Chapter Two

Implementing Strategy: The Value

Chain, the Balanced Scorecard,
and the Strategy Map Blocher, Stout, Juras, Cokins: Cost Management, 7e
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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)
and strategy map
• Explain how to expand the 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 strategy—for example:
– Product innovation
– Quality
– Skill development
• Core competencies
– Areas of significant competitive advantage
– Building blocks for the organization’s overall
strategy
• Quantitative measures
– Are required for each critical success factor
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 SWOT Analysis (continued)
• SWOT analysis has four elements (two are
internal to the firm and two are external):
Look at product lines,
– S – strengths/internal management, R&D,
– W – weaknesses/internal manufacturing, marketing,
and strategy
– O – opportunities/external
– T – threats/external Look at barriers to entry,
intensity of rivalryamong
competitors, substitute
goods, and
customer/supplier
bargaining power

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A final step in the SWOT analysis is to identify quantitative
measures for the critical suc cess factors (CSFs). Critical
success factors are sometimes called value propositions,
that is, the CSF represents the critical process in the firm
that delivers value to the customer. At this final step the
firm converts, for example, the CSF of customer service to
a quantitative mea sure, such as the number of customer
complaints or a customer satisfaction score
 Measuring Critical Success Factors
Critical Success Factor How to Measure the CSF

Financial Factors
• Profitability → Earnings from operations, earnings trend
• Liquidity → Cash flow, trend in cash flow, interest coverage, asset turnover,
inventory turnover, receivables turnover
• Sales → Level of sales in critical product groups, sales trend, percentage of
sales from new products, sales forecast accuracy
• Market value → Share price,

Customer Factors
• Customer satisfaction → Customer returns and complaints, customer survey
• Dealer and distributor → Coverage and strength of dealer and distributor channel
relationships
e.g., number of dealers per state or region
• Marketing and selling → Trends in sales performance, training, market research activities
measured in hours or dollars
• Timeliness of delivery → On-time delivery performance, time from order to customer receipt
• Quality → Customer complaints, warranty expense
Internal Processes
• Quality → Number of defects, number of returns, customer survey, amount
of scrap, amount of rework, field service reports, warranty
claims, vendor quality defects
• Productivity → Cycle time (from materials to finished product); labor
efficiency; machine efficiency; amount of waste, rework, and scrap
• Flexibility → Setup time, cycle time
• Equipment → Downtime, operator experience, machine capacity, maintenance
readiness activities
• Safety → Number of accidents, effects of accidents

Learning and Growth

• Product → Number of design changes, number of new patents or
copyrights, skills innovation of research and development staff
• Timeliness → Number of days over or under the announced ship date
of new product
• Skill development → Number of training hours, amount of skill performance improvement
• Employee morale → Employee turnover, number of complaints, employee survey
• Competence → Rate of turnover, training, experience, adaptability, financial and
operating performance measures
Other
• Governmental → Number of violations, community service activities
and community
relations
 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 program)

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 Value-Chain Analysis
• An analysis for better understanding the details of
the organization’s competitive strategy
– 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

• Three Phases:
– Upstream: product development, links with
suppliers
– Operations: manufacturing or service done
– Downstream: links with customers, delivery, service
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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?

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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: competes on differentiation

• 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 decisions:

– Decision One: the purchase or to make certain

parts
– Decision Two: providing service internally or
outsourcing it

• It is important to consider company strategy

in these decisions

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 Value-Chain Analysis in Computer
Manufacturing (continued)
Value Activity Option One – Current Option Two – Potential

Acquiring raw CIC is not involved at CIC is not involved at

materials this step this step
Manufacturing CIC is not involved at CIC is not involved at
computer chipsand this step; cost is $200 this step; cost is $200
other parts
Manufacturing CIC purchases $300of CIC manufactures these
components, some of parts for each unit parts for $190 per unit
which CIC can make plus $55,000 monthly
Assembling CIC’s costs are $250 CIC’s costs are $250
Marketing, CIC’s costs are $175,000 CIC contracts out these
distributing, and per month services for $130 per unit
servicing sold
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 Results of Value-Chain Analysis

