Question

The TMA Questions

PART A: FORTUNE MOTORS (TAIWAN): IMPLEMENTING STRATEGY CHANGE USING THE BALANCED SCORECARD

Jung Hua Li, chief executive officer (CEO) of Fortune Motors, the largest Mitsubishi dealership in Taiwan, sat in his office in eastern Taipei on a chilly day in January 2004, thinking carefully about his vision for the survival of his company. He knew that Fortune Motors’ sales in 2003 had fallen below 50,000 units for the first time in 10 years. Fortune Motors’ market share had in fact been falling for several years, which Li attributed in part to Toyota’s aggressive growth. With long experience of selling and financing new Mitsubishi cars and small commercial vehicles throughout Taiwan, Li had what he thought was a good plan to enter the business of financing used-car purchases. He thought the “Balanced Scorecard” would be a very useful tool to help implement this change. The first step would be to construct a corporate scorecard. But what should the corporate scorecard look like? What critical variables should he monitor carefully to give him a clear picture of how well his change plan was proceeding?

TAIWAN IN THE EARLY TWENTY-FIRST CENTURY

Taiwan, with a population of 22 million in 2000, was one of the so-called “Asian Tigers” that had experienced enormous economic growth since 1960. Per capita gross domestic product (GDP) had doubled approximately every five years until the mid-1990s, exceeding $1,000 for the first time in 1976. (This value was considered by some to indicate that a country was no longer “developing.”) Even the Asian financial crisis of 1997 had only put a small dent in that decade’s average annual growth rate of approximately 7 per cent: growth in 1998 had been 4.5 per cent, but had recovered to nearly 6 per cent the following year. Part of this increase had been attributed to the growth of the People’s Republic of China (mainland China). Taiwanese companies were active and enthusiastic investors in the mainland economy, despite political differences between their respective governments, which created difficulties for the Taiwanese. For example, except for holiday specials, no direct flights were available from Taiwan to the People’s Republic of China; travelers had to fly via Hong Kong. The new millennium had brought more difficulties. For the Taiwanese economy, 2001 had been an annus horribilis: GDP per capita had fallen 2.2 per cent, and by the end of 2003, had still not recovered to 2000 levels.

THE AUTOMOTIVE INDUSTRY IN TAIWAN

Several major automakers were represented in domestic auto manufacturing industry in Taiwan. Toyota, Nissan, Ford/Mazda, Mitsubishi, Suzuki and Honda all had local assembly plants, which primarily served the local market, though Ford exported approximately 4,500 units (7 per cent of output), and Mitsubishi exported approximately 1,500 units (1.5 per cent) of production in 2003. This domestic manufacturing industry operated under the protection of an import tariff, which had been 30 per cent during most of the 1990s, but in 2002, had been reduced by one percentage point per year.

The total market for new cars in Taiwan was approximately 400,000 vehicles per year. The market had been in steady decline during the late 1990s and had fallen drastically in 2001. Sales had recovered to some degree in the two following years, but 2003 sales had still not recovered to their 2000 level. Toyota was the most successful local manufacturer, with sales of about 100,000 units (28 per cent market share) in 2003. Mitsubishi’s share was nearly 24 per cent market share, or about 86,000 units. Various reasons for this decline had been suggested, including high oil prices and the fact that in recent years, many Taiwanese businesspeople had either temporarily or permanently immigrated to China. Exact numbers of immigrants were difficult to obtain, but some estimated the number at between two million and four million.

As in most countries, new cars in Taiwan were sold through dealerships appointed by the manufacturers and were usually exclusive to a single automaker. Financing for new car purchases was provided by both banks and the dealers (or by automakers through their dealers). Auto loans in Taiwan were a small part of most banks’ business, so they usually subcontracted the credit evaluation to outside companies, which relied on public credit data and were paid based on the number of applications processed, not on the accuracy of their risk assessment. As a result, banks’ bad auto loans were about 3 per cent per year, whereas Fortune Motors, for example, with a close relationship with its customers, enjoyed a bad loan rate of only 1.3 per cent on its new car loans. Consequently, new car financing was a profitable business for dealers.

The used-car market, however, operated differently in Taiwan. Because new car dealers were registered for tax purposes, when they sold cars, they were required to charge 5 per cent sales tax on both new and used cars. However, when private individuals sold their used cars, the transaction attracted no tax — the purchaser simply registered the new ownership. As a result of this 5 per cent price advantage, the market for used cars was served by approximately 3,000 unregulated small, often family-owned, used-car dealers who were not — and did not need to be — registered for sales tax purposes. Thus, when a new car customer wanted to trade in an old car, the new car dealer did not typically buy it. Instead, the salesperson would put the customer in touch with a reputable used-car trader to complete the transaction. If someone wished to buy a used car and needed financing, finding a source of finance was often difficult. Used-car buyers were perceived as high-credit risks by banks, and banks did not have the expertise to evaluate that risk. The only sources of used-car financing were family or the illegal underground financing market where interest rates could be up to 1 per cent per day. In contrast, a low-risk customer would pay about 20 per cent per year for a personal loan.

