Chapter 12 Strategy Balanced scorecard and strategic profitability

Chapter 12 Strategy , Balanced scorecard, and strategic profitability analysis. Dr. Mohamed Mousa 1 -1

Strategy : Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives. Strategy describes how an organization can create value for its customers while differentiating itself from its competitors. A thorough understanding of the industry is critical to implementing a successful strategy. Industry analysis focuses on five forces. Dr. Mohamed Mousa

Industry Analysis Focuses on Five Forces: 1. Number and strength of competitors 2. Potential entrants to the market 3. Availability of equivalent products 4. Bargaining power of customers 5. Bargaining power of input suppliers Dr. Mohamed Mousa

Two Basic Business Strategies : 1. Product differentiation is an organization’s ability to offer products or services perceived by its customers to be superior and unique relative to the products or services of its competitors. Competitive advantage: brand loyalty and the willingness of customers to pay high prices. 2. Cost leadership is an organization’s ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control. Competitive advantage: lower selling prices. Dr. Mohamed Mousa

Implementation of Strategy : Many companies have introduced a balanced scorecard to track progress and manage the implementation of their strategies. A useful first step in designing a balanced scorecard is a strategy map. A strategy map is a diagram that describes how an organization creates value by connecting strategic objectives in explicit cause -and-effect relationships with each other in the financial, customer, internal-business-process, and learning-and-growth perspectives. Dr. Mohamed Mousa

The Balanced Scorecard : The balanced scorecard translates an organization’s mission and strategy into a set of performance measures that provides the framework for implementing its strategy. Not only does the balanced scorecard focus on achieving financial objectives, it also highlights the nonfinancial objectives that an organization must achieve to meet and sustain its financial objectives. The scorecard measures an organization’s performance from four perspectives. Dr. Mohamed Mousa

The Four Perspectives of a Balanced Scorecard (BSC) : 1. Financial : profits and value created for shareholders 2. Customer : the success of the company in its target market 3. Internal business perspective : the internal operations that create value for customers 4. Learning and growth : the people and systems capabilities that support operations The particular measure a company uses to track performance will depend on its strategy. Dr. Mohamed Mousa

The Four Perspectives of a Balanced Scorecard ( BSC): FINANCIAL: Evaluates the profitability of the strategy and the creation of shareholder value. Uses the most objective measures in the scorecard The other three perspectives eventually feed back into this dimension Dr. Mohamed Mousa

The Four Perspectives of a Balanced Scorecard ( BSC) : CUSTOMER: Identifies targeted customer and market segments and measures the company’s success in these segments. Here we see some measures that might be used including market share, number of new customers and customersatisfaction ratings. Dr. Mohamed Mousa

The Four Perspectives of a Balanced Scorecard ( BSC) : INTERNAL BUSINESS: Focuses on internal operations that create value for customers which, in turn, help achieve financial performance. Dr. Mohamed Mousa

The Four Perspectives of a Balanced Scorecard ( BSC) LEARNING AND GROWTH: Identifies the people and information capabilities necessary for an organization to learn, improve and grow. These capabilities help achieve superior internal processes that in turn create value for customers and shareholders. Dr. Mohamed Mousa

Balanced Scorecard Implementation A successful balanced scorecard implementation: Must have commitment and leadership from top management. Must be communicated to all employees. For the balanced scorecard to be effective, managers must view it as a fair way to assess and reward all important aspects of a manager’s performance and promotion prospects. Dr. Mohamed Mousa