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Cost Management - A Strategic Emphasis
Cost Management - A Strategic Emphasis
Implementing Strategy:
The Value Chain,
the Balanced Scorecard,
and the Strategy Map
After studying this chapter, you should be able to . . .
1. Explain how to implement a competitive strategy by using Strengths-Weaknesses-Opportunities-
Threats (SWOT) Analysis
2. Explain how to implement a competitive strategy by focusing on the execution of goals
3. Explain how to implement a competitive strategy using value-chain analysis
4. Explain how to implement a competitive strategy using the balanced scorecard
5. Explain how to expand the balanced scorecard by integrating sustainability
Amazon.com typifies successful competition in the new economy far more than many firms.
Some would say that Amazon invented the Internet retailing business model that all other dot-
coms are struggling to copy. Amazon understands well the strategy (i.e., business model) of
developing and maintaining customer loyalty, which is the key to success in retail e-business,
and implements it effectively.
Speaking of Jeff Bezos, the founder and CEO of Amazon.com, Robert Hof of Business-
Week writes:
“Jeff Bezos . . . was one of the few dot-com leaders to understand that sweating the details
of Internet technologies would make all the difference. Amazon wasn’t the first store on
the Web. But Bezos beat rivals in inventing or rolling out new Internet technologies that
made shopping online faster, easier, and more personal than traditional retail. He offered
customized recommendations based on other buyers’ purchases, let people buy an item
with just one mouse click, and created personalized storefronts for each customer.”1
The amazing thing about Amazon is that it created such a successful strategy for e-commerce
at a time when there was no model to use as a guide. As Hof suggests, Amazon’s success
appears to come from its ability to deliver excellent customer service with very low prices. It
has differentiated itself through efficient and error-free operating systems that provide reli-
able, convenient service. Amazon’s operations are so efficient that it is now performing the
e-tail order-taking and order-filling services for several other retailers, including the retail
giant, Target; these services provide highly profitable fees to Amazon.com. Another growing
service area is the sale of used merchandise. The great news for Amazon is that these new
services provide fat margins, from 45 to 85 percent, far higher than e-tail sales.2 How did
Amazon implement this strategy? By careful planning and disciplined execution.
1
Robert D. Hof, “Jeff Bezos: The Wizard of Retailing,” BusinessWeek, December 20, 2004.
2
“Now Comes the Flood,” BusinessWeek, August 8, 2005.
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34 Part One Introduction to Strategy, Cost Management, and Cost Systems
If you don’t set goals, you can’t regret not reaching them.
Yogi Berra
3
The five forces of industry competition are adapted from Michael E. Porter, “The Five Competitive Forces that Shape Strategy,”
Harvard Business Review, January 2008, pp. 79–93.
REAL-WORLD FOCUS Globalization, Strategy, and Exchange Rates: The Euro
Since January 1999, the euro has been used as the common cur- earnings are from an increase in overseas sales. The rise of the dollar
rency of many European countries. For the first 20 months following in Fall 2008 is expected to reverse this trend.
its introduction, the euro steadily lost about 25 percent in its value *The Economic and Monetary Union (EMU) of Europe has 27 member coun-
relative to the U.S. dollar. Due to changing economic circumstances, tries, 15 of which have adopted the European currency, the euro. The EMU is
the euro then began to rise in early 2002 and in August 2008 had risen the long-term project for the economic unification of Europe. A major mile-
to $1.59, and then fell to a value of $1.26 in March 2009 due in part to stone in this effort was the creation of the euro, the new single currency for
Europe, on January 1, 1999, by fixing exchange rates for adopting countries.
falling oil prices and recession pressures in the EU during the fall of For more information, see http://europa.eu; Justin Scheck, “H-P Net Rises
2008. The constant change of the value of the euro relative to the dol- 14%, Helped by Overseas Sales,” The Wall Street Journal, August 20, 2008, p.
lar creates two types of strategic issues for U.S. and European firms.* B1; Matthew Dolan, “Ford Casts Doubt on Sustainable Profit,” The Wall Street
One is the effect on import and export opportunities. For example, Journal, April 25, 2008, p. B3; Jeff Opdyke, Ray A. Smith, and Sarah Nassauer,
“The Buck Is Back,” The Wall Street Journal,” October 28, 2008, p. D1; Joanna
when the euro was falling this meant a higher cost for U.S. goods in
Slater, “Multinationals in U.S. May See Profits Fall: Dollar’s Rebound Becomes
euro countries, which caused problems for U.S. exporters, especially a Burden,” The Wall Street Journal, September 6, 2008, p. B1. Current and
for smaller firms. Many firms, such as McDonald’s, protect overseas historical values for the exchange rate for the euro vs. the U.S. dollar and for
profits by hedging exchange rates, that is, buying and selling over- exchange rates for other currencies are available on the Federal Reserve
seas currencies at fixed prices to guarantee a given exchange rate in Web site: www.federalreserve.gov/releases/H10/hist/.
€
its business transactions. In the past few years, the falling dollar has
helped U.S. exporters such as Hewlett-Packard and Ford Motor Com-
pany and many others; for some U.S. multinationals, a large portion of
newcomers? Do other factors, including the cost of buyer switching or government regula-
tions and licensing restrictions restrict competition?
