CHAPTER 13 STRATEGY, BALANCED SCORECARD, AND STRATEGIC PROFITABILITY ANALYSIS 13-1 Strategy specifies how an organization matches its

own capabilities with the

opportunities in the marketplace to accomplish its objectives.

13-2 The five key forces to consider in industry analysis are: (a) competitors (b) potential
entrants into the market (c) e!uivalent products (d) bargaining power of customers and (e) bargaining power of input suppliers.

13-3 Two generic strategies are (") product differentiation an organization#s ability to offer
products or services perceived by its customers to be superior and uni!ue relative to the products or services of its competitors and ($) cost leadership an organization#s ability to achieve lower costs relative to competitors through productivity and efficiency improvements elimination of waste and tight cost control.

13-4 The four key perspectives in the balanced scorecard are: (") %inancial perspective&this
perspective evaluates the profitability of the strategy ($) 'ustomer perspective&this perspective identifies the targeted market segments and measures the company#s success in these segments (() )nternal business process perspective&this perspective focuses on internal operations that further both the customer perspective by creating value for customers and the financial perspective by increasing shareholder wealth and (*) +earning and growth perspective&this perspective identifies the capabilities in which the organization must e,cel in order to achieve superior internal processes that create value for customers and shareholders.

13-5 -eengineering is the fundamental rethinking and redesign of business processes to

achieve improvements in critical measures of performance such as cost !uality service speed and customer satisfaction.

13-6 . good balanced scorecard design has several features:

". $. (. *. 1. )t tells the story of a company#s strategy by articulating a se!uence of cause/and/effect relationships. )t helps to communicate the strategy to all members of the organization by translating the strategy into a coherent and linked set of understandable and measurable operational targets. )t places strong emphasis on financial objectives and measures in for/profit companies. 0onfinancial measures are regarded as part of a program to achieve future financial performance. )t limits the number of measures to only those that are critical to the implementation of strategy. )t highlights suboptimal tradeoffs that managers may make when they fail to consider operational and financial measures together.

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13-7
". $. (. *. 1. 5.

2itfalls to avoid when implementing a balanced scorecard are: 3on#t assume the cause/and/effect linkages are precise4 they are merely hypotheses. .n organization must gather evidence of these linkages over time. 3on#t seek improvements across all of the measures all of the time. 3on#t use only objective measures in the balanced scorecard. 3on#t fail to consider both costs and benefits of different initiatives before including these initiatives in the balanced scorecard. 3on#t ignore nonfinancial measures when evaluating managers and employees. 3on#t use too many measures. Three key components in doing a strategic analysis of operating income are: The growth component which measures the changes in revenues and costs attributable solely to an increase in the !uantity of output sold from one year to the ne,t. The price/recovery component which measures the changes in revenues and costs attributable solely to changes in the prices of inputs and outputs from one year to the ne,t. The productivity component which measures the change in costs attributable to a change in the !uantity and mi, of inputs used in the current year relative to the !uantity and mi, of inputs that would have been used in the previous year to produce current year output.

13-8
". $. (.

13-9

.n analyst can incorporate other factors such as the growth in the overall market and reductions in selling prices resulting from productivity gains into a strategic analysis of operating income. 6y doing so the analyst can attribute the sources of operating income changes to particular factors of interests. %or e,ample the analyst will combine the operating income effects of strategic price reductions and any resulting growth with the productivity component to evaluate a company#s cost leadership strategy.

13-10 7ngineered costs result from a cause/and/effect relationship between the cost driver
output and the (direct or indirect) resources used to produce that output. 3iscretionary costs arise from periodic (usually) annual decisions regarding the ma,imum amount to be incurred. There is no measurable cause/and/effect relationship between output and resources used.

13-11 0o. )dentifying unused capacity is easier in the case of engineered costs. The cost
analyst can use the cause/and/effect relationship between output and resources used to determine the amount of unused capacity. The absence of a cause/and/effect relationship in the case of discretionary costs makes identifying resource usage and hence unused capacity much more difficult.

13-12 3ownsizing (also called rightsizing) is an integrated approach configuring processes

products and people to match costs to the activities that need to be performed for operating effectively and efficiently in the present and future. 3ownsizing is an attempt to eliminate unused capacity.

13-13 . partial productivity measure is the !uantity of output produced divided by the
!uantity of an individual input used (e.g. direct materials or direct manufacturing labor).

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13-14 Total factor productivity is the !uantity of output produced divided by the costs of all
inputs used where the inputs are costed on the basis of current period prices.

13-15 0o. Total factor productivity (T%2) and partial productivity measures work best
together because the strengths of one offset weaknesses in the other. T%2 measures are comprehensive consider all inputs together and e,plicitly consider economic substitution among inputs. 2hysical partial productivity measures are easier to calculate and understand and as in the case of labor productivity relate directly to employees# tasks. 2artial productivity measures are also easier to compare across different plants and different time periods.

13-16 ("1 min.) Ba a!"#$ %"&'#"a'$(

". +a 8uinta#s $99* strategy is a cost leadership strategy. +a 8uinta plans to grow by producing high/!uality bo,es at a low cost delivered to customers in a timely manner. +a 8uinta#s bo,es are not differentiated and there are many other manufacturers who produce similar bo,es. To succeed +a 8uinta must achieve lower costs relative to competitors through productivity and efficiency improvements. $. :easures that we would e,pect to see on a +a 8uinta#s balanced scorecard for $99* are

Financial Perspective (") ;perating income from productivity gain ($) operating income from growth (() cost reductions in key areas. These measures evaluate whether +a 8uinta has successfully reduced costs and generated growth through cost leadership. Customer Perspective (") :arket share ($) new customers (() customer satisfaction inde, (*) customer retention (1) time taken to fulfill customer orders. The logic is that improvements in these customer measures are leading indicators of superior financial performance. Internal Business Process Perspective (") <ield ($) productivity (() order delivery time (*) on/time delivery. )mprovements in these measures are e,pected to lead to more satisfied customers and in turn to superior financial performance Learning and Growth Perspective (") 2ercentage of employees trained in process and !uality management ($) employee satisfaction (() number of major process improvements. )mprovements in these measures have a cause/and/effect relationship with improvements in internal business processes which in turn lead to customer satisfaction and financial performance.

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13-17 ($9 min.) A!a )%*% &+ ,'&-./, 0'*"#-'#"&1#'), a!$ 0'&$2".*1*.) "&30&!#!.% 4"&!.*!2a.*&! &+ 13-165(
". +a 8uinta#s operating income gain is consistent with the cost leadership strategy identified in re!uirement " of 7,ercise "(/"5. The increase in operating income in $99* was driven by the =">9 999 gain in productivity in $99*. +a 8uinta took advantage of its productivity gain to reduce the prices of its bo,es and to fuel growth. )t increased market share even though the total market size was unchanged. $. The productivity component measures the change in costs attributable to a change in the !uantity and mi, of inputs used in a year relative to the !uantity and mi, of inputs that would have been used in a previous year to produce the current year output. )t measures the amount by which operating income increases and costs decrease through the productive use of input !uantities. ?hen comparing productivities across years the productivity calculations use current year input prices in all calculations. @ence the productivity component is unaffected by input price changes. The productivity component represents savings in both variable costs and fi,ed costs. ?ith respect to variable costs such as direct materials productivity improvements immediately translate into cost savings. )n the case of fi,ed costs such as fi,ed manufacturing conversion costs productivity gains result only if management takes actions to reduce unused capacity. %or e,ample reengineering manufacturing processes will decrease the capacity needed to produce a given level of output but it will lead to a productivity gain only if management reduces the unused capacity by say selling off the e,cess capacity.

13-18 ($9/(9 min.) Ba a!"#$ %"&'#"a'$(

S.'a.#,*" P#'%0#".*1#%
A %inancial

P#'+&'3a!"# O67#".*1#%
A )ncrease shareholder value A A A A A A A A

8#a%2'#% 7arnings per share 0et income -eturn on assets -eturn on sales -eturn on e!uity 2roduct cost per unit 'ustomer cost per unit 2rofit per salesperson

A )ncrease profit generated by each salesperson A 'ustomer A .c!uire new customers A -etain customers A 3evelop profitable customers A )mprove manufacturing !uality A )ntroduce new products

A 0umber of new customers A 2ercentage of customers retained A 'ustomer profitability A 2ercentage of defective product units

A )nternal 6usiness 2rocesss

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13-18 ('ont#d.)
A :inimize invoice error rate A ;n/time delivery by suppliers A )ncrease proprietary products A +earning and Browth A )ncrease information system capabilities A 7nhance employee skills A 2ercentage of error/free invoices A 2ercentage of on/time deliveries by suppliers A 0umber of patents A 2ercentage of processes with real/time feedback A 7mployee turnover rate A .verage job/related training hours per employee

13-19 ((9 min.) G'&-./, 0'*"#-'#"&1#'), a!$ 0'&$2".*1*.) "&30&!#!.%(

". T/# G'&-./ C&30&!#!. -evenue effect of growth component C .ctual units of output sold in $99* D .ctual units of output sold in $99( ;utput price in $99(

