132. Indicate how the following concepts are used in the preparation of a balanced scorecard.
Provide examples where appropriate.
(a) Leading indicators.
(b) Lagging indicators.
(c) Customer value.
(d) Causal model.
18-102
133. Consider the following management activities:
• Choose the organization’s long-term strategy.
• Plan and organize the use of resources into efficient operations.
• Implement plans and organizational change.
• Measure and report results.
• Define the organization’s scale and scope of operations.
Required:
(a) Identify the sequence in which the decisions must be carried out. Why is it important to carry
out these activities sequentially?
(b) How can an effective cost management system support the above activities?
134. In a presentation to the investment community, Sam Palmisano, CEO of IBM Corporation,
stated: “We intend to continue to take share, as we have in the past two or three years, in our
core businesses.” Palmisano contended that the category of business-process transformation
services, such as customer support, human resources, and other administrative overhead,
represents an untapped market of $500 billion dollars if businesses outsourced these functions to
companies like IBM. IBM’s expressed goal is to capture 10% of this new market. Palmisano also
cited new business opportunities in information technology. The company’s new chief financial
officer, John Loughridge, stated that IBM’s goal was to achieve high-single digit annual
percentage gains in sales and greater than 10% yearly increases in earnings per share. (Source:
Barron’s: May 24, 2004)
Required:
(a) Does the strategy described by IBM’s management fall into the build, hold, harvest, or divest
category of strategic missions? Explain your answer with specific examples related to the general
characteristics of that category of strategic mission.
(b) Identify the types of risks and rewards normally encountered by a company with the strategic
mission described by IBM’s management.
135. Studebaker Corporation, one of the earliest auto manufacturers, prospered in the late
1940’s and into the 1950’s. Its advertising after World War II emphasized quality of design and
production. The corporation also used the stability of its work force in its advertisements, often
featuring pictures of father and son working side by side in its factories.
Required:
A. From just this brief description of Studebaker Corporation, which type of competitive strategy—
cost leadership or differentiation—would you guess Studebaker was using? Explain your choice.
B. Given your answer in Part (A), speculate on what market factors might have caused the
corporation to go into bankruptcy and cease production in the mid-1960s.
136. Explain how nonfinancial performance measures for customer satisfaction may differ from
functional performance measures.
137. Describe the four common perspectives that are used in the balanced scorecard.
138. Describe the difference between a company’s mission statement and its business-level
strategy.
139. What is the difference between continuous improvement and benchmarking?
140. What is productivity, and what are the differences between partial productivity measures
and total factor productivity?
18-108
141. Sam Mahoney, the CEO of Mahoney Technologies, Inc. (MTI), a biotechnology firm had
recently returned from a conference on modern cost management and performance measurement
methods where he was exposed to target costing, value-chain analysis, balanced scorecard,
activity-based management, and other ideas.
MTI is a five-year old company operating in a growing, but competitive market. It develops and
produces a number of different enzymes for use by research scientists and pharmaceutical
companies. Its main competitors are also small to medium sized firms just like MTI. The key to
growth in this industry is the ability to develop new products in a short time. Gail Stevenson, the
vice-president (VP) for research & development (R&D) has noticed that some of MTI’s new
developments did not perform well because of the delays in their introduction into the market.
Stevenson is very keen on hiring the best scientists and ensuring that they stay current in their
fields because knowledge is the key competitive weapon in the biotechnology industry.
Bob Phillips, the controller of MTI had another concern. He has been noticing that the new
products were not only delayed but their actual development costs were usually higher than
budgeted. One of his goals was to see that the new products were profitable for the company.
Linda Joseph, the production manager, had a different concern of her own. Based on her
observation, the production of the new enzymes was taking longer. Her feeling was that the
products spent too much time in the quality control (QC) department. Barry Laker, the manager of
the QC department argued that the new enzymes lacked the rigorous specifications that are
demanded in the marketplace. Consequently, the QC department has had to perform additional
tests to get to the root cause of the problems.
Mahoney had heard complaints from all quarters, and decided to convene a meeting of all the
department heads.
Mahoney: Good afternoon, everyone. I am troubled that despite hiring a number of talented
scientists, we are unable to compete effectively in the marketplace. Many of the recent entrants
in the game seem to be beating us easily.
Stevenson: Sam, the key to our growth is rapid introduction of new products. Although my
scientists are developing new enzymes in record times, they seem to be getting held up in
manufacturing and especially the QC department.
