1Chapter 13 Balanced ScorecardStrategy• How a company matches its own capabilities with its opportunities– How the company will compete in the marketplace• Generic Strategies:– Cost differentiation [Walmart] [H&R Block]– Product Differentiation:• Unique products at a premium price [Gift shop] [Ernst and Young]Balanced Scorecard• Used to assess success of company’s strategy– Financial and non-financial measures• Model of lead and lag indicators– Lead: Identify future outcomes – Lag: Measures of the final outcomes of earlier plansLead and Lag IndicatorsOrganizational Learning and GrowthProduction EfficiencyCustomer ValueFinancial PerformanceLeadsLeadsLeadsBalance Scorecard ExampleOperating Income from growthOperating income from productivityProduct marginsIncrease revenuesControl costsOperating income from Premium ProductsFinancial PerspectiveSurvey% of sales from old customersNumber of new customersCustomer SatisfactionCustomer retentionNew customersCustomer PerspectiveYieldOrder delivery time% of on time deliveresService response timeNumber of new processes% of Inventory returns% of processes with advanced functionsImprove Manufacturing QualityReduce delivery time to customersMeet delivery datesImprove post sales serviceImprove processesImprove Supplier RelationsImprove manufacturing capabilitiesInternal Process Perspective% of employees in trainingSurveyT/O %% of processes with real time feedbackEmployee TrainingEmployee satisfactionEmployee T/OInformation system improvementsLearning and Growth PerspectiveScorecard MeasuresScorecard InitiativesScorecard AreaExample: ex 13-22 p 484• Meredith Corp makes a special purpose machine used in the textile industry. Machine has reputation for being superior and distinct. In 2006, increased the sales price, increased number of customers.• Which strategy?• Balanced Scorecard Measures?2Example: ex 13-22• Which strategy? Product Differentiation• Balanced Scorecard Measures?• Learning and Growth– Development time for designing new machines– Improvements in manufacturing process– Employee education– Employee satisfactionExample: ex 13-22• Balanced Scorecard Measures• Learning and Growth• Internal Processes– Manufacturing quality– New product features– Order delivery timeExample: ex 13-22• Balanced Scorecard Measures• Learning and Growth• Internal Processes• Customer Perspective– Market share in high end special purpose textile machines– Customer satisfaction– New customersExample: ex 13-22• Balanced Scorecard Measures• Learning and Growth• Internal Processes• Customer Perspective• Financial Perspective– Increase in operating income by product line– Growth in Market shareStrategic Analysis of Operating Income•Growth– income due to change in sales volume– Revenue and cost effect• Price recovery Income due to changes in prices (costs)– Product differentiation: positive• Productivity cost differentiation ()– Income due to changes in quantity of inputs used– Cost differentiation: positiveGrowth• Revenue effect:Change in Units Sold x SP (last year)• Cost EffectVariable CostsChange in Input Units Based on last year’s productivity* X Unit Costs (last year) *Ratio of input units to unit sales last year x this year’s sales3Growth• Cost EffectFixed CostsIf adequate capacity in prior year to handle this year’s volume:Zero cost effectIf not adequate capacity:Additional capacity in units x unit cost last yearPrice Recovery• Revenue component:– Change in SP x units sold in current year• Cost effect (variable)– Change in unit costs x Input Units Based on last year’s productivity* *Ratio of input units to unit sales last year x this year’s salesPrice Recovery• Cost effect (Fixed)– If adequate capacity last year to produce this year’s volume• Change in unit capacity costs x Units of capacity last year– If not adequate capacity last year for this year’s volume• Change in unit capacity costs x units of capacity needed in current yearProductivity Component• Variable costs[(Actual input unit current year– (last year input/last year output)x this year’s output)] x unit costs current yearFixed costsAdequate capacity(Actual capacity current yr – actual capacity last year) x unit capacity costs this yearInadequate capacity(Actual capacity current yr – last year’s capacity adjusted to produce current year) x unit capacity costs this yearWas the strategy successful?• Growth may be due to either product differentiation, change in the total market, or strategic decision to lower prices • Usually only lower prices if successful in cost differentiation• Favorable Price Recovery is indicative of successful product differentiation: • you can sell your product at a higher price even as costs go up because it is so “different”• Favorable Productivity is indicative of successful cost differentiation strategy Ex 13-23 Meredith Corp. Income 2005 2006 Revenue ($40,000 × 200; $42,000 × 210) $8,000,000 $8,820,000 Costs Direct materials costs ($8 × 300,000; $8.50 × 310,000) 2,400,000 2,635,000 Manufacturing conversion costs ($8,000 × 250; 8,100 × 250) 2,000,000 2,025,000 Selling & customer service costs ($10,000 × 100; $9,900 × 95) 1,000,000 940,500 Design costs ($100,000 × 12; $101,000 × 12) 1,200,000 1,212,000 Total costs 6,600,000 6,812,500 Operating income $1,400,000 $2,007,500 Change in operating income $607,500 F How much of the change in income is due to growth, price recovery, and