C ($E F99 D "E 599) , ="1 C "1" 199 % .ctual units of input or capacity that would have been used to produce $99* output assuming the same input/output relationship that e,isted in $99(

'ost effect of growth component

.ctual units of input or capacity to produce $99( output

)nput price in $99(

T/shirts purchased in $99* when $E F99 units are sold instead of the "E 599 units sold in $99( assuming the $99( input/output relationship continued in $99* e!ual (9 (95 T/shirts ($9 999 G "E 599 H $E F99). .dministrative costs will not change since ade!uate capacity e,ists in $99( to support the number of customers in $99*. The cost effects of growth component are: :aterials costs ((9 (95 D $9 999) H ="9 .dministrative costs (*9 999 D *9 999) , =$ Total cost effect of growth component C ="9( 959 I 9 ="9( 959 I

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13-19 ('ont#d.) )n summary the net increase in operating income as a result of growth component e!uals: -evenue effect of growth component ="1" 199 % 'ost effect of growth component "9( 959 I 'hange in operating income due to growth component = *> **9 % T/# P'*"#-R#"&1#') C&30&!#!. -evenue effect of price recovery component C ;utput price in $99* D ;utput price in $99( .ctual units of output sold in $99*

C (="* D ="1) H $E F99 C =$E F99 I .ctual units of inputs or capacity that would have been used to produce $99* output assuming the same input/output relationship that e,isted in $99( =(9 (95 % * 999 % =(* (95 %

'ost effect of price/recovery component

)nput prices in $99*

)nput prices in $99(

'ost of T/shirts purchased (=E D ="9) H (9 (95 .dministrative costs (=".E9 D =$.99) H *9 999 Total cost effect of price/recovery component

)n summary the net increase in operating income as a result of the price recovery component e!uals: -evenue effect of price/recovery component =$E F99 I 'ost effect of price/recovery component (* (95 % 'hange in operating income due to price/recovery component = * 595 % T/# P'&$2".*1*.) C&30&!#!. .ctual units of inputs or capacity used to produce $99* output .ctual units of inputs or capacity that would have been used to produce $99* output assuming the same input/output relationship that e,isted in $99(

2roductivity component

)nput price in $99*

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13-19 ('ont#d.) The productivity component of cost changes are: 'ost of T/shirts purchased ((9 999 D (9 (95) H =E .dministrative costs ((5 999 D *9 999) H =".E9 'hange in operating income due to productivity component The strategic analysis of profitability is as follows:
R#1#!2# a!$ C&%. E++#".% &+ G'&-./ C&30&!#!. *! 2004 425 ="1" 199 % "9( 959 I = *> **9 % R#1#!2# a!$ C&%. E++#".% &+ P'*"#R#"&1#') C&30&!#!. *! 2004 435 =$E F99 I (* (95 % = * 595 %

= $ F1* % F 599 % ="9 (1* %

I!"&3# S.a.#3#!. A3&2!.% *! 2003 415 -evenues 'osts ;perating income =$E* 999 $>9 999 = "* 999

C&%. E++#". &+ P'&$2".*1*.) C&30&!#!. *! 2004 445 D ="9 (1* % ="9 (1*

I!"&3# S.a.#3#!. A3&2!.% *! 2004 455 =*"1 >99 ((> *99 = FF *99

$. The analysis indicates that a significant amount of the increase in operating income resulted from ;ceano#s growth which came from its cost leadership. The company was able to drop its selling price and substantially increase its sales volume. ;ceano was also able to earn additional operating income by improving its productivity.

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13-20 ("1 min.) S.'a.#,), 6a a!"#$ %"&'#"a'$(

". :eredith 'orporation follows a product differentiation strategy in $99(. :eredith#s 3*@ machine is distinct from its competitors and generally regarded as superior to competitors# products. To succeed :eredith must continue to differentiate its product and charge a premium price. $. 6alanced Scorecard measures for $99( follow:

Financial Perspective (") )ncrease in operating income from charging higher margins ($) price premium earned on products. These measures indicate whether :eredith has been able to charge premium prices and achieve operating income increases through product differentiation. Customer Perspective (") :arket share in high/end special/purpose te,tile machines ($) customer satisfaction (() new customers. :eredith#s strategy should result in improvements in these customer measures which are leading indicators of superior financial performance. Internal Business Process Perspective (") :anufacturing !uality ($) new product features added (() order delivery time. )mprovements in these measures are e,pected to result in more satisfied customers and in turn superior financial performance. Learning and Growth Perspective (") 3evelopment time for designing new machines ($) improvements in manufacturing processes (() employee education and skill levels (*) employee satisfaction. )mprovements in these measures have a cause/and/effect relationship with improvements in internal business processes which in turn lead to customer satisfaction and financial performance.

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13-21 ((9 min.) S.'a.#,*" a!a )%*% &+ &0#'a.*!, *!"&3# (continuation of "(/$9).
". ;perating income for each year is as follows: 2002 -evenue (=*9 999 $994 =*$ 999 $"9) 'osts 3irect materials costs (=> (99 9994 =>.19 ("9 999) :anufacturing conversion costs (=> 999 $194 > "99 $19) Selling J customer service costs (="9 999 "994 =E E99 E1) 3esign costs (="99 999 "$4 ="9" 999 "$) Total costs ;perating income 'hange in operating income $. T/# G'&-./ C&30&!#!.
-evenue effect .ctual units of .ctual units of ;utput of growth C output sold output sold price in $99$ component in $99( in $99$

2003 => >$9 999

=> 999 999

$ *99 999 $ 5(1 999 $ 999 999 $ 9$1 999 " 999 999 E*9 199 " $99 999 " $"$ 999 5 599 999 5 >"$ 199 =" *99 999 =$ 99F 199 =59F 199 %

($"9 $99) =*9 999 C =*99 999 %

.ctual units of input or capacity that would .ctual units of 'ost effect )nput have been used to produce inputs or capacity of growth = prices used to produce year $99( output assuming component in $99$ the same input / output $99$ output relationship that e,isted in $99$

3irect materials costs that would be re!uired in $99( to produce $"9 units instead of the $99 units produced in $99$ assuming the $99$ input/output relationship continued into $99( e!ual ("1 999 kilogram (
(99 999 $"9). :anufacturing conversion costs and selling and $99

customer/service costs will not change since ade!uate capacity e,ists in $99$ to support year $99( output and customers. -J3 costs would not change in $99$ if :eredith had to produce and sell the higher $99( volume in $99$. The cost effects of growth component are: 3irect materials costs :anufacturing conversion costs Selling J cust./serv. costs 3esign costs 'ost effect of growth component 13-21 ('ont#d.) "(/E (("1 999 (99 999) => ($19 $19) => 999 ("99 "99) =$1 999 ("$/"$) ="99 999 C C C C ="$9 999 I 9 9 9 ="$9 999 I

)n summary the net increase in operating income as a result of the growth component e!uals: -evenue effect of growth component =*99 999 % 'ost effect of growth component "$9 999 I 'hange in operating income due to growth component =$>9 999 % T/# P'*"#-R#"&1#') C&30&!#!.
-evenue effect of .ctual units ;utput price ;utput price price / recovery C of output in $99$ in $99( component sold in $99(

C (=*$ 999 =*9 999) $"9 C =*$9 999 %

.ctual units of inputs or capacity )nput )nput that would have been used 'ost effect of prices in prices in to produce year $99( output price / recovery = year year assuming the same input / output component $99( $99$ relationship that e,isted in $99$

3irect materials costs (=>.19 =>) ("1 999 :anufacturing conversion costs (=> "99 => 999) $19 Selling J customer/service costs (=E E99 ="9 999) "99 3esign costs (="9" 999 ="99 999) "$ Total cost effect of price/recovery component

C ="1F 199 I C $1 999 I C "9 999 % C "$ 999 I =">* 199 I

)n summary the net increase in operating income as a result of the price/recovery component e!uals: -evenue effect of price/recovery component =*$9 999 % 'ost effect of price/recovery component ">* 199 I 'hange in operating income due to price/recovery component =$(1 199 %

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13-21 ('ont#d.) T/# P'&$2".*1*.) C&30&!#!.