• Intensity of rivalry among competitors. Intense rivalry can be the result of high entry
barriers, specialized assets (and therefore limited flexibility for a firm in the industry),
rapid product innovation, slow growth in total market demand, or significant overcapacity
in the industry. How intense is the overall industry rivalry facing the firm?
• Pressure from substitute products. Will the presence of readily substitutable products
increase the intensity level of the firm’s competition?
• Bargaining power of customers. The greater the bargaining power of the firm’s cus-
tomers, the greater the level of competition facing the firm. Bargaining power of cus-
tomers is likely higher if switching costs are relatively low and if the products are not
differentiated.
• Bargaining power of suppliers. The greater the bargaining power of a firm’s suppliers,
the greater the overall level of competition facing the firm. The bargaining power of sup-
pliers is higher when a few large firms dominate the group of suppliers and when these
suppliers have other good outlets for their products.
SWOT analysis guides the strategic analysis by focusing attention on the strengths, weak-
nesses, opportunities, and threats critical to the company’s success. By carefully identifying
the critical success factors in this way, executives and managers can discover differences in
viewpoints. For example, what some managers might view as a strength others might view
as a weakness. SWOT analysis therefore also serves as a means for obtaining greater under-
standing and perhaps consensus among managers regarding the factors that are crucial to the
firm’s success.
A final step in the SWOT analysis is to identify quantitative measures for the critical suc-
cess factors (CSFs). Critical success factors are sometimes called value propositions, that is,
the CSF represents the critical process in the firm that delivers value to the customer. At this
final step the firm converts, for example, the CSF of customer service to a quantitative mea-
sure such as number of customer complaints, or a customer satisfaction score.
Identifying critical processes and developing measures for the CSFs involves a careful
study of the firm’s business processes. Product development, manufacturing, marketing,
management, and financial functions are investigated to determine in which specific ways
these functions contribute to the firm’s success. The objective at this step is to determine the
35
36 Part One Introduction to Strategy, Cost Management, and Cost Systems
specific measures that will allow the firm to monitor its progress toward achieving its strate-
gic goals. Exhibit 2.1 lists sample CSFs and ways in which they might be measured.
Execution
It is very hard to develop a unique strategy, and even harder, should you develop one, to
keep it proprietary. Sometimes a company does have a unique cost advantage or a unique
patented position. Brand position can also be a powerful competitive position—a special
advantage that competitors strive to match. However, these advantages are rarely permanent
barriers to others. . . . So, execution is really the critical part of a successful strategy.
Getting it done, getting it done right, getting it done better than the next person is far more
important than dreaming up new visions of the future.
Louis V. Gerstner, Jr.
Source: Louis V. Gerstner, Jr., Who Says Elephants Can’t Dance? (New York: Harper Business, 2002), pp. 229–230.
Chapter 2 Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map 37
LEARNING OBJECTIVE 2 Lou Gerstner is credited with the remarkable success of IBM in the 1990s. He became CEO
Explain how to implement a of IBM at a very troubled time for the company. He rejected the notion that he could save
competitive strategy by focusing the company with some high vision, but instead he determined that the company needed to
on the execution of goals. focus on execution. This meant determining the critical success factors and putting in place
the processes to develop, achieve, and regularly inspect these processes. At IBM this meant a
focus on the customer: beginning with a careful understanding of the customer’s needs, then
working on “faster cycle times, faster delivery times, and a higher quality of service.” The
service focus has served IBM well as its profits have grown to $10.5 billion in 2007 compared
to the $8 billion loss in 1993, the year Gerstner took over at IBM. Current IBM CEO, Samuel
J. Palmisano, continues Gerstner’s focus on execution. When referring to an earnings shortfall
in the first quarter of 2005, he noted that the company had trouble closing deals at the end of
the quarter, and “we attribute most of that to our (lack of) execution.” IBM’s stock fell sharply
in the first quarter of 2005 but recovered quickly and has been increasing ever since.
Effective execution requires a concise statement of strategy that is clearly communicated
within the organization. It requires a business process approach to management, in which the
CSFs are clearly identified, communicated, and acted upon. It means aligning strategy with
action, or as the saying goes, “plan your work and then work your plan.”
The nature of the types of CSFs that the manager executes depend, of course, on the type
of strategy. For cost leadership firms, the CSFs are likely to relate to operational performance
and quality, while differentiated firms are more likely to focus on the customer or innovation.
Exhibit 2.2 summarizes the differences between the two types of competition, the nature of
the required skills and resources, and the focus of efforts in execution. Also, while most topics
we cover in the text are applicable to executing strategy for both cost leadership and differenti-
ated firms, the topics in Part Three (Operational Control) are particularly relevant for the cost
leadership firm, while those in Part Two (Planning and Decision Making) are useful for both
types of firms.
