Chapter 02 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
Chapter 2
Implementing Strategy: The Value Chain, the Balanced Scorecard, and
the Strategy Map
Learning Objectives
1. Explain how to implement a competitive strategy by using Strengths-Weaknesses-Opportunities-
Threats (SWOT) Analysis
2. Explain how to implement a competitive strategy by focusing on the execution of goals.
3. Explain how to implement a competitive strategy using value-chain analysis.
4. Explain how to implement a competitive strategy using the balanced scorecard and strategy map.
5. Explain how to expand the balanced scorecard by integrating sustainability.
New in this Edition
All Real World Focus items are revised and updated, particularly the item on the
currency fluctuation; one new Real World Focus item on execution; real world
information throughout the chapter is revised for current information
New Cost Management in Action item on strategy in consumer electronics – Apple
vs. Samsung
The section on Execution is updated and enhanced
Twelve new Brief Exercises, three new problems, and several revised exercises and
problems
Teaching Suggestions
This chapter is unique, and is not included in most cost and management accounting textbooks.
Because of the importance of the strategic theme of the book, this entire chapter is devoted to developing
the three key areas of strategy implementation. The chapter follows the introduction to strategy in chapter
1, which we view as a foundational topic, as is ethics, and is thus included in the first chapter. Chapter
two develops the strategic emphasis by explaining the methods in which it is implemented in
organizations.
1) strategy execution, including the development of critical success factors and SWOT
(strengths, weaknesses, opportunities, threats) analysis.
2) the value chain, this chapter takes the perspective of the industry-level value chain, as
explained by John Shank in a number of his publications, in contrast to the firm-level
concept as developed by Michael Porter. Shank’s concept has greater generality and is
more useful for cost management.
3) the balanced scorecard, a concept developed by Robert Kaplan and David Norton,
which includes nonfinancial as well as financial data in providing a broad, balanced
evaluation of the firm and its managers.
4) Sustainability, the adaptation of the balanced scorecard or the development of an
independent scorecard to measure the organization’s effectiveness in achieving social and
environmental goals as well as financial goals.
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Chapter 02 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
For the value chain. I pick a simple example and show it on the board or transparency. Then I ask
the class to help develop a value chain for a similar type of firm. Some students will at first find the
concept of the value chain too vague, and they are concerned how they will do homework problems
and/or exam questions. For this reason, I try to emphasize simple and familiar examples at first, for
example, student organizations or the student book store. Also, I emphasize the use of value chains more
so than the development of value chains. I do not require the students to complete a value chain on an
exam, though I have presented a completed value chain and asked for their interpretation of itwhat it
suggests about how the firm can increase value for the customer or streamline operations and reduce cost.
The balanced scorecard is best presented by example, and is usually very quickly understood by
the students. Occasionally, I have added to this discussion the use of a case, such as the Analog Devices
case (Robert Kaplan, Harvard Business School). I also find useful the article by Chow, Haddad, and
Williamson, “Applying the Balanced Scorecard to Small Companies” (Management Accounting, August
1997, pp 21-27). The article shows the balanced scorecards for four different firms. The article gives me a
way to lead a class discussion on both (1) how the scorecard reflects the firm’s competitive strategy, and
(2) how the scorecard differs among firms and industries.
An important point to convey in this chapter is that cost management must be based on a strategic
competitive assessment of the firm. That is, in order to develop effective cost management methods, it is
necessary to know how the firm competes, and how it is successful. The methods to be developed will
depend on this. If the firm is a cost leadership competitor, the choice of cost management methods will be
different than if the firm is a differentiator.
A related point is that the students must understand at this point that what they will see later in the
course, whether it be the master budget, the flexible budget, or productivity analysis, etc, must be viewed
within the context of how it helps the firm advance its strategy and become more successful. None of the
topics are covered simply because this topic or method is used in practice. Rather, each topic is
considered from the standpoint: how will this method help the firm succeed?
