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managerial accounting

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Bruce Everitt

BU 247 Lecture 2 Thurs. May. 9. 2013 Chapter 2 – The Balanced Scorecard and Strategy Map  Companies use performance measurement systems to perform multiple roles o Communicate strategic objectives o Motivate workers to help achieve these objectives o Evaluate the performance of managers, employees, and operating units o Help managers allocate resources to the most productive and profitable opportunities o feedback on if the company improves processes & meets customer & shareholder expectations  challenge = find the right mix of financial and nonfinancial measures to perform such tasks above th th  Throughout 19 and 20 century, companies used only financial metrics (like operating income, return on investment) to measure performance  these were adequate when the primary assets that generated income were physical assets (properly, plant…)  By end of 20 century, financial measures insufficiently measured/managed company performance because firms needed to create value through intangible assets (ex: organizational culture) o company may enhance intangible assets (upgrade employee skills and motivation, etc.)  financial system treats these as expenses in current period  reported profitability decreases o conversely, a company may cut back on spending on increasing intangible assets’ value, but reported income and ROI would rise (but company likely became less valuable due to the depreciation of its competitive capabilities)  several frameworks have been proposed for expanded performance measurement o mgmt. accounting system based on the Balanced Scorecard = mode widely adopted Balanced Scorecard (BSC) – by Kaplan and Norton  BSC: provides a framework that continues to measure the financial outcomes but supplements these with nonfinancial measures derived from the company’s strategy 20 century invention  BSC isn’t restricted to private sector companies, and is more balanced between financial/nonfinancial measures, short/long term measures, internal/external measures  Measures organizational performance across 4 different but linked perspectives that are derived from the company’s mission, vision, and strategy. The 4 perspectives address: 1) Financial – how is success measured by our shareholders? 2) Customer – how do we create value for our customers? 3) Process – at which processes must we excel to meet customer/shareholder expectations? 4) Learning & growth – what worker capabilities, info systems, & organizational capabilities do we need to continually improve our processes and customer relationships?  Companies can track whether they are building or destroying their capabilities for future growth  The 3 nonfinancial BSC perspectives are leading indicators improve these for better financial performance, because the financial measures tend to be lagging indicators of the strategy  The financial and customer measures represent the what of the strategy  what the company wants to accomplish with its 2 most important external constituents (shareholders, customers)  Process perspective describes how the strategy will be executed, identifies processes (cycle, quality)  Learning and growth perspective measures how will employees obtain the skills to be able to improve the quality and cycle times of the company’s production processes?  Example: this company’s strategy is to produce low-cost, high quality products & on-time delivery o Expects to generate revenues by increasing ROE  retain & expand sales to existing customers o % of repeat customers & growth in customer sales = measures for customer perspective o Strategy is based on belief that customers value on-time delivery and low prices  Customer satisfaction does not always lead to higher profitability link is actually close to 0 1 BU 247 Lecture 2 Thurs. May. 9. 2013  Shows how an entire chain of cause-and-effect relationship among the performance measures in the 4 PSC perspectives tells the story of the business unit’s strategy  The objectives and measures identify the hypotheses of the cause-and-effect relationships between outcome measures in the financial and customer perspectives and the drivers of the outcomes (measured in the process and learning and growth perspectives) Strategy  Accomplishes 2 principal functions 1) Creates a competitive advantage by positioning the company in its external environment where its internal resources/capabilities are better/different from competitors 2) Clear strategy provides clear guidance for where internal resources should be allocated and enables all workers to make decisions and implement policies that are consistent with achieving and sustaining the company’s competitive advantage in the marketplace  Any strategy should have 2 essential components 1) A clear statement of the company’s advantage: what it does differently, better, or uniquely 2) The scope for the strategy: where the company intends to compete most aggressively, either for targeted customer segments, technologies used, geographic locations, product line breadth, etc. BSC Objectives, Measures, and Targets 1) Start building a BSC by developing statements of strategic objectives. For example o Financial: increase revenues through expanded sales to existing customers o Customer: offer complete solutions to targeted customers o Process: achieve excellence in order fulfillment through continuous improvements o Learning/growth: align employee incentives and rewards with the strategy 2) Select measures for each objective; measures represent a quantitative, objective indicator of how performance on a strategic objective will be assessed, how success is determined o objectives should be translated into measures, or workers don’t know the status of the objective o provides a clear focus to workers on how their improvement efforts will be evaluated o Often tied to compensation of managers 3) Select targets for each measure, to establish the level of performance / improvement required o Should be set to represent excellent performance o If achieved, should position the company as one of the best in its industry o Choose targets that create distinctive value for customers/shareholders 2 BU 247 Lecture 2 Thurs. May. 9. 2013 Creating a Strategy Map  illustrates the causal relationships among the strategic objectives across the 4 BSC perspectives 1) identify the long-run financial objectives (ultimate destination for strategy) 2) in customer perspective, select target customers to generate revenues for new strategy, and the objectives for the value proposition offered to attract, retain, and grow the business 3) in process perspective, select objectives that create and deliver the customer value proposition and also improve productivity/efficiency to improve financial performance measures 4) identify employee skills, info needs, and company culture to drive improvement in processes  Financial Perspective: contains objectives and measures that represent the ultimate success measures for profit-seeking companies o Financial performance measures indicate whether the strategy is increasing shareholder value o Improves through 2 basic approaches, which each have 2 components (see image below)  Customer Perspective (heart of strategy): describes how a company intends to attract, retain, and deepen relationships with targeted customers by differen
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