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Week 5
Chapter 12
Strategy, Balanced Scorecard,
and Strategic Profitability
Analysis
1
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
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
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.
Week 5
7
Communication Content, Management Control and the
Balanced Scorecard?
Strategy Alignment FWK
• Focusing
• Competitors
• Customers
Systems Thinking
• Visualizing
• Strategy Map
Measurement
• Formalizing
• Attributes
StrategicResponsibilitySystems
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
1. Familiarization
2. Learning Objectives
3. Game Objectives
17 Quarters
Highest profit
Diary One-Page
summary of
learning
Chapter
12 & 23 14 19
Accounting Customer Internal
Strategy  
Systems
Thinking

Measurement   
Week 5-8: Learning Objective Summary
10
Week 5: Learning Objective 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
Balanced ScorecardreengineeringStrategy
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
1
Strategy – How do firms succeed?
11
© Neale O'Connor 2010
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
12
Strategy
Alignment FWK
• Focusing
• Competitors
• Customers
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
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
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
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
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
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.
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
20
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Q. Which phone vendors
follow cost leadership
and/or product
differentiation strategy?
Basic Business Strategies : Example
21
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Q. Which phone vendors
follow cost leadership
and/or product
differentiation strategy?
Basic Business Strategies : Example
22
Strategy
Alignment FWK
•Customer
preference map
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.
23
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Example: Cost Leadership Strategy – Chipset
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
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
2
What is Reengineering?
27
© Neale O'Connor 2010
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
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
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
3
What is the Balanced Scorecard?
30
© Neale O'Connor 2010
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
What is the Balanced Scorecard?
Learning and Growth
– People (Skills, Satisfaction)
-Information system
- Organization culture (Norms &Values)
-Highest control over change
-Change takes longer = less attention
Customer
Product/Service attributes,
Relationship, Image
- Low control over change
-Change can be fast
= more attention
Financial
Revenue – Costs
- No control
Increasing amount
of control over the
business model
Increasing amount
of attention that is
typically given by
management
Internal Business Process
– Innovation,Operations, Customer Service,
Regulatory requirements
-Medium control over change
-Change can be fast (ie BPR)
© Neale O'Connor 2014
31
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Learning objective 3 :
Understand the four
perspectives of the
balanced scorecard
…financial, customer,
internal business
process, learning and
growth
3
It is about balancing:
 Strategy and operations
 Measurement of financial and non-financial
indicators
 Systems thinking – lead and lag indicators
© Neale O'Connor 2014
What is the Balanced Scorecard?
32
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
33
SMS
GOAL
Strategic
objectives
Measures
Systems
Thinking
Goal
Alignment
On-Time
Decision
Making
Accurate
Decision
Making
Learning
What is the Balanced Scorecard?
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
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
35
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.
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
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
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
44
Systems
Thinking
•Visualizing
•Strategy Map
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
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
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
47
Systems
Thinking
• Visualizing
• Strategy Map
• Connecting the
Dots
SystemsThinking
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
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
49
3. Example: Balanced scorecard - Chipset
Strategy Map (P.500)
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
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
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
52
Shareholder value
1.
2.
3.
1.
2.
3.
1.
2.
3.
1.
2.
3.
T
Systems Thinking
Example: Fast food: map the following process and outcomes
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
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
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
55
Measurement
•Formalizing
•Attributes
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Types of Measures / Indicators
 Key Result Indicators
 Customer Satisfaction
 Profitability/campaign
 Performance Indicators
 % Sales Increase
 % Campaign Conversion
 Key Performance
Indicator
 Availability
 Delays in delivary
 Resolution on 1st touch
56
Key Result
Indicator
Performance
Indicator
Key
Performance
Indicator
Source Key Performance Indicators. D. Pamenter
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
57
3.Example: Balanced scorecard - Chipset
Strategy Map (P.496)
Strategy Reengineering Balanced
Scorecard
Engineered &
Discretionary Cost
Managing Unused
CapacityEvaluating Strategy
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
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
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
New hires
Education
Work experience
Supervision
Support
Fairness
Empowerment
Accountability
61
Measurement
Example: Which Measures Matter
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
Selection and staffing
Employee satisfaction
Employee-added value
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
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
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
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
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
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
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
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
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
4
Evaluating Strategy
71
© Neale O'Connor 2010
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
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?