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Chapter 02 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
Assignment Matrix Chapter 2
Exercises and Problems
Learning Objectives Text Features
7e
6e
Transition
6e to 7e
Time
Connect
1. Using SWOT Analysis
2. Execution of Goals
3. Value chain analysis
4. Balanced scorecard amd strategy map
5. Integrating sustainability
Strategy
Service
International
Ethics
Sustainability
Brief Exercises
2-18 2-18 5 min. X
2-19 2-19 5 min. X
2-20 2-20 5 min. X
2-21 2-21 5 min. X
2-22 2-22 5 min. X
2-23 2-23 5 min. X
2-24 2-24 5 min. X
2-25 2-25 5 min. X
2-26 2-26 5 min. X X
2-27 2-27 5 min. X X
2-28 New in 7e 5 min. X X X
2-29 New in 7e 5 min. X X X
2-30 New in 7e 5 min. X X X
2-31 New in 7e 5 min. X X X
2-32 New in 7e 5 min. X X
2-33 New in 7e 5 min. X X X
2-34 New in 7e 5 min. X X
2-35 New in 7e 5 min. X X
2-36 New in 7e 5 min. X X
2-37 New in 7e 5 min. X X
2-38 New in 7e 5 min. X X X
2-39 New in 7e 5 min. X X
Exercises
2-40 2-28 20 min. X X X X X
2-29 Deleted
2-41 2-30 Revised 15 min. X X
2-42 2-31 15 min. X X X X
2-43 2-32 15 min. X X X X
2-44 2-33 15 min. X X X
2-45 2-34 15 min. X X X
Problems
2-46 2-35 25 min. X X X X
2-47 2-36 20 min. X X
2-48 2-37 20 min. X
2-49 2-38 20 min. X
2-50 2-39 20 min. X
2-51 2-40 20 min. X X
2-52 2-41 20 min. X
2-53 2-42 30 min. X
2-54 2-43 20 min. X
Continued on next page…
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Chapter 02 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
Assignment Matrix Chapter 2
Exercises and Problems (continued)
Learning Objectives Text Features
7e 6e Transition
6e to 7e Time
Connect
1. Using SWOT Analysis
2. Execution of Goals
3. Value chain analysis
4. Balanced scorecard amd strategy map
5. Integrating sustainability
Strategy
Service
International
Ethics
Sustainability
Problems (continued)
2-55 2-44 20 min. X X X
2-56 2-45 25 min. X X X
2-46 Deleted
2-57 2-47 45 min. X X X
2-48 Deleted
2-58 2-49 40-50 min. X X X X
2-59 2-50 Revised 30 min. X X X
2-60 2-51 40-50 min. X X X X X
2-61 2-52 20 min. X X
2-62 2-53 20 min. X X X
2-54 Deleted
2-63 2-55 30 min. X X
2-64 2-56 15 min. X X
2-57 Deleted
2-65 New in 7e 20 min. X X X X
2-66 New in 7e 10 min. X
2-67 2-58 40 min. X
2-68 2-59 40 min. X
2-69 2-60 Revised 20 min. X X
2-70 2-61 30 min. X X
2-71 New in 7e 20 min. X X
2-72 2-62 So min. X X X
Lecture Notes
A. How a Firm Succeeds: The Competitive Strategy. It is useful to reinforce in chapter two the basic
concepts of strategy, using the Michael Porter framework introduced in chapter 1. A firm succeeds by
finding a sustainable strategy, which is a set of policies, procedures, and approaches to business to
produce long-term success. Finding a strategy begins with determining the purpose, long-range direction,
and mission of the company. The mission statement is developed into specific performance objectives,
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Chapter 02 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
Strategic Measures of Success. The strategic cost management system develops both financial and non-
financial strategic information. The financial measures (like earnings and cash flow) show the impact of
the firm’s policies on the firm’s current financial position. Conversely, nonfinancial factors (such as
market share and customer satisfaction) show the firm’s current and potential competitive position.
Strategic financial and nonfinancial measures of success are commonly called critical success factors
(CSFs).
B. Critical Success Factors and SWOT Analysis.
SWOT analysis is a systematic procedure for identifying a firm’s CSFs: its internal Strengths and
Weaknesses and its external Opportunities and Threats. Strengths are skills and resources that the firm
has more abundantly than other firms. Skills or competencies that the firm employs especially well are
called core competencies. Core competencies are important because they point to areas of significant
competitive advantage for the firm; core competencies can be used as the building blocks of the firm’s
and manufacturing).
