Financial Strategies and Objectives Quiz

Introduction

• The chapter examines the use of management accounting information in strategic implementation and evaluation.
• Management control systems are tools for strategy implementation.
• Control systems should support organizational operations and strategies.
• Performance measurement is a crucial strategy implementation tool.

What is Strategy?

• Strategy defines how a company aligns its capabilities with market opportunities to meet overall objectives.
• A good strategy considers both external opportunities and threats and internal competencies and weaknesses.

The Role of Strategic Management Accounting

• Successful companies formulate effective strategies and implement them vigorously.
• Management accountants play a vital role in strategic decision-making and progress tracking.
• Accountants provide relevant information for decision-making and implement reporting tools.
• Examples include gathering competitor information (market intelligence) and identifying cost reduction opportunities.

Introduction: The Balanced Scorecard

• A company needs more than one control instrument like a plane needs more than one instrument.
• Traditional performance measurement systems like ROI were criticized for lacking a connection to a company's strategy and financial performance.
• The Balanced Scorecard (BSC) was developed as a response to these criticisms.
• The BSC is an innovative performance measurement system emphasizing a balanced view and strategic management.

Key Characteristics of the BSC

• Beyond just measuring performance, the BSC integrates performance measures, linking them with company strategy and supporting it.
• It uses both financial and non-financial performance indicators for a well-rounded view.
• It demonstrates the cause-and-effect relationships between non-financial and financial indicators.
• The BSC is adaptable, tailored according to specific organizational circumstances.

Structure of the Balanced Scorecard

• The BSC usually focuses on four perspectives to get a balanced view of business performance.
• The perspectives include financial, customer, internal process, and innovation/learning.
• The four perspectives help create a comprehensive business view.

The Four Dimensions of the Balanced Scorecard

• The perspectives can be categorized as leading or lagging indicators.
• Leading indicators provide insight into current performance and predict future performance.
• Lagging indicators represent past performance and are influenced by leading factors.
• Financial measures are typically lagging indicators, while other perspectives usually contain leading indicators.

Operationalizing the Balanced Scorecard

• The BSC details objectives, measures, targets, and related initiatives within each perspective.
• Each perspective should ideally have 4-6 measures to avoid complexity.

The Financial Perspective

• This perspective examines the financial performance of a strategy's implementation, assessing if it improves bottom-line performance.
• Financial goals are strongly related to the company's other dimensions.
• Typical financial targets and measures mentioned include profitability, growth, and shareholder value, while examples of frequently cited financial measures include Operating profit and revenue growth.

The Customer Perspective

• This perspective focuses on understanding customers and how the business is seen by them.
• The BSC identifies customer segments and tracks performance within those segments.
• A strong customer focus is vital for financial success and is a leading factor for improving financial performance.

The Internal Business Process Perspective

• This perspective analyzes a company's key internal processes, such as innovation, operations, and customer service.
• It details areas where improvement will help both customers and financial performance.
• Process areas like innovation, operations, and after-sales are typically under review.

The Learning & Growth Perspective

• This perspective emphasizes a company's ability to learn, grow, and innovate.
• The perspective focuses on company performance across employees, systems, and organizational processes.
• This perspective identifies support for long-term learning and improvement, ultimately impacting the other three perspectives.

Cause-and-Effect Relationships

• The BSC consists of a series of cause-and-effect relationships.
• This means measures in the various perspectives influence each other.
• This approach links strategic objectives and related performance measures.

Developing a Balanced Scorecard

• Clarify strategic objectives across the four perspectives involving senior management.
• Create a strategy map by linking objectives through cause-and-effect relationships.
• Define performance measures and target values for each objective tied to a specific time frame.
• Determine and define initiatives to achieve each objective.
• Provide ongoing feedback and continuous improvement to monitor and review predictions.

Objective 3: Understanding Good Balanced Scorecards

• Good BSCs illustrate a company's strategy through a series of cause-and-effect links.
• The BSC facilitates communication of the strategy across the organization.
• Well-designed BSCs offer clear, measurable operational goals.
• They may be used at various levels of a company (division or department).

Objective 4: Understanding Balanced Scorecard Development

• The process starts by top management defining strategic objectives relevant to all perspectives.
• A strategic map visualizes cause-and-effect links connecting objectives across perspectives.
• Defining metrics and targets for each objective involves setting specific values over time.
• Determining precise initiatives for meeting targets is critical.
• Continual feedback is essential to monitor and make necessary adjustments.

Features of a Good Balanced Scorecard

• A good balanced scorecard is "balanced" considering various perspectives.
• The perspectives are balanced with short-term and long-term goals, financial and non-financial measures, generic and business-specific measures, objective and subjective measures, and tactical and strategic feedback.

Other

• Specific examples of balanced scorecards provided (Lufthansa, McDonalds, VFB Stuttgart).
• Different forms of balanced scorecards exist (KPI-BSC, strategic-BSC, and full-fledged-BSC).
• Criticisms of the Balanced Scorecard include its complexity, resource demands, and overemphasis on internal processes.
• Visit balancedscorecard.org for a list of companies adopting Balanced Scorecards.