Module 9: Balanced Scorecard

Transcription

1 file:///f /Courses/ /CGALU/MA2/06course/01mod/m09intro.htm Module 9: Balanced Scorecard Overview Module 9 ties all previous modules together into a method for facilitating decision-making and performance evaluation. In this module, you focus on the Balanced Scorecard as a management tool for the implementation of a company s chosen strategy. You learn about the Balanced Scorecard approach to gathering financial and nonfinancial information, and how to apply the resulting scores in strategic decision-making. The module also provides an opportunity for you to use the Balanced Scorecard to create solutions to performance evaluation deficiencies in a given business situation based on a specific strategic focus. Test your knowledge Begin your work on this module with a set of test-your-knowledge questions designed to help you gauge the depth of study required. Topic outline and learning objectives 9.1 Implementation of strategy and the Balanced Scorecard Design a Balanced Scorecard appropriate to the generic strategy of an organization. (Level 2) 9.2 Evaluating success of a strategy Evaluate the success of a strategy using the stoplight system. (Level 1) 9.3 Strategic analysis of operating income Evaluate change in operating income resulting from implementation of strategic components: growth, product differentiation, and cost leadership or productivity. (Level 1) 9.4 Downsizing and management of capacity Identify unused capacity, and design recommendations to deal with that capacity. (Level 1) 9.5 Productivity measurement Evaluate partial and total factor productivity for an organization, and recommend changes. (Level 1) Module summary Print this module file:///f /Courses/ /CGALU/MA2/06course/01mod/m09intro.htm [05/06/ :21:38 PM]

2 file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t01.htm 9.1 Implementation of strategy and the Balanced Scorecard Learning objective Design a Balanced Scorecard appropriate to the generic strategy of an organization. (Level 2) Required reading Chapter 13, pages (Be sure to review the overview of strategy on pages ) Online article: "The Balanced Scorecard" LEVEL 2 According to Kaplan and Norton (2004), the Balanced Scorecard translates an organization s mission and strategy into a comprehensive set of performance measures that provide a framework for implementing its strategy. 1 Rather than the traditional financial measures of ROI, which are used to evaluate management and corporate performance, the Balanced Scorecard (BSC) uses both financial and non-financial measures in four perspectives: Financial Evaluates the profitability of a strategy from growth in the revenue streams or reduction of costs, and uses measures such as return on capital employed, operating income, and revenue growth. Customer Evaluates whether the company is achieving success in meeting customer needs through identifying a customer value proposition (that is, by answering the question, who are we to the customer? ), and utilizes measures such as customer satisfaction, number of new customers, increase in market share, and so on. Internal business process Evaluates the effectiveness and efficiency of managing the internal operations or value chain. It focuses on three principle sub-processes: innovation, operations, and post-sales service. Learning and growth Evaluates the capabilities in which the organization must excel to achieve superior internal processes that create value for both shareholders and customers. Learning and growth emphasizes the following four factors: Goal congruence, measured by satisfaction ratings Skill/process development, measured by the percentage of employees trained Workforce empowerment, measured by the percentage of line workers making management decisions Enhanced information system capabilities, measured by the percentage of processes with real-time feedback The Balanced Scorecard aligns the organization with corporate strategy by linking strategic goals and objectives with initiatives (see Exhibit 13-1, page 519). Exhibit 13-2 (page 520) identifies typical BSC measures. Exhibit 9.1-1: BSC measures financial perspective Objectives Measures Initiatives Target Actual Financial perspective Increased shareholder value Operating income Manage costs and unused capacity $2,000,000 $2,012,500 In typical situations, companies can use a stoplight system (described in detail in the next topic) in which the target is broken into three categories. Green represents meeting expectations, yellow represents results slightly below the desired target ($1,850,000 $2,000,000 in Exhibit 9.1-1), and red represents a problem area to be addressed (income <$1,850,000 in the exhibit). The Balanced Scorecard allows management to determine the impact of initiatives on company performance. Reengineering is a fundamental rethinking and redesign of business processes to achieve improvements in critical file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t01.htm (1 of 2) [05/06/ :21:39 PM]

