Damayanti Puspitasari

1191902007
Chapter 13 - Strategy, Balanced Scorecard, and Strategic Profitability Analysis

Strategy
How an organization can create value for its customers while differentiating itself from its
competitors. Industry analysis focuses on five forces:
1. Number and strength of competitors
2. Potential entrants to the market
3. Availability of equivalent products
4. Bargaining power of customers
5. Bargaining power of input suppliers
The collective effect of these forces shapes an organization’s profit potential. In general, profit
potential decreases with greater competition, stronger potential entrants, products that are
similar and more demanding customers and suppliers. Generally, there are two basic business
strategies that a business can follow:
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. Competitive advantage: brand loyalty and the willingness of customers to
pay high prices.
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. Competitive advantage: lower selling prices.

Building Internal Capabilities: Quality Improvement and Reengineering at Chipset

 Reengineering is the fundamental rethinking and redesign of business processes to
achieve improvements in critical measures of performance, such as cost, quality,
service, speed and customer satisfaction.
 Stated another way, reengineering is the redesign of business processes to improve
performance by reducing cost and improving quality

Strategy Implementation and the Balanced Scorecard

Strategy Maps
A strategy map is a useful first step in designing a balanced scorecard. A strategy map is a
diagram that describes how an organization creates value by connecting strategic objectives
in explicit cause-and-effect relationships with each other in each of the 4 perspectives.

The Balanced Scorecard

Many companies have introduced a balanced scorecard to track progress and manage the
implementation of their strategies.
The balanced scorecard translates an organization’s mission and strategy into a set of
performance measures that provides the framework for implementing its strategy.
Not only does the balanced scorecard focus on achieving financial objectives, it also highlights
the nonfinancial objectives that an organization must achieve to meet and sustain its financial
objectives.
The scorecard measures an organization’s performance from four perspectives. Here are the
four perspectives of a balanced scorecard. The particular measure a company uses to track
performance will depend on its strategy.
1. Financial - profits and value created for shareholders
 Evaluates the profitability of the strategy
 Uses the most objective measures in the scorecard
 The other three perspectives eventually feed back into this dimension

The chart presented here provides some measures that might be used including operating
income from productivity gain or growth, or revenue growth.
2. Customer – the success of the company in its target market
Identifies targeted customer and market segments and measure the company’s success
in these segments.

The chart presented here provides some measures that might be used including market
share, number or new customers and customer-satisfaction ratings.
3. Internal business perspective – the internal operations that create value for customers
Focuses on internal operations that create value for customers which, in turn, will further
the financial perspective by increasing shareholder value. It includes three subprocesses:
 Innovation
 Operations
 Post-sales service

The chart presented here provides some measures that might be used for internal
 business objectives including service response time, yield, order-delivery time, on-time
delivery, number of improvements, or percentage of processes with advanced controls.
4. Learning and growth – the people and systems capabilities that support operations
Identifies the capabilities the organization must excel at to achieve superior internal
processes that create value for customers and shareholders.

The chart presented here provides some measures that might be used including
employee-satisfaction ratings, percentage of line workers empowered to manage
processes, percentage of employees trained in process and quality management and
percentage of manufacturing processes with real-time feedback.

Implementing a Balanced Scorecard

 A successful balanced scored implementation:
 Must have commitment and leadership from top management
 Must be communicated to all employees
 For the balanced scorecard to be effective, managers must view it as a fair way to assess
and reward all important aspects of a manager’s performance and promotion prospects.
 The goal is to align the balanced scorecard with company strategy. Here are some common
measures found on company scorecards in the service, retail and manufacturing sectors.
Environmental and social performance and the balanced scorecard
 Regarding environmental and social performance and the balanced scorecard, companies
are increasingly recognizing that they must earn the right to operate in the communities
and countries in which they do business. Failure to perform adequately on environmental
and social processes puts at risk a company’s ability to deliver future value to
shareholders.
 Many managers are promoting sustainability (the development and implementation of
strategies) to achieve:
 Long-term financial performance
 Social performance (eliminating employee injuries, improving product safety)
 Environmental performance (reducing greenhouse gas emissions)
 Managers interested in measuring environmental and social performance are
incorporating these factors into their balanced scorecards to set priorities for initiatives,
guide decisions and actions and fuel discussions around strategies and business models
to improve performance.
 Companies use a variety of measures including:
 Cost of preventing and remediating environmental damage (financial);
 Brand image (customer);
 Energy consumption (internal-business); and
 Implementation of ISO 14000 environmental standards (learning and growth).

Features of a Good Balanced Scorecard

The first two (of five) features of a good balanced scorecard are that it:
1. Tells the story of a firms strategy, articulating a sequence of cause-and-effect
relationships, the links among the various perspectives that align implementation of the
strategy.
2. Helps to communicate the strategy to all members of the organization by translating the
strategy into a coherent and linked set of understandable and measurable operational
targets.
3. Must motivate managers to take actions that eventually result in improvements in financial
performance. Applies primarily to for-profit entities, but has some application to not-for-
profit entities as well.
4. Limits the number of measures, identifying only the most critical ones.
5. Highlights less-than-optimal trade-offs that managers may make when they fail to
consider operational and financial measures together.

Pitfalls in implementing a balanced scorecard

Some pitfalls in implementing a balanced scorecard include:
 Managers should not assume the cause-and-effect linkages are precise: they are merely
hypotheses.
 Managers should not seek improvements across all of the measures all of the time.
 Managers should not use only objective measures: subjective measures are important as
well.
 Despite challenges of measurement, top management should not ignore nonfinancial
measures when evaluating managers and other employees.
Evaluating the success of Strategy and implementation
 To evaluate how successful a company’s strategy and implementation have been, its
management must compare the target and actual performance columns in the balanced
scorecard.
 If a company does not meet its targets on the two perspectives that are more internally
focused (learning and growth, and internal business processes), it may have had a
problem with strategy implementation.
 If a company performs well in the internally focused perspectives but not customer and
financial measures, it may conclude that the strategy was faulty because there was no
effect on customers or on long-run financial performance and value creation. In this case,
management may have failed to correctly identify the causal links but did a good job
implementing the wrong strategy.

Analysis of Unused Capacity: engineered & discretionary

To understand unused capacity, we must understand the distinction between engineered
costs and discretionary costs.
1. Engineered costs result from a cause-and-effect relationship between the cost driver
(output) and the (direct or indirect) resources used to produce that output. Engineered
costs have a detailed, physically observable and repetitive relationship with output.
2. Discretionary costs have two important features:
 They arise from periodic (usually annual) decisions regarding the maximum amount
to be incurred.
 They have no measurable cause-and-effect relationship between output and
resources used.

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.
 Downsizing often means eliminating jobs, which can adversely affect employee morale
and the culture of a company.