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© John Wiley & Sons, 2011 Chapter 16: Strategic Performance Measurement Eldenburg & Wolcott’s Cost Management, 2eSlide # 3 Q1: Overview of Management Decision Making Organizational Vision Organizational Vision Core Competencies Core Competencies Operating Plans Operating Plans Actual Operations Actual Operations Organizational Strategies Organizational Strategies Measure, Monitor, and Motivate
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© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 1
Cost ManagementMeasuring, Monitoring, and Motivating Performance
Chapter 16
Strategic Performance Measurement
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 2
Chapter 16: Strategic Performance Measurement
Learning objectives• Q1: What is strategic decision making?
• Q2: How are financial and nonfinancial measures used to evaluate organizational performance?
• Q3: What is a balanced scorecard?
• Q4: How is a balanced scorecard implemented?
• Q5: How does the balanced scorecard affect strategic management and incentives?
• Q6: What is the future direction of cost accounting?
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 3
Q1: Overview of Management Decision Making
Organizational
Vision
Core
Competencies
Operating
Plans
Actual
Operations
Organizational
Strategies
Measure, Monitor, and Motivate
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 4
Q1: Strategic Decision Making
• Managers determine performance objectives to monitor the results of actual operations.
• Performance objectives are specific goals.
• Measurements of the performance objectives are compared to management’s expectations.
• Adjustments are made to either change operations or adjust the long-term strategies.
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 5
Q2: Financial Performance Measures
• Financial measures provide information in dollars or ratios of dollars.• These measures come from the accounting
information system.• Traditionally these often were the only
measures used.
• Examples include:• division revenue,• division profit margin or return on sales, and• variances of actual operating results from the
budget.
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 6
Q2: Nonfinancial Performance Measures
• Nonfinancial measures cannot be measured in dollars.
• Examples include:• Defect rates,• Customer satisfaction levels,• Number of days from a candidate’s interview to
his or her start date,• Average service time, and• Employee satisfaction levels.
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 7
Q3: Balanced Scorecard• The balanced scorecard is a method of
organizing the financial and nonfinancial performance measures used to monitor operations.
• The chosen measures are carefully related to the organization’s vision and long-term strategies.
• The balanced scorecard serves as a means of communicating the organization’s strategies throughout the organization.
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 8
Q3: Balanced Scorecard
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 9
Q3: Balanced Scorecard (BSC) Perspectives• A balanced scorecard usually consists of four categories of
measures, with 4 ~ 5 specific measures per category.• The four common categories are called the balanced
scorecard perspectives.1. The financial perspective measures progress towards the
organization’s financial goals.2. The customer perspective evaluates the organization’s
performance from the viewpoint of customers.3. The internal business process perspective assesses the
organization’s ability to produce and deliver goods and services.
4. The learning and growth perspective measures the organization’s ability to change and develop improved strategies.
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 10
Q3: The BSC Translates Strategy to a Series of Cause and Effect Relationships
Long-Term Strategy
Internal Perspective
Customer Perspective
Learning & Growth
Financial Perspective
How do shareholders view organization?
How do customers view organization?
How do employees view organization?
How can organization grow and improve?
Performance measurements for each perspective can be
used to determine appropriate operational and
strategic changes.
Measurements:• Income from operations• ROI, residual income,
EVA©
• Working capital• Operational cash flow• Inventory turns
Objectives:• Maximize Profit• Maximize Cash• Control Costs• Effective Investment
Utilization• Minimize Inventory
Q3: The Financial Perspective
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 11
Measurements:• Customer survey ratings• Market share• Airline passenger loads• Customer retention
rates• New customer
acquisitions
Objectives:• Improve customer
satisfaction• Increase market share• Increase repeat
customers
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 12
Q3: The Customer Perspective
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 13
Q3: The Internal Business Process Perspective• The internal business process perspective contains
three stages:
• In the innovation cycle, customer preferences are determined and the products are designed.
• In the operations cycle, goods and services are produced and delivered to the customer.
• The post-sales service cycle supports the customer after the sale.
