SOLUTION: LO4: Strategic Management | My Assignment Tutor

24/02/20201LO4: Strategic ManagementAccounting: Balanced ScorecardDr Fidelis AkangaLearning outcomesBy the end of this unit Explain what strategic management is andhow it can be used to help a firm create acompetitive advantage. Explain what Balance Scorecard is and howit relates to organisations24/02/20202Strategic Management Accounting CIMA (2005) defines SMA as:“A form of management accounting in whichemphasis is placed on information whichrelates to factors external to the firm, as wellas non-financial information and internallygenerated information”.Strategic Management Accounting Prior to the 1980s management accounting control systemstended to focus mainly on financial measures of performance: Are dependent on the choice of measurement method; Focus on the past; Include only monetary items Motivate managers to focus on cost reduction. Focus excessively on the short-term. Ignore necessary variables e.g. product quality, delivery,reliability, after-sales service, customer satisfaction, etc.24/02/20203The Balanced Scorecard (BSC) In 1992, Kaplan and Norton introduced the Balanced Scorecard(BSC) as a solution to how an organisation can translate itsstrategy into tangible objectives and linked with performancemeasures. Balanced Scorecard is:An effective measurement system which enables managers ofan organisation to determine if the activities occurring within afacility are, in fact, supporting the achievement of objectives,and whether these objectives move the organisation closer tothe stated vision.The Balanced Scorecard (BSC) Balanced Scorecard model proposed by Kaplan and Nortonin 1992 It was a device to improve corporate performance byaligning it with corporate strategy Four perspectives (or aspects) of business Financial (how do we look to shareholders?) Customer (How do customers see us?) Internal Processes (What must we excel at?) Learning & Growth (Can we continue to improve andcreate value?)24/02/20204The Balanced Scorecard (BSC) The BSC provides a system for measuring and managingALL aspects of a company’s performance: It includes financial measures that tell theresults of actions already taken; It complements the Financial measures withoperational measures on: Customer Satisfaction, Internal Processes, and The firm’s Innovation and improvementactivities.The Balanced Scorecard (BSC)24/02/20205Financial Perspective The ultimate objective is maximizing the profit by: Increase the No. of new products Reduce product/service cost per unit Improve asset utilisation Financial performance measures indicate how success inachieving the strategy will be measured and tackled. Percentage of revenue from new products Percentage reduction in cost per unit Return on capital employed Targets spell out the level of performance that is needed. Initiatives indicate key action programmes required to achieveobjectives.Customer Perspective Managers identify the customer and market segments in whichthe business unit will compete: Increase customer retention Improve product/service quality Improve delivery time It includes several measures of the successful outcomes from awell-formulated and implemented strategy: % of growth in business from existing customers % returns from customers % on-time deliveries. Targets spell out the level of performance that is needed. Initiatives indicate key action programmes required to achieveobjectives.24/02/20206Internal Business Perspective Critical processes required to achieve customer and financialobjectives: Innovation process; Operation process ; and Postsales Process. Example of objectives & measures Increase the number of new products % of sales from new products Increase process efficiency Output/input ratio Decrease service time Cycle time in resolving customer problems Targets spell out the level of performance that is needed. Initiatives indicate key action programmes required to achieveobjectives.Learning & Growth Perspective The importance of organisations investing in their: human, systems andprocedures to enable the accomplishment of the other three perspectives’objectives. Increase employee capabilities Employee satisfaction survey ratings Increase information systems capabilities On-line access to customer and product information Increase motivation, empowerment and alignment % of suggested improvements per employee Targets spell out the level of performance that is needed. Initiatives indicate key action programmes required to achieve objectives.24/02/20207Features of a Good BSC1 It tells the story of a company’s strategy by articulating asequence of cause-and-effect relationships.2 It assists in communicating the strategy to all members ofthe organisation by translating the strategy into acoherent and linked set of measurable operationaltargets.3 In for-profit companies, the BSC places strong emphasison financial objectives and measures.4 The BSC limits the number of measures used byidentifying only the most critical ones.Features of a Good BSC5. It is future-oriented Retains financial measures of past performance Also introduces the drivers of future financialperformance6. It is perhaps particularly useful if an organisation isundergoing significant change or if management wants toshift the strategic focus.7. It is a costly process, but with these demands for changeon an organisation, its benefits may outweigh the costs.24/02/20208Limitations of the BSC It is not the final story: performance measurementshould lead to performance management e.g., measuring customer satisfaction does nottell anyone how to improve. When multiple measures are used, there is a dangerthat some measures are really not value drivers i.e. there is no link between the measure andfinancial success – some customers are not willingto pay for improved quality, and improved qualityis costly.Limitations of the BSC Choices of measures get confounded with measurementdifficulties, e.g. Few would argue that customer satisfaction leadsto repeat sales, and hence, shareholder value. Butcan customer satisfaction be measured accurately? It does not solve the problem of setting good goals. How can the goals be made equally and optimallychallenging across the organisation and over time? When multiple measures are used, managers face theproblem of how to weight them.24/02/20209Reading List Drury, C. (2018), Management & CostAccounting, 10th Edition. Chapter 22.