Cost Accounting Strategy Implementation PDF

strategy iMPleMentation and the BalanCed sCoreCard 501 Companies such as AT&T, Banca di America e di Italia, Cigna Insurance, and Cisco have benefited significantly by reengineering their processes across design, production, and marketing (just as in th...

strategy iMPleMentation and the BalanCed sCoreCard 501 Companies such as AT&T, Banca di America e di Italia, Cigna Insurance, and Cisco have benefited significantly by reengineering their processes across design, production, and marketing (just as in the Chipset example). Reengineering has limited benefits when reen- gineering efforts focus on only a single activity such as shipping or invoicing rather than the entire order-delivery process. To be successful, reengineering efforts must focus on an entire process, change roles and responsibilities, eliminate unnecessary activities and tasks, use information technology, and develop employee skills. Take another look at Exhibit 12-1 and note the interrelatedness and consistency in Chipset’s strategy. To help meet customer preferences for price, quality, and customer service, Chipset decides on a cost-leadership strategy. And to achieve cost leadership, Chipset builds DecisiOn internal capabilities by improving quality and by reengineering its processes. Chipset’s next Point challenge is to effectively implement its strategy. What is reengineering? Strategy Implementation and the Balanced Scorecard Many organizations, such as Allstate Insurance, Bank of Montreal, British Petroleum, and Dow Chemical, have introduced a balanced scorecard approach to track progress and manage the implementation of their strategies. Learning Objective 3 Understand the four per- spectives of the balanced The Balanced Scorecard scorecard The balanced scorecard translates an organization’s mission and strategy into a set of perfor-... financial, customer, inter- mance measures that provides the framework for implementing its strategy.4 Not only does the nal business process, and learning and growth balanced scorecard focus on achieving financial objectives, it also highlights the nonfinancial objectives that an organization must achieve to meet and sustain its financial objectives. The scorecard measures an organization’s performance from four perspectives: 1. Financial: the profits and value created for shareholders 2. Customer: the success of the company in its target market 3. Internal business processes: the internal operations that create value for customers 4. Learning and growth: the people and system capabilities that support operations The measures that a company uses to track performance depend on its strategy. This set of measures is called a “balanced scorecard” because it balances the use of financial and nonfinancial performance measures to evaluate short-run and long-run performance in a single report. The balanced scorecard reduces managers’ emphasis on short-run financial performance, such as quarterly earnings, because the key strategic nonfinancial and opera- tional indicators, such as product quality and customer satisfaction, measure changes that a company is making for the long run. The financial benefits of these long-run changes may not show up immediately in short-run earnings; however, strong improvement in nonfinancial measures usually indicates the creation of future economic value. For example, an increase in customer satisfaction, as measured by customer surveys and repeat purchases, signals a strong likelihood of higher sales and income in the future. By balancing the mix of finan- cial and nonfinancial measures, the balanced scorecard broadens management’s attention to short-run and long-run performance. In many for-profit companies, the primary goal of the balanced scorecard is to sustain long-run financial performance. Nonfinancial measures simply serve as leading indicators for the hard-to-measure long-run financial performance. Some companies explicitly set long-term financial, social, and environmental goals. Several of these companies believe that meeting social and environmental goals is a means to achiev- ing financial goals because good performance on social and environmental factors attracts 4 See Robert S. Kaplan and David P. Norton, The Balanced Scorecard (Boston: Harvard Business School Press, 1996); Robert S. Kaplan and David P. Norton, Strategy Maps: Converting Intangible Assets into Tangible Outcomes (Boston: Harvard Business School Press, 2004); Robert S. Kaplan and David P. Norton, Alignment: Using the Balanced Scorecard to Create Corporate Synergies (Boston: Harvard Business School Press, 2006); and Sanjiv Anand, Execution Excellence, (New Jersey: Wiley, 2016). 502 ChaPter 12 strategy, BalanCed sCoreCard, and strategiC ProfitaBility analysis customers, employees, and investors to the company. Other companies focus on social and environmental goals because they take the view that a company has obligations to multiple stakeholders, not just financial investors. As we discuss in a later section, companies use the balanced scorecard to implement multiple goals. Strategy Maps and the Balanced Scorecard In this section, we use the Chipset example to develop strategy maps and the four perspectives of the balanced scorecard. The objectives and measures Chipset’s managers choose for each perspective relate to the action plans for furthering Chipset’s cost-leadership strategy: improv- ing quality and reengineering processes. Strategy Maps A useful first step in designing a balanced scorecard is a strategy map. A strategy map is a diagram that describes how an organization creates value by connecting strategic objectives in explicit cause-and-effect relationships with each other in the financial, customer, internal- business-process, and learning-and-growth perspectives. Exhibit 12-2 presents Chipset’s strat- egy map. Follow the arrows to see how a strategic objective affects other strategic objectives. For example, empowering the workforce helps align employee and organization goals and improves processes, which improves manufacturing quality and productivity, reduces customer delivery time, meets specified delivery dates, and improves post-sales service, all of which exhiBit 12-2 Strategy Map for Chipset, Inc., for 2017 FINANCIAL Increase PERSPECTIVE Grow operating shareholder income value Focal Point CUSTOMER Increase Increase PERSPECTIVE customer market satisfaction share Focal Point INTERNAL- Improve Reduce delivery Meet specified Improve BUSINESS- manufacturing D D time to customers delivery dates post-sales service PROCESS quality and PERSPECTIVE productivity Focal Point Trigger Point Improve manufacturing & Follow up Improve business processes service call manufacturing controls Focal Point Align employee Develop Enhance LEARNING and organization employee process information system AND GROWTH capabilities goals skill PERSPECTIVE Focal Point Empower workforce  strategy iMPleMentation and the BalanCed sCoreCard 503 increase customer satisfaction. Improving manufacturing quality and productivity grows oper- ating income directly and also increases customer satisfaction that, in turn, increases market share, operating income, and shareholder value. To compete successfully, Chipset invests in its employees, implements new technology and process controls, improves quality, and reengineers processes. The strategy map helps Chipset evaluate whether these activities are generating financial returns. Chipset could include many other cause-and-effect relationships in the strategy map in Exhibit 12-2. But Chipset, like other companies implementing the balanced scorecard, focuses on only those relationships that it believes to be the most significant so that the