15-1 The Balanced Scorecard: Strategic- Based Control Prepared by Douglas Cloud Pepperdine University Prepared by Douglas Cloud Pepperdine University

15-1

The Balanced The Balanced Scorecard: Scorecard: Strategic-Strategic-

Based ControlBased ControlPrepared by

Douglas Cloud Pepperdine University

Prepared by Douglas Cloud

Pepperdine University

15-2

1. Compare and contrast activity-based and strategic-based responsibility accounting systems.

2. Discuss the basic features of the Balanced Scorecard.

3. Explain how the Balanced Scorecard links measures to strategy.

4. Describe how an organization can achieve strategic alignment.

ObjectivesObjectivesObjectivesObjectives

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

15-3

Activity-Based versus Strategic-Activity-Based versus Strategic-Based AccountingBased Accounting


The activity-based system adds a process

perspective to the financial perspective of

the functional-based responsibility

accounting system.

The activity-based system adds a process

perspective to the financial perspective of

the functional-based responsibility

accounting system.

A strategy-based responsibility

accounting system translates the strategy

of the organization into operational objectives

and measures.

A strategy-based responsibility

accounting system translates the strategy

of the organization into operational objectives

and measures.

15-4



The Balanced Scorecard is a strategic-based performance

management system that typically identifies

objectives and measures for four

different perspectives.

The Balanced Scorecard is a strategic-based performance

management system that typically identifies

objectives and measures for four

different perspectives.

The financial perspective

The customer perspective

The process perspective

The learning and growth perspective

15-5

Assigning ResponsibilityAssigning ResponsibilityAssigning ResponsibilityAssigning Responsibility

Activity-Based Responsibility Strategic-Based ResponsibilityActivity-Based Responsibility Strategic-Based Responsibility

1. No tie to strategy

2. Systemwide efficiency

3. Team accountability

4. Financial perspective

5. Process perspective

1. Linked to strategy

2. Systemwide efficiency

3. Team accountability

4. Financial perspective

5. Process perspective

6. Customer perspective

7. Learning and growth perspective

15-6

Establishing Performance MeasuresEstablishing Performance MeasuresEstablishing Performance MeasuresEstablishing Performance Measures

Activity-Based Measures Strategic-Based MeasuresActivity-Based Measures Strategic-Based Measures

1. Process-oriented and financial standards

2. Value-added standards

3. Dynamic standards

4. Optimal Standards

1. Standards for all four perspectives

2. Used to communicative strategy

3. Used to help align objectives

4. Linked to strategy and objectives

5. Balanced measures

15-7

ABC versus Strategic-BasedABC versus Strategic-BasedABC versus Strategic-BasedABC versus Strategic-Based

Activity-Based Strategy-BasedActivity-Based Strategy-Based

Performance Evaluation Performance EvaluationPerformance Evaluation Performance Evaluation

1. Time reductions

2. Quality improvements

3. Cost reductions

4. Trend measurements

1. Time reductions

2. Quality improvements

3. Cost reductions

4. Trend measurements

5. Expanded set of metrics

6. Set stretch targets for all four perspectives

15-8

Rewards ComparedRewards ComparedRewards ComparedRewards Compared

Activity-Based Rewards Strategy-Based Rewards Activity-Based Rewards Strategy-Based Rewards

1. Based on multidimensional performance

2. Group rewards

3. Salary increases

4. Promotions

5. Bonuses, profit sharing, and gainsharing

1. Based on multidimensional performance

2. Group rewards

3. Salary increases

4. Promotions

5. Bonuses, profit sharing, and gainsharing

15-9

StrategyStrategyStrategyStrategy

Strategy is choosing the market and customer segments the business unit

intends to service, identifying the critical internal and business processes that the unit must excel at to deliver the value propositions to customers in the

targeted market segments, and selecting the individual and organizational

capabilities required for the internal, customer, and financial objectives.

15-10

Visions and Visions and StrategyStrategy

FinancialFinancial CustomerCustomer ProcessProcess InfrastructureInfrastructure

ObjectivesObjectives

MeasuresMeasures

TargetsTargets

InitiativesInitiatives

Strategy Translation

Process

15-11

Summary of Objectives and Measures: Summary of Objectives and Measures: Financial Perspective Financial Perspective

Summary of Objectives and Measures: Summary of Objectives and Measures: Financial Perspective Financial Perspective

Objectives MeasuresObjectives Measures

Revenue Growth:Increase the number of new Percentage of revenues from products new productsCreate new applications Percentage of revenue from

new applicationsDevelop new customers and Percentage of revenues from

markets new sourcesAdopt a new pricing strategy Products and customer

profitability

ContinuedContinued

15-12


Cost Reduction:Reduce unit product cost Unit product costReduce unit customer cost Unit customer costReduce distribution channel Cost per distribution

cost channel

Asset Utilization:Improve asset utilization Return on investment

Economic value added

15-13

Core Objectives and MeasuresCore Objectives and MeasuresCore Objectives and MeasuresCore Objectives and Measures

Increase market share

Increase customer retention

Increase customer acquisition

Increase customer satisfaction

Increase customer profitability

Only financial measureOnly financial measureAmong the core objectivesAmong the core objectives

Only financial measureOnly financial measureAmong the core objectivesAmong the core objectives

15-14

Customer ValueCustomer Value

Customer value is the difference between realization and sacrifice, where realization is what the customer receives

and sacrifice is what is given up.

Customer value is the difference between realization and sacrifice, where realization is what the customer receives

and sacrifice is what is given up.