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
74
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?
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
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
79
Example:
Strategic
Analysis of
Operating
Income
Basic
Data for
Growth
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
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
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
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
84
Example:
Strategic
Analysis of
Operating
Income
Basic
Data for
Price
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?
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?
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?
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
89
Example:
Strategic
Analysis of
Operating
Income
Basic
Data for
Producti-
vity
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?
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?
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
93
Strategic Analysis of Operating Income
Cost leadership Product differentiation
Growth √ √
Price √
Productivity √
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
94
Example: Strategic Analysis of Profitability - Chipset
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
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?
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
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?
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)
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
5
Analysis of Unused Capacity
100
© Neale O'Connor 2010
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
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
102
Example: Differences Between Engineered and
Discretionary Costs - Chipset
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
6
Managing Unused Capacity
103
© Neale O'Connor 2010
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
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
105
Example: Differences Between Engineered and
Discretionary Costs - Chipset
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
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
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
APPENDIX
108
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?
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?
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?
In Practice: Framework for thinking and deciding on strategy
Your Sustainable Competitive Advantage
Ability to beat competitors
10 High5Low 0
5
High 10
ValuetoCustomer
Top Five Issues
1
2
3
4
5
© Neale O’Connor 2005
T
112
Strategy Reengineering Balanced Scorecard
Engineered &
Discretionary Cost
Managing Unused
Capacity
Evaluating Strategy
HOW?
© Neale O'Connor 2010
What is the BSC Strategic Objectives Simulation GameSystems Thinking
115
Case Example
#2
Xinan JV
Balanced Scorecard
System
Appendix A
Xinan JV - Two Challenges
1. Product development
 Pharmaceutical Market reform by the Chinese government,
through the State Drug Product Council.
2. Sales manager development
 Sales force had an “old Chinese way of thinking” (short term) mindset.
© Neale O'Connor 2010
Case Study
116
Xinan JV - Product development
1. Reduced drug prices
 Reforms in the Chinese pharmaceutical market, such as the reduction of
drug prices of between 30% to 50% across the board,
2. Increased competition
 Introduction of tendering in hospitals, which increased the competition for
the supply of drugs. For example, local generic product manufacturers were
bidding between 30% and 50% below Xinan JV’s price.
3. Speed up the development of new products
 This served as a wake-up call for Xinan JV, which had an aging portfolio of
products that were largely protected from competition, and the challenge
for the company was to speed up the development of new products.
© Neale O'Connor 2010
Case Study
117
Xinan JV - Sales manager development
1. “old Chinese way of thinking” mindset
 Fail to develop customer relationships
 Lack of motivation to develp product knowledge
Faced with these two challenges, Xinan JV set up an action plan
that focused on the development and management of its
intangible assets. This included the development of new
products and the restructuring and development of the skills of
its sales managers.
© Neale O'Connor 2010
Case Study
118
Xinan JV - Balanced Scorecard Implementation (2002)
 Objective
 Strategy - Making medicine accessible – To be a leader in China
branded generic business in 5 years time.
 Improve communication and control over strategy and the
associated objectives and initiatives
© Neale O'Connor 2010
Case Study
119
Information Capital
L4. ERP system (2003)
Financial
Customer
– Desired
marketplace
outcomes
– Customer
benefits
Internal
– Internal Do-
Well’s
Learning and
Growth
– Competencies
, culture,
systems
M2. Build strong
brand image
M1. Increase market
share
M4. Attractive core
product portfolio (AB,
CV, GI, CNS,OTC,etc.)