.ctual units of inputs or capacity that .ctual units of )nput would have been used 2roductivity inputs or capacity = to produce year $99( prices in component used to produce output assuming the same $99( year $99( output input / output relationship that e,isted in $99$

The productivity component of cost changes are 3irect materials costs (("9 999 ("1 999) =>.19 :anufacturing conversion costs ($19 $19) => "99 Selling J customer/service costs (E1 "99) =E E99 3esign costs ("$ "$) ="9" 999 'hange in operating income due to productivity component

C C C C

=*$ 199 % 9 *E 199 % 9 =E$ 999 %

The change in operating income between $99$ and $99( can be analyzed as follows:
I!"&3# S.a.#3#!. A3&2!.% *! 2002 415 -evenues 'osts ;perating income => 999 999 5 599 999 =" *99 999 R#1#!2# a!$ C&%. E++#".% &+ G'&-./ C&30&!#!. *! 2003 425 =*99 999 % "$9 999 I =$>9 999 % R#1#!2# a!$ C&%. E++#". I!"&3# C&%. E++#".% &+ &+ S.a.#3#!. P'*"#-R#"&1#') P'&$2".*1*.) A3&2!.% C&30&!#!. C&30&!#!. *! 2003 *! 2003 *! 2003 455 9 435 445 415 : 425 : 435 : 445 =*$9 999 % ">* 199 I =$(1 199 % =59F 199 % = E$ 999 % = E$ 999 % => >$9 999 5 >"$ 199 =$ 99F 199

'hange in operating income (. The analysis of operating income indicates that a significant amount of the increase in operating income resulted from :eredith#s product differentiation strategy. The company was able to continue to charge a premium price while growing sales. :eredith was also able to earn additional operating income by improving its productivity.

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13-22 ($9 min.) A!a )%*% &+ ,'&-./, 0'*"#-'#"&1#'), a!$ 0'&$2".*1*.) "&30&!#!.% 4"&!.*!2a.*&! &+ 13-215(
Effect of the industry-market-si e factor )f the "9/unit increase in sales from $99 to $"9 units (K or 5 ((K $99) units is due to growth in market size and * ("9 5) units is due to an increase in market share. The change in :eredith#s operating income from the industry/market size factor rather than from specific strategic actions is: =$>9 999 (the growth component in 7,ercise "(/$")
5 "9

="5> 999 %

Effect of product differentiation The change in operating income due to: )ncrease in the selling price of 3*@ (revenue effect of price recovery) )ncrease in price of inputs (cost effect of price recovery) Browth in market share due to product differentiation =$>9 999 (the growth component in 7,ercise "(/$") 'hange in operating income due to product differentiation Effect of cost leadership The change in operating income from cost leadership is: 2roductivity component
* "9

=*$9 999 % ">* 199 I

""$ 999 % =(*F 199 %

=E$ 999 %

The change in operating income between $99$ and $99( can be summarized as follows: 'hange due to industry/market/size 'hange due to product differentiation 'hange due to cost leadership 'hange in operating income ="5> 999 % (*F 199 % E$ 999 % =59F 199 %

:eredith has been successful in implementing its product differentiation strategy. 0early 1FK (=(*F 199 =59F 199) of the increase in operating income during $99( was due to product differentiation. :eredith#s operating income increase in $99( was also helped by a growth in the overall market and some productivity improvements.

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13-23 ("1 min.) I$#!.*+)*!, a!$ 3a!a,*!, 2!2%#$ "a0a"*.)

4"&!.*!2a.*&! &+ 13-205( ". The amount and cost of unused capacity at the beginning of year $99( based on year $99( production follows: A3&2!. &+ ;!2%#$ Ca0a"*.) :anufacturing $19 $"94 ($19 D $"9) => "99 Selling and customer service "99 D >94 ("99 D >9) =E E99 3esign C&%. &+ ;!2%#$ Ca0a"*.) *9 $9

=($* 999 "E> 999

3iscretionary 3iscretionary cost so cannot cost so cannot determine be calculatedL unused capacityL

LThe absence of a cause/and/effect relationship makes identifying unused capacity for discretionary costs difficult. :anagement cannot determine the -J3 resources used for the actual output produced to compare -J3 capacity against.

$. :eredith can reduce manufacturing capacity from $19 units to $$9 ($19 (9) units. :eredith will save (9 => "99 C =$*( 999. This is the ma,imum amount of costs :eredith can save in $99(. )t cannot reduce capacity further (by another (9 units to "E9 units) because it would then not have enough capacity to manufacture $"9 units in $99( (units that contribute significantly to operating income). (. :eredith may choose not to downsize because it projects sales increases that would lead to a greater demand for and utilization of capacity. :eredith may have also decided not to downsize because downsizing re!uires a significant reduction in capacity. %or e,ample :eredith may have chosen to downsize some more manufacturing capacity if it could do so in increments of say "9 rather than (9 units. .lso :eredith may be focused on product differentiation which is key to its strategy rather than on cost reduction. 0ot reducing significant capacity also helps to boost and maintain employee morale.

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13-24 ("1 min.) S.'a.#,), 6a a!"#$ %"&'#"a'$, %#'1*"# "&30a!)(

". Snyder 'orporation#s strategy in $99( is cost leadership. Snyder#s consulting services for implementing sales management software is not distinct from its competitors. The market for these services is very competitive. To succeed Snyder must deliver !uality service at low cost. )mproving productivity while maintaining !uality is key. $. 6alanced Scorecard measures for $99( follow:

Financial Perspective (") )ncrease operating income from productivity gains and growth ($) revenues per employee (() cost reductions in key areas for e,ample software implementation and overhead costs. These measures indicate whether Snyder has been able to reduce costs and achieve operating income increases through cost leadership. Customer Perspective (") :arket share ($) new customers (() customer responsiveness (*) customer satisfaction. Snyder#s strategy should result in improvements in these customer measures which are leading indicators of superior financial performance. Internal Business Process Perspective (") Time to complete customer jobs ($) time lost due to errors (() !uality of job ()s system running smoothly after job is completedM) )mprovements in these measures are e,pected to lead to more satisfied customers lower costs and superior financial performance. Learning and Growth Perspective (") Time re!uired to analyze and design implementation steps ($) time taken to perform key steps implementing the software (() skill levels of employees (*) hours of employee training (1) employee satisfaction and motivation. )mprovements in these measures have a cause/and/effect relationship with improvements in internal business processes customer satisfaction and financial performance.

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13-25 ((9 min.) S.'a.#,*" a!a )%*% &+ &0#'a.*!, *!"&3# 4"&!.*!2a.*&! &+ 13-245(
". ;perating income for each year is as follows: 2002 -evenues (=19 999 594 =*> 999 F9) 'osts Software implementation labor costs (=59 (9 9994 =5( ($ 999) Software implementation support costs (=* 999 E94 =* "99 E9) Software development costs (="$1 999 (4 ="(9 999 () Total costs ;perating income 'hange in operating income $. T/# G'&-./ C&30&!#!. =( 999 999 " >99 999 (59 999 2003 =( (59 999 $ 9"5 999 (5E 999

(F1 999 (E9 999 $ 1(1 999 $ FF1 999 = *51 999 = 1>1 999 ="$9 999 %

-evenue effect of growth C component

.ctual units of .ctual units of ;utput output sold output sold price in $99$ in $99( in $99$

C (F9 D 59) =19 999 C =199 999 %

'ost effect of growth component

.ctual units of input or capacity that would .ctual units of )nput have been used to produce inputs or capacity prices used to produce year $99( output assuming in $99$ the same input / output $99$ output relationship that e,isted in $99$

Software implementation labor costs that would be re!uired in $99( to produce F9 units instead of the 59 units produced in $99$ assuming the $99$ input/output relationship continued into $99( e!ual (1 999 (
(9 999 F9) labor/hours. Software implementation support costs 59

would not change since ade!uate capacity e,ists in $99$ to support year $99( output and customers. Software development costs are discretionary costs not directly related to output and hence would not change in $99$ even if Snyder had to produce and sell the higher year $99( output in $99$.

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13-25 ('ont#d.) The cost effects of growth component are Software implementation labor costs ((1 999 D (9 999) =59 C =(99 999 I Software implementation support costs (E9 D E9) =* 999 C 9 Software development costs (( D () ="$1 999 C 9 'ost effect of growth component =(99 999 I )n summary the net increase in operating income as a result of the growth component e!uals: -evenue effect of growth component =199 999 % 'ost effect of growth component (99 999 I 'hange in operating income due to growth component =$99 999 % T/# P'*"#-R#"&1#') C&30&!#!.

-evenue effect of ;utput price ;utput price .ctual units price / recovery C of output in $99$ in $99( component sold in $99( C (=*> 999 D =19 999) F9 C ="*9 999 I 'ost effect of price / recovery component
.ctul units of inputs or capacity )nput )nput that would have been used prices in prices in to produce year $99( output year year assuming the same input / output $99( $99$ relationship that e,isted in $99$

Software implementation labor costs (=5( D =59) (1 999 Software implementation support costs (=* "99 D =* 999) E9 Software development (="(9 999 D ="$1 999) ( 'ost effect of growth component

C C C

="91 999 I E 999 I "1 999 I ="$E 999 I

)n summary the net decrease in operating income as a result of the price/recovery component e!uals: -evenue effect of price/recovery component ="*9 999 I 'ost effect of price/recovery component "$E 999 I 'hange in operating income due to price recovery component =$5E 999 I

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13-25 ('ont#d.) T/# P'&$2".*1*.) C&30&!#!.