scorecard does not become unwieldy and difficult to understand. Structural Analysis of Strategy Maps Chipset’s managers step back to assess and refine the strategy map before developing the bal- anced scorecard. They use structural analysis to think carefully about the causal links in the strategy map. It helps Chipset’s managers to “read” and gain insights into the strategy map. There are five types of conditions to consider in a structural analysis: strength of ties (causal links), orphan objectives, focal points, trigger points, and distinctive objectives.5 We define these conditions below and refer to the strategy map we developed in Exhibit 12-2 to illustrate them. In the discussion, we refer to the learning and growth perspective as the bot- tom of the map and the financial perspective as the top. Strength of Ties Ties are the causal links between strategic objectives and can be qualified as strong, moderate, or weak. Strong ties are those causal links where the impact of one strategic objective on realization of another is very high, relative to other ties in the map. Weak ties are those causal links where the impact of one strategic objective on realization of another is very low, relative to other ties in the map. Moderate ties are those causal links where the impact of one strategic objective on realization of another is average, relative to other ties in the map. Managers and management accountants, who have a deep understanding of the business, determine if a tie is strong, moderate, or weak, based on historical data, logic, and judgment. In Exhibit 12-2 strong ties are indicated with dark, thick arrows, moderate ties are indicated with thin arrows, and weak ties are indicated with dotted arrows. In Exhibit 12-2, Chipset’s managers identify five strong ties listed below. The strategic objectives located toward the bottom of the map are listed first. Develop employee process skill (Learning and growth perspective) S Improve manufac- turing and business processes (Internal-business-process perspective) ini bicara msalah quality Enhance information system capabilities (Learning and growth perspective) S Improve beli program baru, manufacturing and business processes (Internal-business-process perspective) Improve manufacturing and business processes (Internal-business-process perspective) S Improve manufacturing quality and productivity (Internal-business-process perspective) Improve manufacturing controls (Internal-business-process perspective) S Improve manufacturing quality and productivity (Internal-business-process perspective) Improve manufacturing quality and productivity (Internal-business-process perspective) S Increase customer satisfaction (Customer perspective) A strong tie indicates that if managers successfully implement a causal strategic objec- tive, it will have a strong impact on the realization of the strategic objective that is the effect. Consider again the strong ties in Exhibit 12-2. Chipset’s managers believe that to improve manufacturing quality and productivity, they must improve manufacturing and business processes and manufacturing controls. Aligning employee and organization goals is also important for improving manufacturing quality and productivity but this effect is moder- ate and not as strong or important as the effect that improving manufacturing controls and manufacturing and business processes has on manufacturing quality and productivity. 5 For a more detailed discussion, see J. Godenberg, A. Levav, D. Mazursky, and S. Solomon, Cracking the Ad Code (New York: Cambridge University Press, 2009). 504 ChaPter 12 strategy, BalanCed sCoreCard, and strategiC ProfitaBility analysis Where a tie is moderate or weak, managers anticipate that implementing the causal stra- tegic objective will not have a strong impact on accomplishing the strategic objectives linked to it. A tie may be moderate because factors outside the manager’s control affect the outcome. For example, an increase in market share might have only a moderate effect on operating income because other factors, such as bargaining by customers or price pressure from com- petitors, affect operating income. Tie strength affects how managers allocate resources across strategic objectives. Because managers believe that a strategic objective with a strong tie will result in the objective linked to it, they may be willing to invest more resources in these objectives. As we will see later, tie strength may also influence how managers craft initiatives and metrics in the balanced score- card and the weights that managers put on different elements of the scorecard. There are many moderate ties on the map and one weak tie. Chipset’s managers closely examine weak ties. Consider the strategic objective of a follow-up service call. Chipset’s managers believe that even if they were to achieve this objective, it will have a weak effect on improving post-sales service. That’s because in the technology-heavy context of linear integrated circuit devices (LICDs), customers are not interested in post-sales follow-up. What customers really want is for Chipset to respond quickly and to solve aggressively any prob- lems they might have when these problems arise. It is Chipset’s responsiveness rather than routine follow-ups that customers value. Orphan objectives Consider again Exhibit 12-2. We refer to the strategic objective of follow-up service call as an orphan. An orphan objective is a strategic objective with only weak ties leading out of it to other strategic objectives. Orphan status indicates an oppor- tunity to evaluate the value the strategic objective brings to the overall strategy. Orphan objectives do not contribute to the larger strategy in a way that warrants allocation of resources. Chipset’s managers decide to remove follow-up service call from its strategy map because this strategic objective has at best a weak effect on improving post-sales service. Focal points Some strategic objectives have a hub-and-spoke quality and have multiple ties flowing into or out of them. A focal point is a strategic objective that has many other links funneling into it (see Exhibit 12-2). A focal point indicates strategic complexity; many stra- tegic objectives need to be coordinated to achieve the focal objective. For example, improve manufacturing quality and productivity (in the internal business process perspective) is a focal point because three other strategic objectives—improve manufacturing and business processes, improve manufacturing controls, and align employee and organization goals, must be met before Chipset will see improvement in manufacturing quality and productivity. Even though it is complex to deliver on focal point strategic objectives, it is important for Chipset to achieve it. That’s because, without it, Chipset may not be able to meet its strategic objec- tive to grow operating income. If, however, the focal point has only weak ties emanating from it, the strategy map analysis would suggest that the company not invest resources on the focal point objective. That’s because it is complex to deliver and has questionable benefits even if it is successfully achieved. Trigger points A trigger point is a strategic objective where many ties spur out from it, result- ing in the achievement of many strategic objectives. Trigger points are exciting because if an organization can achieve the trigger point strategic objectives, they enable multiple strategic objectives to be achieved. In Exhibit 12-2, improve manufacturing and business processes (Internal-business-process perspective) is a trigger point because it supports and helps achieve four other strategic objectives (improve manufacturing quality and productivity, reduce