Looking more closely at differentiated firms, the key CSFs and execution issues are in
marketing and product development—developing customer loyalty and brand recognition,
emphasizing superior and unique products, and developing and using detailed and timely
information about customer needs and behavior. This is where the marketing and product
development functions within the firm provide leadership, and the management accountants
support these efforts by gathering, analyzing, and reporting the relevant information. Firms
that excel in the execution of these functions include Coca-Cola, Microsoft, and IBM which
have been the top three global brands for the last seven years.4
Both cost leadership and differentiation firms also can improve on execution through bench-
marking and total quality improvement. The Malcolm Baldrige National Quality Program (U.S.
Department of Commerce; www.quality.nist.gov) sets forth improvement criteria and awards
firms that excel on these criteria. The criteria include a wide variety of business functions,
4
“The 100 Top Brands,” BusinessWeek, September 29, 2008.
38 Part One Introduction to Strategy, Cost Management, and Cost Systems
including leadership, strategic planning, marketing, information and analysis, human resources,
process management, and business results. Another resource for benchmarking is the Inter-
national Organization for Standardization, a network of national standards institutes from
145 countries (www.iso.org).
Value-Chain Analysis
LEARNING OBJECTIVE 3 Because execution is so important in implementing strategy, managers must know how the
Explain how to implement a firm’s strategy and its CSFs are implemented in each and every phase of the firm’s operations.
competitive strategy using value- In other words, managers must implement their firm’s strategy at the detail level of opera-
chain analysis. tions. This sequence of activities must include all the steps necessary to satisfy customers.
Value-chain analysis is a means to reach this detail level of analysis.5
Value-chain analysis is a strategic analysis tool used to better understand the firm’s com-
petitive advantage, to identify where value to customers can be increased or costs reduced,
and to better understand the firm’s linkages with suppliers, customers, and other firms in the
industry. The activities include all steps necessary to provide a competitive product or service
to the customer. For a manufacturer, this starts with product development and new product
testing, then to raw materials purchases and manufacturing, and finally sales and service. For
a service firm, the activities begin with the concept of the service and its design, purpose, and
demand and then moves to the set of activities that provide the service to create a satisfied
customer. Although the value chains are sometimes more difficult to describe for a service
firm or a not-for-profit organization the approach is applied in all types of organizations. An
organization might break its operations into dozens or hundreds of activities; in this chapter, it
is sufficient to limit the analysis to no more than six to eight activities.
The term value chain is used because each activity is intended to add value to the product
or service for the customer. Management can better understand the firm’s competitive advan-
tage and strategy by separating its operations according to activity. If the firm succeeds by
cost leadership, for example, management should determine whether each individual activ-
ity in the value chain is consistent with that overall strategy. A careful consideration of each
activity should also identify those activities in which the firm is most and least competitive.
The value chain can be thought of as three main phases, in sequence: (1) upstream,
(2) operations, and (3) downstream. The upstream phase includes product development and
the firm’s linkages with suppliers; operations refers to the manufacturing operations or, for a
retailer or service firm, the operations involved in providing the product or service; the down-
stream phase refers to linkages with customers, including delivery, service, and other related
activities. Some have referred to the analysis of the upstream phase as supply chain manage-
ment and to the analysis of the downstream phase as customer relationship management.
The determination of which part or parts of the value chain an organization should occupy is
a strategic analysis based on the consideration of comparative advantage for the individual firm,
that is, where the firm can best provide value to the ultimate consumer at the lowest possible
cost. For example, some firms in the computer-manufacturing industry focus on the manufac-
ture of chips (Texas Instruments) while others primarily manufacture processors (Intel), hard
drives (Seagate), or monitors (Sony). Some manufacturers (Hewlett-Packard, Apple) combine
purchased and manufactured components to manufacture the complete computer; others (Dell)
depend primarily on purchased components. In the sport-shoe industry, Reebok manufactures
its shoes and sells them to large retailers; Nike concentrates on design, sales, and promotion,
contracting out all manufacturing. In effect, each firm establishes itself in one or more parts of
the value chain on the basis of a strategic analysis of its competitive advantage.
Value activities
are activities that firms in Value-chain analysis has two steps:
the industry must perform Step 1. Identify the Value-Chain Activities. The firm identifies the specific value activi-
in the process of designing, ties that firms in the industry must perform in the processes of designing, manufacturing, and
manufacturing, and providing providing customer service. For example, see the value chain for the computer-manufacturing
customer service. industry in Exhibit 2.3.
5
This section is based on John K. Shank and Vijay Govindarajan, Cost Management (New York: The Free Press, 1993). See
also the Institute of Management Accountants Statement on Management Accounting, “Value Chain Analysis for Assessing
Competitive Advantage,” Institute of Management Accountants, (www.imanet.org/publications_statements.asp).
