AYB321 Strategic Management Accounting Discussion Leadership Questions TUTORIAL 6 Balanced Scorecard (2) A. Creating a BSC and Strategy Map Chips Ltd manufactures microchips for modems and communication networks. Their best-selling product, the CX1, has superior features relative to its competition, however severe competition exists in respect to price. Chips Ltd has determined that, to remain competitive, they need to reduce the unit cost, without any decrease in reliability. They believe that if they can reduce the price by around 5% then, all other things being equal, they will increase market share dramatically. However, if reliability reduces, they will lose significant market share. Investigations reveal a significant amount of non-value add time in their production processes. This non-value-added time affects both product cost and quality. To reduce non-value add time, their plan is to train all staff in quality processes and ask for their suggestions as to how the processes can be improved. Required: a) Based on the info above, identify objectives for each of the four perspectives of the Kaplan and Norton BSC. You should identify at least one objective for the financial perspective, and at least two objectives each for the other three. (Suggestion for discussion leaders: Brainstorm this with the class and write down all suggestions on the whiteboard under each of the perspectives. Then lead the class to agreement on one set of objectives to go onto the strategy map.) b) Create a strategy map showing the relationships between each of the objectives you had chosen. (Suggestion for discussion leaders: Go around the class asking each student to identify one relationship, and then draw an arrow to represent that relationship. Each class member may either create a new relationship or they may want to change one is already there as long as they can explain why and argue their case. Conclude the exercise by giving your opinion on the completed strategy map.) B. Aligning the Balanced Scorecard to Strategy Ginsberg Engineering Company manufactures electric motors for sale to producers of washing machines. In the past, Stan Grossman, the Operations Manager at Ginsberg Engineering, has been rewarded based on the number of units produced each month, and this has led to actions that are inconsistent with maximising shareholder value. Near the end of each quarter, Grossman estimates expected production in relation to his target. If expected production is below the target, he runs extra shifts in an attempt to meet his production target. As Ginsberg Engineering has limited storage space, this often results in the delivery of motors to customers ahead of time. This is a problem for many customers, who also have limited storage space. Sheryl Hoover, the CEO of Ginsberg Engineering, decided to implement a balanced scorecard (BSC) for the Operations Division, with the specific purpose of eliminating the perverse incentive described above. Hoover believes it is inefficient to build a new BSC, and so she simply copied the BSC used in her last firm. An extract of this BSC is as follows: PERSPECTIVE OBJECTIVE LAG INDICATOR LEAD INDICATOR Financial Improved profitability Profit Cost per unit Customer Improve customer satisfaction Customer satisfaction Customer returns Internal Business Increase product quality Customer returns Defect rates Learning & Growth Improve staff capability Staff quality skills audit score Quality training programs delivered Also, while Hoover believes the BSC is useful in monitoring performance, she believes that all managers need to be rewarded in a consistent way, and so she based all divisional managers’ (including Grossman’s) bonuses on their profit compared to budget. After twelve months of using this BSC, the perverse incentive still exists. Required: Critique the objectives and measures in the BSC used: what strategy does it appear to be addressing? Suggest a new set of objectives and measures for the customer, internal business and learning & growth perspectives only (ie, not the financial perspective), that is more likely to address the perverse incentive and explain why. C. Balanced scorecard implementation: pros and cons Mansfield Motors, a manufacturer of small engines, has recently bought Mount Gravatt Bikes to expand into the bicycle production market. They have always used BSC cards within their operations so they would like to implement a BSC at Mount Gravatt Bikes. Mount Gravatt Bikes’ mission statement reads, ‘we build high-quality reliable mountain bikes at competitive prices’. The entity’s competitive strategy is to continuously improve the functionality, reliability and quality of its bikes while holding prices at levels similar to competitors. The entity operates three sub-units organised around the product lines for the three types of bikes (road, mountain and hybrid) they produce. They sell their bikes directly to bike shops and operate an internet site that allows bike shops to place orders for customised bikes (different components, decals, etc). They have already agreed their objective for the financial perspective is to increase profitability, which they will measure using operating margin, EVA and average profit per bike. They need some assistance in designing their customer, internal business and learning and growth perspectives. While most managers are on board with this, one of the senior managers has voiced his concern with the disadvantages of implementing the BSC, saying she does not believe a BSC is necessary for the new bike business. Required: a) List one objective for each of the Customer, Internal Business and Learning and Growth perspectives. Identify two potential measures for each objective. b) Discuss the pros and cons of implementing a balanced scorecard for Mount Gravatt Bikes.