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Administrative Studies
ADMS 3510
Jamison Aldcorn

CHAPTER 13. STRATEGY, BALANCED SCORECARD AND PROFITABILITY ANALYSIS - Strategy: how to create value for customers while differentiating from others; open & flexible arises from a deliberate, rational, reflective process. - Tool to measure success of competitive corporate strategy- BSC- which translates a corporation’s strategy into a comprehensive set of performance measures to assess how well the strategy is implemented through changes to how a corporation operates. FIVE FORCE ANALYSIS TO DEFINE STRATEGIC ALTERNATIVES: To use corporate strengths to counter threats and maximize opportunities as well as identifying remedies for weaknesses describe a corporation’s distinctive/ core competence- human and capital resources that enable a company to outperform competitors 5 key to successful strategic decision: - Competitors: economies of scale - Potential entrants into the market: profit margin, capital investment, training, strength and maturity of human and capital resources. - Equivalent products/ substitute products: innovation and talent - Price-setting power of customers: bulk purchase gives power, number of customers - Price setting power of the suppliers: number of suppliers, human capital. Identify level of rivalry and how best to exploit opportunities with its own core competence Strategic choices: - Value leadership strategies: when customer perceives the corporation’s output as having either superior or uniquely desirable attributes for which they will pay a higher price ( based on product differentiation) Devotion to R&D and market research - Cost leadership strategies: when corporation can produce products that are at least equal to others in the market at the lower cost. Highly automated processes for bulk production Grow by expanding capacity to harvest economies of scope. Porter’s 5 forces and ROI ROI: estimated returns or earnings of investments by total investment costs. 5 forces model help create strategies to improve opportunities for economic return on investment. Decision to pursue cost leadership leads logically to more sophisticated cost measurement and control methods. With X axis ranging from cost to value strategy, Y axis is the degree of demand U shape diagram focusing on cost or value leadership strategy which provides above average ROI The middle strategy is unfocused strategy of “stuck in the middle” where average ROI is the best. The horizontal arrow indicating an average ROI is the increasing opportunity cost of being stuck in the middle. - Cost leadership strategy: focus on excellent costing system, mass production and close attention to fixed cost management. It also requires variance reports to track yield and mix variances- measure of effectiveness. - Successful achievement of one critical success factor depends on successful achievement in others. Key success factors (KSF) and Key performance factors(KPF) - Re-engineering (redesigning): fundamental rethinking and redesign of business processes to achieve improvements in critical measures such as cost, quality, and speed and customer satisfaction. BALANCE SCORECARD: MEASURES OF PERFORMANCE BSC: provides a reliable and multi-dimensional measure of how effectively and efficiently managers have controlled corporate resources- an evaluation of the quality of stewardship. - 1996 R.S.Kaplan and D.P.Norton - Links short term with long term goals using financial and non financial performance measures of cost and benefit ( KPF and KSF) and looking into their interdependencies - Consistent with porter’s perspective on competitive strategy and the importance of making a decision about strategy - Justifies the benefit of nonfinancial measures of corporate success in areas in the absence of financial measures and which actually enhance profits. Financial perspective- reliability and financial accounting: Achievement of financially strategic goals- max shareholders value through faster response time and order delivery improvement Operating income -> revenue growth-> operating income growth Customer perspective- financial and nonfinancial measures: Customer perspective identifies the targeted market segments and measures the company’s success in these segments. Competitive market – use target pricing- exploits economies of scope, consistent with cost leadership strategy Growth by acquiring similar products from other companies is called growth in adjacencies – way to exploit economies of scope. Customer satisfaction ratings-> number of new customers-> market share Internal business process perspective- relevance of customers Analysis of how to improve internal operation which implicates the entire value chain of business functions. Identify core competence and the resources and processes behind it so as to benchmark performance to learn from others, strive to become best and achieve high yield at low cost. - Benchmark: best process and performance attainable - Create cross functional teams to overlook operations - Improve yield or productivity (ratio of inputs divided by outputs) - Variance reports. Yield -> order delivery time-> on time delivery-> service response time Learning and growth perspective- managing intellectual capital It is a field of study of its own on the identification, development, retention and valuation of intellectual capital Goal of intellectual capital management: supply, retain and expand knowledge and improve long term competitive success. Teamwork, training, reward, employee satisfaction, work environment etc. Non-financial BSC measures: Social, legal and environmental perspectives and demand has brought about need for 3 annual reports: - Financial report - Social responsibility report: bribes are unacceptable - Environmental sustainability report Good corporate governance / stewardship strengthens global competitiveness Improved productivity, cost leadership, capacity utilization and measures of value creation all contribute to competitive advantage. BSC has changed how management teams understand the way to improve profits and requires careful understanding of the interdependence between the firm and its competitive environment. ERM enterprise risk management expands the triple bottom line responsibility beyond the firm itself. – To identify risk and align the firm’s strategy and measures of success using different measures. Features of a good balanced scorecard - identifies company’s strategy by clarifying a limited sequence of orderly relationships among KSF - communicates strategy to all members by translating strategy into a coherent and linked set of understandable and measurable operational targets - Improvements in nonfinancial performance measures usually lead to improvements in financial performance measures. - Limits the number of measures used by identifying only the most critical KSF, avoiding complications and confusion - Highlights suboptimal tradeoffs that managers may make when they fail to consider operational and financial measures together. Pitfalls when implementing a balanced scorecard: - Strategies require knowledge of how orderly changes can be incorporated and result in successfully changing the competitive environment- nourishing strong KSF, identifying strength and speed of orderly change - Careful allocation of resources , including priority setting and tradeoffs - Use of Qualitative or subjective measures for good management of intellectual capital - Dealing with intangible cost and benefits which are hard to measure - Focus on performance becomes central , instead of dealing with corporate success EVALUATION USING THE BSC Strategic cost management compares actual performance with benchmark, identifies the use of cost information to measure the successful implementation of a strategy. - Isolate and measure contributions to favourable operating income change arising from the choice of a strategy ( from cost leadership, Product differentiation and growth) - Irrespective of strategy chosen, cost leadership is important to profitability for any company. - Improvement in performance measures will be interpreted as successful implementation of strategy. - 3 main analysis components: Growth, price recovery and productivity. The growth component: Measures the increase in revenues minus the increase in costs from selling more, while keeping output prices, input prices, efficiencies and capacities constant. i. Revenue
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