Module 2 Flashcards
(21 cards)
Q: What are the three key components of a strategic analysis of operating income?
A:
The three components are:
- Growth Component
Measures the change in operating income due to change in volume of output sold. - Price-Recovery Component
Measures the effect of changes in selling prices and input prices, holding volume constant. - Productivity Component
Measures the change in operating income from using inputs more or less efficiently.
In strategic profitability analysis, you’ll label each component (growth, price, productivity) as F or U based on whether it increased or decreased operating income compared to the prior year.
🧠 Key Insight:
These components isolate the effect of volume, price/cost changes, and efficiency, allowing managers to trace how strategy influences profitability.
Q: What is the Growth Component in a strategic analysis of operating income?
A:
The Growth Component measures the increase (or decrease) in operating income caused by changes in the volume of units sold, assuming prior year prices and input costs stay constant.
Formula:
= (Actual units sold in current year − Actual units sold in prior year)
× Selling price in prior year
× (Costs per unit in prior year for each input)
Key Idea:
Isolates the income impact of volume growth alone, without effects from price or efficiency changes.
Q: What is the Price-Recovery Component in a strategic analysis of operating income?
A:
The Price-Recovery Component measures the effect of changes in selling prices and input prices on operating income, assuming quantities remain constant.
Formulas:
Output Price Effect:
= (Selling price in current year − Selling price in prior year) × Units sold in current year
Input Price Effect:
= (Input price in current year − Input price in prior year)
× Input quantity needed to produce current year output using prior year input-output relationship
Key Idea:
Reflects the firm’s ability to increase selling prices and/or manage input price changes.
Q: What is the Productivity Component in a strategic analysis of operating income?
A:
The Productivity Component measures changes in operating income resulting from efficiency improvements — using fewer inputs or less capacity to produce the same output.
Formulas:
Variable Cost Productivity:
= (Input quantity required in prior year to produce current year output − Input quantity used in current year)
× Input price in current year
Fixed Cost Productivity:
= (Capacity required in prior year to produce current year output − Actual capacity in current year)
× Price per unit of capacity in current year
Key Idea:
Shows whether the company is producing more efficiently, reducing waste or excess capacity.
Q: 🧠 How do you categorize performance measures into the four Balanced Scorecard (BSC) perspectives?
A:
Use this shortcut: What does the measure focus on? Who does it reflect?
💰 Financial Perspective
Measures bottom-line performance.
Examples: ROI, operating income, cost per unit
🤝 Customer Perspective
Measures how customers perceive your value.
Examples: Customer satisfaction, retention rate, on-time delivery
🏭 Internal Business Process Perspective
Measures operational efficiency and quality.
Examples: Cycle time, defect rate, rework costs
📚 Learning and Growth Perspective
Measures employee capability and future improvement.
Examples: Training hours, employee turnover, IT system upgrades.
💡 Tip:
Think about what part of the business the measure is describing — finance, customer relationships, internal operations, or long-term capacity to grow. Always ask: Whose performance is being measured? and What does it affect?
Q: 🧩 What are the four perspectives of the Balanced Scorecard?
💰 1. Financial Perspective
Focus: Profitability and value to shareholders.
Strategic Objectives:
Increase return on investment
Improve cost efficiency
Maximize revenue growth
Performance Measures:
Operating income
Return on capital employed (ROCE)
Cost per unit
🤝 2. Customer Perspective
Focus: Value delivery to target customers.
Strategic Objectives:
Increase customer satisfaction
Improve customer retention
Deliver on-time and complete orders
Performance Measures:
Customer satisfaction index
On-time delivery rate
Net Promoter Score (NPS)
🏭 3. Internal Business Process Perspective
Focus: Operational efficiency and process quality.
Strategic Objectives:
Reduce cycle time
Minimize defects
Streamline order fulfillment
Performance Measures:
Average order processing time
Rework hours
% defective units
📚 4. Learning & Growth Perspective
Focus: Employee development, engage employees while doing overall growth.
Strategic Objectives:
Enhance employee skills
Improve information systems
Foster a culture of innovation
Performance Measures:
Employee training hours
Employee turnover rate
💡 Tip for exams:
Strategic objectives = broad goals
Performance measures = how you track progress toward those goals
Q: 📊 What is the Balanced Scorecard (BSC), and how is it used?
A:
The Balanced Scorecard (BSC) is a strategic performance management system that translates an organization’s vision and strategy into a clear set of performance objectives and measures across four key perspectives: Financial, Customer, Internal Business Processes, and Learning & Growth.