.ctual units of inputs or .ctual units of capacity t hat would have been used )nput 2roductivity inputs or capacity to produce year $99( output prices in = component assuming the same used to produce $99( year $99( output input / output relationship that e,isted in $99$

The productivity component of cost changes are: Software implementation labor costs (($ 999 D (1 999) =5( Software implementation support costs (E9 D E9) =* "99 Software development costs (( D () ="(9 999 'hange in operating income due to productivity component C =">E 999 % C 9 C 9 =">E 999 %

The change in operating income between $99$ and $99( can be analyzed as follows:
I!"&3# S.a.#3#!. A3&2!.% *! 2002 415 R#1#!2# a!$ C&%. E++#".% &+ G'&-./ C&30&!#!. *! 2003 425 R#1#!2# a!$ I!"&3# C&%. E++#".% &+ C&%. E++#". &+ S.a.#3#!. P'*"#-R#"&1#') P'&$2".*1*.) A3&2!.% C&30&!#!. C&30&!#!. *! 2003 *! 2003 *! 2003 455 9 435 445 415 : 425 : 435 : 445

-evenues 'osts ;perating income

=( 999 999 $ 1(1 999 = *51 999

=199 999 % (99 999 I =$99 999 %

="*9 999 I "$E 999 I =">E 999 % =$5E 999 I =">E 999 % ="$9 999 % 'hange in operating income

=( (59 999 $ FF1 999 = 1>1 999

(. The analysis of operating income indicates that a significant amount of the increase in operating income resulted from Snyder#s productivity improvements in $99(. The company had to reduce selling prices while labor costs were increasing but was able to increase operating income by improving its productivity. The productivity gains also allowed Snyder to be competitive and grow the business. The unfavorable price recovery component indicates that Snyder could not pass on increases in labor/related wages via price increases to its customers very likely because its product was not differentiated from competitors# offerings.

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13-26 ($1 min.)

A!a )%*% &+ ,'&-./, 0'*"#-'#"&1#') a!$ 0'&$2".*1*.) "&30&!#!.% 4"&!.*!2a.*&! &+ 13-255(

Effect of industry-market-si e factors ;f the "9/unit increase in sales from 59 to F9 units 1K or ( units (1K 59) is due to growth in market size and F ("9 () units is due to an increase in market share. The change in Snyder#s operating income from the industry market/size factor rather than from specific strategic actions is: =$99 999 (the growth component in 7,ercise "(/$1)
( "9

=59 999 %

Effect of product differentiation ;f the =$ 999 decrease in selling price "K or =199 ("K =19 999) is due to a general decline in prices and the remaining decrease of =" 199 (=$ 999 =199) is due to a strategic decision by Snyder#s management to implement its cost leadership strategy of lowering prices to stimulate demand. The change in operating income due to a decline in selling price (other than the strategic reduction in price included in the cost leadership component) =199 F9 units )ncrease in prices of inputs (cost effect of price recovery) 'hange in operating income due to product differentiation Effect of cost leadership 2roductivity component 7ffect of strategic decision to reduce selling price =" 199 F9 Browth in market share due to productivity improvement and strategic decision to reduce selling price =$99 999 (the growth component in 7,ercise "(/$1) 'hange in operating income due to cost leadership
F "9

= (1 999 I "$E 999 I ="5* 999 I =">E 999 % "91 999 I

"*9 999 % =$$* 999 %

The change in operating income between $99$ and $99( can then be summarized as 'hange due to industry/market/size 'hange due to product differentiation 'hange due to cost leadership 'hange in operating income = 59 999 % "5* 999 I $$* 999 % ="$9 999 %

Snyder has been very successful in implementing its cost leadership strategy. 3ue to a lack of product differentiation Snyder was unable to pass along increases in labor costs by increasing the selling price&in fact selling price declined by =$ 999 per work unit. @owever Snyder was able to take advantage of its productivity gains to reduce price gain market share and increase operating income.

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13-27 ($9 min.) I$#!.*+)*!, a!$ 3a!a,*!, 2!2%#$ "a0a"*.) 4"&!.*!2a.*&! &+ 13-245(
". The amount and cost of unused capacity at the beginning of year $99( based on work performed in year $99( follows:
A3&2!. &+ C&%. &+ ;!2%#$ ;!2%#$ Ca0a"*.) Ca0a"*.) $9 =>$ 999 3iscretionary 3iscretionary cost so cannot cost so cannot determine be calculatedL unused capacityL

Software implementation support E9 F94 (E9 F9) =* "99 Software development

LThe absence of a cause/and/effect relationship makes identifying unused capacity for discretionary costs difficult. :anagement cannot determine the software development resources used for the actual output produced to compare against software development capacity.

$. Snyder can reduce software implementation support capacity from E9 units to F1 (E9 "1) units. Snyder will save "1 =* "99 C =5" 199. This is the ma,imum amount of costs Snyder can save by downsizing in $99(. )t cannot reduce capacity further (by another "1 units to 59 units) because it would then not have enough capacity to perform F9 units of work in $99( (work that contributes significantly to operating income). (. Snyder may choose not to downsize because it projects sales increases that would lead to greater demand for and utilization of capacity. Snyder may have also decided not to downsize because downsizing re!uires significant reduction in capacity. %or e,ample Snyder may have chosen to downsize additional software implementation support capacity if it could do so in say increments of 1 rather than "1 units. 0ot reducing significant capacity by laying off employees boosts employee morale and keeps employees more motivated and productive.

13-28 ($9 min.) Ba a!"#$ %"&'#"a'$(

". 'alte,#s strategy is to focus on Nservice/oriented customersO who are willing to pay a higher price for services. 7ven though its product is largely a commodity product gasoline 'alte, wants to differentiate itself through the service it provides at its retailing stations. 3oes the scorecard represent 'alte,#s strategyM 6y and large it does. The focus of the scorecard is on measures of process improvement !uality market share and financial success from product differentiation and charging higher prices for customer service. There are some deficiencies that the subse!uent assignment !uestions raise but abstracting from these concerns for the moment the scorecard does focus on implementing a product differentiation strategy. @aving concluded that the scorecard has been reasonably well designed how has 'alte, performed relative to its strategy in $99*M )t appears from the scorecard that 'alte, was successful in implementing its strategy in $99*. )t achieved all targets in the financial internal business and learning and growth perspectives. The only target it missed was the market

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13-28 ('ont#d.) share target in the customer perspective. .t this stage students may raise some !uestions about whether this is a good scorecard measure. -e!uirement ( gets at this issue in more detail. The bottom line is that measuring Nmarket share in the overall gasoline marketO rather than in the Nservice/oriented customerO market segment is not a good scorecard measure so not achieving this target may not be as big an issue as it may seem at first. $. <es 'alte, should include some measure of employee satisfaction and employee training in the learning and growth perspective. 'alte,#s differentiation strategy and ability to charge a premium price is based on customer service. The key to good fast and friendly customer service is well trained and satisfied employees. Intrained and dissatisfied employees will have poor interactions with customers and cause the strategy to fail. @ence training and employee satisfaction are very important to 'alte, for implementing its strategy. These measures are leading indicators of whether 'alte, will be able to successfully implement its strategy and hence should be measured on the balanced scorecard. (. 'alte,#s strategy is to focus on the 59K of gasoline consumers who are service/oriented not on the *9K price/shopper segment. To evaluate if it has been successful in implementing its strategy 'alte, needs to measure its market share in its targeted market segment Nservice/ oriented customer O not its market share in the overall market. Biven 'alte,#s strategy it should not be concerned if its market share in the price/shopper segment declines. )n fact charging premium prices will probably cause its market share in this segment to decline. 'alte, should replace Nmarket share in overall gasoline marketO with Nmarket share in the service/oriented customer segmentO in its balanced scorecard customer measure. 'alte, may also want to consider putting a customer satisfaction measure on the scorecard. This measure should capture an overall evaluation of customer reactions to the facility the convenience store employee interactions and !uick turnaround. The customer satisfaction measure would serve as a leading indicator of market share in the service/oriented customer segment. *. .lthough there is a cause/and/effect link between internal business process measures and customer measures on the current scorecard 'alte, should add more measures to tighten this linkage. )n particular the current scorecard measures focus e,clusively on refinery operations and not on gas station operations. 'alte, should add measures of gas station performance such as cleanliness of the facility turnaround time at the gas pumps the shopping e,perience at the convenience store and the service provided by employees. :any companies do random audits of their facilities to evaluate how well their branches and retail outlets are performing. These measures would serve as leading indicators of customer satisfaction and market share in 'alte,#s targeted segments. 1. 'alte, is correct in not measuring changes in operating income from productivity improvements on its scorecard under the financial perspective. 'alte,#s strategy is to grow by charging premium prices for customer service. The scorecard measures focus on 'alte,#s success in implementing this strategy. 2roductivity gains per se are not critical to 'alte,#s strategy and hence should not be measured on the scorecard.