3 file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t01.htm measures of performance. Reengineering can reduce costs, increase quality, and increase customer satisfaction. This is then reflected in the BSC at the internal business process level. The training required to implement the reengineering is reflected in the learning and growth perspective and could also be mapped to show its impact on the customer perspective. If these changes also reduce costs and increase revenue (for example, through increased customer satisfaction), this effect would show up in the financial perspective. Each organization has a different strategy and therefore requires different sets of measures. For example, government organizations do not have a profit orientation, and non-government organizations (NGOs) are required to meet the goals of different constituency groups. For an example of this type of BSC, see Exhibit 13-3 on pages 525 shows a Balanced Scorecard used at the Canadian Institute of Health Information. Implementing a Balanced Scorecard Successfully implementing a Balanced Scorecard requires commitment and leadership from top management. Usually, an implementation team is put together to conduct interviews with senior managers to gather input used for developing objectives, measures, and buy-in. The goal is to achieve consensus on objectives and to establish a cause-and-effect linkage across objectives at both senior and middle-level management. Once the measures are developed, senior managers meet with middle-level managers to finalize the scorecard, to determine who is responsible for each area/objective, and to decide how the measures will be attained. The textbook lists features of a good Balanced Scorecard (page 520) and also lists pitfalls to avoid when implementing a Balanced Scorecard on page 522. Activity 9.1-1: Balanced Scorecard strategies Try Activity to test your understanding of how Balanced Scorecard strategies and measures relate to a company s goals and initiatives. For additional information and examples of how the Scorecard is used in several organizations, go to the Balanced Scorecard Institute. 1 R.S. Kaplan and D. P. Norton, Strategy Maps: Converting Intangible Assets into Tangible Outcomes, Boston: Harvard Business School Press, file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t01.htm (2 of 2) [05/06/ :21:39 PM]

4 file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t02.htm 9.2 Evaluating success of a strategy *Updated: November 19, 2008 Learning objective Evaluate the success of a strategy using the stoplight system. (Level 1) Required reading Chapter 13, page 524 LEVEL 1 Managers can compare the Balanced Scorecard to actual results using the target stoplight system. In this process, post mortems are held where management identifies problems results showing in the yellow- and red-light ranges and looks for ways to improve operations. The following example changes the data for CXI given in the text (Exhibit 13.1, page 519) to illustrate the value stoplight analysis can provide in identifying problems and focusing attention on critical data. Example 9.2-1: Setting targets for stoplight at Chipset Assume the following changes in the actual performance data for Chipset: Operating income from productivity gain: $2,512,500 Operating income from growth: $2,400,000 Market share in network segment: 5.50% Customer satisfaction rating: 74.50% Using this data, managers must first determine the ranges for the three stoplight categories green, yellow, and red for each target performance measure. This target-setting process is key to the effective use of the system. For the CXI data, green-light data ranges could be as follows: Operating income from productivity gain: any result above $2,000,000 Operating income from growth: any result above $3,000,000 Market share in network segment: any result above 6.0% Customer satisfaction rating: any result above 90.0% Green-light data is considered favorable; and amounts in this category are not usually considered to be of concern. However, greenlight results are reviewed to ensure that there are no problems with the target-setting process. For example, if the operating income from productivity gain was twice or three times as large as expected, this may indicate a problem with setting targets. Yellow-light data ranges for this example could be as follows: Operating income from productivity gain: any result between $1,000,000 and $1,999,999 Operating income from growth: any result between $2,500,000 and $2,999,999 Market share in network segment: any result between 3% and 5.5% Customer satisfaction rating: any result between 75% and 85.0% This is a range of values; the key is to use professional judgment in determining the appropriate range. Yellow light data highlights areas that may be trending in a negative direction, so managers need to be aware of them. Red-light data for this example could be as follows: Operating income from productivity gain: any result below $1,000,000 file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t02.htm (1 of 2) [05/06/ :21:40 PM]

5 file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t02.htm Operating income from growth: any result below $2,500,000 Market share in network segment: any result below 3% Customer satisfaction rating: any result below 75% Red-light data is set as any number below a certain measure. Amounts in the red-light range are highlighted as areas where managers should focus their concern. Exhibit shows a printout of the section of the Balanced Scorecard analysis highlighted using the stoplight system. *Exhibit 9.2-1: Stoplight system Objectives Measures Initiatives Target Actual Financial Perspective Performance Performance Increase shareholder value Operating income from productivity gain Manage costs $ 2,000, $ 2,512, Operating income from growth Build strong customer relations $ 3,000, $ 2,400, Customer Perspective Increase market share Market share in network segment Identify future needs of customers 6% 5.50% Increase customer satisfaction Customer-satisfaction ratings Increase customer focus of sales organization 90% 74.50% The goal when evaluating the results of a strategy using the Balanced Scorecard is to isolate operating numbers related to the strategy from other causes. For example, increases in operating income could result from growth in the overall economy as opposed to the successful implementation of the strategy. A methodology for doing a detailed analysis of operating income is addressed in the next topic. file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t02.htm (2 of 2) [05/06/ :21:40 PM]