deliv- ery time to customers, meet specified delivery dates, and improve post-sales service). Because of their centrality to many other strategic objectives across the strategy map, trigger points require special attention from managers. Trigger points are interesting even if one of links emanating from it is weak because there are other strong and moderate ties. Distinctive objectives Strategic objectives that distinguish an organization from its com- petitors, based on the organization’s strategy are distinctive objectives. They are frequently located within the learning and growth and internal-business-process perspectives, because they define important activities undertaken by a company to satisfy customers and achieve financial performance. In the map these strategic objectives are labeled with a “D.”  strategy iMPleMentation and the BalanCed sCoreCard 505 Recall that based on its competitive analysis, Chipset’s management chooses to pursue a cost-leadership strategy—lowering costs and reducing prices instead of developing more advanced chips and charging a higher price. The key steps to achieving cost leadership require Chipset to enhance quality and reengineer its processes to eliminate excess capacity and reduce delivery time to customers. As a result, Chipset’s managers and management accountants identify improving manufacturing quality and productivity and reducing deliv- ery time to customers as distinctive objectives that allow Chipset to differentiate itself from its competitors. Chipset’s managers debate whether they should choose “lower” strategic objectives such as “improve manufacturing controls” or “improve manufacturing and busi- ness processes” as distinctive objectives rather than the ones they chose. They do not because Chipset’s managers, like managers at many companies, prefer to choose as distinctive objec- tives those objectives that customers experience. It is higher quality and lower delivery times that give Chipset a distinctive competitive advantage while improving manufacturing controls and manufacturing and business processes are important steps in achieving those objectives. Thinking about distinctiveness within the internal-business-process perspective has two other benefits. First, they describe the development of core capabilities. As a result, these strategic objectives produce long-term benefits in addition to short-term ones, creating sus- tainable competitive advantage. Second, they force senior managers to develop nonfinancial metrics to measure important, but difficult-to-quantify activities, within which competitive advantage resides. If no strategic objective is truly distinctive, managers would need to revisit the strategy objectives and think about how to modify or replace them to achieve a strategy that distin- guishes the company from its competitors while creating value for its customers. In this way, a structural analysis of “reading” a strategy map helps companies both implement and refine their strategies. Insights into strategy maps We summarize the insights that Chipset’s managers gain from using the five tools of structural analysis—strength of ties, orphan objectives, focal points, trigger points, and distinctive objectives. To achieve its financial goals, Chipset needs to delight its customers by “improving manufacturing quality and productivity” and “reduc- ing delivery time to customers.” These objectives distinguish Chipset from its competitors. The large number of focal points leading up to these objectives suggests that it will be dif- ficult for a competitor to successfully compete with Chipset. A number of strong ties lead into “improving manufacturing quality and productivity.” Chipset’s managers believe that developing employee process skills, enhancing information system capabilities, improving manufacturing controls, and improving manufacturing and business processes will have a strong impact on manufacturing quality and productivity. The links into reducing delivery time to customers are not as strong. Chipset’s managers will have to continue to monitor how well its reengineered order-delivery process is working. On the positive side, it appears that customers care more about quality and cost (strong tie) than they do about delivery time (moderate tie). Chipset’s managers will use the insights from structural analysis to wisely allocate resources across different strategic objectives (for example, allocating more resources to improving manufacturing quality and productivity than to reducing delivery time). They starve orphan objectives of resources, dropping follow-up service calls from the strategy map and the balanced scorecard. Chipset uses the strategy map from Exhibit 12-2 to build the balanced scorecard presented in Exhibit 12-3. The scorecard highlights the four perspectives of performance: financial, customer, internal business process, and learning and growth. The first column presents the strategic objectives from the strategy map in Exhibit 12-2. At the beginning of 2017, the com- pany’s managers specify the strategic objectives, measures, initiatives (the actions necessary to achieve the objectives), and target performance (the first four columns of Exhibit 12-3). Chipset wants to use the balanced scorecard targets to drive the organization to higher levels of performance. Managers therefore set targets at a level of performance that is achiev- able yet distinctly better than competitors. Chipset’s managers complete the fifth column, reporting actual performance at the end of 2017. This column compares Chipset’s perfor- mance relative to target. 506 ChaPter 12 strategy, BalanCed sCoreCard, and strategiC ProfitaBility analysis exhiBit 12-3 The Balanced Scorecard for Chipset, Inc., for 2017 Target Actual Strategic Objectives Measures Initiatives Performance Performance Financial Perspective Operating income from Manage costs and $1,850,000 $1,912,500 Grow operating income productivity gain unused capacity Operating income from Build strong customer $2,500,000 $2,820,000 Increase shareholder value growth relationships Revenue growth 9% 10%a Customer Perspective Increase market share Market share in Identify future needs of 6% 7% communication- customers networks segment Increase customer Number of new Identify new target-customer 1 1b satisfaction customers segments Customer-satisfaction Increase customer focus of 90% of 87% of ratings sales organization customers give customers give top two ratings top two ratings Internal-Business-Process Perspective Improve postsales Service response time Improve customer-service Within 4 hours Within 3 hours service process Improve manufacturing Yield Identify root causes of 91% 92.3% quality and problems and improve productivity quality Reduce delivery time to Order-delivery time Reengineer order-delivery 30 days 30 days customers process Meet specified delivery On-time delivery Reengineer order-delivery 97% 95% dates process Improve manufacturing Number of major Organize teams from 5 5 & business processes improvements in manufacturing and sales to manufacturing and modify processes to specified business processes target levels Improve manufacturing Percentage of processes Organize R&D/manufact- 90% 90% controls with advanced controls uring teams to implement advanced controls Learning-and-Growth Perspective Align employee and Employee-satisfaction Employee participation and 80% of 88% of organization goals ratings suggestions program to employees give employees give build teamwork top two ratings top two ratings Empower workforce Percentage of line Have supervisors act as 92% 94% workers empowered to coaches rather than manage processes decision makers Develop employee Percentage of employees Employee training programs 94% 96% process skill trained in process and quality management Enhance information- Percentage of Improve online and offline 93% 93% system capabilities manufacturing data gathering processes with real-time feedback a (Revenues in 2017 ] Revenues in 2016) 4 Revenues in 2016 5 ($25,300,000 ] $23,000,000) 4 $23,000,000 5 10%. b Number of customers increased from seven to eight in 2017.  