Measurements:• # of engineering
changes• Order response time• Cycle time• Defects per million• Warranty costs• # of returns
Objectives:• Reduce cycle time• Reduce engineering
changes• Improve order response
time• Efficient capacity
utilization• Minimize waste
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 14
Q3: The Internal Business Process Perspective
Q3: Learning & Growth Perspective
Measurements:• Training hours per
employee• Retention rate• Specific skill
development metrics• Number of information
systems
Objectives:• High quality employee
training• Minimize turnover• Develop efficient
information systems
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 15
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 16
Q3: BSC ExampleThe School for Future Artists is a private, for-profit, high school for students that are gifted in painting, drawing, and sculpture. Its mission is to train students in techniques and give them the confidence to be innovative, while at the same time preparing them to earn a living. Students are admitted to the school after a review of their portfolios. Half of the students are given full scholarships and the parents of the other half pay the expensive tuition. Parents who are paying tuition are given the opportunity to pay reduce tuition if they become shareholders. The School also receives donations from successful alumni. Identify some performance measures the School might use for the financial perspective on its balanced scorecard.
• Operating income• Return on equity• Donations as a percent of total
revenues
• Variances between actual and budgeted expenditures
• Dollar amount of state and federal grant money received this year
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 17
Q3: BSC ExampleIdentify some performance measures the School for Future Artists might use for the customer perspective on its balanced scorecard.
• Percent of graduates who eventually complete masters degrees in fine arts or related fields
• Percent of graduates who eventually become art professors
• Number of graduates who were involved in art expositions this year
• Number of graduates who received federal or state grants this year
• Number of families with 2 or more children at the school
• Responses to satisfaction surveys given to students and parents
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 18
Q3: BSC ExampleIdentify some performance measures the School for Future Artists might use for the 3 categories of the internal business processes perspective on its balanced scorecard.
Innovation cycle• Number of new courses developed• Course development time
Operations cycle• Percent of students who graduate• Art supply costs per student
Post-sales service cycle• Accounts receivable turnover ratio• Results of alumni satisfaction
surveys
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 19
Q3: BSC ExampleIdentify some performance measures the School for Future Artists might use for the learning and growth perspective on its balanced scorecard.
• Teacher turnover• Number of training workshops attended by teachers this year• Results of teacher satisfaction surveys• Teacher and student use of newly purchased kiln equipment• Number of management efficiency and leadership conferences
attended by administrators this year
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 20
Q4: Balanced Scorecard Implementation• A BSC implementation includes the following
stages:• Clarify vision, competencies, and strategies.• Analyze the four BSC perspectives to develop
objectives and measures.• Communicate the components of the BSC throughout
the organization.• Establish performance targets and action plans.• Collect and analyze scorecard data.• Investigate variances and reward employees.• Provide feedback and refine the scorecard.
Vision Barrier •People in the organization do not understand the strategy
•BSC helps engage people throughout the organization
People Barrier •Employee incentives are not linked to strategy
•BSC can integrate operating plans and employee performance evaluation
Resource Barrier •Organization resources are not linked to strategy
•BSC can focus resource allocations to areas that align with strategy
Mgmt Barrier
•Top managers do not spend enough time discussing strategy•BSC engages managers in discussion on strategy and the interactions
between financial and non financial measurements
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 21
Q5: Barriers to Implementing Strategies
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 22
Q5: Balanced Scorecard Strengths• The greatest strength of the BSC is the
communication of strategies throughout the organization.
• The BSC forces top management to clarify the vision and strategies of the organization.
• The BSC links employee rewards to performance objectives that are linked to the organization’s vision and strategies, so short-term and long-term strategies are more likely to be in alignment.
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 23
Q5: Balanced Scorecard Potential Weaknesses• If based on inappropriately defined visions and
strategies, the BSC provides the wrong incentives for managers.
• Sometimes performance measures are chosen because the data is easy to obtain and familiar, rather than because they are linked to the vision and strategies.
• If performance measure targets are unattainable, employees may not buy in to the BSC initiative.
• Managers may focus on measurements that are already successful rather than areas that need improvement.
© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement
Eldenburg & Wolcott’s Cost Management, 2e Slide # 24
Q6: Future Direction of Cost Accounting• Information technology advances free accountants
from preparing detailed reports.
• More time is available to concentrate on providing the best information possible to support management decision making.
• Accountants increasingly need to become aware of and understand emerging management tools (such as the balanced scorecard).