000 3,500,000
Processing capacity - 4.28 4.28 4.35 4.35
sq cm of silicon wafer 16,050,000 16,050,000 16,312,500 15,225,000
- 262,500 (1,087,500)
Actual units of capacity in prior period to produce current periods output
R & D Costs 40 40 40 39
Employees 100,000 100,000 100,000 100,000
4,000,000 4,000,000 4,000,000 3,900,000
- - (100,000)
24,250,000 24,880,000 25,487,500 23,475,000
630,000 607,500 (2,012,500)
Growth Price Productivity
1. What are the two
types of variances for
ordinary standard
costing analysis?
2. Where does the
third variance come
from?
90. Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Example: Strategic Analysis of Profitability - Chipset
Revenues 2012 G 2013 P E 2013
= growth of 15% Units produced
Units produced 1,000,000 1,150,000 1,150,000
27 27 25
27,000,000 31,050,000 28,750,000
4,050,000 (2,300,000)
Costs 2012 G 2013 P E 2013
For growth of 15% should have req 3450000 sq cm Actual
Materials costs 3,000,000 3,450,000 3,450,000 2,900,000
1.40 1.40 1.50 1.50
4,200,000 4,830,000 5,175,000 4,350,000
630,000 345,000 (825,000)
Actual units of capacity in prior period to produce current periods output
Fixed Conversion costs 3,750,000 3,750,000 3,750,000 3,500,000
Processing capacity - 4.28 4.28 4.35 4.35
sq cm of silicon wafer 16,050,000 16,050,000 16,312,500 15,225,000
- 262,500 (1,087,500)
Actual units of capacity in prior period to produce current periods output
R & D Costs 40 40 40 39
Employees 100,000 100,000 100,000 100,000
4,000,000 4,000,000 4,000,000 3,900,000
- - (100,000)
24,250,000 24,880,000 25,487,500 23,475,000
630,000 607,500 (2,012,500)
91. Revenues 2012 G 2013 P E 2013
= growth of 15% Units produced
Units produced 1,000,000 1,150,000 1,150,000
27 27 25
27,000,000 31,050,000 28,750,000
4,050,000 (2,300,000)
Costs 2012 G 2013 P E 2013
For growth of 15% should have req 3450000 sq cm Actual
Materials costs 3,000,000 3,450,000 3,450,000 2,900,000
1.40 1.40 1.50 1.50
4,200,000 4,830,000 5,175,000 4,350,000
630,000 345,000 (825,000)
Actual units of capacity in prior period to produce current periods output
Fixed Conversion costs 3,750,000 3,750,000 3,750,000 3,500,000
Processing capacity - 4.28 4.28 4.35 4.35
sq cm of silicon wafer 16,050,000 16,050,000 16,312,500 15,225,000
- 262,500 (1,087,500)
Actual units of capacity in prior period to produce current periods output
R & D Costs 40 40 40 39
Employees 100,000 100,000 100,000 100,000
4,000,000 4,000,000 4,000,000 3,900,000
- - (100,000)
24,250,000 24,880,000 25,487,500 23,475,000
630,000 607,500 (2,012,500)
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Example: Strategic Analysis of Profitability - Chipset
93. 101
5. Analysis of Unused Capacity
Two Important Features:
1. 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. They arise from periodic (annual) decisions regarding the maximum
amount to be incurred
2. They have no measurable cause-and-effect relationship between output
and resources used
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Learning objective 5 :
Distinguish engineered costs
… a cause-and-effect relationship exists between
output produced and costs incurred
from discretionary costs
… no cause-and-effect relationship exists between
output
Produced and costs incurred
5
96. 104
Managing Unused 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
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Learning objective 6 :
Identify unused capacity
… capacity available minus
capacity used
and how to manage it
…downsize to reduce
capacity
6
98. 106
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
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
99. 107
Summary
Strategy
Learning objective 1: Recognize which of two generic strategies a company is using
Reengineering
Learning objective 2: Understand what comprises reengineering
Balanced Scorecard
Learning objective 3: Understand the four perspectives of the balanced scorecard
Evaluating Strategy
Learning objective 4: Analyze changes in operating income to evaluate strategy
Engineered & Discretionary Cost
Learning objective 5: Distinguish engineered costs from discretionary costs
Managing Unused Capacity
Learning objective 6: Identify unused capacity and how to manage it
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
101. 109109
In Practice: Framework for thinking and deciding on strategy
Strategic objectives
What is the basis for success?
What is the Sustainable Competitive Advantage (SCA)?
Why? - Direction of effort
How?
Learn how to beat competitors and provide value to customer
Develop consensus as to the priorities and initiatives to undertake in the short term
(next 12 months)
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
HOW?
102. In Practice: Framework for thinking and deciding on strategy
Sustainable Competitive Advantage (SCA)
Source: Aaker (1995) Strategic Market Management (Fourth Edition) New York: Wiley.
110
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
SCA
The Way You Compete
- Product strategy
- Position strategy
- Manufacturing strategy
- Distribution strategy, etc.
Basics of Competition
- Assets and skills
Where You Compete
- Product-market selection
Whom You Compete Against
- Competitor selection
HOW?
103. 111
In Practice: Framework for thinking and deciding on strategy
Recently Identified Sustainable Competitive Advantages (SCA) of 248 Firms
AAKER (1995) Strategic Market Management (Fourth Edition) New York: Wiley.
• Reputation for quality
• Customer service/product support
• Retain good management & engineering staff
• Low-cost production
• Financial resources
• Customer orientation/feedback/market research
• Product-line breadth
• Technical superiority
• Installed base of satisfied customers
• Segmentation/focus
• Product characteristics/differentiation
• Continuing product innovation
• Market share
• Size/location of distribution
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
HOW?