15-15

Summary of Objectives and Measures: Summary of Objectives and Measures: Customer Perspective Customer Perspective

Summary of Objectives and Measures: Summary of Objectives and Measures: Customer Perspective Customer Perspective


Core:Increase market share Market share (percentage of

marketIncrease customer retention Percentage growth, existing

customersPercentage of repeating

customersIncrease customer acquisition Number of new customersIncrease customer satisfaction Ratings from customer surveysIncrease customer Customer profitabilityprofitability

ContinuedContinuedContinuedContinued

15-16


Performance Value:Decrease price PriceDecrease postpurchase costs Postpurchase costsImprove product functionality Ratings from customer surveysImprove product quality Percentage of returnsIncrease delivery reliability On-time delivery percentage

Aging scheduleImprove product image and Ratings from customer surveysreputation

15-17

Cycle Time and VelocityCycle Time and Velocity

The time it takes a company to respond

to a customer order is referred to as

responsiveness.

The time it takes a company to respond

to a customer order is referred to as

responsiveness.

Cycle time and velocity are two

operation measures of

responsiveness.

Cycle time and velocity are two

operation measures of

responsiveness.

Cycle time (manufacturing) is the length of time it takes to

produce a unit of output from the time materials are received until the good is delivered to

finished goods inventory.

Cycle time (manufacturing) is the length of time it takes to

produce a unit of output from the time materials are received until the good is delivered to

finished goods inventory.Velocity is the number of units of output that an be produced in

a given period of time..

Velocity is the number of units of output that an be produced in

a given period of time..

15-18

Conversion Cost ExampleConversion Cost ExampleConversion Cost ExampleConversion Cost Example

A company has the following data for one of its manufacturing cells:

Theoretical velocity: 40 units per hour

Productive minutes available (per year): 1,200,000

Annual conversion costs: $4,800,000

Actual velocity: 30 units per hour

15-19

Conversion Cost ExampleConversion Cost ExampleConversion Cost ExampleConversion Cost Example

Actual Conversion Cost per UnitActual Conversion Cost per Unit

Standard cost per minute = $4,800,000/1,200,000

= $4 per minute

Actual cycle time = 60 minutes/30 units

= 2 minutes per unit

Actual conversion cost = $4 x 2

= $8 per unit

Theoretical Conversion Cost per UnitTheoretical Conversion Cost per Unit

Theoretical cycle time = 60 minutes/40 units

= 1.5 minute per unit

Ideal conversion cost = $4 x 1.5

= $6 per unit

15-20

Objectives and Measures: Objectives and Measures: Process PerspectiveProcess Perspective

Objectives and Measures: Objectives and Measures: Process PerspectiveProcess Perspective


Innovation:Increase the number of new Number of new products/totalproducts products: R & D expenses

Increase proprietary products Percentage revenue from proprietary products

Number of patents pendingDecrease product Time to market (from start todevelopment cycle time finish)

15-21


Operations:Increase process quality Quality costs

Output yieldsPercentage of defective units

Increase process efficiency Unit cost trendsOutput/input(s)

Decrease process time Cycle time and velocityMCE

Postsales Services:Increase service quality First-pass yieldsIncrease service efficiency Cost trends

Output/input(s)Decrease service time Cycle time

15-22

Objectives and Measures: Objectives and Measures: Learning and Growth PerspectiveLearning and Growth Perspective

Objectives and Measures: Objectives and Measures: Learning and Growth PerspectiveLearning and Growth Perspective


Increase employee Employee satisfaction ratingscapabilities Employee turnover percentages

Employee productivity (revenue/employee)

Hours of trainingStrategic job coverage ratio

(percentage of critical jobrequirements filled)

15-23


Increase motivation and Suggestions per employeealignment Suggestions implemented per

employeeIncrease information systems Percentage of processes with capabilities real-time feedback

capabilitiesPercentage of customer-facing

employees with on-lineaccess to customer andproduct information

15-24

DecreaseDecreaseProcessProcessCostsCosts

Increase Increase ProfitsProfits

Increase Increase RevenuesRevenues

ImproveImproveDeliveryDelivery

ReliabilityReliability

IncreaseIncreaseCustomerCustomerRetentionRetention

Increase Increase Market Market ShareShare

ImproveImproveCycle TimeCycle Time

RedesignRedesignProcessProcess

Improve Employee SkillsImprove Employee Skills

Increase Shareholder ValueIncrease Shareholder Value

Casual Flow

Diagram: Testable Strategy

Illustrated

Financial

Customer

Internal Process

Learning and Growth

15-25

Targets and Weighting Targets and Weighting Scheme IllustratedScheme Illustrated


Perspectives Objectives Perspectives Objectives

Financial (25%) Increase shareholder value (25%)

Measures Targets Measures Targets

Share price 50% increase

15-26




Financial (25%) Increase profits (25%)


Profits Double

15-27




Financial (25%) Increase revenues (25%)


Revenues 30% increase

15-28




Financial (25%) Decrease process costs (25%)


Costs 20% decrease

15-29




Customer (25%) Increase market share (20%)


Market share 25%

15-30




Customer (25%) Increase customer retention (30%)


Repeat orders 70%

15-31




Customer (25%) Improve delivery reliability (50%)


On-time percentage 100%

15-32




Internal Process (25%) Improve cycle time (60%)


Cycle time 2 days

15-33




Internal Process (25%) Redesign process (40%)


Yes or No Yes

15-34




Learning and Growth (25%) Improve employee skills (100%)


Hours of training 30 hours per employee

15-35

ChapteChapterr

End ofEnd of

15-36

Documents

15-1 The Balanced Scorecard: Strategic- Based Control Prepared by Douglas Cloud Pepperdine University Prepared by Douglas Cloud Pepperdine University