6 file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t03.htm 9.3 Strategic analysis of operating income Learning objective Evaluate change in operating income resulting from implementation of strategic components: growth, product differentiation, and cost leadership or productivity. (Level 1) Required reading Chapter 13, pages (to Downsizing and the Management of Capacity ) LEVEL 1 For evaluating implementation of cost leadership, product differentiation, and growth strategies, managers can use a strategic analysis of operating income over a minimum of two years. This is done by breaking down changes in operating income from one year to the next into the following components: Revenue and cost effects of growth Revenue and cost effects of price-recovery Cost effect of productivity Exhibit 13-4 on page 527 shows the overall strategic analysis of profitability for the CXI scenario. It explains the $2,500,000 increase in operating income by breaking it down into its component parts. Growth component The growth component measures change in revenue and costs based on changes in units sold or produced, with all other variables being the same as the previous year. By isolating the change in units, the analysis looks at the impact of the change in growth on revenue. Revenue effect of growth Revenue effect of growth component = (Actual units of output sold in 20X8 Actual units of output sold in 20X7) Selling price in 20X7 Maintaining the selling price of 20X7 isolates the increase in revenue resulting from the change in units sold. Cost effect of growth Cost effect of growth component = (Actual units of input or capacity that would have used to produce year 20X8 output assuming the same input-output relationship that existed in 20X7 Actual units of input capacity to produce 20X7 output) Input prices in 20X7 Maintaining the input-output relationship in 20X7 input prices isolates the increase in cost resulting from the growth in sales between 20X7 and 20X8. Since fixed costs do not change, variable direct-material costs are isolated from fixed costs (including conversion and R&D costs). This approach assumes that the company is still operating within its relevant range. Price-recovery component file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t03.htm (1 of 3) [05/06/ :21:41 PM]

7 file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t03.htm The price-recovery component of operating income measures the change in revenues and the change in costs to produce the given level of current output resulting from the change, assuming the relationship of input-output remains constant. This isolates the change in revenue due solely to the change in selling price. Revenue effect of price recovery Revenue effect of product differentiation component = (Selling price in 20X8 Selling price in 20X7) Actual units of output sold in 20X8 Cost effect of price recovery This component focuses on the effect of changes in prices of input and also incorporates changes in fixed costs or conversion costs. Cost effect of product differentiation component = (Input prices in 20X8 Input prices in 20X7) Actual units of inputs/ capacity that would have been used to produce in 20X8 output assuming the same input-output relationship that existed in 20X7 Productivity component The productivity component analysis uses current-year (20X8) prices to isolate the change in costs between the current and past year (20X7) caused solely by the changes in quantities, mix, and capacity of inputs. Productivity/cost leadership component = (Actual units of input/capacity to produce the 20X8 input Actual units of inputs/ capacity that would have been used to produce 20X8 output assuming the same input-output relationship that existed in 20X7) Year 20X8 prices Conclusion Companies that have chosen a cost-leadership strategy would be more likely to focus on productivity and growth components, while companies following a differentiation strategy would see more changes in price-recovery and growth components. Further analysis An organization may wish to further analyze the results to factor out industry or market forces from strategic forces. Market growth can lead to an increase in sales, regardless of whether the company implemented a successful growth strategy. Assume the market growth rate in the industry was 10% and total sales increased from $1,000,000 to $1,150,000. The company could factor out the impact of industry growth ($1,000,000 x 10% = $100,000) from the 150,000-unit increase in company sales ($1,150,000 1,000,000). Thus the actual growth (From Exhibit 13-4, column 2) would yield the following: Revenue and cost effects of growth component in 2008 $3,420,000F 50,000 units 150,000 units = 1,140,000 F The following computer illustration uses Excel and the stoplight method to perform a basic analysis of operating income. file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t03.htm (2 of 3) [05/06/ :21:41 PM]

