Developing a Balanced Scorecard

Historically, the Great Northwest Paper Company (GNP) has manufactured commodity-grade papers for use in printers and photocopiers. GNP has reported net operating losses for the last two years due to intense price pressure from larger competitors. The GNP management team - including Brenda Sanchez (CEO), Igor Baginski (VP-Manufacturing), Pete Kirkeby (VP- Marketing), and Felix Salka (CFO) - is contemplating a change in strategy to save the company from impending bankruptcy. Following are comments from a recent meeting:
Sanchez: As we all know, the commodity paper manufacturing business is all about economies of scale. The largest competitors with the lowest cost per unit win. The limited capacity of our older machines makes it difficult for us to compete in the market for high-volume commodity paper grades. Further, the extraordinarily high price tag of new machines makes it impractical for us to update and expand our capacity. Therefore, I propose that we abandon our current strategy that relies on cost reduction to compete and instead pursue manufacturing flexibility as the key to our future success.
Salka: Manufacturing flexibility? What does that mean?
Baginski: It means we have to abandon our "crank out as many tons of paper as possible" mentality. Instead, we need to pursue opportunities in the lower-volume business of supplying non-standard, specialized paper grades. We'll need to improve our flexibility in three ways. First, we must improve our ability to switch quickly between paper grades. Right now, we require an average of four hours to change our machines over to produce a different paper grade. Timely customer deliveries are a function of changeover performance. Second, we need to expand the range of paper grades that we can manufacture. Currently, we only manufacture and sell three commodity paper grades. We need to be seen by our customers as the "one-stop-shop" that can meet all of their specialized paper grade needs. Third, we need to improve our yields (e.g., tons of acceptable output relative to total tons processed) in the nonstandard paper grades. I am certain that our percentage of waste within these grades will be unacceptably high unless we do something to improve our processes. Our variable costs will go through the roof if we cannot increase our yields!
Salka: Wait just a minute! These frequent changeovers are going to destroy our equipment utilization performance!
Kirkeby: You're right, Felix; however, our customers don't care about our equipment utilization. Instead, as Igor just alluded to, customers in this market want just-in-time delivery of smaller quantities of a full range of paper grades. If we can shrink the elapsed time from order placement to order delivery and expand our product offerings, it will increase sales from current customers and bring in new customers. Further, we will be able to charge premium prices because there is limited competition in this niche. Our contribution margin per ton should drastically improve.
Baginski: Of course, executing the change in strategy will not be easy. We'll need to make a substantial investment in training because ultimately it is our people who will create our ability to succeed with this new flexible manufacturing strategy.
Required:
1. Contrast GNP's previous manufacturing strategy with its new manufacturing strategy.
2. When GNP changes its strategic goals, why does it need to change its performance measurement system as well? What are some examples of measures that would have been appropriate for GNP prior to its change in strategy? Why would these measures fail to support GNP's new strategy?
3. Construct a balanced scorecard that supports GNP's new manufacturing strategy. There is a model on the next page to help. Make sure it uses the following three columns: (1) Balanced Scorecard Perspective, (2) strategic objective for GNP, and (3) the measure (or measures) you would use to evaluate whether strategic objectives are being achieved. To keep this manageable, for each of the four Balanced Scorecard Perspectives, include at least one measure but no more than three measures.
4. Explain what hypotheses about strategic links are embedded in your balanced scorecard. How would you go about testing or verifying these hypotheses?

Kendall Company

In late 2013, the Board of Directors of Kendall Company concluded it was time to make a change and hired a new CEO. Since the management change, Kendall Company has had a steady growth in profitability as shown in the summary results below. Net income increased each year between 2014 and 2016 and increased by about 25% in total over the three-year span. Largely because of the steady increases in net income, the Board of Directors has been awarding generous bonuses to the new CEO.

Kendall’s current liabilities consist entirely of non-interest bearing liabilities.
At the time the new CEO was hired in 2013, Kendall changed from a dividend policy that pays out cash dividends equal to earnings each year to a policy where all earnings are retained in the business. By retaining all earnings instead of distributing them as dividends and also steadily increasing long-term debt, Kendall has been able to finance substantial growth in total assets of about 89% over the three-year span.
The interest rate on all long-term debt is 10% and Kendall’s corporate tax rate is 40%. Kendall’s weighted average cost of capital (WACC) has remained steady at 12% across all four years, even as the mix of debt and equity in the capital structure has changed over time.
Despite steady increases in net income, the stock price has declined slowly but steadily from $50 per share in 2013 when the new CEO was hired to $38 per share near the end of 2016. The Board of Directors has become increasingly uncomfortable about the fact that they have provided large bonuses to management while the stock price has been declining.

Required:
1. Compute EVA for each of the years: 2013, 2014, 2015, and 2016. For purposes of this calculation, you can assume there are no adjustments to Operating Income or Total Assets needed for “Bad GAAP”.

2. Using your calculations from item 1, write a brief memo (no more than 2 paragraphs) advising the Board on the performance of senior management during the last three years.

Developing a Balanced Scorecard Historically, the Great Northwes...