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13-29 ((9 min.) Ba a!"#$ %"&'#"a'$(

". The market for color laser printers is competitive. +ee#s strategy is to produce and sell high !uality laser printers at a low cost. The key to achieving higher !uality is reducing defects in its manufacturing operations. The key to managing costs is dealing with the high fi,ed costs of +ee#s automated manufacturing facility. To reduce costs per unit +ee would have to either produce more units or eliminate e,cess capacity. The scorecard correctly measures and evaluates +ee#s broad strategy of growth through productivity gains and cost leadership. There are some deficiencies of course that subse!uent assignment !uestions will consider. )t appears from the scorecard that +ee was not successful in implementing its strategy in $99*. .lthough it achieved targeted performance in the learning and growth and internal business process perspectives it significantly missed its targets in the customer and financial perspectives. +ee has not had the success it targeted in the market and has not been able to reduce fi,ed costs. $. +ee#s scorecard does not provide any e,planation of why the target market share was not met in $99*. ?as it due to poor !ualityM @igher pricesM 2oor post/sales serviceM )nade!uate supply of productsM 2oor distributionM .ggressive competitorsM The scorecard is not helpful for understanding the reasons underlying the poor market share. +ee may want to include some measures in the customer perspective (and internal business process perspective) that get at these issues. These measures would then serve as leading indicators (based on cause/and/effect relationships) for lower market share. %or e,ample +ee should measure customer satisfaction with its printers on various dimensions of product features !uality price service and availability. )t should measure how well its printers match up against other color laser printers on the market. This is critical information for +ee to successfully implement its strategy. (. +ee should include a measure of employee satisfaction to the learning and growth perspective and a measure of new product development to the internal business process perspective. The focus of its current scorecard measures is on processes and not on people and innovation. +ee considers training and empowering workers as important for implementing its high/ !uality low/cost strategy. Therefore employee training and employee satisfaction should appear in the learning and growth perspective of the scorecard. +ee can then evaluate if improving employee/related measures results in improved internal/business process measures market share and financial performance. .dding new product development measures to internal business processes is also important. .s +ee reduces defects +ee#s costs will not automatically decrease because many of +ee#s costs are fi,ed. )nstead +ee will have more capacity available to it. The key !uestion is how +ee will obtain value from this capacity. ;ne important way is to use the capacity to produce and sell new models of its products. ;f course if this strategy is to work +ee must

"(/$"

develop new products at the same time that it is improving !uality. @ence the scorecard

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13-29 ('ont#d.) should contain some measure to monitor progress in new product development. )mproving !uality without developing and selling new products (or downsizing) will result in weak financial performance. *. )mproving !uality and significantly downsizing to eliminate unused capacity is difficult. -ecall that the key to improving !uality at +ee 'orporation is training and empowering workers. .s !uality improvements occur capacity will be freed up but because costs are fi,ed !uality improvements will not automatically lead to lower costs. To reduce costs +ee#s management must take actions such as selling e!uipment and laying off employees. 6ut how can management lay off the very employees whose hard work and skills led to improved !ualityM )f it did lay off employees now will the remaining employees ever work hard to improve !uality in the futureM %or these reasons +ee#s management should first focus on using the newly available capacity to sell more product. )f it cannot do so and must downsize management should try to downsize in a way that would not hurt employee morale such as through retirements and voluntary severance.

13-30 ((1 min.) S.'a.#,*" a!a )%*% &+ &0#'a.*!, *!"&3#(

". @alsey is following a product differentiation strategy. @alsey offers a wide selection of clothes and e,cellent customer service. @alsey#s strategy is to distinguish itself from its competitors and to charge a premium price. $. ;perating income for each year is as follows:
2004 -evenues (=59 *9 9994 =1E *9 999) 'osts 'osts of goods sold (=*9 *9 9994 =*" *9 999) Selling J customer service costs (=F 1" 999)4 =5.E9 *( 999) 2urchasing J admin. costs (=$19 E>94 =$*9 >19) Total costs ;perating income 'hange in operating income =$ *99 999 2005 =$ (59 999

" 599 999 " 5*9 999 (1F 999 $E5 F99 $*1 999 $9* 999 $ $9$ 999 $ "*9 F99 = "E> 999 = $"E (99 =$" (99 %

(.

T/# G'&-./ C&30&!#!. -evenue effect of growth component

.ctual units of .ctual units of ;utput output sold output sold price in $99* in $991 in $99*

C (*9 999 *9 999) =59 C =9

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13-30 ('ont#d.)
.ctual units of input or capacity that would .ctual units of )nput 'ost effect have been used to produce inputs or capacity of growth C prices year $991 output assuming to produce component in $99* the same input / output $99* output relationship that e,isted in $99*

2ieces of clothing that would be re!uired to be purchased in $991 would be the same as that re!uired in $99* because output is the same between $99* and $991. 2urchasing and administrative costs and selling and customer/service costs will not change since ade!uate capacity e,ists in $99* to support year $991 output and customers. The cost effects of growth component are: 'osts of goods sold Selling J cust./serv. costs 2urch. J admin. costs 'ost effect of growth component (*9 999 *9 999) (1" 999 1" 999) (E>9 E>9) =*9 C =F C =$19 C =9 9 9 =9

)n summary the net effect on operating income as a result of the growth component e!uals: -evenue effect of growth component 'ost effect of growth component 'hange in operating income due to growth component T/# P'*"#-R#"&1#') C&30&!#!. -evenue effect of price / recovery component C
;utput price ;utput price in $991 in $99* .ctual units of output sold in $991

=9 9 =9

C (=1E =59) *9 999 C =*9 999 I

"(/$*

13-30 ('ont#d.)
.ctual units of inputs or capacity )nput that would have been used )nput to produce year $991 output prices in prices in year year assuming the same input / output $991 $99* relationship that e,isted in $99*

'ost effect of price / recovery component

'osts of goods sold (=*" =*9) Selling J cust./serv. costs (=5.E9 =F) 2urchas. J admin. costs (=$*9 =$19) Total cost effect of price/recovery component

*9 999 1" 999 E>9

C C C

=*9 999 I 1 "99 % E >99 % =$1 "99 I

)n summary the net decrease in operating income as a result of the price/recovery component e!uals: -evenue effect of price/recovery component 'ost effect of price/recovery component 'hange in operating income due to price/recovery component T/# P'&$2".*1*.) C&30&!#!.
.ctual units of inputs or capacity that .ctual units of )nput would have been used 2roductivity inputs or capacity = to produce year $991 prices in component used to produce $991 output assuming the same year $991 output input / output relationship that e,isted in $99*

=*9 999 I $1 "99 I =51 "99 I

The productivity component of cost changes are: 'osts of goods sold (*9 999 *9 999) =*" Selling J cust./serv. costs (*( 999 1" 999) =5.E9 2urchasing J admin. costs (>19 E>9) =$*9 'hange in operating income due to productivity component

C C C

9 =11 $99 % (" $99 % =>5 *99 %

"(/$1

13-30 ('ont#d.) The change in operating income between $99* and $991 can be analyzed as follows:
I!"&3# S.a.#3#!. A3&2!.% *! 2004 415 R#1#!2# a!$ C&%. E++#".% &+ G'&-./ C&30&!#!. *! 2005 425 R#1#!2# a!$ C&%. E++#". I!"&3# C&%. E++#".% &+ &+ S.a.#3#!. P'*"#-R#"&1#') P'&$2".*1*.) A3&2!.% C&30&!#!. C&30&!#!. *! 2005 *! 2005 *! 2005 455 9 435 445 415 : 425 : 435 : 445

-evenues 'osts ;perating income

=$ *99 999 $ $9$ 999 = "E> 999

=9 9 =9

=*9 999 I $1 "99 I =51 "99 I =$" (99 %

= >5 *99 % = >5 *99 %

=$ (59 999 $ "*9 F99 = $"E (99

'hange in operating income *. The analysis of operating income indicates that a significant amount of the increase in operating income resulted from productivity gains rather than product differentiation. The company was unable to charge a premium price for its clothes. Thus the strategic analysis of operating income indicates that @alsey has not been successful at implementing its premium price product differentiation strategy despite the fact that operating income increased by more than "9K between $99* and $991. @alsey could not pass on increases in purchase costs to its customers via higher prices. @alsey must either reconsider its product/differentiation strategy or focus managers on increasing margins and growing market share by offering better product variety and superb customer service.

13-30 E<"# A00 *"a.*&!