8 file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t03.htm Computer illustration 9.3-1: Analysis of operating income Solution file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t03.htm (3 of 3) [05/06/ :21:41 PM]

9 file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t04.htm 9.4 Downsizing and management of capacity Learning objective Identify unused capacity and design recommendations to deal with that capacity. (Level 1) Required reading Chapter 13, pages LEVEL 1 Unlike variable costs, fixed costs are tied to capacity. Managers can manage unused capacity by understanding engineered costs and discretionary costs. Engineered costs result from cause-and-effect relationships between output (cost driver) and direct or indirect resources used to produce that output. Direct materials are an example of direct cost. Conversion costs include factory overhead needed to produce a given level of output and are an example of indirect fixed costs, which are tied to capacity in the short-run. Discretionary costs arise from periodic (usually yearly) decisions regarding maximum amounts to be incurred, and have no measurable cause-and-effect relationship between output and resources consumed. Discretionary costs are under management s discretion to incur or not in the short-run and can usually be eliminated in the short-run without hurting sales. Relationships between inputs and outputs Engineered costs are related to processes that are detailed, physically observable, and repetitive (such as manufacturing or customer service activities), while discretionary costs are less precise and not as tied to processes. Further, discretionary costs are less certain. As defined in the text, uncertainty refers to the possibility that an actual amount will deviate from an expected amount. The higher the level of uncertainty, the less likely a cause-and-effect relationship will exist. See Exhibit 13-5 on page 534 for a summary of engineered and discretionary costs. Unused capacity for engineered and discretionary overhead costs Engineered unused manufacturing capacity costs can be calculated by taking the maximum capacity and subtracting current output, then multiplying by the conversion cost rate. Using the example in the text, the maximum capacity is 1,875,000 units and current production is 1,450,000, resulting in unused capacity cost as follows: (Maximum capacity Current production) x Indirect engineered cost (1,875,000 1,450,000) x $6.20 = $2,635,000 The absence of cause-and-effect relationships make discretionary costs more difficult to relate to used or unused capacity. Managing unused capacity Firms have two options for managing unused capacity. They can eliminate the unused capacity by downsizing (also known as rightsizing) or they can attempt to use the unused capacity by growing revenues. Many companies have focused on the first approach to reduce costs and increase efficiency by reconfiguring processes, and by reducing products and human resources. Before downsizing, an organization must consider future growth expectations and the impact of reductions on quality and efficiencies. For example, Air Canada reduced its workforce by 30%: A complete analysis would involve all aspects of the Balanced Scorecard, which also considers the impact of such a staff reduction on internal business processes, employee morale, and customer satisfaction perspectives. The reduction in workforce could increase the wait-time for ticket processing and baggage claim, leading to decreased efficiencies, less customer satisfaction, and decreased morale of remaining employees. file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t04.htm (1 of 2) [05/06/ :21:42 PM]

10 file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t04.htm The second approach, growing revenues, can be accomplished by decreasing selling prices and increasing sales or by developing new products. For example, unused space can be rented out to achieve higher revenues. Ethical issues and downsizing When considering options regarding unused capacity and downsizing, it is important to ensure that all effects of such decisions have been taken into account, including effects on all stakeholders. Downsizing can have a profound effect on workers and communities. People living in small, one-industry towns are particularly vulnerable to the negative effects of downsizing. Care must be taken to mitigate negative effects these events may have on workers. For example, have employees been given fair notice? Has the company provided counseling and training for new opportunities? Has the company ensured that workers have the opportunity to qualify for the appropriate pension or unemployment insurance? The organization also needs to make sure that it has lived up to any previous commitments. For example, often when a large employer comes into a small community, that community provides tax incentives to the company in exchange for the employment opportunities for the townspeople. Also, the company may have provided certain employees with employment commitments in order to obtain their skills. While not all of these commitments are legally enforceable, they do create legitimate expectations regarding the subsequent actions of the organization. file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t04.htm (2 of 2) [05/06/ :21:42 PM]

