Implementing and Monitoring Strategy: High Tech Limited - Case Study Example

Strategic Accounting High Tech Limited - Case Analysis Implementing and Monitoring Strategy Development of Value Chain Introduction The Value chain analysis is a concept that has been developed to aid the management which was conceptualized by Michael Porter in 1985. A value chain is a chain of activities through which the products pass through. At the passing of each of the activities the product gains some value to arrive at the final value. The chain of activities provide the products more added value than the sum of added values of all activities. Value Chain In order to understand the activities of any firm through which it would be possible for the firm to develop a competitive advantage and thereby enhance the shareholder value, the model of 'value chain' developed by Michael Porter comes handy. The objective of developing a value chain is to break down the business system in to a series of value generating activities and study them individually to gain more knowledge on the strengths and weaknesses of the existing business systems, so that corrective action may be taken wherever there are weaknesses and there is scope for improvement (Quick MBA). The value chain for High Tech Limited - Corporate Level may take the following form. Figure: Value Chain: High Tech Limited - Corporate Level The value chain for the Yorkshire Plant may take the following form: Figure: Value Chain; High Tech Limited - Yorkshire Plant Human Resource Management Technology Development Procurement Inbound Logistics Operations Outbound Logistics Marketing and Sales Service On an observation of the value chain both at the corporate level and at the plant level appear to be more or less similar to each other. The infrastructure development function appearing in the value chain at the corporate level does not find a place in the plant level value chain, as it would be ideal to centralize the infrastructure development for both Yorkshire and Essonnes plants. The individual functions of the value chain are explained in detail in the following section: Primary Activities The primary activities in the value chain both at the corporate level and Yorkshire plant level are the same with no distinctions. Hence the discussion on the primary activities of value chain covers both the entities. Inbound Logistics The inbound logistics include the receiving and warehousing of raw materials and their distribution to manufacturing as and when they are required by the production processes. In the case of Yorkshire plant the major issue identified with the inbound logistics is the identification of the procurement cost of the part much after accounting. This affects the pricing of the products and this area needs improvement and attention for the proper pricing of the products Operations This function in the value chain involves the processes of transforming the inputs into finished products and services. The strategy here is to reduce the overall product costs by reducing the throughput times. Although the time period between the parts procurement and completing the assembly takes only 3 weeks, the product lies with the dealers for another 3 weeks before it reaches the end user. Moreover the dealers are billed at approximate values for the products at the time of placing the goods with them, as the company is unable to arrive at the actual cost till one month after the goods are delivered to the dealers. There can be considerable improvement planned in this part of the value chain for improving the total product cycle time. This would greatly help the reduction of overall inventory costs. Outbound Logistics This function includes the warehousing and distribution of goods. In the case of High Tech Limited the disadvantage the company is facing is that it distributes the products through the dealers. The strongest competitors of High Tech have reduced the throughput time by eliminating the dealers and distributing the products directly to the end customers. The one advantage that High Tech by distributing the products through the dealers is that the company can ensure that the service to the customers is provided almost immediately through the dealers on receiving the service requests from the customers. This appears to be a competitive advantage over the competitors since the end customers of the competitors have to wait for a long time to receive the service from the company directly or the customers have to make their own arrangements for getting their products serviced. Hence it would be advisable for High Tech to retain the present arrangement and find out ways of reducing the time at the dealer points so that there will be a reduction in the overall throughput time. Marketing and Sales This function includes the identification of the needs of the customers and the generation of profitable sales. For High Tech Limited there is the problem of the inventory levels at the dealer points which reduces the profitability of the company to a great extent. According to the marketing policy of the company the dealers are provided discounts on the stocks that remain with the dealer for obsolete inventory. This deters the dealers to buy small quantities from High Tech and they are not in a hurry to sell the stocks as the more time the stocks stay with them the more price advantage they get. If the inventory is not moved for a long time the loss is only for the High Tech and the