Chapter 02 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
2-59 Strategy Requirements Under the Baldrige National Quality
Award Program (30 min)
The Baldrige program should be a good process for a firm not only in
developing and revising its strategy, but also in strategy implementation.
In particular, the seven categories could be considered an expanded
balanced scorecard. As for the BSC, the Program focuses on the
perspectives of customer, process, financial results, and workforce; the
Baldrige program includes the additional perspectives: measurement and
these areas, the organization is doing something very much like a balanced
scorecard.
The Baldrige Performance Excellence Program at NIST (unfunded as of
2012), is transitioning to one based on funding by the Baldrige Foundation,
The new model is explained at
http://www.nist.gov/baldrige/transition/index.cfm.
2-41
Education.
Chapter 02 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
2-60 Strategy; Value Chain (40-50 min)
1. The following data is for July 25, 2011 and August 11, 2014, for
companies in the listed sectors of the industry.
Size Measure Profitability Measures
Sector Market Cap ROE Profit margin
Integrated Oil
and Gas
2014
2011
$129,382B
40,833B
12.2%
15.0
5.1%
6.5
Drilling and
Exploration
2014
2011
4,561B
3,856B
5.1
11.2
7.6
11.8
Equipment and
Services
2014
2011
4,274B
13,733B
10.2
8.7
7.6
7.4
Pipelines 2014
2011
864B
432B
11.5
11.1
5.7
5.6
Refining and
Marketing
2014
2011
10,599
8,513B
12.8
12.7
1.8
2.9
For comparison, the airline industry:
Major Airlines 2014
2011
3,448B
681.2
37%
40.5%
5.6%
2.2%
Some key observations regarding the above information: (1) market
capitalization has increased substantially for both the Oil & Gas industry
(all sectors except Equipment and Services) and the airline industry, as
industry sectors are mixed and little changed; likewise for the airline
industry.
2. All of the sectors in the industry value chain are very capital intensive – it
requires a lot of investment to enter and stay in the business. This is
particularly true for the integrated firms, and for those in the pipeline and
refining and marketing sectors. There is also a lot of risk involved in
2-42
Education.
2-60 (continued -1)
Critical Success Factors
Integrated Oil
and Gas
Customer: marketing expenditures; share of market, customer mix and
profitability
Internal Processes: distribution costs, processing costs, safety incidents,
refinery reliability, inventory level, quality index
Learning and growth: technology for oil and gas exploration, refining and
distribution, hours trained in BSC and strategy map, community service
projects, sustainability scorecard
Financial: return on investment, net profit margin, sales growth, cash flow
Drilling and
Exploration
Customer: marketing expenditures; share of market
Internal Processes: drilling costs per site, exploration yield index, safety
incidents, quality index
Learning and growth: technology for oil and gas exploration, hours trained in
BSC and strategy map, community service projects, sustainability scorecard
Learning and growth: technology for new design in equipment, new products
and types of services offered, hours trained in BSC and strategy map,
community service projects, sustainability scorecard
Financial: return on investment, net profit margin, sales growth, cash flow
Pipelines Customer: marketing expenditures; share of market, pipeline interruption
Financial: return on investment, net profit margin, sales growth, cash flow
Refining and
Marketing
Customer: marketing expenditures; share of market,
Internal Processes: distribution costs, processing costs, safety incidents,
refinery reliability, inventory level, quality index
Learning and growth: technology for oil and gas refining, hours trained in
quality index
Learning and growth: hours trained in BSC and strategy map, community
service projects, sustainability scorecard
Financial: net profit margin, sales growth, cash flow
2-43
Chapter 02 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
2-60 (continued -2)
3. Most students will be familiar with the Deepwater Horizon oil spill and
its consequences. The purpose of the question is to identify
operating risks in the industry (all sectors) and to discuss the potential
role of the value chain in the analysis of the tragedy. There is also
an opportunity to have a class discussion of the sustainability issues
involved in the case;
Background: the oil spill of the Deepwater Horizon drilling rig in the
Gulf of Mexico on April 20, 2010 caused an enormous financial and
environmental catastrophe for the industry and for the Gulf Coast
region – the largest oil spill in U.S. history.
Role of the Value Chain: three companies in three different sectors
of the industry were involved. One company from the integrated
sector, BP, leased the drilling rig from its owner, Transocean, a
company in the drilling and exploration sector. A third company,
Investigating the Risks: further investigations since the oil spill have
revealed a variety of risks that were involved in all three companies,
including defects in design, failure to follow industry-approved
maintenance practices, human error (in reading measurements),
failure to monitor and follow up on critical warning signals
Some helpful links:
http://oscaction.org/about-osca/
http://en.wikipedia.org/wiki/Deepwater_Horizon_oil_spill
http://www.bp.com/sectiongenericarticle800.do?
categoryId=3313&contentId=7067651
2-44
Education.
