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Implementing Strategy: The

Balanced Scorecardand theValue Chain

Chapter Two

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Explain how to implement a competitive strategy byusing Strengths-Weaknesses-Opportunities-Threats(SWOT) Analysis

Explain how to implement a competitive strategy byfocusing on the execution of goals

Explain how to implement a competitive strategyusing value-chain analysis

Learning Objectives

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Explain how to implement a competitive strategyusing the Balanced Scorecard(BSC)

Explain how to expand a conventional BalancedScorecard (BSC) by integrating sustainability

Learning Objectives(continued)

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There are two main competitive strategies:

cost leadership

differentiation

Once a firm chooses which strategy to follow,there are various means of implementation:

SWOT Analysis

Focus on execution Value-chain analysis

Balanced scorecard (BSC)

Implementing a Strategy

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Identification of critical success factors (CSFs)tied to strategyfor example:

Product innovation

Quality

Skill development Identification of quantitative measures for the

specified CSFsfor example:

Number of design changes or new patents

Number of defects or number of returns

Number of training hours or amount of skillperformance improvement

SWOT Analysis

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The SWOT analysis has four areas:

Sstrengths/internal Wweaknesses/internal

Oopportunities/external

Tthreats/external

SWOT Analysis(continued)

Look at product lines,management, R&D,manufacturing, marketing,and strategy

Look at barriers to entry,intensity of rivalry amongcompetitors, substitutegoods, andcustomer/supplierbargaining power

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The CSFs a manager executes depend on thechosen strategy

Cost leadership: operational performance and quality

Differentiation: customer satisfaction and innovation

Differentiated firms must pay close attention tomarketing and product development

Management accountants assist by gathering,analyzing, and reporting on relevant information

Can be improved through benchmarking and totalquality improvement (e.g., Malcolm Baldrige Quality

Award)

Execution

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Means to reach the detail-level of analysis CSFs must be implemented in each and every phase of

operations

Helps a firm better understand its competitive

advantage by analyzing what processes add value(processes that do not add value can be deleted oroutsourced)

Design to manufacturing to service after sale Not all areas will get the same attention (identification of

areas most important to the customer will determine thefirms focus)

Goal = the most value at the lowest possible cost

Value-Chain Analysis

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Value-chain analysis has two steps: Identify the value-chain activities at the smallest level

possible

Develop a competitive advantage by reducing cost

or adding value To develop a competitive advantage, a firm

must consider the following:

What is our competitive advantage (strategy)?

Where can we add value for the customer?

Where can we reduce costs?

Are any of our processes linked (linkages exploited)?

Value-Chain Analysis

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Computer Intelligence Company (CIC)manufactures computers for small businesses

The company has an excellent reputation forservice and reliability as well as a growingcustomer list

Is there any way to add value for the customerwhile reducing costs?

Example: Value-Chain Analysisin Computer Manufacturing

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The company is considering two options:

Option Oneis to continue functioning as is

Option Twoincludes two separate outsourcingdecisions: (a) the purchase or manufacture ofparts, and (b) providing service internally oroutsourcing it

It is important to consider company strategyin outsourcing decisions

Example: Value-Chain Analysis inComputer Manufacturing (continued)

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Value-Chain Analysis in ComputerManufacturing (continued)

Value Activity Option OneCurrent Option TwoPotential

Acquiring rawmaterials

CIC is not involved atthis step

CIC is not involved atthis step

Manufacturing

computer chips andother parts

CIC is not involved at

this step; cost is $200

CIC is not involved at

this step; cost is $200

Manufacturingcomponents, some ofwhich CIC can make

CIC purchases $300 ofparts for each unit

CIC manufactures theseunits for $190 per unitplus $55,000 monthly

Assembling CICs costs are $250 CICs costs are $250

Marketing, distributing,and servicing

CICs costs are$175,000 per month

CIC contracts out theseservices for $130 permonth

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Results ofValue-Chain Analysis