FORTUNE MOTORS LTD.

Fortune Motors was the larger of the two Mitsubishi retail dealers in Taiwan and was the exclusive supplier of Mitsubishi’s line of small commercial vehicles (less than 3.5 tons). The typical price of these vehicles was approximately NT$300,000. Fortune Motors was 40 per cent owned by China Motors Corporation, the Taiwanese manufacturer of Mitsubishi vehicles, and 60 per cent owned by three local families.

In 2004, Fortune Motor Company operated 89 sales centres throughout the country and dominated the market for small commercial vehicles, with 80 per cent market share. Within Mitsubishi vehicles (including passenger cars), Fortune held 60 per cent share (Shung Ye Group, which sold only the Mitsubishi car line, held the remaining share). In the previous two years, the market for new vehicles in Taiwan had rebounded, growing at about 9 per cent per year after several years of decline. Mitsubishi’s share had declined from 25.4 per cent in 2002 to 20.8 per cent in 2003, and within that, Fortune Motors’ share from 15.8 per cent to 12.1 per cent.

The company sold and financed new cars (about 40 per cent of Fortune’s new car sales were also financed by them) and provided service. Selling new cars was unprofitable, but the financing was profitable, so overall, Fortune Motors’ new car sales and financing activity broke even. Servicing was profitable and made about as much profit as financing new cars.

A critical part of financing was the accurate assessment of the credit risk of the customer. Historically, approximately 10 per cent of applications were not approved for credit risk reasons.

Li attributed the company’s success over its 30-year history to its strong core values, which centered on its careful attention to customer service and satisfaction. Fortune Motors’ service motto was “Get it right the first time — or it is free.”

THE BALANCED SCORECARD

The Balanced Scorecard was a tool first proposed by Professor Robert Kaplan and others, based on field research into best practice performance measurement. Each company’s scorecard was unique, reflecting the company’s corporate strategy, with a limited number of (typically four) measures on four interrelated dimensions or perspectives: Financial, Innovation, Customer and Internal Processes. Senior management would usually prepare each company’s corporate scorecard. Sub-units of the company would then build their own lower-level scorecard, informed by and linked to the corporate scorecard. Often, the process of identifying the key measures and their interrelationships was a valuable process in its own right, clarifying the role of sub-units in the corporate strategy. The ongoing annual review and fine-tuning of the scorecard was also a valuable strategy communication and implementation process.

THE NEW STRATEGY

Li’s vision was to build on the company’s expertise in financing new cars and on the powerful network of relationships between its 1,500 salespeople located in the 89 sales centres with the thousands of small and medium-sized used car sellers around the country. These two strengths would allow Fortune Motors to sell used-car financing profitably through the thousands of small and medium-sized used car dealers in Taiwan. The dealers that would offer Fortune’s financing would not merely be a more attractive source of financing than the illegal market or relatives but would need to meet strict requirements for cleanliness of their premises and for quality and safety standards.

Li envisioned a nationwide umbrella branding of used-car dealers that Fortune Motors would approve as vendors of its financing service. The name-mark he proposed for this venture was SUM, which stood for “Serve Your Motors.” SUM-appointed car dealers would be required to maintain high ethical and customer service standards, compatible with Fortune’s own values. Not all used car dealers would be able to become members of the SUM family. Li felt it important that the SUM dealers share his values of the importance of customer service. For this reason, Li believed that husband-and-wife owner-managed small dealerships were most suitable. (The very largest used-car dealers would typically be run by hired managers and were already too large to be able to easily change their existing values, so they would not be appointed. Very small dealers were excluded because they would probably not be economical, since signing up a dealer required considerable effort on the part of Fortune Motors). Li estimated that approximately 3,000 dealers would qualify. In effect, the SUM brand would become a quality and integrity certification of a used-car dealer. For warranty purposes, certified dealers would only be permitted to sell Taiwanese-made vehicles less than five years old. Li did not plan to charge a fee to the used-car dealers for the use of the SUM brand, unless their volume was very small.

Customers buying from a SUM dealer would know that they would be receiving a guaranteed high-quality used car, and if they were financing their purchase, a fair interest rate. In fact, customers would be able to buy an additional warranty if they wished. All this would make purchasing (and financing) a used car from a SUM-certified dealer far less stressful and risky than was the case at present.