Chapter 02 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
2-60 (continued -3)
In recent years, as the amount of oil transported by railroad cars has
increased dramatically, the number and severity of oil rail car accidents has
also increased. Railroad executives, oil company executives, and
transportation officials are working to make these transports safer. The
rapid growth in oil rail traffic has meant that the industry standards have not
caught up with the current needs.
Clifford Krasuss and Jad Mouawad, “Accidents Surge as Oil Industry Takes
the Train,” The New York Times, January 25, 2014. See also:
http://dot111.info/category/recent-derailments/
2-45
Education.
Chapter 02 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
2-61 Strategy; Critical Success Factors; Martial Arts (20 min)
1. George’s strategy seems to be a mix of differentiation (customer
service, reputation for quality training) and cost leadership (keep prices low,
lower than competitors, by locating in strip malls). What do his customers
want? For this type of service (as for many types of personal services:
personal trainers, hair stylist, etc) it is likely to be the quality of training as a
priority, and the cost of the training has to be in line with competitors, but
2. The indicators seem to reflect pretty well what George is after, growth
based on customer service. By watching his sales numbers, and the
performance of his teachers, he is likely to build the priorities that are
important to his business. Some refinement is possible. These indicators
can be linked more closely to his strategy by gathering the sales numbers
for each location so that the productivity of the different locations can be
growing company.
As part of the class discussion, you might ask what the BSC for George’s
business might look like, and would a BSC be appropriate for the business.
Clearly the customer and human resources perspectives would be
important to George, as well as the financial perspective. The operations
2-46
Education.
Chapter 02 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
2-62 Balanced Scorecard and Strategy: Food Ingredients Company
(20 min)
Answers will vary. A key point to be made in the discussion is that a food
ingredients company, of the type described (though with limited
information) is likely to be a cost leader. The products are commodities for
the most part. Some students will observe that certain types of food, or
certain restaurants, etc., are for the gourmet and very expensive
customers/markets. However, the BSC shown in this problem seems to
best describe a cost leadership type of company. Note the emphasis on
2-47
Education.
Chapter 02 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
2-63 Value-Chain Analysis (30-40 min)
1. The value chain for Sheldon Radio follows:
Value Activity Current Operation Two Decision Alternatives
First: Raw
Materials
Sheldon not
involved at this step
in the value chain
Sheldon not involved at this step in the
value chain
Second:
Manufacture of
parts for the radio
Sheldon not
involved at this step
in the value chain;
the cost is $120 to
Sheldon
Sheldon not involved at this step in the
value chain; the cost of these parts is
$120 to Sheldon (Note: $120 is the $250
total less $130 for purchased parts that
could be manufactured)
service
Costs Summary:
Costs which
Purchase of
components:
$130 x 500 =
$65,000
Unit costs for manufacture of
components ($80 x 500) + monthly cost
of $35,000 for labor and equipment=
$75,000
The total cost of purchase is less
than the cost of manufacture by
$10,000.
Monthly cost for
marketing,
distribution and
service: $125,000
Monthly cost of Brashear contract:
$105 x 500 =$52,500
The total cost of the Brashear
contract is less than the cost of the
inside service by $72,500
2-48
Education.
Chapter 02 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
2-63 (continued -1)
2. The value-chain analysis shows that Sheldon can save $10,000 by
choosing to continue to purchase rather than to manufacture the
parts, and Sheldon could save an additional $72,500 by outsourcing
the marketing, distribution and service costs. Perhaps, on the basis
of reducing costs, Sheldon should choose to continue to purchase
the components and to outsource the marketing, service and
distribution function. However, Sheldon also needs to consider its
strategic competitive position. If its customers rely upon Sheldon
primarily for its service and reliability, then the contracting-out of the
marketing, distribution, and service functions could be unwise.
2-49
Chapter 02 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
2-64 Value Chain; Harley-Davidson (15 min)
The Riding Academy program fits best near the end of Harley-Davidson’s
value chain, near to the customer. In this program the firm provides a
customer service that is unique in the industry, and potentially an important
way to attract new customers. Moreover, the program can be an important
new source of income for Harley-Davidson. As new riders, and perhaps
some of the veterans, find they can improve their cycling skills, the program
could become a popular and a significant source of new income for the
firm.
The women’s program fits both the upstream and downstream ends of the
HD value chain. The program involves both a design approach to develop
a product for women, and also a customer service effort involving the
Another aspect of value chain for HD is its financing unit. As for many
manufacturers, including the auto companies, General Electric, and the
large software firms such as Oracle, Harley-Davidson has a finance unit
that finances the sale of its motorcycles for many of its customers.
Note: HD once owned a 98% share of Buell Motorcyle, a company known
for its high-end and successful racing cycles. HD divested the Buell brand
in 2009 to focus on its main brand after the recession of 2007-2008 caused
motorcycle sales to drop by more than 50%. In the summer of 2014 Buell
partnered with the Indian company, Hero MotorCorp, to design low-cost
bikes for the Indian market where price and durability are key. Some of
these new Hero bikes will be sold in the U.S. by Buell in the next year or
so. Buell should then be able to sell its high-end brand and also a less
expensive bike in the same store.
2-50
Education.