Confirming Pages
Chapter 2 Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map 39
EXHIBIT 2.3 Step in the Value Chain Activities Expected Output of Activities
Value Chain for the Computer
Manufacturing Industry Step 1: Design Performing research and Completed product design
development
Step 2: Raw materials Purchasing, receiving, and Various parts and metals
acquisition stocking
Step 3: Materials assembled Converting raw materials into Desired components and parts
into components components and parts used to
manufacture the computer
Step 4: Intermediate assembly Converting, assembling, finishing, Boards, higher-level
testing, and grading components
Step 5: Computer Final assembling, packaging, and Completed computers
manufacturing shipping the final product
Step 6: Wholesaling, Moving products to retail locations Rail, truck, and air shipments
warehousing, and distribution and warehouses, as needed
Step 7: Retail sales Making retail sale Cash receipts
Step 8: Customer service Processing returns, inquiries, and Serviced and restocked
repairs computers
The development of a value chain depends on the type of industry. For example, the focus
in a service industry is on operations and on advertising and promotion rather than on raw
materials and manufacturing. An example of a service industry value chain is shown in self-
study problem 1 at the end of the chapter.
Step 2. Develop a Competitive Advantage by Reducing Cost or Adding Value. In this step,
the firm determines the nature of its current and potential competitive advantage by studying
the value activities and cost drivers identified earlier. In doing so, the firm must consider the
following:
1. Identify competitive advantage (cost leadership or differentiation). The analysis of
value activities can help management better understand the firm’s strategic competitive advan-
tage and its proper positioning in the overall industry value chain. For example, IBM, Boeing,
General Electric, and other firms have increased emphasis on services for their customers, as
many of these services are more profitable than the sale of their basic products.
2. Identify opportunities for added value. The analysis of value activities can help iden-
tify activities in which the firm can add significant value for the customer. For example,
food-processing plants and packaging plants are now commonly located near their largest
customers to provide faster and cheaper delivery. Similarly, large retailers such as Wal-Mart
use computer-based technology to coordinate with suppliers to efficiently and quickly restock
each of its stores. In banking, ATMs (automated teller machines) were introduced to provide
improved customer service and to reduce processing costs. Banks have begun to develop on-
line computer technologies to further enhance customer service and to provide an opportunity
to reduce processing costs further.
3. Identify opportunities for reduced cost. A study of its value activities can help a firm
determine those parts of the value chain for which it is not competitive. For example, firms in
the electronics business, such as Flextronics International Ltd. and Sanmina-SCI, have become
large suppliers of parts and subassemblies for computer manufacturers and other electron-
ics manufacturers such as Hewlett-Packard, Sony, Apple and Microsoft, among others. The
brand-name manufacturers have found that outsourcing some of the manufacturing to firms
such as Flextronics reduces total cost and can improve speed, quality, and competitiveness.
The passage of the North American Free Trade Agreement (NAFTA) automakers throughout the world as a result of these changes in the
in 1997 and reduced restrictions on international trade through the global business environment.
World Trade Organization (WTO) have created many opportunities as (Refer to Comments on Cost Management in Action at end of chapter)
well as obstacles for global companies. Identify one or two of the
strategic issues for companies like Boeing in the United States or
who are willing to pay a small premium for these advantages. The manufacturing process
consists primarily of assembling components purchased from various electronics firms plus
a small amount of metalworking and finishing. The manufacturing operations cost $250 per
unit. The purchased parts cost CIC $500, of which $300 is for parts that CIC could manu-
facture in its existing facility for $190 in materials for each unit plus an investment in labor
and equipment that would cost $55,000 per month. CIC is considering whether to make or
continue to buy these parts.
CIC can contract out to another firm, JBM Enterprises, the marketing, distributing, and
servicing of its units. This would save CIC $175,000 in monthly materials and labor costs.
The cost of the contract would be $130 per machine sold for the average of 600 units sold per
month. CIC uses value-chain analysis to study the effect of these options on its strategy and
costs. The analysis is summarized in Exhibit 2.4.
EXHIBIT 2.4
Value-Chain Analysis for CIC Option 2: Manufacture
Manufacturing Company Components and Contract
Option 1: Continue Current Out Marketing, Distributing,
Value Activity Operations and Servicing Functions
Acquiring raw materials CIC is not involved at this CIC is not involved at this step
step in the value chain. in the value chain.
Manufacturing computer CIC is not involved at this CIC is not involved at this step
chips and other parts step in the value chain; the in the value chain; the cost of
cost of these parts is $200 these parts is $200 to CIC.
to CIC.
Manufacturing CIC purchases $300 of parts CIC manufactures these parts
components, some of for each unit. for $190 per unit plus monthly
which CIC can make costs of $55,000.
Assembling CIC’s costs are $250. CIC’s costs are $250.
Marketing, distributing, CIC’s costs are $175,000 CIC contracts out servicing to
and servicing per month. JBM Enterprises for $130 per
unit sold.