IMPLEMENTING THE PLANNED BALANCED SCORECARD

Li was aware that he needed to first recruit used car dealers over the next several years and, through them, build up the used car loan business. At the same time, he was concerned about the downturn in the economy, the pressure from Toyota, and the risks of the new business. His management team fully supported the new strategy. He knew that as CEO, it was his responsibility to create the corporate scorecard. How could he best measure the effectiveness of his new strategy?

(Source: Ivey Publications, 2011)

Required:

Explain each of the following points or inquires separately:

1. Evaluate the strengths and weaknesses of the used-car financing business proposal. (190 words)
2. What must Jung Hua Li do well in order for the new business to succeed? (100 words)
3. Prepare a balanced scorecard for the implementation of this business and discuss the linkage between the measures. (200 words)

            [Marks: (20+10+30) = 60]

PART B: THE SUPPLY CHAIN

Several studies of inter-firm accounting have shown how accounting and controls are
implicated in the management of supply chains. Supply Chain Management (SCM) is an essential element to operational efficiency.

Required:

1. Briefly explain the supply chain management. (70 words)
2. Discuss, using examples, four five of the risks encountered in strategic alliances. (150 words)
3. Discuss the link between the management accounting and the supply chain. (100 words)
4. Elaborate on how a good management of the supply chain, using accounting systems, improves the customer’s satisfaction. (140 words)

Answer 1

Part A :

Analysis of the strengths and weaknesses of the used-car financing business proposal

Strength of the Used-car financing Business proposal was to build on the company’s expertise in financing new cars and on the powerful network of relationships between its 1,500 salespeople located in the 89 sales centres with the thousands of small and medium-sized used car sellers around the country.

Weakness of the Used-car financing Business proposal was the downturn of the economy, introduction of new business in the market and the high pressure from Toyota.

What should Jung Hua Li do well in order for the new business to succeed?

In order for his new business to succeed, Li should first conduct a SWOT analysis and plan strategically. A scan of internal and external environment is a must and very important part before introduction of a new business in the market. SWOT analysis will help Li to understand the status and will provide information which is helpful in matching the firm's resources and capabilities to the competitive environment in which it operates. Also, internal analysis will help him to understand the firm's capability which will directly influence the evolution of successful strategies.

Some factors that needed to be taken into considerations are

1. patents
2. good reputation among customers
3. cost advantages from proprietary know-how
4. favourable access to distribution networks
5. removal of internal trade barriers

Prepare a balanced scorecard for the implementation of this business and discuss the linkage between the measures.

A Balanced Scorecard introduced by Robert Kaplan and David Norton, is a strategic performance management framework that allows the firm to manage and measure the delivery of their strategy.

The Balanced ScoreCard of Li's business is as follows :

1) Financial perspective : It covers the financial objectives of Li's business and will allow him to track financial success and shareholder value.

2) Customer Perspective : It will cover the customer service and satisfaction objectives like market share goals and well as product and service attributes.

3) The Internal process perspective : It basically covers all the internal operational goals and outlines the key processes necessary to deliver the customer objectives

4) The Learning and Growth Perspective : It covers the intangible drivers of future success such as human capila, organisational capital and information capital including skills, training, organizational culture, leadership, systems and Databases.

Part B :

Supply Chain Management was orginally coined in the year 1982 by Keith Oliver. SCM consistes of flow of goods and services, resources, finances and information, sourcing, procurement and all logistics functions involved in running a business. In involves in creating a product to from the point of origin to the point of destination. Some of the examples of Supply Chain Management are transportation, manufacturing, designing, inventory management and storage, location, production etc. It encompasses execution of process with integration of planning. The main elements of SCM is Operation, Integration, Purchasing and Distribution. These elements rely on each other to complete the SCM cycle.

Five Risks encountered in Strategic Alliance :

Strategic Alliance is relationship between two companies that helps each other to achieve its strategic goals/objectives by sharing their available resouces and information. In this, two companies work together for a mutually benefit project. Companies usually form a Strategic alliance due to factors like Slow or Standard Cycle of the business. Some of the important risks involved in Strategic Alliance are as follows:

1) Lack of Management Planning : All business operates differently with different plans and agenda. Companies which lack management strategy and planning will any how pull down the alliance partner in the market. Absence of senior management leadership is one of the high risk involed in alliance. Neiman Marcus and Target's alliance failed because of uninteresting designs, quality and presentation.