Opportunities and threats are identified by looking outside the firm. Opportunities are important
favorable situations in the firm’s environment (demographic trends, technological changes). Conversely,
threats are major unfavorable situations in the firm’s environment (new competitors, government
regulations). Opportunities and threats can be identified most easily by analyzing the industry and the
firm’s competitors (barriers to entry, rivalry intensity, substitute products, customers’ bargaining power,
and suppliers’ bargaining power). The ultimate objectives of the SWOT analysis are to identify the
overall strategy and the CSFs of the firm and to begin to develop a consensus among executives and
managers regarding them.
C. Execution. No matter how carefully crafted the firm’s strategy, success will not be achieved without
disciplined efforts at execution. A number of CEOs indicate that a good strategy is worthless without
effective execution.
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Chapter 02 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
D. Cost, Quality, and Time. Many firms find that a consideration of critical success factors yields a
renewed focus on the three key factors: cost, quality, and speed of product development and product
delivery. Increasingly, firms find that they must compete effectively on each of these three factors.
Suppliers to these firms expect to meet very high standards of quality and to meet increasingly demanding
delivery terms.
E. Value-Chain Analysis. Value-chain analysis is a strategic analysis tool used to better
understand the firm’s competitive advantage, to identify where value to customers can be
increased or costs reduced, and to better understand the firm’s linkages with suppliers,
customers, and other firms. The activities of the value-chain include all steps necessary
to provide a competitive product or service to the customer. Although the value-chains
are sometimes difficult to describe for a service or not-for-profit organization because
they might have no physical flow to visualize, the approach is applied to all types of
firms. The term value-chain is used because each activity is intended to add value to the
product or service. Management can better understand the firm’s competitive advantage
by separating its operations according to activity. The underlying concept of the analysis
is that each firm occupies a selected part or parts of the entire value chain. The
determination of which part or parts of the chain to occupy is a strategic analysis based
on the consideration of comparative advantage for the firm. Value-chain analysis has
three steps:
a. Identify the Value-Chain Activities. The firm identifies the specific value activities that the
firm in the industry must perform in the process of designing, manufacturing, and providing
customer service. Some firms are involved in a single activity or a subset of the total activities.
The activities should be determined at a relatively detailed level of operations, that is, at the level
of business unit or process just large enough to be managed as a separate business activity.
b. Identify the Cost Driver(s) at Each Value Activity. A cost driver is any factor that changes
the level of total cost. The objective of this step is to identify activities for which the firm has a
current or potential cost advantage.
c. Develop a Competitive Advantage by Reducing Cost or Adding Value. In this step, the
firm determines the nature of its current and potential competitive advantages by studying the
value activities and cost drivers identifies earlier. In doing so, the firm must consider the
following:
Identify competitive advantage (cost leadership or differentiation). The analysis of value
activities can help better understand the firm’s strategic competitive advantage and its proper
positioning in the overall industry value chain.
Identify opportunities for added value. The analysis of value activities can help identify
activities in which the firm can add significant value for the customer.
Identify opportunities for reduced cost. A study of its value activities and cost drivers can help a
firm determine those parts of the value chain for which it is not competitive.
Exploit linkages among activities in the value chain. The decision to provide an activity
internally or to outsource it is sometimes influenced by the way that activity is affected by
another activity in the chain.
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Chapter 02 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
Value-chain analysis supports the firm’s strategic competitive advantage by facilitating the discovery of
opportunities for adding value for the customer and/or by reducing the cost to provide the product or
service.
F. The Five Steps of Strategic Decision Making for CIC Manufacturing
The five steps of strategic decision making are illustrated in chapter two with an example of value chain
analysis. The example is developed in the text, and the five steps are highlighted as follows. The context
is a company (CIC) that manufactures computers and competes on a differentiation strategy.
1. Determine the Strategic Issues Surrounding the Problem.
CIC competes as a differentiator based on customer service, product innovation and
reliability; customers pay more for the product as a result.
2. Identify the Alternative Actions:
CIC faces two decisions, the first of which is to make or buy certain parts, which CIC
currently buys for $300 but CIC could manufacture these parts for $ 190 per unit plus an
additional $55,000 monthly cost.