40
FLEXTRONICS INTERNATIONAL, INC lower profits from its credit card business due in part to write-offs
Flextronics is a large international contract manufacturer of elec- of bad debts.
tronics products. Contract manufacturers like Flextronics, which
is headquartered in Singapore, provide electronics manufacturing Finance Unit Profit as a % of Total Profit
services to automotive, industrial, medical, and technology com-
2004 2007
panies. In 2004 the firm purchased a majority stake in the award-
winning design firm, Frog Design (the firm that designed the Apple Ford Motor 103%* *
computer, the Macintosh). Flextronics’ strategy with this acquisi- General Electric 49% 46%
tion is to expand its contract manufacturing business by including Deere 22% 19%
upstream activities such as design—designing both the electronic Caterpillar 19% 13%
components, and the look and feel of the product. The latter type *In 2004, Ford’s finance unit earnings exceeded total company
of design is where Frog Design excels. Flextronics will be able to earnings because of losses in the automotive segment; in
2007, the finance unit earned $1.2 billion, not enough to make
provide greater value to customers since it can take the customer’s
up for the loss in the automotive segment of $5 billion. All
job from start to finish—design through delivery, saving time and information is taken from company annual reports.
cost for the customer. The firm’s purchase of Nortel’s manufactur-
ing operations in 2006 and the purchase of Solectron (a competing LOUIS VUITTON MOVES DOWN THE VALUE CHAIN
contract manufacturer) in 2008 have helped to solidify Flextronics’ Because lower-cost rivals have gotten new fashion trends to the
strategy as the complete solution for those seeking electronics showroom faster than Louis Vuitton (the luxury fashion manufacturer)
contract manufacturing—it provides integrated services to design, and taken sales from the company, Louis Vuitton has chosen to totally
build, ship, and service the product. revamp its manufacturing process to be more in line with the flexible,
fast, processes of other industries such as electronics manufactur-
GOING DOWNSTREAM WHERE THE PROFITS ARE ing. Instead of design, the focus is now on making sure the product
Many manufacturers of expensive equipment and autos also have a is available promptly to retailers. Strategically, the company has
finance unit. The finance unit is a downstream activity that provides revamped its value chain.
the customer access to the needed funds, once the purchasing
Gary McWilliams, “Credit Card Ills, Weak Sales Hurt Target,” The Wall Street
decision has been made. Looking ahead, the finance units of these Journal, August 20, 2008, p. B3; Christina Passariello, “Louis Vuitton Tries
corporations are facing the difficult times of the 2008 liquidity crisis Modern Methods on Factory Lines,” The Wall Street Journal, October 9,
and recession. For example, in 2008 Target Corp. reported sharply 2006, p. 1.
to manufacture the part is only $169,000 ( [600 $190] $55,000); thus making the part
saves $11,000 per month.
Second decision: CIC calculates that the monthly cost of the contract with JBM enterprises
would be $78,000 ( 600 $130) per month. This is a $97,000 saving over the in-house cost
of $175,000 per month.
4. Based on strategy and analysis, choose and implement the desired alternative.
First decision: As a differentiator based on product quality and innovation, CIC considers the
importance of the quality of the part in question and decides to manufacture the part. Note
that while this would save CIC $11,000 per month, the key reason for the decision is to control
the quality of the part and thereby improve overall quality and to support the firm’s differen-
tiation strategy. Note, however, that if CIC believes that the supplier can provide the part at a
higher level of quality than can CIC, the better strategy is reversed; it is now better to continue
to buy, even if the costs are higher, in order to support quality, a critical success factor.
Second decision: As a differentiator based on customer service, CIC considers the contin-
ued high level of service from in-house personnel as critical to the company’s success and con-
tinues to maintain these personnel, even if it means the loss of monthly savings of $97,000.
5. Provide an ongoing evaluation of the effectiveness of implementation in Step 4.
Management of CIC realize that the quality of the product and of customer service is critical
to the company’s success. So, CIC will continue to review the quality of product and service
provided internally. If the quality of the part purchased outside or the service provided inter-
nally is inferior then a change would be desirable.
41
Chapter 2 Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map 43
• Be linked to reward and compensation systems; managers and employees have clear incen-
tives linked to the scorecard.
• Include processes for assuring the accuracy and reliability of the information in the
scorecard.
• Ensure that the relevant portions of the scorecard are readily accessible to those responsi-
ble for the measures, and that the information is also secure, available only to those author-
ized to have the information.6
Because of its emphasis on performance measurement, we will again cover the BSC when we
cover operational control (Part Three) and management control (Part Four) in later chapters.
Measures
Customer Perspective
Quality Own quality relative to industry standards; number of defects; delivered product quality
Price Own price relative to competitive market price; sales volume; customer willingness to pay
Delivery Actual versus planned; number of on-time deliveries
Shipments Sales growth; number of customers that make up 90 percent of shipments
New products Number of new products; rate of technology improvements; percent of sales from products
introduced in last two years
Support Response time; customer satisfaction surveys
Internal Capabilities
Efficiency of manufacturing Cycle time; lead time; manufacturing overhead cost/quarter; rate of increase in use of
automation
New product introduction Rate of new product introduction/quarter
New product success New products’ quarterly sales; number of orders
Sales penetration Actual sales versus plan; increases in number of $1 million customers each quarter
New businesses Number of new businesses each year
Innovation
Technology leadership Product performance compared to competition; number of new products with patented
technology in them
Cost leadership Manufacturing overhead per quarter as a percent of sales; rate of decrease in cost of quality
per quarter
Market leadership Market share in all major markets; number of systems developed to meet customer requests
and requirements
Research and development Number of new products; number of patents
Financial Perspective
Sales Annual growth in sales and profits
Cost of sales Extent it remains flat or decreases each year
Profitability Return on total capital employed
Liquidity Cash flows
Employees and Community Perspective
Competitive benefits and salaries Salaries compared to norm in local area
Opportunity Individual contribution; personal satisfaction in job
Citizenship Company contributions to community and the institutions that support the environment
6
The above is based on information from: Robert S. Kaplan and David P. Norton, Strategy Maps (Boston: Harvard Business
School Press, 2007); Raef Lawson, Toby Hatch, and Denis Desroches, Scorecard Best Practices, (New York: Wiley, 2008).