2) Leakage of confidential information : Trust is a very important factor in Strategic Alliance. It is very essential for a company not to share any confidential resources and information and maintain the secracy. Any step leading to leakage of the information should be avoided immediately. Any valuable information can be stolen and used in other ways for their own benefits. Ex : Apple and U2

3) Risk of Conflicts due to cultural diffferences : It is likely that when two companies come together, there is a high chance of conflicts between them. Lack of communication or barriers in language or work culture leads to a high chances of conflicts which in turn leads to less productivy and inefficiency between the employees. AOL and Time Warner failed because of major cultural differences. Where AOL represented an aggressive identity, Time Warner’s work culture was a conservative culture.

4) Risking the reputation : There is always certain percentage of risking the reputation of the company. Goodwill of the company helps to stay connected with its potential customers in a long run. Any alliance severly impacts the reputation and profit of the company. Any product failure of the alliance partner will directly impact the goodwill and reputation of the company. Staples and Office Depot alliance failed due to antitrust issues.

5) Lack of skill sharing or Financial Viability : The companies may lie about their current status of their company's financial positoin to mislead the partner. Partners may misre-present about their competency and proficiency. It may also stick alliance partner with majority of expenses. CISCO and MOTOROLA alliance is a very common example failed alliance as they did not understand that resources and skills sharing is very important to build a Strategic alliance.

Other risks involved are Partner lock-in Risk Innovation risk, Surge capacity risk , Co-ordination risk, Intellectual property risk, Product/service failure risk, Misalignment of incentives and Input supply risk

The link between the management accounting and the supply chain :

Management accounting plays a very important role in boosting a companies Supply chain management. It involves analyzing key performance indicators, planning and contribution in cost cutting, monitoring, organising and manufacturing the logistics throught the value chain. It also helps to buid internal financial records and data which benefits the company in long run.

J. Batty defines Management Accounting as “the term used to describe the accounting methods, systems and techniques which, coupled with special knowledge and ability, assist management in its task of maximising profits or minimising losses”

Link between Supply chain management and management accounting are as follows :

• Financial information : The main emphasis of management accounting is to provide financial information to Supply Chain management. The information is provided in a manner suitable to various levels of management for reviewing policies and decision making. This helps the SCM in taking quick and relevant decisions which are beneficial for the company. Also, If there is loss causes for the losses are investigated. If there is profit the variable affecting the profit are also analysed. The amount of profit is compared with expenditure, sales, capital employed, etc., to draw appropriate conclusions relating to the effect of those items on profit.

• Analysis and Interpretation of Data and information : The accounting data is analyzed meaningfully for effective planning and decision-making. The data is presented in a comparative form and the Ratios are calculated and likely trends are projected. It helps to provide comparative data for analysis and interpretation for effective decision making and policy formulation.

• Research and Development : Management accounting also helps to provide relevant information-to SCM to take various important decisions. Historical information provides a base on which the future impact is predicted, researched and then alternatives are developed and decisions are made to select the most beneficial course of action.

• Improvement in Efficiency : The purpose of accounting is to provide information to increase efficiency. The actual performance is compared with that of targets. Positive deviations are reviewed. The negative deviations are probed to ascertain the causes. The efficiency of departments, and divisions can be improved by fixation of targets or goals for a specific period. The ways and means to tackle the causes are analysed and targets are achieved. The process of fixing and achieving the targets leads to gradual improvement in overall efficiency. That is why it is said that management accounting depends on the efficiency of the management in using information and taking effective decisions.

• Minimizes Risks and Losses : Management accounting is mostly concerned with taking decisions for future implementation. This involves prediction and forecasting of future. It is also helpful in planning and laying down of objectives which helps in minimizing the risks and uncertainities which are likely to occur in near future.

How a good Supply Chain management, using accounting systems, improves the customer’s satisfaction.

Customer service has a very important role in Supply Chain Management. It severly affects the process where the products are sold to the customer and it is there when products are delivered. Through the processes of manufacturing, distributing and selling the finished goods, the companies should mostly focus their efforts on supply an excellent assistance to their clients, answering their queries, taking feedbacks to improve their operations and functions.

With the help of accounting systems, Supply chain Management understands the :

• Retention rates of Customers
• Market Share ( %age of total no of customer, %age of total dollars invested in customers and %age of total units sold to customer)
• Cost to retain old customers
• Total value chain analysis
• Cost to recruit new customers

With the help of Accounting systems, Supply Chain management is able to understand the Customer relationship management, customer profitability analysis and their relationship with managerial accounting and cost systems.

Accounting system or the accounting management often brings to the attention of SCM managers the important issues that need their managerial experience and skills. In many cases, accounting managers will not answer the question or solve the problem, but rather make management aware that the issue or problem exists.

Also, Managers rely on many information systems like economic analysis and forecasting, marketing research, legal research and analysis etc.