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
- 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
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
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
- 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
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
Competitive market – use target pricing- exploits economies of scope, consistent with cost leadership
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
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
Goal of intellectual capital management: supply, retain and expand knowledge and improve long term
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
- 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
- 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.