STRATEGIC COST MANAGEMENT - SPRING 2011 12-1 Balanced Scorecard Model Financial Perspective Customer Perspective Internal Business Process Perspective

STRATEGIC COST MANAGEMENT - SPRING 2011 12-1

Balanced Scorecard Model

Financial Perspective

Customer Perspective

Internal BusinessProcess Perspective

Learning & GrowthPerspective


Balanced Scorecard Components

Financial Perspective Customer Perspective Internal Business Process Perspective Learning and Growth Perspective


The Measures

Approximately 5-7 per section Link the measures…cause & effect Include outcomes and drivers Strategic measures become part of the bal.

scorecard; control system measures become “critical success factors” (or everyday measures)


Balanced Scorecard Success

Employee level Link with Compensation Include leading and lagging indicators


Features of a Good Balanced Scorecard

It tells a story. It helps communicate a strategy. It preserves a financial focus. It provides for metric focus. It highlights sub-optimal tradeoffs.


Balanced Scorecard Pitfalls

Failure to allow the scorecard to evolve. Emphasizing across the board improvement. Focus on only objective measures. Failure to focus on both costs and benefits. Failure to include non-financial measures in

evaluating employees.


Economic Value-added Analysis--EVA®

Measurement Alternative for Shareholder Value

Elements


A Little Bit of History

Residual income measures have been around for over 100 years in academic literature.

Stern Stewart & Co. introduced the formal concept of EVA® about 10 years ago.

Fortune Magazine put EVA® on the map in a September 1993 article.

A whole slew of offspring have followed. SVA from Andersen Consulting Other variations of Economic Value Added


EVA™ Testimonials

“Only EVA® gives a real picture of value creation. Accounting benchmarks just don’t do the job.” Robert Boldt, Calpers.

EVA® correlates better with stock performance than EPS. Fortune Magazine study.


EVA® Benefits

Objective evaluation Easy tool for strategic decision support Common shareholder & management focus Consistent measurement tool Improves on-going operating decisions Provides basis for common incentive-pay


EVA® Risks

May be subjective in implementation. Singular reliance on EVA® may be misleading.


Let’s Define EVA®

When the Cost of Capital is less thanthe Operating Income from that Capital, you create EVA®!!!

“Stuff” Generates Income

Capital Buys “Stuff”

Sources of Capital-Debt-Equity


EVA® Elements

Cost of Debt Financing Cost of Equity Financing Components of Capital Adjusted Net Operating Income


Cost of Debt Financing

Interest Expense After-tax Impact Consider all Debt, Excluding A/P


Cost of Equity Financing

Shareholder Hurdle Rate Price Appreciation Dividend Rate “Six Percentage Point” Rule


Components of Capital

Net Working Capital Net Long-lived Tangible Assets R & D Spending Employee Development Spending


Adjusted Net Operating Income

Substitute R&D and Employee Development Costs with Annual Amort.

Use Net Income from Continuing Operations Adj. Net Op. Income Minus Cost of

Financing Equals Economic Value Added


EVA® Uses

Planning Tool Business Unit Evaluation Incentive Compensation Base Merger and Acquisition Analysis Capital Asset Analysis


Corporate Examples

CSX Quaker Oats


Ways to Raise EVA®

Increase Profits Reduce Capital Spending Reduce Investment in Working Capital Increase High-margin Capital Investments


EVA® Implementation

Top management buy-in Make it a way of life Implement Gradually Keep it Simple Train the users

Documents

STRATEGIC COST MANAGEMENT - SPRING 2011 12-1 Balanced Scorecard Model Financial Perspective Customer Perspective Internal Business Process Perspective