11 file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t05.htm 9.5 Productivity measurement Learning objective Evaluate partial and total factor productivity for an organization and recommend changes. (Level 1) Required reading Chapter 13, Appendix: pages LEVEL 1 Productivity measures the relationship between actual inputs (quantity and costs) and actual outputs produced. The lower the input for a given level of output, the greater the productivity achieved. Partial productivity measures The following ratio measures the level of output to the level of input used. Partial productivity = Quantity of output produced Quantity of input used The higher the ratio, the greater the productivity achieved. Evaluating changes in partial productivities It is important to separate variable from fixed productivity changes. A reduction in variable costs immediately lowers overall cost, while fixed costs tend to be based on a minimum capacity, so lowering the capacity used does not necessarily reduce total costs. Changes resulting from year to year can be used to determine percentage changes from year to year as in Exhibit 13-7 on page 540. Percentage change = Partial productivity 20X8 Partial productivity 20X7 Partial productivity 20X7 Total-factor productivity (TFP) Partial productivity measures individual inputs and isolates relevant factors of importance to managers, but fails to determine the overall impact on productivity by the mix of inputs. Total-factor productivity = Quantity of output produced Costs of all inputs used Total-factor productivity considers all inputs simultaneously and assesses the tradeoffs made based on current input prices. To compare the changes over time, TFP benchmarks against the company for the previous year but maintains the current year prices to control for changes in price. Total factor productivity = Quantity of output produced in 20X8 for 20X8 using 20X8 prices Cost of inputs used in 20X8 based on 20X8 prices This is compared to 20X7 input required to produce the 20X8 level of output. file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t05.htm (1 of 2) [05/06/ :21:43 PM]

12 file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t05.htm Benchmark TFP = Quantity of output produced in 20X8 Cost of inputs that would have been used in 20X7 to produce 20X8 output From this, you can compute the percentage change in total factor productivity Percentage change in TFP = TFP (20X8) TFP (20X7) TFP (20X7) Using both total-factor and partial productivity measures These measures work well together, as the strengths of one are the weaknesses of the other. While partial productivity measures identify changes in specific factors, they fail to identify the impact on overall productivity. Total-factor productivity measures provide across-the-firm numbers. However, increased productivity in one area can cause decreased productivity in another, which can remain hidden when the total-factor number is used. The total-factor number is more like a snapshot, and usually needs further analysis to provide useable information. Both measures can be used across time as they both measure physical inputs that can be tracked. This allows the organization to identify improvements over time, and the results can ultimately be tied to productivity-based bonus and compensation systems. Ethical considerations Since productivity measures can be used in productivity-based compensation systems, incentives can be created for individual managers to manipulate information for their own gain, which would be counterproductive to achieving the organizational goals. Both the Balanced Scorecard and productivity measures must be designed and implemented in such a way that managers will not be able to manipulate the system. This problem is often solved through ensuring transparency of information and process. The steps in creating the Balanced Scorecard should be designed to demonstrate openness and incorporate feedback, which would allow each manager to have a say in developing the BSC measures and goals. file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t05.htm (2 of 2) [05/06/ :21:43 PM]

13 file:///f /Courses/ /CGALU/MA2/06course/01mod/m09summary.htm Module 9 summary Design a Balanced Scorecard appropriate to the generic strategy of an organization The four perspectives are: financial, customer, internal business processes, and learning and growth. Evaluate the success of a strategy using the stoplight system The target stoplight system is a method of evaluating the results of the balanced scorecard effort that isolates areas for further analysis. Evaluate change in operating income resulting from implementation of strategic components: growth, product differentiation, and cost leadership or productivity Growth Revenue effect of growth = (Actual units sold in current year Actual units sold in previous year) x Previous year output price. Cost effect of growth = (Actual units of input/output that would have been used in current year based on previous year s relationship Actual units of input/output to produce previous years output) x Previous year s prices. Price-recovery Revenue effect of product differentiation = (Output price in current year Output price in previous year) x Actual units sold in current year. Cost effect of product differentiation = (Input price in current year Input price in previous year) x Actual units of input/ output that would have been used to produce current year output assuming the same relationship as previous year. Productivity Productivity/cost leadership component = (Actual units input/capacity to produce for current year Actual units of inputs/ capacity that would have been used to produce current year assuming same relationship as previous year) x Current year prices. Identify unused capacity, and design recommendations to deal with that capacity Fixed costs are tied to capacity. There are two types of fixed costs engineered and discretionary. Engineered costs have a direct relationship with outputs. Discretionary costs are periodic costs with no measurable cause-effect relationship to output. Manage unused capacity by downsizing. Use unused capacity to increase revenues. Evaluate partial and total factor productivity for an organization, and recommend changes Partial productivity = Quantity of output produced Quantity of input used The higher the ratio, the greater the productivity achieved. Total factor productivity = Quantity of output produced Costs of all inputs used file:///f /Courses/ /CGALU/MA2/06course/01mod/m09summary.htm [05/06/ :21:44 PM]

