Assignment on

Balanced Scorecard
Mason Paper Company (MPC) manufactures commodity-grade papers for use in computer
printers and photocopiers. MPC has reported operating losses for the last two years due to
intense price pressure from much larger competitors. The MPC management team—including
Kristen Townsend (CEO), Mike Martinez (vice-president of Manufacturing), Tom Andrews
(vice-president of Marketing), and Wendy Chen (CFO)—is contemplating a change in strategy
to save the company from impending bankruptcy. Excerpts from a recent management team
meeting are shown below:

Townsend: As we all know, the commodity paper manufacturing business is all about economies
of scale. The largest competitors with the lowest cost per unit win. The limited capacity of
our older machines prohibits us from competing in the high-volume commodity paper
grades. Furthermore, expanding our capacity by acquiring a new paper-making machine is
out of the question given the extraordinarily high price tag. Therefore, I propose that we
abandon cost reduction as a strategic goal and instead pursue manufacturing flexibility as the
key to our future success.

Chen: Manufacturing flexibility? What does that mean?

Martinez: It means we have to abandon our “crank out as many tonnes of paper as possible”
mentality. Instead, we need to pursue the low-volume business opportunities that exist in the
non-standard, specialized paper grades. To succeed in this regard, we'll need to improve our
flexibility in three ways. First, we must improve our ability to switch between paper grades.
Right now, we require an average of four hours to change over to another paper grade.
Timely customer deliveries are a function of changeover performance. Second, we need to
expand the range of paper grades that we can manufacture. Currently, we can manufacture
only three paper grades. Our customers must perceive that we are a “one-stop shop” that can
meet all of their paper-grade needs. Third, we will need to improve our yields (e.g., tonnes
of acceptable output relative to total tonnes processed) in the non-standard paper grades. Our
percentage of waste within these grades will be unacceptably high unless we do something
to improve our processes. Our variable costs will go through the roof if we cannot increase
our yields!

Chen: Wait just a minute! These changes are going to destroy our equipment utilization
numbers!

Andrews: You're right, Wendy; however, equipment utilization is not the name of the game
when it comes to competing in terms of flexibility. Our customers don't care about our
equipment utilization. Instead, as Mike just indicated, they want just-in-time delivery of
smaller quantities of a full range of paper grades. If we can shrink the elapsed time from
order placement to order delivery and expand our product offerings, it will increase sales
from current customers and bring in new customers. Furthermore, we will be able to charge

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 a premium price because of the limited competition within this niche from our cost-focused
larger competitors. Our contribution margin per tonne should drastically improve!

Martinez: Of course, executing the change in strategy will not be easy. We'll need to make a
substantial investment in training because ultimately it is our people who create our flexible
manufacturing capabilities.

Chen: If we adopt this new strategy, it is definitely going to impact how we measure
performance. We'll need to create measures that motivate our employees to make decisions
that support our flexibility goals.

Townsend: Wendy, you hit the nail right on the head. For our next meeting, could you pull
together some potential measures that support our new strategy?

Required:

1. Contrast MPC's previous manufacturing strategy with its new manufacturing strategy.

MPC’s previous manufacturing strategy had as a goal to maintain the machines

running to maximize the units of tonnes produced focusing on the high-volume
production of a limited range of paper (economies of scale). In this strategy, the
changeovers were not utilized because they reduced the use of the equipment. Therefore,
maximization of tonnes and reduction of changeovers helped to utilize the same fixed
costs to produce more output. However, the new manufacturing strategy has as a goal to
increase the units of paper manufactured, reduce changeover times, and increase yield
across non-standard grades focusing on low volume production of a wide range of
products (economies of scope). This new strategy will optimize the use of the fixed cost
resources with manufacturing flexibility.

2. Generally speaking, why would a company that changes its strategic goals need to change
its performance measurement system as well? What are some examples of measures that
would have been appropriate for MPC prior to its change in strategy? Why would those
measures fail to support MPC's new strategy?

A company that changes its strategic goals need to change its performance
measurement system because it will help drive the employees to make decisions to
promote and adjust to the new strategy. This change of evaluation of performance will
help to the adjustment of the company processes to the new strategy, taking as a result a
success of its implementation. In order to achieve strategic goals, a company must have a
strategically-aligned performance measures that will ensure that the employees are
working towards achieving these goals. If a company changes its strategy but are still
evaluating its employees using old performance measurement, employees become
conflicted and still promote the old strategy and if they follow the new strategy while
they’re performance is still measured by the old evaluation, they’re performance will
suffer. Prior to change, some performance measures that would be appropriate to MPC’s
old strategy are the number of tonnes of paper produced, the percentage of utilization of

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 equipment, and the cost of ton produced. These measures would fail to support MPC’s
new strategy because they would not support increasing the range of paper grades
produced.
3. Construct a balanced scorecard that would support MPC's new manufacturing strategy.
Use arrows to show the causal links between the performance measures and show
whether the performance measure should increase or decrease over time. Feel free to
create measures that may not be specifically mentioned in the chapter, but nonetheless
make sense given the strategic goals of the company.

Financial

Sales + Contribution
Margin per Unit +

Customers Number of
New
+
Customer
Customers Satisfaction
Time to Finish an with the +
- Order Variety of
Products
Offered

Internal
Business Number of +
Process Different Paper
Grades Produced
Average Change
- Average
Overtime +
Manufacturing

Learning
and Number of employees +
Growth trained to support the
flexible strategy

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4. What hypotheses are built into MPC's balanced scorecard? Which of these hypotheses do
you believe are most questionable and why?
a. New customers, sales, and contribution margin per unit will increase if the
customer satisfaction with the variety of products offered.
b. New customers, sales, and contribution margin per unit will increase if the time to
finish an order decrease.
c. The time to finish an order will decrease if the average change overtime.
d. The contribution margin per unit will increase if the average manufacturing
increase.
e. Sales will increase if new customers increase.
f. The customer satisfaction with the variety of products offering will increase if the
units of paper grades produced increases.
g. The average changeover time will decrease, and number of different paper grades
produced, and average manufacturing yield will increase if the number of
employees trained to support the flexible strategy increases.
All the hypothesis has a certain grade of doubt because of the unknown factors that can
affect the process. However, if the scorecard is used accurately, management can be able
to identify if any of the hypotheses are invalid to be modified.