🔍 Why it’s used:
Helps organizations align daily actions with long-term strategy
Encourages a balanced approach — not just financial results
Tracks both outcomes and the drivers of those outcomes
Provides a strategic feedback loop for continuous improvement
Makes strategy actionable and understandable at all levels of the organization
🎯 How it’s used:
Leaders define strategic goals
Each goal is linked to a perspective
For each goal, they select:
➤ A performance measure
➤ A target
➤ An initiative to achieve it
💡 In short: It connects vision → strategy → objectives → metrics → action.
Q: 🛠️ What does it mean to “operationalize” the Balanced Scorecard?
A:
To “operationalize” the BSC means to translate abstract strategic goals into specific, measurable, and actionable indicators that can guide performance and decision-making across the organization.
⚙️ Why it’s important:
Strategy is often too vague to act on (“Be the best in customer service”)
Operationalizing breaks it down into tangible, trackable metrics
Everyone from frontline workers to executives knows what to do and how success will be measured
📝 Example of operationalizing a strategic goal:
Strategic Objective: “Improve product quality”
→ Performance Measures:
✔️ % defect-free units
✔️ Cost of quality control
✔️ Number of customer complaints
Strategic Objective: “Become an employer of choice”
→ Performance Measures:
✔️ Employee satisfaction score
✔️ Annual turnover rate
✔️ Training hours per employee
💡 Key Insight: Operationalizing = making strategy visible, measurable, and actionable.
Q: How do you match a strategic objective to its correct Balanced Scorecard perspective?
A:
Ask: What is the objective trying to impact?
If it aims to improve profits or reduce costs → Financial
If it targets customer experience or loyalty → Customer
If it seeks to improve operational processes or quality → Internal Business Process
If it focuses on people, knowledge, or systems → Learning & Growth
Examples:
“Reduce rework hours” → Internal Business Process
“Increase market share” → Customer
“Improve employee training” → Learning & Growth
“Lower cost per unit” → Financial
Q: 🏷️ How do you determine whether a company’s strategy is cost leadership or product differentiation?
A:
💸 Cost Leadership Strategy
Focus: Reduce costs, improve productivity, compete on price
Clues: Rework reduction, low cost per unit, efficiency goals
BSC Emphasis: Internal Process & Financial
🌟 Product Differentiation Strategy
Focus: Unique features, brand value, customer loyalty
Clues: High design cost, customer satisfaction, product innovation
BSC Emphasis: Customer & Learning & Growth
🧠 Tip: Look at what the company is trying to win on: price vs. uniqueness.
Q: 📉 What is unused capacity, and how is it measured?
A:
Unused capacity is the portion of available resources that weren’t needed to meet actual production or service levels.
Formula:
Unused Capacity = Capacity Available − Capacity Used
Cost of Unused Capacity = Unused Capacity × Cost per unit of capacity
⚠️ Why it matters:
High unused capacity = overinvestment or underuse → Reduces cost efficiency, especially in cost leadership strategies.
Q: 🎯 How do you separate price-recovery effects from productivity effects in input costs?
A:
💵 Price-Recovery Effect = Impact from changes in input prices
Formula: (Current input price − Prior input price) × Input quantity based on prior-year efficiency
⚙️ Productivity Effect = Impact from changes in input quantity (efficiency)
Formula: (Input quantity required in prior year − Input quantity used in current year) × Current input price
📌 Why split them?
Price-recovery shows how much of a cost change is out of your control (input prices)
Productivity shows how efficiently you’re using resources
🧠 Tip:
Price-recovery = hold quantity constant
Productivity = hold price constant
Q: Why don’t we connect strategic profitability analysis to the Balanced Scorecard?
- Strategic Profitability Analysis
-Focused on explaining changes in operating income between two years
-Broken down into growth, price-recovery, and productivity components
-Quantitative and backward-looking (based on actual results)
- Balanced Scorecard (BSC)
-A forward-looking strategic performance management system
-Tracks non-financial and financial drivers of long-term success
-Organizes objectives into 4 perspectives: Financial, Customer, Internal, Learning & Growth
❌ Why they’re not connected in your assignment:
-Strategic profitability analysis is used for explaining past income changes
-The BSC is used to track strategy execution going forward
They’re both about strategy, but they serve different purposes, use different structures, and are not applied together in your assigned questions
🧠 Key Insight:
Treat them as separate tools:
Use profitability analysis to explain what happened
Use the BSC to guide what should happen next
Q: 🛡️ What are Porter’s Five Forces, and what do they help analyze?