Manufacturing

Marketing,distributing, and

servicing

Option One 600 x $300 =$180,000 $175,000 per month

Option Two 600 x 190 +$55,000 =$169,000 $78,000 per month

Savings withOption Two $11,000 $97,000 per month

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Results of Value-Chain Analysis(continued)

CIC can save $108,000 ($11,000 + $97,000) permonth by manufacturing the parts and contractingout marketing, distributing, and servicing

The main factor driving the decision is companystrategy, which in this case is quality andcustomer service

For a firm pursuing a differentiation strategy, the best

option is not necessarily the one which provides themost savings (savings is a secondary consideration)

From a strategic viewpoint, Option One is preferredover Option Two

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A performance report based on a broad set offinancial and nonfinancial measures that is crucialto understanding and implementing a strategy

This report groups a firms CSFs into four areas:

Financial perspective (financial measures)

Customer perspective (customer satisfaction)

Internal business process perspective (e.g., productivityand speed)

Learning and innovation (e.g., training and number ofnew patents or products)

The Balanced Scorecard (BSC)

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Benefits

Means for implementing strategy

Means to achieve a desired organizational change instrategy

Can be used to determine managementscompensation and rewards

Coordinates efforts within the firm to achieve CSFs

Limitations

Nonfinancial information is subjective Confidentiality must be insured for certain information

Must be adaptable and frequently updated

Costly and time-consuming to implement

The Balanced Scorecard (BSC) (continued)

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A properly constructed BSC can be used to infer acompanys strategy

BSC Strategy, rather than Strategy BSC

The emphasis placed on each performanceperspective reflects the strategy of the firm

For a cost leader, the operations perspective might be themost important; for a differentiator, the customerperspective

The Balanced Scorecard(BSC) (continued)

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A strategy map is a cause-and-effect diagram ofthe relationships embodied in a BSC:

Shows how the achievement of CSFs in one perspective

should affect the achievement of goals in anotherperspective

The financial perspective is the target in the strategy mapbecause financial performance is the ultimate goal for

most profit-seeking organizations Success in the other perspectives leads directly to

improved financial performance and shareholder value

Strategy Map

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The fifth perspective for many organizations

The balancing of short-term and long-term goals inall three dimensions of the companysperformanceeconomic, social, and environmental:

Environmental reports use environmental performanceindicators (EPIs) to measure sustainability

These indicators are in three areas: Operational (measure stresses to the environment/regulatory

compliance issues)

Management (try to reduce environmental effects)

Environmental condition (measure environmental quality)

Sustainability

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Competitive strategy is different:

Must satisfy funding authorities, political leaders, and thegeneral public

The BSC can still be used to monitor CSFs relatedto internal processes, customer satisfaction,financial measures, and human resources measures

Value-chain analysis can still be used to determineat what points costs can be reduced or value addedon the value chain

The BSC and Not-For-Profit(NFP) Organizations

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Three cost-management resources for implementingstrategy are discussed in this chapter:

SWOT analysisprovides a system and structure toidentify CSFs

Value-chain analysisbuilds on the CSFs by breakingthem down into detailed activities

The BSCprovides a way to implement the detailedstrategy developed through the previous two analyses; itprovides the processes for evaluating the organizationsachievement of CSFs

The Role of Accounting

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Strengths-Weaknesses-Opportunities-Threats (SWOT)Analysis provides a system and structure in which toidentify a firms critical success factors (CSFs)

Execution of goals is important in implementing astrategy

Execution depends on the competitive strategy a firmis pursuing

Management accountants assist management bygathering, analyzing, and reporting on relevantinformation

Chapter Summary

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Chapter Summary (continued)

Value-chain analysis builds on the CSFs identified inSWOT analysis by breaking them into detailed activities

The balanced scorecard (BSC) provides the processes

for evaluating a firms achievement of CSFs

Sustainability builds on the conventional BSC bybalancing short-term and long-term goals

Sustainability focuses on economic, social, andenvironmental issues