Laker: Sam, I think I can pinpoint the root cause of the problem. I agree that our scientists are
developing new enzymes in record times, but they do not seem to be paying any attention to
standards. It looks like my department will have to provide training to them regarding quality
control matters.
Stevenson: With due respect, I do not think there is more to know about QC standards. It looks
like the department wants more attention and is therefore creating all this unnecessary fuss.
Joseph: I think I will agree with Barry that there are problems at the R&D side. My production
scientists are also complaining that adequate specifications have not been developed; they have
to constantly phone their R&D counterparts for clarifications.
18-109
Stevenson: I do not believe that the production problems can be attributed to R&D. I have
personally screened each and every scientist during the hiring process.
Phillips: I don’t think we will make much progress as a company if we keep pointing fingers at one
another. We all must realize that all problems, regardless of their origin, finally affect the bottom–
line of our company. Unless we set aside our differences and work together as a team, we will be
unable to compete with our rivals. Some of our competitors follow best practices, which we must
try to emulate.
Mahoney: I agree with Bob. We must all look for solutions. I recently attended a conference
where noted speakers talked about the value-chain of a company, interrelationships between
functions, and the balanced scorecard. In fact, some speakers suggested that companies must
stop discussing in terms of individual functions or departments; instead they must talk in terms of
processes and understand linkages among all the processes that exist in an organization. I believe
there are a number of ideas that we could adopt. I will leave the conference proceedings in the
library, and suggest that we all read about these different topics. How about getting together after
six weeks and discussing a plan of action? Thank you and see you all after six weeks.
Required:
Assume the role of a consultant preparing a report for MTI. Discuss the following aspects in your
report:
18-110
18-112
142. David Palmer, manager of the Paper Products Division of a Graham Corporation, is a
strong believer of outcome measures. During one of his management meetings, he impressed
upon his management team that financial measures are the most important, and that his
managers should only focus on improving those measures.
Nina Meyers, a recent CMA who was at the meeting filling in for her superior, was not too
impressed with Palmer’s exclusive focus on financial measures. As the meeting was about to end,
she nervously pointed out to Palmer that his focus on outcome measures could be detrimental to
the performance of the company.
Meyers: Excuse me, Mr. Palmer, but I think it is wrong to place exclusive emphasis on financial
outcome measures. Instead, the emphasis must be on what are known as lead indicators, which
provide information about the likely outcome of managerial decisions.
Palmer: I commend you for your knowledge on recent developments. However, I have more than
20 years’ experience in this field and I think I know what I am doing. After all, ultimately financial
results are what we want.
Meyers: I do not dispute that the ultimate result may largely be the financial returns to our
shareholders. However, unless we pay attention to the drivers of the results, we will not
understand the problems that exist in our processes. I can bring you up to date on a new
performance measurement system known as the Balanced Scorecard if you like.
Although Palmer was not too impressed at being challenged, he instructed Meyers to write him a
report on the Balanced Scorecard.
Required:
Prepare a brief report on the Balanced Scorecard with particular emphasis on the following
aspects:
• What are leading and lagging indicators?
• Why are leading indicators important?
• What is the relationship between leading and lagging indicators (cause-effect relationships)?
• What are the different dimensions of the Balanced Scorecard?
• What are some examples of indicators pertaining to the different dimensions of the Scorecard?
18-114
143. Consider the following information pertaining to the balanced scorecard of a company:
• A 500-hour increase in job-related training will (a) increase the average employee education
level by 1 point on a 100-point scale, (b) reduce cycle time by 0.8 hours, and (c) decrease
defective products by 0.3% points.
• A one-point increase in the average education level (on a 100-point scale) will (d) decrease
average cycle time by 0.5 hours and (e) decrease defective products by 0.1% points.
• A 1% decrease in defective products will (f) decrease average cycle time by 1 hour and (g)
increase on-time deliveries by 0.2%.
• A one-hour decrease in average cycle time will (h) increase on–time deliveries by 0.1% points.
• A 1% point increase in on-time deliveries will (i) increase retained customers by 0.7% points.
• A 1% point increase in retained customers will (j) increase the gross margin ratio by 0.3% points.
Required:
(a) Express the cause-effect relationships among the different indicators visually.
(b) Would you expect the benefits of job related training to increase proportionately? For example,
would you expect the benefit of 50,000 hours of job–related training to be 100 times the impact of
500 hours of training?