strategy iMPleMentation and the BalanCed sCoreCard 507 Four Perspectives of the Balanced Scorecard We next describe the perspectives in general terms and illustrate each using the measures Chipset managers chose to implement its strategy. When analyzing the scorecard, as the arrows in Exhibit 12-3 show, we discuss measures at the bottom of each perspective (the cause) and work our way upward to the top (the effect). 1. Financial perspective. This perspective evaluates the profitability of the strategy and the creation of shareholder value. Because Chipset’s key strategic initiatives are cost reduc- tion relative to competitors’ costs and sales growth, the financial perspective focuses on revenue growth and how much operating income results from reducing costs and selling more units of CX1. 2. Customer perspective. This perspective identifies targeted customer and market seg- ments and measures the company’s success in these segments. To monitor its customer objectives, Chipset’s managers use (a) market research, such as surveys and interviews, to determine market share in the communication-networks segment, and (b) information about the number of new customers and customer-satisfaction ratings from its customer management systems. 3. Internal-business-process perspective. This perspective focuses on internal operations that create value for customers that, in turn, help achieve financial performance. Managers at Chipset determine internal-business-process improvement targets after benchmarking against its main competitors. Benchmarking involves getting information about competitors from published financial statements, prevailing prices, customers, sup- pliers, former employees, industry experts, and financial analysts. The internal-business- process perspective is composed of three subprocesses: Innovation process: Creating products, services, and processes that will meet the needs of customers. This is a very important process for companies that follow a product-differentiation strategy and must constantly design and develop innovative new products to remain competitive in the marketplace. Chipset’s innovation focuses on improving its manufacturing capability and process controls to lower costs and im- prove quality. Chipset measures innovation by the number of improvements in manu- facturing processes and percentage of processes with advanced controls. Operations process: Producing and delivering existing products and services that will meet the needs of customers. Chipset’s strategic initiatives are (a) improving manufac- turing quality and productivity, (b) reducing delivery time to customers, and (c) meeting specified delivery dates, so it measures yield, order-delivery time, and on-time delivery. Post-sales-service process: Providing service and support to the customer after the sale of a product or service. Chipset monitors how quickly and accurately it is re- sponding to customer-service requests. 4. Learning-and-growth perspective. This perspective identifies the people and information capabilities necessary for an organization to learn, improve, and grow. These capabilities help achieve superior internal processes that in turn create value for customers and share- holders. Chipset’s learning-and-growth perspective emphasizes three capabilities: Information-system capabilities, measured by the percentage of manufacturing pro- berkaitan dengan informasinya cesses with real-time feedback Employee process capabilities, measured by the percentage of employees trained in berkaitan dengan orangnya process and quality management Motivation of employees to achieve organizational goals, measured by employee satis- faction, and the level of empowerment, measured by the percentage of manufacturing and sales employees (also called line workers) empowered to manage processes The arrows in Exhibit 12-3 indicate the broad cause-and-effect linkages: how gains in the learning-and-growth perspective lead to improvements in internal business processes, which lead to higher customer satisfaction and market share, and finally lead to superior financial performance. The detailed causal linkages within each perspective are described in the strat- egy map in Exhibit 12-2. Note how the scorecard describes elements of Chipset’s strategy  508 ChaPter 12 strategy, BalanCed sCoreCard, and strategiC ProfitaBility analysis implementation. Worker training and empowerment improve employee satisfaction and lead to manufacturing and business-process improvements that improve quality and reduce deliv- ery time, which, in turn, results in increased customer satisfaction and higher market share. The last column in Exhibit 12-3 indicates that Chipset’s actions have been successful from a financial perspective. Chipset has earned significant operating income from executing its cost- leadership strategy, and that strategy has also led to growth. To sustain long-run financial performance, a company must strengthen all links across its different balanced scorecard perspectives. For example, Southwest Airlines’ high employee satisfaction levels and low employee turnover (learning-and-growth perspective) lead to greater efficiency and customer-friendly service (internal-business-process perspective) that enhances customer satisfaction (customer perspective) and boosts profits and return on investment (financial perspective). A major benefit of the balanced scorecard is that it promotes causal thinking as described in the previous paragraph—where improvement in one activity causes an improvement in another. Think of the balanced scorecard as a linked scorecard or a causal scorecard. Managers must search for empirical evidence (rather than rely on intuition alone) to test the validity and strength of the various connections. A causal scorecard enables a company to focus on the key drivers that steer the implementation of its strategy. Without convincing links, the scorecard loses much of its value. Implementing a Balanced Scorecard To successfully implement a balanced scorecard, subordinate managers and executives require mereka akan membuat commitment and leadership from top management. At Chipset, the vice president of strategic kelompok kecil lebih dulu. planning headed the team building the balanced scorecard. The team conducted interviews with senior managers; asked executives about customers, competitors, and technological preelimenary dulu, developments; and sought proposals for balanced scorecard objectives across the four perspec- karena yang tau masalah tives. The team then met to discuss the responses and build a prioritized list of objectives. yang paling dalem adalah In a meeting with all senior managers, the team sought to achieve consensus on the score- oarang lapangan card objectives. The vice president of strategic planning then divided senior management into four groups, with each group responsible for one of the perspectives. In addition, each group broadened the base of inputs by including representatives from the next-lower levels of manage- ment and key functional managers. The groups identified measures for each objective and the sources of information for each measure. The groups then met to finalize scorecard objectives, measures, targets, and the initiatives to achieve the targets. Management accountants played an important role