The second decision is choose whether to continue marketing, distributing, and serving
its products, or to outsource that set of activities to JBM enterprises for $130 per unit sold and
save $175,000 per month in materials and labor costs.
3. Obtain Information and Conduct Analyses of the Alternatives
First decision: CIC calculates that the monthly cost to buy is $180,000 (=600 x $300)
while the monthly cost to manufacture the part is only $169,000 (=600 x $190 + $55,000), a
saving of $11,000 to make.
Second decision: CIC calculates that the monthly cost of the contract with JBM
enterprises would be $78,000 (=600 x $130) per month. This is a $97,000 saving over the in-
house cost of $175,000 per month.
4. Based on Strategy and Analysis, Choose and Implement the Desired Alternative
First decision: As a differentiator based on product quality and innovation, CIC considers
the importance of the quality of the part in question, and decides to manufacture the part. Note
that while this would save CIC $11,000 per month, the key reason for the decision is to control
the quality of the part and thereby improve overall quality, and support the firm’s differentiation
strategy. Note however, that if CIC believes that the supplier can provide the part at a higher
level of quality than can CIC, the better strategy is reversed; it is now better to continue to buy,
even if the costs are higher, in order to support quality, a critical success factor.
Second decision: As a differentiator based on customer service, CIC considers the
continued high level of service from in-house personnel as critical to the company’s success and
continues to maintain these personnel, even if it means the loss of monthly savings of $97,000.
5. Provide an On-going Evaluation of the Effectiveness of implementation in Step 4.
Management of CIC realize that the quality of the product and of customer service is
critical to the company’s success. So, CIC will continue to review the quality of product and
service provided internally. If the quality of the part purchased outside, or the service provided
internally is inferior to that provided by JBM, then a change to JBM would be desirable.
G. The balanced scorecard (BSC), a performance report based on a broad set of both financial and non-
financial measures, is a crucial part of the firm’s efforts to better understand and to implement its strategy.
It consists of four “perspectives,” or groupings of critical success factors: (1) the financial perspective
which includes the financial performance measures such as operating income and cash flow, (2) customer
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Chapter 02 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
perspective, including measures of customer satisfaction, (3) internal process perspective, which includes
measures of productivity, speed, among others, and (4) learning and innovation, which includes such
measures as employee training hours, number of new patents or new products. The BSC provides four
key benefits:
it provides a means for implementing strategy, by drawing managers attention to
strategically-relevant critical success factors, and rewarding them for achievement on these
factors
it provides a framework for the firm to achieve a desired organizational change in strategy,
by drawing attention to and rewarding achievement on factors that are part of a new strategy;
the BSC makes the nature and direction of the desired change clear to all
it provides a fair and objective basis for determining each manager’s compensation and
advancement
it provides a framework for coordinating efforts within the firm for achieving critical success
factors; each manager is able to see how their activity contributes to the success of others.
The BSC can be viewed as a two-way street. Since it is designed to help implement strategy, it also
should reflect strategy. One should be able to infer a firm’s strategy by a careful study of the firm’s BSC.
A strategy map is a cause-and- effect diagram of the relationships among the BSC perspectives. It is
used to show how the achievement of CSFs in each perspective affect the achievement of goals in other
perspectives, and finally the overall financial performance of the firm. An illustration of a strategy map
taken from the chapter follows:
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Chapter 02 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
H. Expanding The Balanced Scorecard: Sustainability
More and more large companies, especially those in the extractive industries, are concerned about the
sustainability of their business, that is, the balancing of short and long term goals in all three dimensions
of the company’s performance – economic, social and environmental. Economic performance is
measured in traditional ways, while social performance relates to health and safety of employees and
other stakeholders, while the environmental dimension refers to the impact of the firm’s operations on the
environment.
The CSFs in a sustainability perspective are called environmental performance indicators (EPIs),
which are defined in three categories by the World Resources Institute:
operational indicators; measure potential stresses to the environment, for example, fossil
fuel use
management indicators; measure efforts to reduce environmental effects, for example,
hours of environmental training,
environmental condition indicators; measure environmental quality, for example, ambient
air pollution concentrations
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