Decision One Decision Two

Current cost 600 x $300 =
$180,000 $175,000 per month
Cost if 600 x 190 + 600 x $130 =
change is $55,000 = $78,000 per month
made $169,000
Net benefit $11,000 per month $97,000 per month
to make the = $180,000 – = $175,000 -
change $169,000 $78,000

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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 service
– For a firm pursuing a differentiation strategy, the best
decision is not always based on lowest cost
– From a strategic viewpoint, the best decisions are to
continue to make the parts and to continue the
marketing function internally

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 The Five Steps of Strategic
Decision Making for CIC
1. Determine the strategic issues surrounding the
decisions: CIC competes on differentiation
2. Identify the alternative actions for the two
decisions
3. Obtain information and conduct analyses of the
alternatives: calculate the relevant costs
4. Based on strategy and analysis, choose and
implement the desired alternative – support CIC’s
strategy, this is the key to the analysis
5. Provide an on-going evaluation of the effectiveness
of implementation in Step 4.

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 The Balanced Scorecard (BSC)
• A comprehensive performance report that contains
the organization's critical success factors; the BSC is used
in implementing the organization’s strategy

• This BSC groups a the organization’s CSFs into four

perspectives:
– Financial perspective (financial measures)
– Customer perspective (customer satisfaction)
– Internal process perspective (e.g., productivity and speed)
– Learning and growth (e.g., training and number of new
patents or products)

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 The Balanced Scorecard (continued)
• Benefits
– Provides a means for tracking progress on
implementing strategy
– Provides a means to achieve a desired
organizational change in strategy
– Can be used to determine management’s
compensation and rewards
– Aligns managers’ efforts with strategy
– Coordinates efforts within the firm to achieve
CSFs
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 The Balanced Scorecard (continued)

• Aproperly constructed BSC reflects a company’s

strategy
--One should be able to infer a company’s strategy from its
balanced scorecard

• 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
Astrategy map is a cause-and-effect diagram of the
relationships among the critical success factors in a
BSC. The strategy map:
• Shows how the achievement of CSFs in one perspective
should affect the achievement of goals in another
perspective
• Focuses on the financial perspective because financial
performance is the ultimate goal for most profit-seeking
organizations
• Illustrates how success in the customer, internal processes,
and learning & growth perspectives leads directly to
improved financial performance

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An Example Strategy Map

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 Sustainability
• Sustainability involves the balancing of all three
dimensions of the company’s performance–financial,
social, and environmental. Sustainability reporting is
often implemented as a perspective of the balanced
scorecard

• Sustainability involves both environmental and social

performance indicators

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 Sustainability (continued)
• Environmental Indicators (EPIs) include:
-Operational measures (e.g., regulatory
compliance issues)
- Management measures
- Environmental measures
• Social performance indicators (SPIs) include:
- Working conditions (worker safety and training)
- Community involvement
- Philanthropy (direct contributions)

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 Chapter Summary
• Strengths-Weaknesses-Opportunities-Threats
(SWOT) Analysis provides a system and structure in
which to identify a firm’s critical success factors
(CSFs)

• Execution is important in implementing a strategy .

Execution depends on the competitive strategy a
firm is pursuing

• Value-chain analysis builds on the CSFs identified in

SWOT analysis by breaking them into detailed
activities

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 Chapter Summary (continued)

• The balanced scorecard (BSC) is a comprehensive

performance report that contains the organization's
critical success factors
• The strategy map is a cause-and-effect diagram of the
relationships among the critical success factors in a
BSC.
• Sustainability, often included as a perspective of the
BSC, builds on the conventional BSC by balancing
financial, social, and environmental issues

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