in the design and implementation of the balanced scorecard, particularly in determining measures to represent the realities of the business. This required management accountants to understand the economic environment of the industry, Chipset’s customers and competitors, and internal business issues such as human resources, operations, and distribution. Managers at Chipset made sure that employees understood the scorecard and the score- card process. The final balanced scorecard was communicated to all employees. Sharing the scorecard allowed engineers and operating personnel, for example, to understand the reasons for customer satisfaction and dissatisfaction and to make suggestions for improving internal processes directly aimed at satisfying customers and implementing Chipset’s strategy. Too often, only a select group of managers see scorecards. By limiting the scorecard’s exposure, Chipset would lose the opportunity for widespread organization engagement and alignment. Companies such as Citibank, Exxon Mobil, and Novartis share their scorecards widely across their divisions and departments. Chipset also encourages each department to develop its own scorecard that ties into Chipset’s main scorecard described in Exhibit 12-3. For example, the quality control depart- ment’s scorecard has measures that its department managers use to improve yield—number of quality circles, statistical process control charts, Pareto diagrams, and root-cause analyses (see Chapter 19, pages 774–776, for more details). Department scorecards help align the actions of each department to implement Chipset’s strategy. Companies frequently use balanced scorecards to evaluate and reward managerial perfor- mance and to influence managerial behavior. Using the balanced scorecard for performance evaluation widens the performance management lens and motivates managers to give greater  strategy iMPleMentation and the BalanCed sCoreCard 509 attention to nonfinancial drivers of performance. Surveys indicate, however, that companies continue to assign more weight to the financial perspective 145 -55%2 than to the other perspectives—customer 115 -25%2, internal business process 110 -20%2, and learning and growth 110 -20%2. Companies cite several reasons for the relatively smaller weight on nonfi- nancial measures, including difficulty evaluating the relative importance of nonfinancial mea- sures; challenges in measuring and quantifying qualitative, nonfinancial data; and difficulty in compensating managers despite poor financial performance (see Chapter 23 for a more detailed discussion of performance evaluation). Companies put more weight on nonfinancial measures that represent distinctive objectives and have strong ties to financial results. For example, in evaluating its senior managers, Chipset places greater weight on the percentage of employees trained in process and quality management (a measure of employee process skills) and yield (a measure of improvements in manufacturing quality and productivity). That’s because Chipset believes that these measures create distinctive competitive advantage with strong ties to customer satisfaction and operating income. More and more companies in the manufacturing, merchandising, and service sectors are giving greater weight to nonfinancial measures when promoting employees because they believe that nonfinancial measures—such as customer satisfaction, process improvements, and employee motivation—better assess a manager’s potential to succeed at senior levels of management. As this trend continues, operating managers will put more weight on nonfi- nancial factors when making decisions even though these factors carry smaller weights when determining their annual compensation. For the balanced scorecard to be effective, however, managers must view it as a fair way to assess and reward all important aspects of a manager’s performance and promotion prospects. Different Strategies Lead to Different Scorecards Recall that while Chipset follows a cost-leadership strategy, its competitor, Visilog, follows a product-differentiation strategy by designing custom chips for modems and communication networks. Visilog designs its balanced scorecard to fit its strategy. For example, in the finan- cial perspective, Visilog evaluates how much of its operating income comes from charging premium prices for its products. In the customer perspective, Visilog measures the percent- age of its revenues from new products and new customers. In the internal-business-process perspective, Visilog measures the number of new products introduced and new product development time. In the learning-and-growth perspective, Visilog measures the development of advanced manufacturing capabilities to produce custom chips. Visilog also uses some of the measures described in Chipset’s balanced scorecard in Exhibit 12-3. For example, revenue growth, customer satisfaction ratings, order-delivery time, on-time delivery, percentage of frontline workers empowered to manage processes, and employee-satisfaction ratings are also important measures under the product-differentiation strategy.6 Exhibit 12-4 presents some common measures found in company scorecards in the service, retail, and manufactur- ing sectors. Environmental and Social Performance and the Balanced Scorecard Companies are increasingly recognizing that they must continually earn the right to operate in the communities and countries in which they do business. Failure to perform adequately on environmental and social outcomes puts at risk a company’s ability to deliver future value to shareholders. Citizens and governments are becoming much more active in pushing companies to live up to and to report on what they see as their environmental and social obligations. For example, in 2010, the Securities and Exchange Commission (SEC) issued a statement intended to remind companies of their obligations under existing federal securities laws and regulations 6 For simplicity, we have presented the balanced scorecard in the context of companies that have followed either a cost-leadership or a product-differentiation strategy. Of course, a company may have some divisions for which cost leadership is critical and other divisions for which product differentiation is important. The company will then develop separate scorecards to implement the differ- ent strategies. In still other contexts, product differentiation may be of primary importance, but some cost leadership must also be achieved. The balanced scorecard measures would then be linked in a cause-and-effect way to this strategy. 