Strategy, Balanced Scorecard, and Strategic Profitability Analysis Halsey Company Original Data 2004
Pieces of clothing purchased and sold Average selling price Average cost per piece of clothing Selling and customerservice capacit Selling and customerservice costs Selling and customerservice capacit cost per customer 40,000 $60 $40 51,000 $!5",000

2005
40,000 $59 $41 4!,000 $#96,"00

$"

$6$90

"(/$5

13-30 ('ont#d.)
Purchasing and administrative capacit Purchasing and administrative costs Purchasing and administrative capacit cost per distinct design &evenues 'osts (irect materials costs Selling and customer service costs Purchasing and administrative costs )otal costs *perating +ncome e!en"e and Cost #ffects of $ro%t& &evenue effect of gro,th 'ost effect of gro,th (irect materials costs Selling and customer service costs Purchasing and administrative costs )otal cost-effect of gro,th Price' eco!ery Component &evenue effect of pricerecover 'ost effect of price-recover (irect materials costs Selling and customer service costs Purchasing and administrative costs )otal cost-effect of pricerecover Prod"cti!ity Component (irect materials costs Selling and customer service costs Purchasing and administrative costs 'ost effect of productivit component Strategic Analysis of Profitability (ncome Statement Amo"nts in 2004 $#,400,000 #,#0#,000 19%,000 #ffects of $ro%t& Component $#ffects of Price' eco!ery Component $-40,000. #5,100 -65,100. #ffects of Prod"cti!ity Component $-%6,400. %6,400 (ncome Statement Amo"nts in 2005 $#,!60,000 #,140,"00 #19,!00 9%0 $#45,000 %50 $#04,000

$#50 $#,400,000 1,600,000 !5",000 #45,000 #,#0#,000 $19%,000

$#40 $#,!60,000 1,640,000 #96,"00 #04,000 #,140,"00 $#19,!00

$-40,000. 40,000 -5,100. -9,%00. #5,100

/ / 0 0 /

$0 $-55,#00$00. $-!1,#00. $-%6,400.

0 0 0

&evenues 'osts *perating +ncome

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13-31 ($1 min.)

A!a )%*% &+ ,'&-./, 0'*"#-'#"&1#'), a!$ 0'&$2".*1*.) "&30&!#!.%.

". ?inchester follows a product differentiation strategy in $991. ?inchester#s ball bearings are regarded as superior to its competitors. ?inchester#s strategy is to charge a premium price for its ball bearings. $. The growth component is favorable because ?inchester sold more units in $991 compared to $99*. The price/recovery component is favorable because output prices increased faster than the input prices between $99* and $991. The productivity component is favorable because ?inchester used fewer inputs to produce year $991 output relative to what it would have used in $99* (calculated using $991 prices). (. 7ffect of the industry/market/size factor 7ffect of product differentiation 2rice recovery component 'hange in market share (=(99 999 =F19 999) 0et effect of product differentiation 7ffect of cost leadership (productivity component) 'hange in operating income = F19 999 % =*99 999 % *19 999 I 19 999 I (19 999 % =" 919 999 %

The analysis of the growth price/recovery and productivity components indicates that the =" 919 999 increase in operating income between $99* and $991 is due to growth in the market and to productivity gains. ?inchester#s strategy is product differentiation and the product differentiation component is =19 999 unfavorable. ?inchester was unable to pass along increases in input prices to customers while maintaining and increasing its market share. )ts sales did not keep up with the growth in market size. @ence the gain in operating income in $991 is not consistent with the product differentiation strategy described in re!uirement ".

13-32 ($9 min.) E!,*!##'#$ a!$ $*%"'#.*&!a') &1#'/#a$ "&%.%, 2!2%#$ "a0a"*.), '#0a*'% a!$ 3a*!.#!a!"#(
". -owland#s repair and maintenance costs are indirect engineered costs. The amount of repair and maintenance costs each year may not correlate directly to the !uantity of gears produced. ;ver time however there is a clear cause/and/effect relationship between the output (!uantity of gears produced) and repair and maintenance costs&the more gears that are produced the greater the number of hours the machines will be run and the greater the repairs and maintenance the machines will need. $. (") .vailable repair and maintenance capacity > hours per day $19 days * workers ($) -epair and maintenance work actually done (() C (") ($) @ours of unused repair and maintenance capacity (*) -epair and maintenance cost per hour =*9 999 $ 999 (1) C (() (*) 'ost of unused repair and maintenance capacity > 999 hours 5 999 hours $ 999 hours =$9 per hour =*9 999

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13-32 ('ont#d.) -easons why -owland might want to downsize its repair and maintenance capacity are: a. to reduce costs of carrying unused capacity b. to create a culture of streamlining processes and operating efficiently -easons why -owland might not want to downsize its repair and maintenance capacity are: a. it projects greater demand for repairs and maintenance activity in the near future b. it would negatively affect employee morale c. it may want to use the e,pertise of the repairs and maintenance staff in other areas such as process improvements d. it does not regard the unused capacity as particularly e,cessive (. )f repair and maintenance costs are discretionary costs calculating unused capacity is much more difficult. -epair and maintenance costs would be discretionary if repair and maintenance are mostly of a preventive type that management can choose when to do. )n this case the lack of a cause/and/effect relationship between output and repair and maintenance activity means that -owland cannot determine the repair and maintenance resources used and hence the amount of unused capacity.

13-33 ($9 min.) E!,*!##'#$ a!$ $*%"'#.*&!a') &1#'/#a$ "&%.%, 2!2%#$ "a0a"*.), "2%.&3#' /# 0-$#%=(
". 'able Balore#s customer help/desk costs are indirect engineered costs. ;ver time there is a clear cause/and/effect relationship between the output (number of subscribers or customers) and customer help/desk representatives needed and customer help/desk costs. The more homes serviced the greater the number of customer/service calls e,pected and the greater the number of customer help/desk representatives needed. $a. .ssume customer help/desk costs are engineered costs. (") .vailable customer help/desk capacity > hours per day $19 days 1 representatives ($) 'ustomer help/desk services actually used *1 999 calls
" hour per call 5

"9 999 hours F 199 hours $ 199 hours ="> per hour =*1 999

(() C (") ($) @ours of unused customer help/desk capacity (*) 'ost per hour =(5 999 $ 999 hours (> hoursPday $19 days) (1) C (() (*) 'ost of unused customer help/desk capacity in $99$

$b. .ssume customer help/desk costs are discretionary costs. )n this case cost of unused capacity in $99$ cannot be determined. The absence of a cause/and/effect relationship between homes serviced and customer/service calls means that 'able Balore cannot determine the customer help/desk resources used and hence the amount of unused capacity.

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13-33 ('ont#d.) (.
Telephone calls received in $99$ *1 999 = C 5K Total subscribers in $99$ F19 999

.pplying this 5K to the E99 999 subscribers in $99( means that 'able Balore received 1* 999 (5K E99 999) calls in $99(. a. .ssume customer help/desk costs are engineered costs. (") .vailable customer help/desk capacity in $99( ($) 'ustomer help/desk services actually used 1* 999 calls
" hour per call 5

"9 999 hours E 999 hours " 999 hours ="> per hour ="> 999

(() C (") ($) @ours of unused customer help/desk capacity (*) 'ost per hour (1) C (() (*) 'ost of unused customer help/desk capacity in $99(

b. .ssume customer help/desk costs are discretionary costs. %or the reasons described in $b cost of unused capacity in $99( cannot be determined.

13-34 ($9 min.)

".

Pa'.*a 0'&$2".*1*.) 3#a%2'#3#!. ('hapter .ppendi,)

6erkshire 'orporations partial productivity ratios in $991 are as follows: C

8uantity of output produced in $991 Qilograms of direct materials used in $991

3irect materials partial productivity kg. 3irect manuf. labor partial productivity
:anufacturing overhead partial productivity

1$1 999 5"9 999

C 9.>5 units per

8uantity of output produced in $991 3irect manuf. labor / hours used in $991

1$1 999 E 199

11.$5 units per labor / hour

C C
1$1 999

8uantity of output produced in $991 Inits of manuf. capacity in $991

C per unit of 1>$ 999

capacity

9.E9 units

To compare partial productivities in $991 with partial productivities in $99* we first calculate the inputs that would have been used in $99* to produce year $991#s 1$1 999 units of output assuming the year $99* relationship between inputs and outputs. 3irect materials C *19 999 kg ($99*) (F1 999 output units in $99* C *19 999 ".* C 5(9 999 kg.
1$1 999 output units in $991

3irect manuf. labor

C F 199 hours ($99*) (F1 999 output units in $99* C F 199 ".* C "9 199 labor/hours "(/(9

1$1 999 output units in $991

13-34 ('ont#d.) :anufacturing capacity C 599 999 units of capacity because manufacturing capacity is fi,ed and ade!uate capacity e,isted in $99* to produce year $991 output. 2artial productivity calculations for $99* based on year $991 output (to make the partial productivities comparable across the two years)
8uantity of output produced in $991

3irect materials partial productivity

Qilograms of direct materials that would have been used in $99* to produce year $991 output 8uantity of output produced in $991

1$1 999 5(9 999

9.>( units per kg

3irect manufac. labor partial productivity

3irect manuf. labor / hours that would have been used in $99* to produce year $991 output 8uantity of output produced in $991

1$1 999 "9 199

C labor / hour

19 units per

:anufacturing overhead partial productivity

Inits of manuf. capacity that would have been used in $99* to produce year $991 output

1$1 999 599 999

9.>F1 units per unit of capacity

The calculations indicate that 6erkshire improved the partial productivity of all its inputs between $99* and $991 via improvements in efficiency of direct materials and direct manufacturing labor and by reducing unused manufacturing capacity. $. .ll partial productivity ratios increase from $99* to $991. ?e can therefore conclude that total factor productivity definitely increased from $99* to $991. 2artial productivities cannot however tell us how much total factor productivity changed because partial productivity measures cannot be aggregated over different inputs. (. 6erkshire 'orporation management can use the partial productivity measures to set targets for the ne,t year. 2artial productivity measures can easily be compared over multiple periods. %or e,ample they may specify bonus payments if partial productivity of direct manufacturing labor increases to 59 units of output per direct manufacturing labor/hour and if partial productivity of direct materials improves to 9.E9 units of output per kilogram of direct materials. . major advantage of partial productivity measures is that they focus on a single input4 hence they are simple to calculate and easy to understand at the operations level. :anagers and operators can also e,amine these numbers to understand the reasons underlying productivity changes from one period to the ne,t&better training of workers lower absenteeism lower labor turnover better incentives or improved methods. :anagement can then implement and sustain these factors in the future.

