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MANAGEMENT ACCOUNTING AND STRATEGY Lectures
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Brabazon (1999) 'According to the old saying 'what gets measured gets attention.' However, it is probably even more correct to say that 'what gets paid gets even more attention.' 'compensation system must be able to deal with trade offs between the measures'
? E.g. if it does well on one but not another
? But should there be trade offs between measures in the first place? (Pip)
? 'the dynamic nature of the BSC can cause difficulties in designing a satisfactory linkage to compensation.' 'the precise cause and effect relationships between measures for each of the perspectives on the BSC will be complex because the driver and outcome measures for the various perspectives are interlinked.'
? 'must be a question mark as to the accuracy of any calculated correlations between driver and outcome measures.'
? 'implies that it will only be possible to determine the accuracy of cause and effect linkages after the event, which could make the use of the BSC in dynamic industries questionable.' 'Effective Performance Management with the Balanced Scorecard' (Murby & Gould) 'originally developed as a performance measurement tool, the scorecard is now associated increasingly with strategy implementation.' 'the underlying premise of the strategic scorecard is straightforward: that all the actions determined by management decisions and implemented to promote strategy realisation, have an impact.' 'to successfully contribute to achievement of an organisation's mission, the scorecard must effectively interpret strategy into operational terms.' First generation scorecards - performance measurement framework Second generation scorecards - 'allowed individuals and teams to define what they must do well to contribute to higher level goals.' Third generation scorecards - can lead to strategy refinement Strategy mapping
? 'Kaplan & Norton noted the value of articulating and representing graphically such links between actions and desired outcomes' - strategy mapping
? 'the BSC design process is founded on the premise of strategy as a set of hypotheses about cause and effect.' 'often confusion, for instance, around assumed logical, rather than actual, causal relationships between drivers of performance and hence performance measures.'
? Not always the case e.g. assume increase customer satisfaction improves financial performance but customer satisfaction is much lower in low cost airlines than high cost ones but comparative financial performance of low cost airlines is much better 'the correct 'balance' that a scorecard encompasses should be driven by - and reflect - the value proposition (product leadership, operational excellence etc.) on which the strategy is based.' 'the bottom line is that a good scorecard will reveal an organisation's strategy and paint a picture that the traditional focus on financial measures is unable to do' Kaplan & Norton's 5 guiding principles:
? Translate strategy into operational terms
? Align the organisation to the strategy
? Make strategy everyone's job
'it may be valuable to cascade the scorecard down to individual level so that each employee has a personalised scorecard which could then be used as the basis of their performance appraisal.'
Launching a strategy o Ownership of strategy by all employees
? Make strategy a continual process - strategy management meetings and the learning process
? Mobilise change through executive leadership o Shell example
? Intangible performance drivers:
Customer focused innovation
Technology, brand, reach, reputation
Talented and diverse pool of employees
Strong business principles and sustainable development
? Shell implemented BSC in 1996
? Forms the basis of employees' appraisals (up to 30% of salary is available as a bonus)
Developed a 'happiness index' with the help of Cranfield University 'It is not the stock of assets (tangible or intangible) that deliver value, rather it is the deployment, configuration and interactions between these assets, and the transformation process from inputs into outputs/offerings that is key.' o 'The Value Creation Map approach offers the freedom to depart from the four perspectives of the BSC framework and start from a blank sheet of paper in order to reflect the idiosyncratic nature of each firm.' Reasons why BSC might not work: o Transitional issues
? Major organisational changes
'not a 'quick-fix' approach to alleviate financial problems.' o If restructuring is seen as a short term fix, will suffer in the long run
? Unlikely to be sustainable
? Changes in key personnel
If, following the change, new management no longer support BSC it may fail. o Design failures
? Confusion regarding primary performance drivers
? Poorly defined metrics
? Negotiated, rather than stakeholder focused performance target
? Lack of a delivery level target deployment system
All financial measures can be communicated using a single metric, but much more difficult with non-financial measures
? No state-of-the-art improvement system is used
? There is not, and cannot be a quantitative linkage between non-financial and expected financial results
? Being inward looking and examining the impact of external discountinuities o Presentation/stylistic criticisms
? 'for example the use of rhetoric, storytelling, metaphors and authority arguments in the place of sound argument.' o 'the use of numeric targets as the foundation of making fundamental improvements. It has been suggested that arbitrary numerical target setting is more likely to provoke
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