Exhibit 2.5 shows that the electronics firm places the customer perspective at the top of the
scorecard. Also, while price is mentioned, note that the emphasis is on customer satisfaction,
through quality, innovation, and service. A strong theme through the entire scorecard is the
importance of innovation and new products. This seems to fit pretty well a firm that succeeds
through differentiation based on quality and innovation, and the scorecard reflects that. Cost
control is mentioned in the innovation perspective, but as supportive of the differentiation strat-
egy, rather than in conflict with it. Note also the inclusion of an “employees and community”
perspective that reflects this firm’s strategic emphasis and desire to achieve in these areas.
EXHIBIT 2.6
A Strategy Map for Martin & Ownership Equity
Carlson
Return on
Financial
Investment
Reduce cost for
Revenue
each unit and for
growth
each value stream
and strategy map for the company, which would require identifying and linking goals, man-
agement techniques, and critical success factors.
In the first step, Jack and Janet chose their firm’s mission, based on personal values, values
they knew were shared by their employees: “To be the highest-rated brand in crafted furni-
ture.” The strategy then followed: to differentiate the firm based on innovation, style, quality,
and customer service (with an emphasis on short lead time, the time from receipt of an order
to delivery of the customer’s order). They chose as the firm’s tagline, “To delight with our
product, and impress with our speed.”
The second step (SWOT and value chain) provided further insights which are reflected
in the BSC and strategy map. The third step was to develop the strategy map, shown in
Exhibit 2.6. The financial goals are revenue growth, cost reduction, and increased return on
investment (which would be achieved by the revenue growth and cost reduction). Similarly,
goals were set for the other three perspectives of the BSC, being careful to ensure that the
goals were consistent with the firm’s mission and strategy. Note how the goals are linked to
show the causal relationships among the goals. For example, improved customer satisfaction
(a customer goal) should positively affect revenue growth (a financial goal). The strategy map
is a key tool for Janet and Jack to better understand their road to success and, importantly, a
way to communicate to their employees where and how the firm needs to perform to achieve
the firm’s strategy and mission.
The next step was to determine how to achieve and to measure these goals. The techniques,
shown in the middle column of Exhibit 2.7, are the contemporary management techniques
covered in Chapter 1. They are tried and true tools for achieving the goals. The final step was
to determine the measures that, when achieved, would show progress on the desired goals.
For brevity, we have a small number of measures here, though in practice there may be 100 or
more measures. Also, the strategy map and scorecard could be integrated with the concepts
of lean accounting or enterprise risk management, which we have not attempted here. These
measures are what constitute the BSC for the company.7 Janet and Jack now have the tools
7
“Lean Enterprise Fundamentals,” Statement on Management Accounting (www.imanet.org/publications_statements.asp);
Mark Beasley, Al Chen, Karen Nunez, and Lorraine Wright, “Working Hand in Hand: Balanced Scorecards and Enterprise Risk
Management,” Strategic Finance, March 2006, pp. 49–54; Mark L. Frigo, “When Strategy and ERM Meet,” Strategic Finance,
January 2008, pp. 45–49.
Confirming Pages
EXHIBIT 2.7 Goals, Techniques, and Measures for Martin & Carlson’s Balanced Scorecard
Goals Techniques Balanced Scorecard: Measures
Financial • Increase return on • Return on investment
investment
• Revenue growth • Percentage increase in sales, by
product line
• Reduce cost for each unit • Cost per unit, by product line
and each value stream
Customer • Improve customer • Activity-based costing used to • Customer profitability by
profitability determine the profitability of distribution channel and customer
customers and distribution channels, groups
used with business intelligence to
manage customer relationships
• Improve customer • Survey customer satisfaction
satisfaction
• Reduce order-filling time • Theory of constraints and lean • Lead time, the time between when
manufacturing the order is received and delivered
Internal Processes • Enhance product innovation • Target costing • Number of profitable new products
• Improve quality • Total quality management or product features
• Improve productivity • Lean accounting, business process • Number of defects detected
improvement • Inventory level, process speed
Learning and Growth • Communicate strategy • Strategy map and balanced • Percentage of employees trained
throughout the organization scorecard on the firm’s strategy map
• Improve use of technology • Business intelligence, enterprise • Number of business risks
• Enhance employee skills risk management discovered and analyzed
• Training hours in skill development
they need to understand their strategy, to communicate it to employees, and to measure per-
formance to strategic success. What would happen if they had not developed these strategic
tools? The answer is shown in Exhibit 1.8 on page 16.