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13-35 ($1 min.)

Total factor productivity for $991 using $991 prices

T&.a +a".&' 0'&$2".*1*.) 4"&!.*!2a.*&! &+ 13-345(

8uantity of output produced in $991 'osts of inputs used in $991 based on $991 prices

".

C C

1$1 999 (5"9 999 =".$1) R (E 199 =$1) R (1>$ 999 =".F1) 1$1 999 1$1 999 = =F5$ 199 + =$(F 199 + =" 9"> 199 =$ 9"> 199

C 9.$5 units of output per dollar of input $. 6y itself the $991 T%2 of 9.$5 units per dollar of input is not particularly helpful. ?e need something to compare the $991 T%2 against. ?e use as a benchmark T%2 calculated using the inputs that 6erkshire would have used in $99* to produce 1$1 999 units of output (calculated in re!uirement ") at $991 prices. Ising the current year#s ($991) prices in both calculations controls for input price differences and focuses the analysis on the adjustments the manager made in the !uantities of inputs in response to changes in prices.
6enchmark T%2 from $99*

8uantity of output produced in $991 'osts of inputs that would have been used in $99* to produce $991 output at year $991 input prices

C C

1$1 999 (5(9 999 =".$1) R ("9 199 =$1) R (599 999 =".F1)
1$1 999 1$1 999 = =F>F 199 +=$5$ 199 + =" 919 999 =$ "99 999

C 9.$1 units of output per dollar of inputs Ising year $991 prices total factor productivity increased *K S(9.$5 9.$1) 9.$1T from $99* to $991.

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13-35 ('ont#d.) (. Total factor productivity increased because 6erkshire produced more output per dollar of input in $991 relative to $99* measured in both years using $991 prices. The gain in T%2 occurs because 6erkshire increases the partial productivities of each individual input (as calculated in 7,ercise "(/(*) and seeks the least e,pensive combination of inputs to produce the output. %or e,ample 6erkshire reduces direct manufacturing labor input to produce 1$1 999 units of output from "9 199 hours in $99* to E 199 hours in $991 a decrease of E.1$K S("9 199 E 199) "9 199T. 'orrespondingly direct materials used decreases from 5(9 999 kgs. to 5"9 999 kgs. a decrease of (."FK S(5(9 999 5"9 999) 5(9 999T. 0ote that direct manufacturing labor costs increased by $1K S(=$1 =$9) =$9T from $99* to $991 while direct materials costs increased by *."FK S(=".$1 =".$9) =".$9T from $99* to $991. To improve total factor productivity in $991 6erkshire used relatively more of direct materials inputs (whose price had gone up less) and relatively less of direct manufacturing labor (whose price had gone up more). -ecall that direct materials and direct manufacturing labor are substitutable inputs. . major advantage of T%2 over partial productivity measures is that T%2 combines the productivity of all inputs and so measures gains from using fewer physical inputs and substitution among inputs.

13-36 ($1 min.) Ba a!"#$ %"&'#"a'$, #./*"%(

". <es the @ousehold 2roducts 3ivision (@23) should include measures of employee satisfaction and customer satisfaction even if these measures are subjective. %or a maker of kitchen dishwashers employee and customer satisfaction are leading indicators of future financial performance. There is a cause/and/effect linkage between these measures and future financial performance. )f @23#s strategy is correct and if the scorecard has been properly designed employee and customer satisfaction information is very important in evaluating the implementation of @23#s strategy. @23 should use employee and customer satisfaction measures even though these measures are subjective. ;ne of the pitfalls to avoid when implementing a balanced scorecard is not to use only objective measures in the scorecard. ;f course @23 should guard against imprecision and potential for manipulation. 2atricia 'onley appears to be aware of this. She has tried to understand the reasons for the poor scores and has been able to relate these scores to other objective evidence such as employee dissatisfaction with the new work rules and customer unhappiness with missed delivery dates. $. )ncorrect reporting of employee and customer satisfaction ratings to make divisions performance look good is unethical. )n assessing the situation the specific NStandards of 7thical 'onduct for :anagement .ccountantsO (described in 7,hibit "/F) that the management account should consider are listed below.

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13-36 ('ont#d.) Competence 'lear reports using relevant and reliable information should be prepared. 2reparing reports on the basis of incorrect employee and customer satisfaction ratings in order to make the division#s performance look better than it is violates competence standards. )t is unethical for 'onley to change the employee and customer satisfaction ratings in order to make the division#s performance look good. Integrity The management accountant has a responsibility to avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict. 'onley may be tempted to report better employee and customer satisfaction ratings to please 7mburey. This action however violates the responsibility for integrity. The Standards of 7thical 'onduct re!uire the management accountant to communicate favorable as well as unfavorable information. !"#ectivity The management accountant#s standards of ethical conduct re!uire that information should be fairly and objectively communicated and that all relevant information should be disclosed. %rom a management accountant#s standpoint modifying employee and customer satisfaction ratings to make division performance look good would violate the standard of objectivity. 'onley should indicate to 7mburey that the employee and customer satisfaction ratings are indeed appropriate. )f 7mburey still insists on reporting better employee and customer satisfaction numbers 'onley should raise the matter with one of 7mburey#s superiors. )f after taking all these steps there is continued pressure to overstate employee and customer satisfaction ratings 'onley should consider resigning from the company and not engage in unethical behavior.

13-37 ((1 min.) D&-!%*>*!, (':. adapted).

". The downsizing plan would be acceptable as the re!uired subsidy is less than $9K of the current subsidy4 ="1 999 compared to ="5 F99 calculated as follows: Inder downsizing plan .nnual revenue: S("19 sandwiches =(.59) R =$(9 beveragesPdessertsT $19 days 'ost of supplies: ="E$ 199 19K 'ost of downsizing plan: ?ages and fringe benefits" Itilities and e!uipment maintenance .nnual cost of supplies Total costs .nnual revenue :ayfair downsizing plan subsidy
"

="E$ 199 = E5 $19 = >" $19 (9 999 E5 $19 $9F 199 "E$ 199 = "1 999

=51 999 R ($1K =51 999) C =>" $19

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13-37 ('ont#d.) Inder current cafeteria plan .nnual revenues S("99 entrees =*) R (>9 saladsPsandwiches =() R =$99 beveragesPdessertT $19 days 'ost of supplies (59K =$"9 999) 'omputation of subsidy limitation 'urrent operation ?ages and fringe benefits S=""9 999 R ($1K =""9 999)T Itilities J e!uipment maintenance 'ost of supplies (=$"9 999 59K) Total costs .nnual revenue :ayfair current operations subsidy :ayfair 'orporations subsidy limitation $9K of current subsidy ($9K =>( 199)

=$"9 999 ="$5 999 ="(F 199 (9 999 "$5 999 $E( 199 $"9 999 = >( 199 ="5 F99

$. The ?ilco %oods proposal is more advantageous to :ayfair 'orporation than the downsizing plan as the subsidy at the projected volume is =1 "*9 less than the downsizing plan: ="1 999 compared to =E >59. The calculations follow: -evenue to :ayfair: ?ilco revenue" +ess: 6reakeven sales$ -evenues in e,cess of breakeven sales -evenues payable to :ayfair( (=$9( 199 9.9*) 2lus: -ent* Total payments to :ayfair 'ost to :ayfair: %i,ed costs (utilities and e!uipment maintenance) :ayfair#s ?ilco %oods proposal subsidy
S(55 entrees =1) R (E* sandwichesPsalads =*) R =(99T $19 days (=" 999 monthly payment "$ months) (" F1K) contribution margin ratio ( -evenues in e,cess of breakeven sales *K * =" 999 monthly payment "$ months
" $

=$1" 199 *> 999 =$9( 199 = > "*9 "$ 999 $9 "*9

(9 999 = E >59

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C/a0.#' 13 I!.#'!#. E<#'"*%#