510 ChaPter 12 strategy, BalanCed sCoreCard, and strategiC ProfitaBility analysis exhiBit 12-4 Frequently Cited Balanced Scorecard Measures Financial Perspective Income measures: Operating income, gross margin percentage Revenue and cost measures: Revenue growth, revenues from new products, cost reductions in key areas Income and investment measures: Economic value addeda (EVA®), return on investment Customer Perspective Market share, customer satisfaction, customer-retention percentage, time taken to fulfill customers’ requests, number of customer complaints Internal-Business-Process Perspective Innovation Process: Percentage of processes with advanced controls, number of new products or services, new-product development times, and number of new patents Operations Process: Yield, defect rates, percentage of on-time deliveries, average time taken to respond to orders, setup time, manufacturing downtime Post-sales Service Process: Time taken to replace or repair defective products, hours of customer training for using the product Learning-and-Growth Perspective Employee measures: Employee education and skill levels, employee-satisfaction ratings, employee turnover rates, percentage of employee suggestions implemented, percentage of compensation based on individual and team incentives Technology measures: Information system availability, percentage of processes with real-time feedback aThis measure is described in Chapter 23. “to consider climate change and its consequences as they prepare disclosure documents to be filed with us and provided to investors.” As we discussed in Chapter 1, many managers are promoting sustainability—the develop- ment and implementation of strategies to achieve: Long-term financial performance Social performance, such as minimizing employee injuries, improving product safety, and eliminating corruption Environmental performance, such as reducing greenhouse gas emissions and non-recycled waste The Brundtland Commission7 defined a sustainable society as one where “the current genera- tion meets its needs without jeopardizing the ability of future generations to meet their needs.” There are a wide variety of opinions on this issue. Some believe that managers should focus only on long-run financial performance and not be distracted by pursuing social and environmental goals beyond the minimum levels required by law. Others believe that manag- ers must act to attain environmental and social objectives beyond what is legally required, while achieving good financial performance—often called the triple bottom line—as part of a company’s social responsibility. Still others believe that there is no conflict between achieving social and environmental goals and long-run financial performance. Many managers recognize that good environmental and social performance helps to attract and inspire outstanding employees, improve employee safety and health, increase productivity, and lower operating costs. Environmental and social performance also enhances a company’s reputation with socially conscious customers and investors and boosts its image with governments and citizens, all contributing to long-run financial performance. Experienced financial analysts are publishing favorable reports about companies with strong environmental and social performance because of their greater transparency and engagement with multiple stakeholders. A distinguishing organizational characteristic of companies that emphasize environmental and social performance is their long-term orientation. Some recent 7 The Brundtland Commission was set up by the United Nations as the World Commission on Environment and Development. It issued its report, Our Common Future, in 1987.  strategy iMPleMentation and the BalanCed sCoreCard 511 research suggests that taking the long-term view and engaging with multiple stakeholders results in superior financial performance. Companies, such as Natura, China Light & Power, and Dow Chemical, that focus on the triple bottom line of financial, environmental, and social performance benefit from innovating in technologies, processes, products, and business models to reduce the tradeoffs between financial and sustainability goals. These companies also build transformational and transitional leadership and change capabilities needed to implement the strategies to achieve the triple bottom line. Managers interested in measuring environmental and social performance incorporate these factors into their balanced scorecards to set priorities for initiatives, guide decisions and actions, and fuel discussions around strategies and business models to improve perfor- mance. Suppose Chipset decides to emphasize environmental and social goals in its balanced scorecard. What measures might it add to the balanced scorecard presented in Exhibit 12-3? Exhibit 12-5 presents these additional environment and social measures. In practice, Chipset, like all companies that emphasize environmental and social goals, integrates sustainability goals and measures presented in Exhibit 12-5 with business goals and measures presented in Exhibit 12-3 into a single combined scorecard. Chipset gains the following benefits from measuring environmental and social performance. 1. Creating shared value. A major benefit of measuring environmental and social per- formance is the opportunity it provides to create shared value8—recognizing that the competitiveness of Chipset and its social activities are mutually dependent. In this view, achieving environmental and social objectives is seen as providing strategic advantage to the business. For example, reducing greenhouse gas emissions motivates Chipset to redesign its product and processes to reduce energy consumption. Measuring non- recycled hazardous and nonhazardous waste prompts Chipset to work with its suppliers to redesign and reduce packaging and toxic substances in its materials and components. Measuring worker-related injuries and illnesses motivates Chipset to redesign processes to lessen the number of such incidents. In each of these initiatives, Chipset achieves envi- ronmental and social goals as well as gains competitive advantage by reducing costs and pushing itself to innovate and build a social and environmental value proposition into its business strategy. 2. Identifying cause-and-effect relationships to evaluate benefits. Together with develop- ing the kinds of skills in processes and information systems described in Exhibit 12-3, Chipset’s top management creates a culture that encourages hiring employees from a wide variety of backgrounds, particularly women and minorities. This furthers the company’s social goals, but also gives it access to top talent from a broad cross section of society. In addition, the company trains and mentors employees to create shared value. This train- ing improves internal business processes to decrease greenhouse gases, hazardous and nonhazardous waste, and work-related injuries. These actions, in turn, improve customer measures such as Chipset’s reputation for sustainability with customers and customer satisfaction. The financial benefits are the cost savings from shared value such as lower energy consumption and waste. If Chipset can measure growth in revenue or operating income from customers attracted to Chipset’s environmental and social actions with rea- sonable accuracy, the company might add that measure in its financial perspective. The scorecard shows that Chipset has achieved all its environmental and social goals, indicat- ing that its environmental and social actions are translating into financial gains. These results would encourage Chipset to continue its environmental and social efforts. 3. Reducing risks. A final benefit of measuring environmental and social performance is to help manage downside risk by acting as a good corporate citizen. This means being respon- sive to different stakeholders and reducing any adverse environmental or social effects of business activities. For example, reducing greenhouse gases might ward off fines or more stringent carbon emission caps from the U.S. Environmental Protection Agency and de- crease the risk of lawsuits and negative media attention and stakeholder activism that can damage Chipset’s reputation. 8 M. Porter and M. Kramer, “Creating Shared Value: Redefining Capitalism and the Role of the Corporation in Society,” Harvard Business Review (January/February 2011): 62–77. 