dealers are in no way affected, as they will be getting the rebate from the company for the obsolete inventory. This area in the marketing function needs relook and improvement. Service This function represents the support offered to the customers of the firm after the products and services are sold to them. The service function assumes greater importance in any industry. Especially in the computer industry service function is of vital importance for improving the sales through customer satisfaction. In this area of the value chain, High Tech appears to be placed in a competitively advantageous position as compared to the other players and hence it is important that the company retains the exiting structure and tries to find ways of improving the throughput time to reduce the overall cost of production. Support Activities These activities are undertaken by the firm in order to support the primary activities: Infrastructure This support function encompasses the organizational structure, controls systems in general, developing organizational culture etc. In the case of High Tech Limited this function is better to be centralized at the corporate level. Human Resource Management The human resource management generally includes the activities of recruitment, selection, hiring, training and development and compensation. Since both the Yorkshire and Essonnes plants are completely decentralized this function needs to be taken care of them by the individual plants. There may be the need for some supporting staff at the corporate level and hence this function also appears in the value chain for the corporate entity. Technology Development This function covers the development of those technologies that help the organizations to add value creating activities. For High Tech Limited the research and development may constitute the main technology support. The research and development at the corporate level may be focused on the development of new product lines. This function also appears in the value chain for the Yorkshire plant, as there may be some research and development activity undertaken at the plant level for improvements in the production processes. Procurement The support function under the head procurement includes the purchase of inputs like raw materials, supplies, and equipments. This function works in close coordination with that of inbound logistics and in the case of Yorkshire plant this function needs streamlining to get the purchase price of components immediately. The function appearing in the value chain for the corporate covers the purchases for the research and development needs and other general procurements by the company for use exclusively at the corporate office. Balanced Scorecard The balanced scorecard translates an organization's mission and strategy into a comprehensive set of performance measures that provides the framework for implementing its strategy. (Kaplan and Norton, 1966) The balanced scorecard does not focus solely on achieving financial objectives of the firm. It also highlights the non-financial objectives that an organization must achieve in order to meet its financial objectives. The balanced scorecard measures an organization's performance from four key perspectives: (1) Financial, (2) Customer, (3) Internal Business Processes and (4) Learning and Growth (Horngren et al 2002) The Balanced Scorecard for High Tech Limited may take the following form: Balanced Score Card for High Tech Limited Objectives Measures Initiatives Target Performances Actual Performance Financial Perspectives Increase shareholder value 1.Operating income from productivity gain 2. Operating income from growth 3. Revenue growth 1. Manage costs and unused capacity 2. Build strong customer relationships 3. Build strong customer relationships 70,000 10,000 7.5% 73,100 8,900 5.64%1 Customer Perspective Increase market share Increase in customer satisfaction 1. Market share in hardware sales 2. Market share in software sales 3. Identification of new customers Customer satisfaction survey Identify future needs of customers Identify future needs of customers Identify new target customer segments Increase customer focus of sales organization (Dealers) 5% 5% 3 90% Internal Business Process Perspective Improve manufacturing capability Improve manufacturing quality and productivity Reduce delivery time to customers Meet specified delivery dates Percentage of processes with advanced controls Yield Order delivery time On-time delivery Organize R&D manufacturing teams to implement advanced controls Identify root causes of the problems and improve quality Reengineer delivery order process Reengineer order delivery process 75% 78% 4 weeks 92% 6 weeks Learning and Growth Perspectives Develop process skills Empower workforce Align employee and organization goals Enhance information system capabilities Improve manufacturing process Percentage of employees trained in process and quality management Percentage of front-line workers empowered to manage processes Employee satisfaction survey Percentage of manufacturing processes with real-time feed back Number of major improvements in process controls Employee training programs Have supervisors act as coaches rather than decision makers Employee participation and suggestion program to build teamwork Improve off-line data gathering Organize R&D manufacturing teams to modify processes 90% 85% 80% 80% 5 The above balanced scorecard of High Tech Limited will provide the following strategic