Chapter Two

Implementing Strategy: The

Balanced Scorecard and the
Value Chain
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Learning Objectives
Explain how to implement a competitive strategy by
using Strengths-Weaknesses-Opportunities-Threats
(SWOT) Analysis
Explain how to implement a competitive strategy by
focusing on the execution of goals
Explain how to implement a competitive strategy
using value-chain analysis
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Learning Objectives
(continued)
Explain how to implement a competitive strategy
using the Balanced Scorecard (BSC)
Explain how to expand a conventional Balanced
Scorecard (BSC) by integrating sustainability

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Implementing a Strategy
There are two main competitive strategies:
cost leadership
differentiation

Once a firm chooses which strategy to follow,

there are various means of implementation:

SWOT Analysis
Focus on execution
Value-chain analysis
Balanced scorecard (BSC)

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SWOT Analysis
Identification of critical success factors (CSFs)
tied to strategyfor example:
Product innovation
Quality
Skill development

Identification of quantitative measures for the

specified CSFsfor example:
Number of design changes or new patents
Number of defects or number of returns
Number of training hours or amount of skill
performance improvement
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SWOT Analysis
(continued)
The SWOT analysis has four areas:

S strengths/internal
W weaknesses/internal
O opportunities/external
T threats/external

Blocher,Stout,Cokins,Chen, Cost Management 4e

Look at product lines,

management, R&D,
manufacturing, marketing,
and strategy
Look at barriers to entry,
intensity of rivalry among
competitors, substitute
goods, and
customer/supplier
bargaining power
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Execution
The CSFs a manager executes depend on the
chosen strategy
Cost leadership: operational performance and
quality
Differentiation: customer satisfaction and innovation
Differentiated firms must pay close attention to
marketing and product development
Management accountants assist by gathering,
analyzing, and reporting on relevant information
Can be improved through benchmarking and total
quality improvement (e.g., Malcolm Baldrige Quality
Award)
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Cost Management 4e
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Value-Chain Analysis
Means to reach the detail-level of analysis
CSFs must be implemented in each and every phase of
operations

Helps a firm better understand its competitive

advantage by analyzing what processes add value
(processes that do not add value can be deleted or
outsourced)
Design to manufacturing to service after sale
Not all areas will get the same attention (identification of
areas most important to the customer will determine the
firms focus)
Goal = the most value at the lowest possible cost
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Value-Chain Analysis
Value-chain analysis has two steps:
Identify the value-chain activities at the smallest level
possible
Develop a competitive advantage by reducing cost
or adding value

To develop a competitive advantage, a firm

must consider the following:

What is our competitive advantage (strategy)?

Where can we add value for the customer?
Where can we reduce costs?
Are any of our processes linked (linkages exploited)?

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Example: Value-Chain Analysis

in Computer Manufacturing
Computer Intelligence Company (CIC)
manufactures computers for small businesses
The company has an excellent reputation for
service and reliability as well as a growing
customer list
Is there any way to add value for the customer
while reducing costs?
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Example: Value-Chain Analysis in

Computer Manufacturing (continued)
The company is considering two options:
Option One is to continue functioning as is
Option Two includes two separate outsourcing
decisions: (a) the purchase or manufacture of
parts, and (b) providing service internally or
outsourcing it

It is important to consider company strategy

in outsourcing decisions
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Value-Chain Analysis in Computer

Manufacturing (continued)
Value Activity

Option One Current

Option Two Potential

Acquiring raw
materials

CIC is not involved at

this step

CIC is not involved at

this step

Manufacturing
computer chips and
other parts

CIC is not involved at

this step; cost is $200

CIC is not involved at

this step; cost is $200

Manufacturing
components, some of
which CIC can make

CIC purchases $300 of

parts for each unit

CIC manufactures these

units for $190 per unit
plus $55,000 monthly

Assembling

CICs costs are $250

CICs costs are $250

Marketing, distributing, CICs costs are

and servicing
$175,000 per month
Blocher,Stout,Cokins,Chen, Cost Management 4e

CIC contracts out these

services for $130 per
month
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Results of
Value-Chain Analysis
Manufacturing
Option One
Option Two
Savings with
Option Two