512 ChaPter 12 strategy, BalanCed sCoreCard, and strategiC ProfitaBility analysis exhiBit 12-5 Environmental and Social Balanced Scorecard Measures for Chipset, Inc., for 2017 Target Actual Strategic Objectives Measures Initiatives Performance Performance Financial Perspective Reduce waste Cost savings from reducing Quality improvement $400,000 $415,000 energy use and waste programs Reduce cost of time Cost savings from fewer Train workers in safety $50,000 $55,000 lost from work injuries work injuries and illness methods and hygiene and illness Customer Perspective Enhance reputation for Percentage of customers Communicate environmental 90% 92% sustainability with giving top two ratings for and social goals and customers environmental and social performance performance Internal-Business-Process Perspective Reduce greenhouse Greenhouse gas emissions Increase energy efficiency 27 grams/$1 25.6 grams/$1 gas emissions per million dollars of sales and reduce carbon million of sales million of sales footprint by planting trees Reduce operational Hazardous and non- Increase recycling 130 grams/$1 126 grams/$1 waste not recycled hazardous waste not programs and redesign million of sales million of sales recycled per million products dollars of sales Reduce work-related Days of lost time per Redesign processes to 0.20 days per 0.18 days per injuries and illnesses worker per year due to improve worker safety worker per year worker per year injury or illness and hygiene Learning-and-Growth Perspective Inspiring employees Percentage of employees Training employees 87% 90% through environmental giving top two ratings about environmental and social goals for environmental and social benefits and social performance Diversity of employees Percentage of women and Develop human resource 40% 42% minorities in managerial practices to support positions mentoring and coaching for women and minorities Companies use a variety of measures for environmental and social performance in addition to the ones described in the Chipset example: 1. Financial perspective. Carbon taxes or fees (in countries that levy a carbon tax for emis- sions), cost of preventing and remediating environmental damage (training, cleanup, legal costs, and costs of consumer boycotts); cost of recycled materials to total cost of materials 2. Customer perspective. Brand image (percentage of survey respondents who rate the com- pany high on trust)  strategy iMPleMentation and the BalanCed sCoreCard 513 3. Internal-business perspective. Energy consumption (joules per $1,000 of sales), water use (millions of cubic meters); wastewater discharge (thousands of cubic meters); individual quantities of different greenhouse gases, for example, carbon dioxide, nitrous oxide, or sulphur dioxide (grams per $1 million in sales); number of environmental incidents (such as unexpected discharge of air, water, or solid waste); codes of conduct violations (percentage of total employees); contributions to community-based nonprofit organizations; number of joint ventures and partnerships between the company and community organizations 4. Learning-and-growth perspective. Implementation of ISO 14000 environmental man- agement standards (subjective score); employees trained and certified in codes of conduct (percentage of total employees); employees trained in United Nations global compact, for example, human rights, fair wage, no child labor, corruption and bribery prevention (per- centage of total employees) Features of a Good Balanced Scorecard feature = nilai manfaat yang bisa diberikan A well-designed balanced scorecard has several features: 1. It tells the story of a company’s strategy, articulating a sequence of cause-and-effect relationships—the links among the various perspectives that align implementation of the strategy. In for-profit companies, each measure in the scorecard is part of a cause- and-effect chain leading to financial outcomes. Not-for-profit organizations, such as the World Bank and Teach for America, design the cause-and-effect chain to achieve their strategic service objectives—for example, reducing the number of people in poverty or raising high school graduation rates. 2. It helps to communicate the strategy to all members of the organization by translat- ing the strategy into a coherent and linked set of understandable and measurable operational targets. Guided by the scorecard, managers and employees take actions and make decisions to achieve the company’s strategy. Companies that have distinct strategic business units (SBUs)—such as consumer products and pharmaceuticals at Johnson & Johnson—develop their balanced scorecards at the SBU level. Each SBU has its own unique strategy and implementation goals, so building separate scorecards allows manag- ers of each SBU to choose measures that help implement its distinctive strategy. 3. In for-profit companies, the balanced scorecard motivates managers to take actions that eventually result in improvements in financial performance. Managers sometimes tend to focus too much on quality and customer satisfaction as ends in themselves. For example, Xerox discovered that higher customer satisfaction, through service guarantees, did not increase customer loyalty and financial returns because customers also wanted product innovations, such as high-speed color printing, that met their needs. Some companies use statistical methods, such as regression analysis, to test the anticipated cause-and-effect relationships among nonfinancial measures and financial performance. The data for this analysis can come from either time-series data (collected over time) or cross-sectional data (collected, for example, across multiple stores of a retail chain). In the Chipset example, improvements in nonfinancial factors have, in fact, already led to improvements in financial factors. 4. It focuses attention on only the most critical measures. Chipset’s scorecard, for example, has 16 measures, between three and six measures for each perspective. Limiting the number of measures focuses managers’ attention on those that most affect strategy implementation. Using too many measures makes it difficult for managers to process rel- evant information. 5. It highlights less-than-optimal tradeoffs that managers may make when they fail to consider operational and financial measures together. Consider, for example, a company that follows an innovation and product differentiation strategy and so invests in R&D. The company could achieve superior short-run financial performance by reducing R&D spend- ing. A good balanced scorecard would signal that the short-run financial performance has been achieved by taking actions that hurt future financial performance because a leading indicator of future performance, R&D spending and R&D output, has declined. 514 ChaPter 12 strategy, BalanCed sCoreCard, and strategiC ProfitaBility analysis pitfalls = hidden danger Pitfalls in Implementing a Balanced Scorecard Pitfalls to avoid in implementing a balanced scorecard include the following: 1. Managers should not assume the cause-and-effect linkages are precise. These linkages are merely hypotheses. Over time, a company must gather evidence of the strength and timing of the linkages among the nonfinancial and financial measures. With experi- ence, organizations should alter their scorecards to include those nonfinancial strategic objectives and measures that are the best leading indicators (the causes) of financial performance (a lagging indicator or the effect). Understanding that the scorecard evolves over time helps managers avoid wasting time and money trying to design the “perfect” scorecard at the outset. Moreover, as the business environment and strategy change over time, the measures in the scorecard also need to change. For example, when Sandoz, a manufacturer of generic pharmaceutical chemicals, shifted its strategy to produce biologic medicines that required significant investment in new technologies and patient trials, its balanced scorecard also changed from only emphasizing productivity and cost efficiency to also measuring innovation. 