Sustainable growth seeks to make more of the world’s people our customers—and to do
so by developing markets that promote and sustain economic prosperity, social equity, and
environmental integrity.
Charles O. Holliday, Jr, CEO of DuPont
Sustainability The growing concerns worldwide about global warming, volatile gasoline prices, high com-
means the balancing of short- modity prices, and corporate social and environmental responsibility have created new expec-
and long-term goals in all three tations that organizations adopt the triple bottom line—social, economic, and environmental
dimensions of the company’s performance ( or, “people, planet, and profits”). The triple bottom line has come to be known
performance—social, economic, as sustainability, that is, the balancing of short- and long-term goals in all three dimensions of
and environmental. performance. Economic performance is measured in traditional ways, while social perform-
ance relates to the health and safety of employees and other stakeholders. The environmental
LEARNING OBJECTIVE 5 dimension refers to the impact of the firm’s operations on the environment.
Explain how to expand the Many companies manage sustainability in a strategic manner, through sustainability reports
balanced scorecard by integrating to shareholders. Some, such as Nike and Ford Motor Co., integrate sustainability into their
sustainability. balanced scorecards, both as a separate perspective and as additional measures in the internal
process, customer, or learning and growth perspectives. Business intelligence firms such as
IBM, Oracle, and SAS Institute offer sustainability scorecard software (a screen shot of the
SAS software is shown in Exhibit 2.8). The following shows why and how a number of global
organizations are adapting to the challenge of sustainability.
EXHIBIT 2.8
SAS Corporate Responsibility
Scorecard
8
Marc J. Epstein, Making Sustainability Work: Best Practices in Managing and Measuring Corporate Social, Environmental and
Economic Impacts (San Francisco: Berrett Koehler Publishers, 2008); Joann Lublin, “Environmentalism Sprouts Up on Corporate
Boards,” The Wall Street Journal, August, 11, 2008; Tamara Bekefi and Marc J. Epstein, “Transforming Social and Environmental
Risks into Opportunities,” Strategic Finance, March 2008, pp. 42–47; Stephanie Rosenbloom and Michael Barbaro, “Green-Light
Specials, Now at Wal-Mart,” The New Your Times, January 25, 2009, Business Section, p 1; Yuliya Chernova and Sari Krieger, “How
to Go Green in Hard Times,” The Wall Street Journal, February 9, 2009, p. R1. See also, Thomas L. Friedman, Hot, Flat and Crowded,
(New York: Farrar, Strauss and Giroux 2007).
Real-World Focus Sustainability and Decision Making at Patagonia
Patagonia, maker of clothing and gear for the outdoors enthusiast, is known for its focus on environmental issues in its manufacturing
and company strategy. As an example of its commitment to the environment, the company studies the environmental impact of planned
new products. One new product, a wool shirt, would be made from wool from New Zealand, processed in a factory in Japan, sewn in
Los Angeles, and then packaged in Reno for distribution to retail locations worldwide. Patagonia figured the following would be the
impact on the environment for a single shirt:
and computers. These industries are leading the way in corporate environmental and social
responsibility. For example, two firms frequently mentioned in corporate responsibility include
Toyota and Ford from the auto industry. Toyota rates highly for its hybrid gas–electric vehicles
and its efforts to promote environmental management systems and waste reduction efforts.
Ford is included because of its efforts in developing hybrid cars, fuel economy, and vehicle
safety. Other recognized companies include General Electric which works on reducing the
emissions of the jet engines it produces and on developing solar energy. Home Depot is rec-
ognized for its community service—allowing employees time off to participate in important
community activities.9
Summary This chapter has discussed the four cost management resources for implementing strategy:
SWOT analysis, a focus on execution, value-chain analysis, and the balanced scorecard and
the strategy map. The first, SWOT analysis, helps management to implement strategy by pro-
viding a system and structure in which to identify the organization’s critical success factors.
The second, execution, is a management focus on making priorities and achieving these CSFs.
The third, value-chain analysis, helps management to implement strategy by breaking the
organization down into a sequence of value-providing activities; management can identify the
CSFs at each step in the value chain and ask the question, How do we add value at this step
in the value chain? The final step, the balanced scorecard and strategy map, provides a means
to collect, report, and analyze the CSFs; the BSC helps management to measure progress to
strategic goals and to align employees’ performance efforts, incentives, and rewards to these
strategy goals.
An important supplement to the balanced scorecard, or in the form of a separate report,
is the organization’s performance in the area of sustainability. Because of global warming,
increases in commodity prices, and other factors, expectations for corporate social and envi-
ronmental responsibility has increased significantly in recent years.
Comments on Cost In addition to changes in trade restrictions, fluctuations in currency have had a large effect on global competi-
tors. The fall of the U.S. dollar relative to most currencies in recent years has created an opportunity for in-
Management in creased exports for U.S.-based multinational companies. The changes have also caused non-U.S. manufactur-
Action ers such as BMW and VW to locate plants in the United States where the cost of doing business is relatively
low due to the rise in the Euro and relatively high wage costs in parts of Europe. For example, a recent study of
the cost of doing business in selected countries shows the United States to have an advantage relative to many
countries (the survey did not include China and other Asian countries nor the recent rise in the U.S. dollar):
Other issues concern the degree of global integration—multinational companies operating simultaneously
in many countries. Just as BMW and VW locate plants in the United States for strategic reasons, U.S.-based
manufacturers such as Boeing use parts made overseas (in one Boeing plane, 70 percent of the parts are
sourced from non-U.S. suppliers).