600 x $300 =
$180,000

Marketing,
distributing, and
servicing
$175,000 per month

600 x 190 +
$55,000 =
$169,000

$78,000 per month

$11,000

$97,000 per month

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Results of Value-Chain Analysis

(continued)
CIC can save $108,000 ($11,000 + $97,000) per
month by manufacturing the parts and contracting
out marketing, distributing, and servicing
The main factor driving the decision is company
strategy, which in this case is quality and customer
service
For a firm pursuing a differentiation strategy, the best
option is not necessarily the one which provides the
most savings (savings is a secondary consideration)
From a strategic viewpoint, Option One is preferred over
Option Two
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The Balanced Scorecard (BSC)

A performance report based on a broad set of
financial and nonfinancial measures that is crucial
to understanding and implementing a strategy
This report groups a firms CSFs into four areas:
Financial perspective (financial measures)
Customer perspective (customer satisfaction)
Internal business process perspective (e.g., productivity
and speed)
Learning and innovation (e.g., training and number of
new patents or products)
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The Balanced Scorecard (BSC) (continued)

Benefits
Means for implementing strategy
Means to achieve a desired organizational change in
strategy
Can be used to determine managements
compensation and rewards
Coordinates efforts within the firm to achieve CSFs

Limitations

Nonfinancial information is subjective

Confidentiality must be insured for certain information
Must be adaptable and frequently updated
Costly and time-consuming to implement

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The Balanced Scorecard

(BSC) (continued)
A properly constructed BSC can be used to infer a
companys strategy
BSC Strategy, rather than Strategy BSC

The emphasis placed on each performance

perspective reflects the strategy of the firm
For a cost leader, the operations perspective might be the
most important; for a differentiator, the customer
perspective
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Strategy Map
A strategy map is a cause-and-effect diagram of
the relationships embodied in a BSC:
Shows how the achievement of CSFs in one perspective
should affect the achievement of goals in another
perspective
The financial perspective is the target in the strategy map
because financial performance is the ultimate goal for
most profit-seeking organizations
Success in the other perspectives leads directly to
improved financial performance and shareholder value
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Sustainability
The fifth perspective for many organizations
The balancing of short-term and long-term goals in
all three dimensions of the companys
performanceeconomic, social, and environmental:
Environmental reports use environmental performance
indicators (EPIs) to measure sustainability
These indicators are in three areas:
Operational (measure stresses to the environment/regulatory
compliance issues)
Management (try to reduce environmental effects)
Environmental condition (measure environmental quality)
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The BSC and Not-For-Profit

(NFP) Organizations
Competitive strategy is different:
Must satisfy funding authorities, political leaders, and the
general public

The BSC can still be used to monitor CSFs related

to internal processes, customer satisfaction,
financial measures, and human resources
measures
Value-chain analysis can still be used to determine
at what points costs can be reduced or value added
on the value chain
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21

The Role of Accounting

Three cost-management resources for implementing
strategy are discussed in this chapter:
SWOT analysis provides a system and structure to
identify CSFs
Value-chain analysis builds on the CSFs by breaking
them down into detailed activities
The BSC provides a way to implement the detailed
strategy developed through the previous two analyses; it
provides the processes for evaluating the organizations
achievement of CSFs
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Chapter Summary
Strengths-Weaknesses-Opportunities-Threats (SWOT)
Analysis provides a system and structure in which to
identify a firms critical success factors (CSFs)
Execution of goals is important in implementing a
strategy
Execution depends on the competitive strategy a firm is
pursuing
Management accountants assist management by
gathering, analyzing, and reporting on relevant
information
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Chapter Summary (continued)

Value-chain analysis builds on the CSFs identified in
SWOT analysis by breaking them into detailed activities
The balanced scorecard (BSC) provides the processes
for evaluating a firms achievement of CSFs
Sustainability builds on the conventional BSC by
balancing short-term and long-term goals
Sustainability focuses on economic, social, and
environmental issues
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