Chapter 6 Stategic Profitability Analysis

Chapter 13
Strategy, Balanced Scorecard, and

Strategic Profitability Analysis
Copyright © 2003 Pearson Education Canada Inc. Slide 13-1

Strategic Profitability Analysis
• Strategy describes how an organization matches its

own capabilities with opportunities in the
marketplace in order to achieve its objectives
• Industry analysis focuses on:
• competitors
• potential entrants into the market
• equivalent products
• bargaining power of customers
• bargaining power of suppliers
Copyright © 2003 Pearson Education Canada Inc. Pages 492 - 493 Slide 13-2
Strategic Profitability Analysis (Continued)
• Product differentiation refers to the organization’s
ability to make its products or services unique
• Cost leadership occurs when the organization is able
to reduce costs, relative to competitors, through
productivity and efficiency improvements
Balanced Scorecard
• The Balanced Scorecard translates an organization’s

mission and strategy into a comprehensive set of
measures
• Measurements provide feedback on how well the
organization is implementing its strategy
• reduced emphasis on short-term financial goals
Four Elements of the Balanced Scorecard

1. Financial measures
2. Customer measures
3. Internal business process measures
4. Learning and growth
Example of Balanced Scorecard
Target Actual
Objective Measures Performance Performance
Financial Gain in income $5,000,000 $5,520,000

Perspective Revenue growth 6% 6.48%
Customer New customers 5 6

Perspective Customer satisfaction 90% 87%
Internal
Process Yield 78% 79%
Perspective On-time delivery 92% 90%
Learning & Employees trained 90% 92%

Growth Employee satisfaction 80% 88%
Perspective # of improvements 5 5
Copyright © 2003 Pearson Education Canada Inc. Page 496 Slide 13-5
Features of a Good Balanced Scorecard
• Tells the story of the company’s strategy by
articulating a sequence of cause-effect relationships
• Helps communicate the strategy to all members of
the organization by translating the strategy into a
coherent and linked set of understandable targets
• In profit-seeking companies, places strong emphasis
on financial measures and objectives
• Limits the number of measures used by identifying
only the most critical ones
• Highlights suboptimal tradeoffs that managers may
make when they tail to consider operational and
financial measures together
Pitfalls Implementing a Balanced Scorecard
• Don’t assume the cause-and-effect linkages to be

precise
• Don’t seek improvements across all measures all
the time
• Don’t use only objective measures on the
scorecard
• Don’t fail to consider both costs and benefits of
initiatives
• Don’t ignore non-financial measures when
evaluating managers and employees
Engineered and Discretionary Costs
Engineered costs
• result specifically from a clear cause-effect
relationship between output and resources used
• materials
Discretionary costs
• costs which arise from a periodic appropriation
decision
• lack a clear cause-effect relationship between output
and resources used
• advertising, executive training, R&D, public relations
Downsizing and Capacity Management
Engineered Discretionary
Costs Costs
Process or Detailed and Knowledge of the
Activity physically process is sketchy
observable or unavailable
Repetitive Non-repetitive
Level of Moderate Large

Uncertainty or small
• Downsizing (or rightsizing) is process of matching

resources with current and future needs
• Difficult for discretionary costs as ideal amount is
unknown
Productivity Measurements
• Productivity measures the relationship between actual

inputs used and actual outputs achieved
Partial Productivity
= Quantity of output produced / Quantity of input used
= 1,150,000 units / 2,900,000 cm2 of direct material
= 0.40 units per cm2 of direct materials
Total Factor Productivity

= Quantity of output produced / Quantity of all inputs used
= 1,150,000 units / $23,500,000
= 0.048936 units of output per dollar of input

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Chapter 13

Strategy, Balanced Scorecard, and

Copyright © 2003 Pearson Education Canada Inc. Slide 13-1

• Strategy describes how an organization matches its

• The Balanced Scorecard translates an organization’s

Four Elements of the Balanced Scorecard

Financial Gain in income $5,000,000 $5,520,000

Customer New customers 5 6

Learning & Employees trained 90% 92%

• Don’t assume the cause-and-effect linkages to be

Level of Moderate Large

• Downsizing (or rightsizing) is process of matching

• Productivity measures the relationship between actual

Total Factor Productivity

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