M5. Enhance Gov.
relationship
M6.High service
level
Operation Management
Processes
I1. Improve cost of goods
I7. Improve internal
operation
I6. GMP updgrading
I8. National HR Policy &
management
Human Capital
L1. Up-grade skill of
employees
M3.Competitive
prices
Organizational Capital
L3. Commitment & Result
Orientated Culture
L2. Improve internal &
external communication
F3. ROCE: 5%
Customer Management
Processes
I4. Restructure sales &
marketing team
I9. Tender management
I5. Improve customer relation
Innovation Processes
I2. Portfolio selection, speedy
registration & launch
I3. Reengineering R&D
capability
F2. Operating
margin: 10%
F1. Revenue increase annual
growth rate: 10%
Long-Term
Shareholder Value
Productivity
Strategy
Growth
Strategy
© Neale O'Connor 2010
Case Study
120
Problems in implementing the balanced scorecard
1. Training and participation
2. Frequent reviews
3. Contingency plans were difficult to show
© Neale O'Connor 2010
Case Study
121
© Neale O'Connor 2010
What is the BSC Strategic Objectives Simulation GameSystems Thinking
122
Case Example
#1
CTI Ltd’s
Incentive System
Appendix A
Critical factors in CTI’s strategy
CTI
 Two factors were critical to CTI’s profit growth
strategy:
 Reliance on sales of higher margin products
 Cash collection.
 Incentive plan change
 With increasing introduction of new products and growth in
sales – these two factors drove CTI to change the incentive plan
to direct management effort towards these objectives.
© Neale O'Connor 2010
Case Study
123
Setting of this study
Quotes on the incentive plan
 “We want people to be able to see everything. They
should not just be able to make sales, but should be
able to motivate people, organize things strategically,
putting down their thoughts into paper, think
logically, and express themselves in a coherent
fashion.”
© Neale O'Connor 2010
Case Study
124
Components of General multiple measure formula
© Neale O'Connor 2010
Bonus compensation formula = (Employees + 1)
* (General formula) + (Direct sales formula)
Direct sales formula = Products - 50 cents per old product sold,
1.00 per new product sold.
General formula = 5000 + (Points – 60) * 100
Points awarded according
to Objective assessment
formula and Objective
(Financial) Measures
(45 points)
Points awarded according to
Subjective assessment and
Objective (Non-Financial)
Measures
(30 points)
Points awarded according to Subjective
assessment and Subjective measures
(25- 35 points)
Sales components
-Cash collection (40)a
-Relative branch office
costs (5)a
Service level components
-Execution of routine
maintenance (5)b
-Major incident complaint
(10)b
-Customer satisfaction
survey (15)b
Management capability components
-Regional office daily management (15)
-Evaluation byVP –Teamwork,
cooperativeness (10)
-Evaluation by President andVP sales –
proactive, innovative e.g., Making
suggestions doing things beyond
responsibility and solving difficult
problems - Bonus points (10)
Case Study
125
Introduction
 Situation
 Old incentive plan – sale bonus (up to 40%)… resulted in
 Cash collection problems 6-10 months of sales in ACCREC
 New products were being developed with increasing numbers of
features that allowed CTI to gain higher margins from the units sold
 Other problems
 How to manage uncontrollable factors – market factors?
 How to encourage communication, teamwork,
 and managerial skill development?