Some companies deal with global competition by becoming more competitive. For example, the tire
maker Bridgestone Firestone, to achieve cost advantage in its U.S. plants, focuses on developing employee
skills. In one North Carolina plant, applicants for the local tire plant must complete a series of specialized
courses at the nearby community college. Another way to succeed is to pursue differentiation, as at Pendleton
50 Part One Introduction to Strategy, Cost Management, and Cost Systems
Woolen Mills in Portland, Oregon. The mill, built in 1910, is one of the last functioning woolen mills in the
U.S. Pendleton succeeds by specializing in upscale fabrics, such as vintage baseball uniforms and commemo-
rative blankets and dance shawls for Native American Tribes.
Source: “KPMG Competitive Alternatives 2008,” BusinessWeek, April 14, 2008, p. 6; “Globalization Bites Boeing,” BusinessWeek,
March 24, 2008, p. 32; Edward Taylor, “Automakers Shift to Offset Effects of Soaring Euro,” The Wall Street Journal, February 28,
2008, p. a13; “A Tale of Survival,” Time, December 2004, p. A16; “Manufacturing Lessons,” The Raleigh News & Observer, January
28, 2007, p. E1; “A Bigger World,” The Economist, September 20, 2008, pp. 3–14.
Required Analyze the value chain to help Jack better understand the nature of the competition between the
Bulls and the Buffaloes and to identify opportunities for adding value and/or reducing cost at each activity.
2. SWOT Analysis
Required Refer to the information in Self-Study question 1, regarding the Waynesboro Bulls. Prepare a
SWOT analysis for the Bulls.
Questions 2-1 Identify and explain the two types of competitive strategy.
2-2 Identify three or four well-known firms that succeed through cost leadership.
2-3 Identify three or four well-known firms that succeed through product differentiation.
2-4 How are the four strategic resources—SWOT analysis, execution, the value chain, and the balanced
scorecard—linked in a comprehensive strategic analysis?
Chapter 2 Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map 51
Brief Exercises 2-18 Think of an example of a firm that succeeds on cost leadership and give some examples of its strengths
and weaknesses that would be included in a SWOT analysis.
2-19 Think of an example of a firm that succeeds on differentiation and give some examples of its strengths
and weaknesses that would be included in a SWOT analysis.
2-20 What industries do you think are most suited for the value-chain analysis and why?
2-21 How would you explain the relationship between value-chain analysis and the use of the balanced
scorecard for a firm that uses both? You can use a hospital as an example.
2-22 Suppose you are a large firm in a service business and you think that by acquiring a certain compet-
ing firm, you can generate growth and profits at a greater rate for the combined firm. You have asked
some financial analysts to study the proposed acquisition/merger. Do you think value-chain analysis
would be useful to them? Why or why not?
2-23 Consider the question in 2-22 above. How would your answer differ if the firm were a
manufacturer?
2-24 What are some of the key issues to consider in effectively implementing a balanced scorecard?
2-25 How many measures are usually on the balanced scorecard?
2-26 1. Consider a commodity business such as building materials, many types of food products, and
many types of electronics products. A good example of a commodity is gasoline. Are these com-
panies likely to compete on cost leadership or differentiation, and why?
2. Consider professional service firms such a law firms, accounting firms, and medical practices.
Are these firms likely to compete on cost leadership or differentiation, and why?
2-27 Many would argue that the TV manufacturing business has become largely a commodity business,
and competition is based on price, with many good brands offered at low prices at retailers such as
Wal-Mart. The manufacturers of TVs are said to have a barrier to entry from other potential com-
petitors because the existing manufacturers (Phillips, Sony, Samsung, etc.) have spent huge sums
to develop their brands and manufacturing facilities. In recent years there has been a large growth
in the number of contract manufacturers (such as Flextronics) that manufacture TVs for the large
firms. How does this affect the competition within the industry? Are there now new opportunities
for smaller manufacturers of TVs?
Exercises 2-28 Special Order, Strategy Joel Deaine, CEO of Deaine Enterprises, Inc. (DEI), is considering a
special offer to manufacture a new line of women’s clothing for a large department store chain. DEI
has specialized in designer women’s clothing sold in small, upscale retail clothing stores throughout
the country. To protect the very elite brand image, DEI has not sold clothing to the large department
stores. The current offer, however, might be too good to turn down. The department store is willing
to commit to a large order, which would be very profitable to DEI, and the order would be renewed
automatically for two more years, presumably to continue after that point.
Required Analyze the choice Joel faces based on a competitive analysis.
2-29 Strategy, Auto Parts In the mid-1990s, a large retailer of auto parts, Best Parts, Inc. (BPI), was
looking for ways to invest an accumulation of excess cash. BPI’s success was built on a carefully