20/01/2023

STRATEGY, BALANCED SCORECARD AND

STRATEGIC PROFITABILITY ANALYSIS
LECTURE 7

Strategy analysis

Implementation of strategies

Balanced Scorecard

Outline
Balanced Scorecard implementation

Evaluate strategy

Strategic analysis of operating income

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Strategy specifies how an

organization matches its own
capabilities with the opportunities
in the marketplace to accomplish its
objectives.

Strategy
A thorough understanding of the
industry is critical to implementing
a successful strategy.

Five Aspects of Industry Analysis

• Number and strength of competitors

• Potential entrants to the market
• Availability of equivalent products
• Bargaining power of customers
• Bargaining power of input suppliers

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Basic Business Strategies

• 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
Ø Leads to brand loyalty and the willingness of customers to pay high
prices
• 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
Ø Leads to lower selling prices

Implementation of Strategy

• Many companies have introduced a balanced

scorecard to manage the implementation of their
strategies.

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The Balanced Scorecard

The balanced scorecard translates an organization’s mission and strategy into

a set of performance measures that provides the framework for
implementing its strategy.

It is called the balanced scorecard because it balances the use of financial

and nonfinancial performance measures to evaluate performance

Balanced Scorecard Perspectives

Financial Customer

Internal
Learning
business and growth
perspective

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The Financial Perspective

The other three

Evaluates the Uses the most perspectives
profitability of the objective measures eventually feed
strategy in the scorecard back into this
dimension

The Customer Perspective

• Identifies targeted customer and market segments and

measures the company’s success in these segments

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Focuses on internal operations that

create value for customers that, in
turn, furthers the financial
perspective by increasing shareholder
value
The Internal
business
Perspective
Includes three subprocesses:

Innovation Operations Post-sales

service

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The Learning and Growth Perspective

• Identifies the capabilities the organization must excel at

to achieve superior internal processes that create value
for customers and shareholders

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The Balanced Scorecard Flowchart

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Balanced Scorecard Illustrated

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Balanced Scorecard Illustrated

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Balanced Scorecard Illustrated

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Strategy and
the Balanced
Scorecard,
Illustrated

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Common Balanced Scorecard Measures

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Must have commitment and

leadership from top
management
Balanced
Scorecard
Implementation
Must be communicated to
all employees

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Features of a Good Balanced Scorecard

• Tells the story of a firm’s strategy, articulating a sequence of cause-and-

effect relationships—the links among the various perspectives that
describe how strategy will be implemented
• Helps 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

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Predominately
Must motivate managers applies to for-
to take actions that profit entities,
eventually result in but has some
improvements in application to
not-for-profit
financial performance entities as well

Features of a
Good Limits the number of measures,

Balanced identifying only the most critical ones

Scorecard
Highlights less-than-optimal trade-offs
that managers may make when they fail
to consider operational and financial
measures together

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Managers should not assume

the cause-and-effect linkages
are precise: they are merely
hypotheses.

Balanced
Scorecard Managers should not seek
improvements across all of the
Implementation measures all of the time.
Pitfalls
Managers should not use only
objective measures:
subjective measures are
important as well.

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Managers must include both costs and benefits of initiatives

placed in the balanced scorecard: costs are often overlooked.

Managers should not ignore nonfinancial measures when

evaluating employees.

Managers should not use too many measures.

Balanced Scorecard
Implementation Pitfalls

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Strategic analysis of operating income

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

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Lecture example 13-29

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Strategic analysis of operating income

Effect of growth
Revenue Actual Units of Actual Units of Prior
Effect = Output Sold in the _ Output Sold in the X Period
of Current Period Prior Period Selling
Growth Price

Revenue effect of growth

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Strategic analysis of operating income

Effect of growth
Cost Effect Units of Input Required Actual Units of Prior
of Growth = to Produce Current _ Input Used to X Period
for Variable Output in the Prior Produce Prior Input
Costs Period Period Output Price

Cost effect of growth for architech labour

Cost effect of growth for architech software implementation

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Strategic analysis of operating income

Effect of price recovery

Revenue effect of price recovery

Cost effect of price recovery for architech labour

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Strategic analysis of operating income

Effect of price recovery

Cost effect of price recovery for architech software

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Strategic analysis of operating income

Effect of productivity

Cost effect of productivity for architech labour

=(27,000 – 30,000)* $36 = $108,000F

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Strategic analysis of operating income

Effect of productivity

Cost effect of price recovery for architech software

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Strategic analysis of operating income

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