 Elaborate performance measurement and incentive plan
introduced
Case Study
© Neale O'Connor 2010 126

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Week 5

  • 1. Week 5 Chapter 12 Strategy, Balanced Scorecard, and Strategic Profitability Analysis 1
  • 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
  • 8. 1. Familiarization 2. Learning Objectives 3. Game Objectives 17 Quarters Highest profit Diary One-Page summary of learning Chapter 12 & 23 14 19 Accounting Customer Internal Strategy   Systems Thinking  Measurement    Week 5-8: Learning Objective Summary
  • 9. 10 Week 5: Learning Objective 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 Balanced ScorecardreengineeringStrategy Engineered & Discretionary Cost Managing Unused Capacity Evaluating Strategy
  • 10. 1 Strategy – How do firms succeed? 11 © Neale O'Connor 2010 Strategy Reengineering Balanced Scorecard Engineered & Discretionary Cost Managing Unused Capacity Evaluating Strategy
  • 11. 12 Strategy Alignment FWK • Focusing • Competitors • Customers Strategy Reengineering Balanced Scorecard Engineered & Discretionary Cost Managing Unused Capacity Evaluating Strategy
  • 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
  • 13. 14 Strategy Reengineering Balanced Scorecard Engineered & Discretionary Cost Managing Unused Capacity Evaluating Strategy
  • 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
  • 18. 20 Strategy Reengineering Balanced Scorecard Engineered & Discretionary Cost Managing Unused Capacity Evaluating Strategy Q. Which phone vendors follow cost leadership and/or product differentiation strategy? Basic Business Strategies : Example
  • 19. 21 Strategy Reengineering Balanced Scorecard Engineered & Discretionary Cost Managing Unused Capacity Evaluating Strategy Q. Which phone vendors follow cost leadership and/or product differentiation strategy? Basic Business Strategies : Example
  • 20. 22 Strategy Alignment FWK •Customer preference map Strategy Reengineering Balanced Scorecard Engineered & Discretionary Cost Managing Unused Capacity Evaluating Strategy
  • 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
  • 24. 2 What is Reengineering? 27 © Neale O'Connor 2010 Strategy Reengineering Balanced Scorecard Engineered & Discretionary Cost Managing Unused Capacity Evaluating Strategy
  • 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
  • 27. 3 What is the Balanced Scorecard? 30 © Neale O'Connor 2010 Strategy Reengineering Balanced Scorecard Engineered & Discretionary Cost Managing Unused Capacity Evaluating Strategy
  • 28. What is the Balanced Scorecard? Learning and Growth – People (Skills, Satisfaction) -Information system - Organization culture (Norms &Values) -Highest control over change -Change takes longer = less attention Customer Product/Service attributes, Relationship, Image - Low control over change -Change can be fast = more attention Financial Revenue – Costs - No control Increasing amount of control over the business model Increasing amount of attention that is typically given by management Internal Business Process – Innovation,Operations, Customer Service, Regulatory requirements -Medium control over change -Change can be fast (ie BPR) © Neale O'Connor 2014 31 Strategy Reengineering Balanced Scorecard Engineered & Discretionary Cost Managing Unused Capacity Evaluating Strategy Learning objective 3 : Understand the four perspectives of the balanced scorecard …financial, customer, internal business process, learning and growth 3
  • 29. It is about balancing:  Strategy and operations  Measurement of financial and non-financial indicators  Systems thinking – lead and lag indicators © Neale O'Connor 2014 What is the Balanced Scorecard? 32 Strategy Reengineering Balanced Scorecard Engineered & Discretionary Cost Managing Unused Capacity Evaluating Strategy
  • 30. 33 SMS GOAL Strategic objectives Measures Systems Thinking Goal Alignment On-Time Decision Making Accurate Decision Making Learning What is the Balanced Scorecard? Strategy Reengineering Balanced Scorecard Engineered & Discretionary Cost Managing Unused Capacity Evaluating Strategy
  • 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
  • 32. 35
  • 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
  • 37. 44 Systems Thinking •Visualizing •Strategy Map 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
  • 40. 47 Systems Thinking • Visualizing • Strategy Map • Connecting the Dots SystemsThinking 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
  • 42. 49 3. Example: Balanced scorecard - Chipset Strategy Map (P.500) 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