14 file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t03ci.htm Computer illustration 9.3-1: Analysis of operating income This illustration uses conditional formatting techniques along with basic analysis to promote better communication of issues of concern in operating income. Refer to Problem on pages Material provided File MA2M9P1 containing a partially completed worksheet M9P1, the solution worksheet M9P1S, the Balanced Scorecard on a worksheet called Balanced Scorecard, and the solution to the Balanced Scorecard portion on a worksheet called Balanced Scorecard sol Required Answer Part 1 based on the information given. Then, using the spreadsheets, answer the remaining parts to Problem Complete the Balanced Scorecard tab by linking to M9P1S. Procedure Start Excel. Open the file MA2M9P1. 1. Review the data table (A4 to I 23) and note that it replicates the information given in the textbook for Problem Complete a comparative income statement for Halsey and Company for the year ended December 31, 2007, using the template found at A26 to I41 and the information in the data table. 3. Using the formulas given in the text on pages , complete Part 3 entitled "Revenue and Cost Effects of Growth" in section A43 to H To apply conditional formatting to this section, highlight the appropriate cell or group of cells. Click Format, then Conditional Formatting and follow the instructions. (For Excel 2007, click on the Conditional formatting icon within the Home tab.) Choose green for positive results, yellow for results that may require further research, and red for values that are of concern. Judgement is required in choosing specific conditions. For example, for the variance analysis: For Revenues: values >0, choose green; values <0, choose red; and, values = 0, choose yellow. For Costs: values >0, choose red; values <0, choose green; and, values = 0, choose yellow. 5. Using the formulas given in the text on page 529, complete Part 3 entitled "Revenue and Cost Effects of Price Recovery" in section A56 to H Using the formulas given in the text on pages , complete Part 3 entitled "Cost Effects of Productivity" in section A70 to H For both "Revenue and Cost Effects of Price Recovery" and "Cost Effects of Productivity," use the same conditional formatting logic as for "Revenue and Cost Effect of Growth." 8. Complete the Strategic Analysis of Productivity using formulas and concepts given on pages , using section A82 to K96 in M9P1. The final product should look like Exhibit 13-4 on page 527. Use columns E, G, and I to indicate whether the variance is favorable or unfavorable by entering either an F or a U where appropriate. Where appropriate, use the If function to ensure the validity of the calculations (re cells C93 and J93). 9. Indicate the total change in operating income in cell F95 using cell G95 to indicate favorable or unfavorable. 10. To use the conditional formatting commands, first highlight the appropriate cell or section and follow the guidelines as given in Step 4. Note that there are two key issues when using conditional formatting. The first is to make the judgement call on where the relevant numbers will be deciding at what point a value is ok, when it requires caution, and when it becomes a problem. The second issue is taking care to isolate changes in revenue from changes in cost. 11. Click OK. Then open the Balanced Scorecard tab. In column H, create formulas (H8, H12) that reference the M9P1S tab to fill in the actual numbers achieved on the scorecard. Note that the amounts for cells H16, H20, and H25 have been filled in for you. 12. Use the conditional formatting again for each cell that contains an actual amount, using judgment to determine the appropriate values. file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t03ci.htm [05/06/ :21:45 PM]

15 file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t03sol.htm Computer illustration Solution The Balance Scorecard analysis shows the following with stoplight formatting. Conclusion 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 Halsey has not been successful at implementing its premium price and product differentiation strategy, despite the fact that operating income increased by more than 10% between 20X6 and 20X7. Halsey could not pass on increases in purchase costs to its customers via higher prices. Halsey must either reconsider its strategy or focus managers on increasing margins and growing market share by offering better product variety and superb customer service. The [stoplight] score indicates that management needs to do a more detailed analysis of the Increase in shareholder value section and the market share numbers. These numbers show areas of concern and indicate that the company did not actually achieve their product differentiation. Have the needs of the market changed? What other issues may be indicated? The cost savings on improved internal business processes were acceptable; however, given the supposed increase in quality and subsequent decline in customer service expectations, the learning and growth numbers should be analyzed further. file:///f /Courses/ /CGALU/MA2/06course/01mod/m09t03sol.htm [05/06/ :21:46 PM]