Chapter 2: Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
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2-51 (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
responsibilities of the companies involved.
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://www.oilspillcommission.gov/
http://en.wikipedia.org/wiki/Deepwater_Horizon_oil_spill
http://www.bp.com/sectiongenericarticle800.do?categoryId=3313&co
ntentId=7067651
Chapter 2 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
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2-52 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
the focus on selection locations should be the attractiveness and
accessibility of the locations to his targeted customer groups.
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
additional suggestions for measures that would be appropriate for a fast
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
2-48
2-53 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
I have used the case a number of times, with class discussion sometimes
of a few minutes up to several minutes, depending on my objectives for the
class and the degree of student interest and involvement at that time.
Chapter 2 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
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2-54 Value-Chain Analysis (20 min)
STEPS IN THE VALUE
CHAIN
ACTIVITIES AT EACH STEP OF THE
VALUE CHAIN
First Step: Obtaining and
maintaining the right to
provide public service
Licenses, fees, and compliance with
regulatory requirements; obtaining
gates at desired airports
Second Step: Marketing
and promotion
Advertising, relationships with travel
agents, resort chain, etc.
Third Step: Ticketing
Confirmation codes, payment
acceptance, seat availability
Fourth Step: Airport
operations
Gate activities for arrivals and
departures, airport fees, security costs,
baggage handling
Fifth Step: Aircraft
operations
Maintenance, fueling, fleet operations
(including purchase and repair)
Sixth Step: In-flight
service
Safety regulation conformance,
passenger request satisfaction,
equipment functions, food and
beverage service
As to adding value and reducing cost, the airlines in recent years have
added fees for inboard services and for checked baggage, and for other
services which were once free. The added services have increased the
profitability of the airlines, while passengers have complained and
prices have become more volatile, and additionally, there appears to be a
long-term upward trend in gas prices.
Chapter 2: Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
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2-54 (continued –1)
Regarding competitive developments in the airline industry:
Recent events in the airline industry indicate the industry as a whole may
be moving to a cost leadership position. The bankruptcy of American Air,
following that of Delta and United, has positioned the industry to complete
as a set of large cost leaders (see, for example: Susan Carey and Jack
Nicas, “Rivals Invade Southwest’s Air Space,” The Wall Street Journal,
December 16, 2011, p. B8). This suggests that throughout the industry,
companies will be looking to the value chain for ways to reduce costs.
An interesting case study reported in the Harvard Business Review
(Loizos Heracleous and Jochen Wirtz, “Singapore Airlines’ Balancing Act,”
July-August 2010, pp. 145-149.) shows an example of an airline that
appears to be applying both cost leadership and differentiation. Singapore
Airlines does this by using target costing and careful investment strategies,
countries. See chapter 13 for a further development of this idea, in Robin
Cooper’s study of Japanese companies that, relying on target costing,
seemed to be applying simultaneously the cost leadership and
differentiation strategies.
In Michael Porter’s earliest writing, he offered the idea of a type of
competitive strategy based on finding a “niche,” that is, an area of the
industry business that other firm’s neglected or avoided. In the context of
airlines, a recent exam fits this “niche” strategy. A small airline, Seaport
Chapter 2 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
2-55 Value-Chain Analysis (30-40 min)
1. The value chain for Sheldon Radio follows:
Value Activity
Option One
Option Two
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)
Third:
Manufacture of
components
Sheldon
purchases $130
of these parts
Fourth:
Assembly
Sheldon’s costs
are $110
Fifth:
Marketing,
distribution and
service
Sheldon’s costs
are $125,000 per
month
Sheldon contracts these services
out to Brashear Enterprises for
$105 each
Costs
Summary:
Costs which
differ between
the two options
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
Monthly cost of Brashear contract:
Chapter 2: Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
2-52
service:
$125,000
contract is less than the cost of
the inside service by $72,500
2-55 (continued -1)
2. The value-chain analysis shows that Sheldon can save $62,500
per month ([$65,000 + $125,000 = $190,000] and [$75,000 + $52,500
= $127,500] so that the saving is $190,000 – $127,500) by choosing
option two, and thus from a cost advantage option two is preferred.
customers rely upon Sheldon primarily for its service and reliability,
then the contracting-out of the marketing, distribution, and service
functions could be unwise. Moreover, by making rather than buying
the components, Sheldon is moving in the direction of competing on
cost leadership with other manufacturers. The question then is
whether Sheldon can compete effectively in the cost leadership
segment of the market.
Chapter 2 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
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2-56 Strategy; Value Chain; Harley-Davidson (15 min)
The Rider’s Edge 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
magazine and other programs directed to increase the interest of women in
the product.
Both programs fit the HD strategy of broadening its customer base beyond
the loyal but dwindling HD customer base.
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. As for
Source: James R. Hagerty, “Harley, With Macho Intact, Tries to Court More
Women,” The Wall Street Journal, October 31, 2011, p B1’ “Harley Shows
Its Feminine Side,” Bloomberg Businessweek, October 4, 2010, p 25;
James R. Hagerty, “Harley Roars On U.S. Rebound,” The Wall Street
Journal, July 20, 2011, p B4; “Harley Just Keeps on Cruisin’,” Business
Week, November 6, 2006, p 71-72.
Chapter 2: Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
2-57 The Balanced Scorecard; Strategy Map; Banking (20 min)
1. An illustration of a BSC that could be used as a basis for discussion is
as follows. It is adapted from Chee W. Chow, Kamal M. Haddad, and
James W. Williamson, “Applying the Balanced Scorecard to Small
Companies,” Management Accounting, August 1997, pp 21-27.
This problem is intended primarily to provide a basis for class discussion of
the application of the BSC in a service industry such as banking, so
Chapter 2 – Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map
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2-57 (continued –1)
Note that the scorecard shown above does not include a perspective on
internal processes. To a certain extent, the process perspective is
captured by the CSFs shown under the customer perspective in the
scorecard. The students are likely to come up with a variety of
perspectives and CSFs, and these differences can provide a useful basis
for looking at the different ways a BSC could be used in a commercial
bank.
2. The strategy map could be very helpful for Carlos in this project. The
strategy map can help him show his client how performance in each
perspective can contribute to success in other perspectives, and to the
performance on the customer perspective should then lead to good
financial performance.
3. Carlos could recommend that the strategy map and balanced scorecard
be linked to an employee incentive compensation plan in order to more
effectively align the bank’s strategy and its performance. The bank’s
employees would have a clear incentive to work towards strategic goals.
An actual example of how this was done in a medium sized Texas bank
follows. The bank determined an incentive compensation amount for each