  • 45. 52 Shareholder value 1. 2. 3. 1. 2. 3. 1. 2. 3. 1. 2. 3. T Systems Thinking Example: Fast food: map the following process and outcomes 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
  • 48. 55 Measurement •Formalizing •Attributes Strategy Reengineering Balanced Scorecard Engineered & Discretionary Cost Managing Unused Capacity Evaluating Strategy
  • 49. Types of Measures / Indicators  Key Result Indicators  Customer Satisfaction  Profitability/campaign  Performance Indicators  % Sales Increase  % Campaign Conversion  Key Performance Indicator  Availability  Delays in delivary  Resolution on 1st touch 56 Key Result Indicator Performance Indicator Key Performance Indicator Source Key Performance Indicators. D. Pamenter Strategy Reengineering Balanced Scorecard Engineered & Discretionary Cost Managing Unused Capacity Evaluating Strategy
  • 50. 57 3.Example: Balanced scorecard - Chipset Strategy Map (P.496) Strategy Reengineering Balanced Scorecard Engineered & Discretionary Cost Managing Unused CapacityEvaluating Strategy
  • 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
  • 54. New hires Education Work experience Supervision Support Fairness Empowerment Accountability 61 Measurement Example: Which Measures Matter Strategy Reengineering Balanced Scorecard Engineered & Discretionary Cost Managing Unused Capacity Evaluating Strategy Selection and staffing Employee satisfaction Employee-added 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
  • 64. 4 Evaluating Strategy 71 © Neale O'Connor 2010 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
  • 67. 74
  • 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
  • 85. 93 Strategic Analysis of Operating Income Cost leadership Product differentiation Growth √ √ Price √ Productivity √ Strategy Reengineering Balanced Scorecard Engineered & Discretionary Cost Managing Unused Capacity Evaluating Strategy
  • 86. 94 Example: Strategic Analysis of Profitability - Chipset 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
  • 92. 5 Analysis of Unused Capacity 100 © Neale O'Connor 2010 Strategy Reengineering Balanced Scorecard Engineered & Discretionary Cost Managing Unused Capacity Evaluating Strategy
  • 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
  • 94. 102 Example: Differences Between Engineered and Discretionary Costs - Chipset Strategy Reengineering Balanced Scorecard Engineered & Discretionary Cost Managing Unused Capacity Evaluating Strategy
  • 95. 6 Managing Unused Capacity 103 © Neale O'Connor 2010 Strategy Reengineering Balanced Scorecard Engineered & Discretionary Cost Managing Unused Capacity Evaluating Strategy
  • 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
  • 97. 105 Example: Differences Between Engineered and Discretionary Costs - Chipset Strategy Reengineering Balanced Scorecard Engineered & Discretionary Cost Managing Unused Capacity Evaluating Strategy
  • 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?
  • 104. In Practice: Framework for thinking and deciding on strategy Your Sustainable Competitive Advantage Ability to beat competitors 10 High5Low 0 5 High 10 ValuetoCustomer Top Five Issues 1 2 3 4 5 © Neale O’Connor 2005 T 112 Strategy Reengineering Balanced Scorecard Engineered & Discretionary Cost Managing Unused Capacity Evaluating Strategy HOW?
  • 105. © Neale O'Connor 2010 What is the BSC Strategic Objectives Simulation GameSystems Thinking 115 Case Example #2 Xinan JV Balanced Scorecard System Appendix A
  • 106. Xinan JV - Two Challenges 1. Product development  Pharmaceutical Market reform by the Chinese government, through the State Drug Product Council. 2. Sales manager development  Sales force had an “old Chinese way of thinking” (short term) mindset. © Neale O'Connor 2010 Case Study 116
  • 107. Xinan JV - Product development 1. Reduced drug prices  Reforms in the Chinese pharmaceutical market, such as the reduction of drug prices of between 30% to 50% across the board, 2. Increased competition  Introduction of tendering in hospitals, which increased the competition for the supply of drugs. For example, local generic product manufacturers were bidding between 30% and 50% below Xinan JV’s price. 3. Speed up the development of new products  This served as a wake-up call for Xinan JV, which had an aging portfolio of products that were largely protected from competition, and the challenge for the company was to speed up the development of new products. © Neale O'Connor 2010 Case Study 117