$he Internet e%ercise is availa"le to students only on the Prentice &all Companion 'e"site www(prenhall(com)horngren( *tudents can click on Cost +ccounting, -- th ed(, and access the Internet E%ercise for the chapter, which links to the 'e" site of a company or organi ation( $he Internet E%ercise on the 'e" will "e updated periodically so that it is current with the latest information availa"le on the su"#ect organi ation.s 'e" site( + printout copy of the Internet e%ercise for this chapter as of early /00/ appears "elow( $he solution to the Internet e%ercise, which will also "e updated periodically, is availa"le to instructors from the Companion 'e"site.s faculty view( $o access the solution, click on Cost +ccounting, --th ed(, Faculty link, and then register once to o"tain your password through the online form( +fter the initial registration, you will have a personal login I1 and password to use to log in( + printout of the solution to the Internet e%ercise for this chapter as of early /00/ follows( $he e%ercise and solution provide instructors with an idea of the content of the Internet e%ercise for this chapter( I!.#'!#. E<#'"*%# The balanced scorecard highlights four key perspectives of performance: financial customer internal business process and learning and growth. :ark#s ?ork ?arehouse +td.#s award/ winning annual report publishes corporate goals forecasts and senior management objectives for the upcoming year. )t also provides a NpostmortemO on whether it achieved the prior year#s goals forecasts and objectives. To access :ark#s ?ork ?arehouse#s (:??#s) latest annual report go to www.marks.com and click on the N'orporateO link followed by N)nvestor )nformation.O ". -eview senior management performance objectives for ne,t year and identify objectives that fit each of the balanced scorecard performance perspectives. $a. -efer to the ;perational Boals. ?hat is the purpose of operational goalsM

$b. 3id :ark#s ?ork ?arehouse meet its five operational goals for the yearM ?hat is the area of greatest concernM (. -efer to the ;ther )ndicators. 3id :ark#s ?ork ?arehouse customer/service performance rating improve in the current yearM ?hat is the goal for ne,t yearM

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I!.#'!#. E<#'"*%# ('ont#d.) S& 2.*&! .& I!.#'!#. E<#'"*%# ". 6alanced Scorecard 2erspectives %inancial 2erspective: 'onsolidated pre/ta, profit of =">.$ million. :ajor transaction or series of transactions that cause the 'ompany#s share price to increase by (9K. 3ivisional preta, profit growth of "1K in :ark#s 3ivision. 3ivisional gross margin of ="15 million and *".>K gross margin rate in :ark#s 3ivision. 3ivisional preta, profit up by =9.E million in 3ockers Stores 3ivision. 3ivisional preta, profit up by =".( million in ?ork ?orld 3ivision. 3ivision net front/line contribution up =".F million in ?ork ?orld 3ivision. 'onsolidated "$/month rolling funded debt/to/e!uity ratio ".9( to ".

'ustomer 2erspective: 2lanned new relocated and refurbished stores.

)nternal 6usiness 2rocess 2erspective: :ark#s 3ivision total sales dollars per front/line and back/line staff full/time e!uivalent =$*( 999. Systems Steering 'ommittee projects and departmental operations capital e,penditures on budget. Timely and accurate internal and e,ternal financial reporting. :anage the 'ompany#s ta, affairs on budget.

+earning and Browth 2erspective: Qeep the company technologically current and senior management informed about future retail technology.

$a. N;perational goals are key items that the 'ompany monitors to gauge its progress towards the achievement of its Strategic 2lan and :ission. ;perational goals and other indicators also provide data that can be benchmarked against our competitors in the industry.O $b. :ark#s ?ork ?arehouse met a portion of its operating goals. )nventory turnover is the area of most concern at the time of preparing the $99" .nnual -eport (report for the year ended Uanuary $F $99"). )t failed to meet the turnover goal for each of its three divisions.

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I!.#'!#. E<#'"*%# ('ont#d.) G&a ". Sales per average retail s!uare foot :ark#s 3ivision ?ork ?orld 3ivision 3ocker#s Stores 3ivision $. Bross margin return on investment (times) :ark#s 3ivision ?ork ?orld 3ivision 3ocker#s Stores 3ivision (. %ront/line contribution as a percent of corporate store sales *. %ranchise royalties and other less bad debts as a percent of franchise sales: :ark#s 3ivision ?ork ?orld 3ivision 1. )nventory turnover (times) :ark#s 3ivision ?ork ?orld 3ivision 3ocker#s Stores 3ivision =$1> =$(1 =**5 A".2a =$1E =$$" =((( E1a 2a.*&! <es 0o 0o

".F 9.E ".E "9.EK

".> 9.E ".1 "9.1K

<es <es 0o 0o

5.$K *.9K $.* ".( $.E

5.5K *.$K $." ".$ ".>

<es <es 0o 0o 0o

(. :ark#s ?ork ?arehouse#s customer service performance rating dropped from E$.5K in fiscal year $999 to E"."K in fiscal year $99". )ts goal for $99$ is a rating of E*K.

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C/a0.#' 13 ?*$#& Ca%# $he video case can "e discussed using only the case writeup in the chapter( +lternatively, instructors can have students view the videotape of the company that is the su"#ect of the case( $he videotape can "e o"tained "y contacting your Prentice &all representative( $he case 2uestions challenge students to apply the concepts learned in the chapter to a specific "usiness situation( 8"DONALD@S CORPORATIONA THE BALANCED SCORECARD ". 'ompetitors: There are numerous competitors in the !uick/service restaurant category from large corporations such as 6urger Qing ?endy#s and Taco 6ell to small local establishments in each community where :c3onald#s has a store. )t is easy to copy a new product or match a price change keeping competition fierce. 2otential 7ntrants: 6arriers to entry in the restaurant business are relatively low. +abor and food are the largest recurring costs in store operations. The cost of facilities is not so great as to discourage new entrants. (<our own local community may bear this out D how often do new restaurants openM) .t the corporate level managers are not so concerned with new entrants since :c3onald#s has so many stores (close to $1 999) in communities of all sizes around the globe. 7!uivalent 2roducts: 'ustomers can choose to cook meals at home or buy grocery store take/out meals instead of visiting a restaurant. )f you also consider impulse food purchases outside of regular meal times any outlet offering food could be considered e!uivalent. 'onvenience stores and gas station markets would fit in this category. :c3onald#s acknowledges that few people plan a meal out at one of their stores so they try to locate them in high/traffic areas. ?hen hunger strikes :c3onald#s wants to be the choice. 6argaining 2ower of 'ustomers: This can be viewed from two angles D consumers and business partners. 'ustomers have tremendous bargaining power since they have so many food choices available. :aking customers happy is critical to the company#s continued success. The bargaining power of business partners on the other hand depends on the partner. %or e,ample :c3onald#s has entered into agreements with ?al/:art to put smaller scaled/down restaurants in some of its stores. ?al/:art e,erts considerable bargaining power over its suppliers. .lternatively a shopping mall may strongly desire :c3onald#s presence in its food court and therefore may offer concessions and very favorable terms in order to attract them. 6argaining 2ower of )nput Suppliers: ?ith close to $1 999 stores in ""* countries :c3onald#s is in good position to negotiate its terms with suppliers. %or the supplier they get to add :c3onald#s name to their client list. )n the past the company has gone so far as to literally Nbuy the farmO to vertically integrate its food supply chain. )f you consider labor (employees) in the category the analysis changes. ?ith the current period of low unemployment it is very difficult to attract !ualified workers. :c3onald#s must take action to keep employees happy and committed to their jobs so they don#t leave.

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?*$#& Ca%# ('ont#d.) Strongest force: This could be an interesting class debate. 'ustomers arguably drive store success. ?ithout them there would be no :c3onald#s. ?eakest force: .gain there may be mi,ed class responses here. 'orporate management has indicated in interviews with the case writer that they are not all that concerned about the threat of new entrants due to their size. $. ?hen !uestioned about this topic in a recent interview :c3onald#s management was hesistant to make a choice of one over the other. Several of the company#s strategies (V$ and V1 in the case) point to product differentiation through product innovation. 2erhaps the class can name some recent e,amples D the :c3+T pizza and pasta (people didn#t want to wait for a pizza at :c3onald#s) @appy :eals and Walue :eals are just a few. The popularity of bagels has triggered :c3onald#s to begin testing bagel sandwiches in a few of its company/owned stores. 'ost leadership is also apparent in :c3onald#s actions. There is constant pressure to drive costs out of operations. -estaurant food waste is tracked and standards e,ist for the preparation of each food item on the menu. Special dispensers mete out the precise amount of soda for each cup size and scales are used to weigh french fry portions. Their products could be considered similar to competitors# offerings so lower selling prices and high/!uality products rather than uni!ue products or services provide a measure of competitive advantage. (. See if you can get students to think beyond financial measures such as sales or net income as performance indicators. %or e,ample :c3onald#s tracks market share customer satisfaction and employee satisfaction. Service times at the drive/thru front counter and during lunch are tracked. +abor data are reported for the following: crew turnover average hourly rates overtime labor as a percent of sales and actual versus needed hours. ;ne of the key factors in deciding what goes onto the :c3onald#s scorecard is whether the items under consideration can be controlled by the store manager. .nother factor is linkage to vision and strategy. 'hallenge students to justify the measures in their scorecard in light of these factors.

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