A:
Porter’s Five Forces is a framework used to analyze the competitive intensity and profitability potential of an industry.
The Five Forces:
Competitive Rivalry
How intense is competition among existing firms?
High rivalry = lower profitability
Indicators: price wars, many competitors, slow industry growth
Threat of New Entrants
How easy is it for new firms to enter the market?
High threat = lower long-term profits
Barriers: capital costs, regulations, brand loyalty
Threat of Substitutes
Are there alternative products that meet the same need?
High threat = limits pricing power
Substitutes come from outside the industry (e.g., streaming vs. cable)
Bargaining Power of Suppliers
Can suppliers dictate prices or terms?
High power = higher input costs
Greater when few suppliers exist or switching costs are high
Bargaining Power of Buyers
Can customers force lower prices or demand more value?
High power = reduced margins
Strong when buyers are large, well-informed, or have alternatives
🎯 Use: Helps assess industry attractiveness, build strategy, and understand where profitability is most threatened.
Q: 📏 What is partial productivity, and how is it used?
A:
Partial productivity measures output relative to a single input (e.g., labour hours, machine time).
Formula:
Partial Productivity = Output ÷ Quantity of one input
Example:
Units produced ÷ labour hours
Key Insight:
Easy to use and understand
Doesn’t capture changes in other inputs
Best used to track specific efficiency improvements over time
Q: 🧠 What are discretionary costs, and how do they behave?
A:
Discretionary costs are costs set by periodic decision, with no direct, measurable link to output volume.
Examples:
Advertising
R&D
Executive training
Key Traits:
Often fixed in the short term
Evaluated by effectiveness, not efficiency
BSC Link:
Tracked in the Learning & Growth or Customer perspectives, depending on purpose
Q: 🏭 What is the Internal Business Process Perspective in the Balanced Scorecard, and what does it focus on?
A:
The Internal Business Process Perspective evaluates how well the company’s internal operations support customer value and financial goals.
It focuses on the processes that directly create and deliver value, often divided into three key stages:
a. Innovation – Designing and developing new products and services
Metrics: R&D cycle time, % of revenue from new products
b. Operations – Producing and delivering products or services efficiently
Metrics: Cycle time, rework hours, cost per unit
c. Post-sale Service – Providing support and retaining customers
Metrics: Customer complaints resolved, service response time
🧠 Key Insight:
These processes are the “engine room” of the organization — improving them leads to better customer satisfaction and stronger financial outcomes.
Q: 🤝 What are strong customer-focused non-financial measures, and how do they support strategy?
A:
Example Focus Statement:
“To be the most trusted provider of high-quality, customer-centered service.”
Customer Perspective Measures:
Customer satisfaction score (e.g., survey results, 1–5 scale)
Net Promoter Score (NPS)
Customer retention rate
On-time delivery %
Number of service complaints
Average resolution time for complaints
Why they matter:
These measures assess how well the organization delivers value to customers — supporting objectives like loyalty, trust, and market differentiation.
Q: 🏭 What are strong internal process non-financial measures, and how do they support strategy?
A:
Example Focus Statement:
“To operate with efficiency, consistency, and operational excellence.”
Internal Business Process Measures:
Cycle time (e.g., order processing time)
Rework or defect rate
% of tasks completed on time
Error rate or service failures
Inventory turnover rate
Downtime hours (e.g., system or production downtime)
Orders fulfilled without error (% accuracy)
Why they matter:
These measures reflect the efficiency and reliability of core operations — supporting cost leadership and customer satisfaction goals.
Q: 📚 What are strong learning & growth non-financial measures, and how do they support strategy?
A:
Example Focus Statement:
“To be an agile, innovative organization driven by learning and employee development.”
Learning & Growth Measures:
Employee training hours per quarter
Employee satisfaction or engagement scores
Employee turnover rate
Number of improvement suggestions submitted
System reliability or IT uptime %
Internal promotion rate
% of employees with up-to-date certifications
Why they matter:
These measures support long-term capability by focusing on people, technology, and innovation — essential for sustaining future performance.
Q: 🎯 What are strong initiative-specific or strategic execution non-financial measures?
A:
Example Focus Statement:
“To successfully implement strategic initiatives that drive growth and innovation.”
Strategic/Initiative Measures:
Milestone achievement rate (% of goals completed on time)
Adoption rate of new product/service/process
Customer feedback on new initiatives
Pilot program participation rate
Employee involvement in rollout or testing
Time to market for new product launches
Why they matter:
These measures help monitor the execution and impact of specific strategies or innovations — ensuring alignment and accountability.