2. Managers should not seek improvements across all of the measures all of the time. Managers should strive for quality and on-time performance but not beyond the point at which further improvement in these objectives is so costly that it is inconsistent with long-run profit maximization. Cost–benefit considerations should always be central when designing a balanced scorecard. 3. Managers should not use only objective measures in the balanced scorecard. Chipset’s balanced scorecard includes both objective measures (such as operating income from cost leadership, market share, and manufacturing yield) and subjective measures (such as customer- and employee-satisfaction ratings). When using subjective measures, however, managers must be careful that the benefits of this potentially rich information are not lost by using measures that are inaccurate or that can be easily manipulated. DecisiOn Point 4. Despite challenges of measurement, top management should not ignore nonfinancial measures when evaluating managers and other employees. Managers tend to focus on How can an organization translate its strategy into the measures used to reward their performance. Excluding nonfinancial measures (such as a set of performance customer satisfaction or product quality) when evaluating the performance of managers measures? will reduce their significance and importance to managers. Evaluating the Success of Strategy and Implementation To evaluate how successful Chipset’s strategy and its implementation have been, its man- agement compares the target- and actual-performance columns in the balanced scorecard (Exhibit 12-3). Chipset met most targets set on the basis of competitor benchmarks in 2017 rippled = as improvements in Chipset’s learning-and-growth perspective quickly rippled through to the langsung financial perspective. While Chipset will continue to make improvements to achieve the targets berdampak it did not meet, managers are satisfied that the strategic initiatives that Chipset identified and measured for learning and growth resulted in improvements in internal business processes, customer measures, and financial performance. If Chipset did not meet all its balanced scorecard goals, how could it tell if the failure to meet its objectives was because of problems in strategy implementation or because of problems with its strategy? Consider first, the situation where Chipset did not meet its goals on the two internally focused perspectives: learning and growth and internal business processes. In this case, Chipset would conclude that it did not implement its strategy because it did not imple- ment the activities that would give it competitive advantage. But what if Chipset performed well on learning and growth and internal business processes, but customer measures and finan- cial performance in this year and the next still did not improve? Chipset’s managers would then conclude that Chipset did a good job of implementation, as the various internal nonfinancial measures it targeted improved, but that its strategy was faulty because there was no effect on customers or on long-run financial performance and value creation. In this case, management had failed to identify the correct causal links and did a good job implementing the wrong strat- egy! Management would then reevaluate the strategy and the factors that drive it.  strategiC analysis of oPerating inCoMe 515 Strategy Map—Retail Company Nile is an online, mail-order company, which provides customers with a wide variety 12-1 try it! of products. The managers of Nile have identified their financial objectives as: grow operating income and increase shareholder value. To accomplish the company’s financial goals, the man- agers have determined the company needs to increase customer satisfaction and market share. To increase customer satisfaction and market share, Nile needs to reduce delivery time, increase product offerings, and improve customer service. To meet these objectives, Nile will need to attract and retain quality employees and continually improve the quality of employee training. The information technology systems to support the online orders are on par with Nile’s competitors. 1. Draw a strategy map as in Exhibit 12-2 describing the cause-and-effect relationships among the strategic objectives you would expect to see. Present at least two strategic objectives you would expect to see under each balanced scorecard perspective. Iden- tify what you believe are any (a) strong ties, (b) focal points, (c) trigger points, and (d) distinctive objectives. Comment on your structural analysis of the strategy map. 2. For each strategic objective, suggest a measure you would recommend in Nile’s bal- anced scorecard. Strategic Analysis of Operating Income As we have discussed, Chipset performed well on its various nonfinancial measures, and oper- ating income this year and the next also increased. As a result, Chipset’s managers might be tempted to declare the cost-leadership strategy a success. However, more analysis is needed Learning Objective 4 Analyze changes in before managers can conclude that Chipset successfully formulated and implemented its operating income to intended strategy. Operating income could have increased simply because prices of inputs evaluate strategy decreased or the entire market expanded. Alternatively, a company that has chosen a cost-... growth, price recovery, leadership strategy, like Chipset, may find that its operating-income increase actually resulted and productivity from some degree of product differentiation. To evaluate the success of a strategy, manag- ers and management accountants need to link strategy to the sources of operating-income increases. These are the kinds of analyses that top management and boards of directors routinely discuss in their meetings when evaluating performance. Managers who have mastered the strategic analysis of operating income changes gain an understanding of the levers of strat- egy and strategy implementation that help them deliver sustained operating performance. Can Chipset’s managers conclude they were successful in implementing their strategy? They can only if improvements in the company’s financial performance and operating income over time can be attributed to achieving targeted cost savings and growth in market share. The top two rows of Chipset’s balanced scorecard in Exhibit 12-3 show that operating- income gains from productivity ($1,912,500) and growth ($2,820,000) exceeded targets. (The next section of this chapter describes how these numbers were calculated.) This means that Chipset’s strategy formulation and implementation, not other factors, led to increases in operating income. The success of its strategy means that Chipset’s management can be more confident that the gains will be sustained in subsequent years. We next discuss how Chipset’s management accountants subdivide changes in operating income into components that can be identified with product differentiation, cost leadership, and growth. The growth component is important because it helps Chipset’s managers evalu- ate if successful cost leadership increased market share and helped it to grow. Subdividing the change in operating income to evaluate the success of a strategy is conceptually similar to the variance analysis discussed in Chapters 7 and 8. One difference, however, is that, in this case, management accountants compare actual operating performance over two different periods, not actual to budgeted numbers in the same time period as in variance analysis.9 A second 9 Other examples of focusing on actual performance over two periods rather than comparisons of actuals with budgets can be found in J. Hope and R. Fraser, Beyond Budgeting (Boston, MA: Harvard Business School Press, 2003).