  • 108. Xinan JV - Sales manager development 1. “old Chinese way of thinking” mindset  Fail to develop customer relationships  Lack of motivation to develp product knowledge Faced with these two challenges, Xinan JV set up an action plan that focused on the development and management of its intangible assets. This included the development of new products and the restructuring and development of the skills of its sales managers. © Neale O'Connor 2010 Case Study 118
  • 109. Xinan JV - Balanced Scorecard Implementation (2002)  Objective  Strategy - Making medicine accessible – To be a leader in China branded generic business in 5 years time.  Improve communication and control over strategy and the associated objectives and initiatives © Neale O'Connor 2010 Case Study 119
  • 110. Information Capital L4. ERP system (2003) Financial Customer – Desired marketplace outcomes – Customer benefits Internal – Internal Do- Well’s Learning and Growth – Competencies , culture, systems M2. Build strong brand image M1. Increase market share M4. Attractive core product portfolio (AB, CV, GI, CNS,OTC,etc.) M5. Enhance Gov. relationship M6.High service level Operation Management Processes I1. Improve cost of goods I7. Improve internal operation I6. GMP updgrading I8. National HR Policy & management Human Capital L1. Up-grade skill of employees M3.Competitive prices Organizational Capital L3. Commitment & Result Orientated Culture L2. Improve internal & external communication F3. ROCE: 5% Customer Management Processes I4. Restructure sales & marketing team I9. Tender management I5. Improve customer relation Innovation Processes I2. Portfolio selection, speedy registration & launch I3. Reengineering R&D capability F2. Operating margin: 10% F1. Revenue increase annual growth rate: 10% Long-Term Shareholder Value Productivity Strategy Growth Strategy © Neale O'Connor 2010 Case Study 120
  • 111. Problems in implementing the balanced scorecard 1. Training and participation 2. Frequent reviews 3. Contingency plans were difficult to show © Neale O'Connor 2010 Case Study 121
  • 112. © Neale O'Connor 2010 What is the BSC Strategic Objectives Simulation GameSystems Thinking 122 Case Example #1 CTI Ltd’s Incentive System Appendix A
  • 113. Critical factors in CTI’s strategy CTI  Two factors were critical to CTI’s profit growth strategy:  Reliance on sales of higher margin products  Cash collection.  Incentive plan change  With increasing introduction of new products and growth in sales – these two factors drove CTI to change the incentive plan to direct management effort towards these objectives. © Neale O'Connor 2010 Case Study 123
  • 114. Setting of this study Quotes on the incentive plan  “We want people to be able to see everything. They should not just be able to make sales, but should be able to motivate people, organize things strategically, putting down their thoughts into paper, think logically, and express themselves in a coherent fashion.” © Neale O'Connor 2010 Case Study 124
  • 115. Components of General multiple measure formula © Neale O'Connor 2010 Bonus compensation formula = (Employees + 1) * (General formula) + (Direct sales formula) Direct sales formula = Products - 50 cents per old product sold, 1.00 per new product sold. General formula = 5000 + (Points – 60) * 100 Points awarded according to Objective assessment formula and Objective (Financial) Measures (45 points) Points awarded according to Subjective assessment and Objective (Non-Financial) Measures (30 points) Points awarded according to Subjective assessment and Subjective measures (25- 35 points) Sales components -Cash collection (40)a -Relative branch office costs (5)a Service level components -Execution of routine maintenance (5)b -Major incident complaint (10)b -Customer satisfaction survey (15)b Management capability components -Regional office daily management (15) -Evaluation byVP –Teamwork, cooperativeness (10) -Evaluation by President andVP sales – proactive, innovative e.g., Making suggestions doing things beyond responsibility and solving difficult problems - Bonus points (10) Case Study 125
  • 116. Introduction  Situation  Old incentive plan – sale bonus (up to 40%)… resulted in  Cash collection problems 6-10 months of sales in ACCREC  New products were being developed with increasing numbers of features that allowed CTI to gain higher margins from the units sold  Other problems  How to manage uncontrollable factors – market factors?  How to encourage communication, teamwork,  and managerial skill development?  Elaborate performance measurement and incentive plan introduced Case Study © Neale O'Connor 2010 126