inputs for the improvement in the performance of the company: Financial Perspective: This perspective evaluates the profitability of the strategy. Because of cost reduction relative to competitors and growth are the key strategic initiatives of High Tech Limited the financial perspectives focus on how much operating income results from the new strategies. Customer Perspective: This perspective identifies the targeted market segments and measures the company's success in these segments. Internal Business Process Perspectives This perspective focuses on internal operations that further both the customer perspective by creating value for customers and the financial perspective by increasing the shareholder wealth. High Tech has to determine the internal business process improvement targets after benchmarking them against the key competitors, as the values provided in this model represent the ideal index for the performance. Learning and Growth Perspectives This perspective identifies the capabilities in which the organization must excel in order to achieve superior internal processes that create value for customers and shareholders. The learning and growth perspective of High Tech emphasizes three capabilities: 1. Employee capabilities measured using employee education and skill levels, surveys of employee satisfaction, employee turnover and employee productivity 2. Information system capabilities measured by percentage of front line employees having on line access to customer information and percentage of business processes with real-time feedback and 3. Motivation and empowerment measured by number of suggestions per employee, percentage of suggestion implemented and percentage of compensation based on individual and team incentives. B. Standard and Activity Based Costing 1. Adoption of Activity Based Costing System Presently Yorkshire is using ABC costing only for allocating the warehousing costs. It is advisable that the company adopts Activity based costing to the whole operations as the annual allocation of expenses to the different products have certain anomalies associated with the allocation and this would vitiate the total cost of production of the individual products. For instance there are some parts, for which the transportation-out is higher. For example, the transportation of servers cost more as the servers are heavy. In respect of other products, order filling is the highest costs. For example, desktops absorb high order-filling costs because desktops are composed of multiple individual parts. The desktops may have 10-15 pieces to a box so it takes more time to fill a desktop order than a server order, which is composed of one or two parts. Because of these differences the current basis for allocation of these expenses can not give the exact costing for the products. Hence it is advisable to arrive at new cost drivers and follow activity based costing system. 2. Current Costing System In the H-T limited case, the costs of the products are estimated on the basis of standard costing wherein the raw materials and goods produced are invoiced at previous month costs which are 2-3% more than the present values thanks to the highly competitive advanced market. In such a case, it is highly important that the goods are invoiced at their current levels which are possible only through ABC. 3. Development of an Activity Based Costing Model The following is an overview of the activity based costing system for the production department of Yorkshire Plant of High Tech Limited: Cost Pool Cost Drivers Basis of Allocation Direct Cost Direct Material As applied to the Product Line Direct Manufacturing Labor Other Direct Overheads Indirect Cost Receiving Number of Purchase orders handled Shipping Number of Shipments Storage Area Occupied - Square foot of Storage Floor face occupied by the raw materials, components and parts of the respective products Trans-out Tonnage of products handled The homogenous cost pools and the choice of cost-allocation bases tied to the cost hierarchy give the managers of High-Tech Limited greater confidence in the activity and product cost numbers from the Activity based costing system. The current system of allocating the costs on the basis of the head count and info system hours may not provide correct costing information resulting in over or under costing of the products and the ultimate determination of the selling price of the products. For instance the allocation of transportation out cost on the basis of the headcount will under cost servers as they are heavy and the cost of transporting the servers would get distributed to other products unnecessarily and increase the cost of these products, while the cost of the server may not be reflected correctly. Similarly the receiving costs for the desktops must be more as they have a number of multiple individual parts and hence the number of purchase orders handled for allocating the receiving cost is considered proper. References Horngren T. Charles, Foster George, and Datar M. Srikant (2002) 'Cost Accounting A Managerial Emphasis' Edition X Prentice Hall of India Private Limited New Delhi India organisation Kaplan R.S and Norton D.P (1966) 'The Balanced Scorecard: Translating Strategy into Action' Harvard Business School press Boston MA Michael Porter, 1980, Value chain Analysis, Marketing Teacher Available online at Retrieved on 05th April 2008 Quick MBA 'The Value Chain' Available online at Retrieved on 05th April 2008 Read More