Balanced Score Card for Tesco by Manish Essay
Balanced Score Card for Tesco by Manish
The Balanced Scorecard was first developed in the early 1990s by two researchers: Kaplan and Norton (2001). The researchers Marr and Adam (2004) found that the balanced scorecard was designed to be used as a strategic performance measurement and management framework. Kaplan and Norton (1996) describe the originality of the balanced scorecard as: “The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation” (p.7). In recent years, balanced scorecards have been proposed and widely used to measure organisational performance from four different perspectives that help companies focus on their critical areas, and to translate their strategy into action (Seraphim, 2006).
The balanced scorecard proposes that the organization is viewed from four perspectives, and metrics, that it should collect information and examine it in relation to each of these perspectives; Kaplan and Norton (2001) urged people to view the organisation from four perspectives (the financial perspective, the customer perspective, the internal business process perspective, and the learning and growth perspective). “These perspectives are interlinked and layered: so that financial results are determined by customer satisfaction, which are in turn determined by internal processes and, underneath these three layers, is the foundation of the learning and growth perspective”(Marr and Adams 2004). The causal relationship between these perspectives can then be visualised in strategy maps (Marr and Adams 2004) p.18.
However, according to Marr and Adams (2004) a major weakness in the balanced scorecard is the learning and growth perspective. The researchers Marr and Adams (2004) believe that this latest attempt to evolve the balanced scorecard by Kaplan and Norton might have had an adverse effect. Marr and Adams outline how Kaplan and Norton failed to acknowledge the large body of writing on intangible assets and, therefore, produced an inconsistent, incomplete, and potentially very confusing classification of intangible assets. However, in my opinion the balanced scorecard also has other weaknesses, which mean that the balanced scorecard will not always guarantee success. Many companies fail to put the required measurements in place to make the balanced scorecard a success. Two reasons for this may be: (a) Time
The balanced scorecard takes time to implement and many companies may not have the time or the sufficient resources to properly invest in this performance measurement. (b) Fee
It can be costly to implement the balanced scorecard. The organizational will have to ensure that all employees are sufficiently trained and if they are not they will have to send them on training courses which is costly. They may also have to improve their production processes i.e. having new, up to date technology and machines that are of high quality.
The Balanced Scorecard Today: Tesco PLC
Tesco was founded in 1919 by Jack Cohen when he began selling surplus groceries from a stall in the East End of London (Tesco 2009). In 1932, Tesco Stores Limited became a private limited company (Tesco 2009). Tesco floated on the stock exchange for the first time in 1947 with an initial share price of 25p (Tesco 2009). Tesco introduced the Clubcard in 1995, which is a loyalty card for customers (Tesco 2009). This card has helped Tesco evaluate its customers. “Tesco is the UK’s leading food retailer in an extremely competitive market” (Vignali 2001). For this reason it decided to expand operations across Europe, which also included expanding to Ireland. According to Vignali (2001), Tesco entered the Irish food retail market by choosing to purchase all Quinnsworth, Crazy Prices and Stewart’s stores in Ireland. Tesco plc currently employs over 470,000 people across 14 countries (Tesco 2009). In 2009, Tesco’s turnover exceeded £1 billion per week over the 12-month period (Microsoft, 2010). The current share price is 427.55p, which exceeds its leading competitors share price of 332.40p (Tesco 2009).
The company’s major shareholder is Legal & General Assurance (Pensions Management Limited) (Tesco 2009). Tesco floats on the London Stock Exchange under the symbol TSCO and it also floats on the Irish Stock Exchange as TESCO PLC. While most people call their strategic planning and management systems a balanced scorecard (Witcher and Chau, 2008), Tesco call it the Steering Wheel (Tesco 2009). This organisational tool centers their business on the delivery of their core purpose (Tesco 2009). The only difference is that there are five perspectives instead of four; the fifth perspective being community (Tesco 2009).
The editors of Strategic Direction (2009) found that at Tesco “performance is reported quarterly to the board, and a summary report sent to the top 2,000 managers to cascade to staff” (p.5). The salary of senior management is created by the KPIs, with bonuses established on a descending scale according to the level of success on the steering wheel (Editors of Strategic Direction 2009) However, according to ICMR (2005), Tesco’s ‘Steering Wheel’ was so successful in fulfilling the company’s strategic objectives that the company forgot about HR policies and procurement policies when the company began to grow rapidly. This resulted in Tesco paying unduly low wages and having a high absenteeism rate. The balanced scorecard does appear to have been a great success for Tesco as it is the largest British retailer. |
“The Financial Perspective covers the financial objectives of an organisation and allows managers to track the financial success of a company for example how wealth is created for shareholders” (Advanced Performance Institute 2010). However, despite the need to provide a balanced approach to performance measurement, companies remain focused on traditional financial measures (gross revenue, profit before tax, and cost reduction) and often forget about intangible assets (Chia, Goh and Hum 2009). According to Valiris, Chytas and Glykas, (2005) financial measures remain an important dimension within the balanced scorecard. The Financial perspective measures whether a company’s strategy, implementation, and execution are contributing to bottom-line improvement (Valiris et al. 2005). The financial perspective focuses on traditional return-based efficiency and effectiveness metrics (Punniyamoorthy and Murrali 2008).
In order for Tesco to meet its target profits in 2009 it decided to charge elevated prices in its Irish stores at the beginning of the year (Cullen 2009). Cullen (2009) also found that Tesco then lowered their prices from March on 11 Border stores in preparation for a price war against competitors. For Tesco to achieve its profit targets for 2009 it had to make up to 100 employees redundant at its Irish headquarters in Dún Laoghaire (Cullen 2009). In 2008, Tesco had a profit margin of 9.3 per cent in Ireland, while its profits were €248 million and 2009 profits were projected to rise to €255 million (Cullen 2009). Tesco have reduced their costs in order to increase sales revenue.
These figures may look great to the shareholders in times of economic downturn but for Tesco to cut their prices they more than likely put pressure on their suppliers (especially Irish suppliers) to reduce their prices. This in effect can put some suppliers out of business. Tesco have also reduced their direct expenses by cutting employee hours and introducing self service scan tills into most of their stores. This may have benefited Tesco’s bottom line but it has made its employees threaten strike action.
Tesco’s main competitor in the UK is Sainsbury’s. Tesco is appealing to shareholders as it achieving a return on capital employed of 15%, while its competitor (Sainsbury’s) is achieving a return on capital employed of 9% (Appendix1). The absolute difference between these returns on capital employed is 6%, which means that Tesco is the more profitable company. The relative difference is 66%, which indicates that Tesco are 66% more profitable than Sainsbury’s. Tesco paid out a final dividend of 8.39p (Tesco 2009) to its shareholders at the end of 2009, while its competitor Sainsbury plc paid out a dividend of 9.6p (Sainsbury plc 2009).
Tesco has a policy of not paying their trade creditors for 54 days, which in turn puts pressure on their suppliers. Tesco’s group sales have increased by 7,000 since 2008 (Tesco 2009), while Sainsbury’s increased by 1,000 from 2008 (Sainsbury plc 2009). Tesco should be given credit for their increased sales during tough economic times but to achieve these sales they have had to cut prices, which means that they would have also undercut their suppliers. Tesco’s net profit percentage has an absolute difference of 3% when compared to Sainsbury’s (Appendix3). The relative difference is 88%, which signifies that management in Tesco are controlling their costs more efficiently than Sainsbury’s. This is evident in that Tesco have cut wages, which would increase Tesco’s net profit.
“In the customer perspective of the Balanced Scorecard, managers identify the customer and market segments in which the business unit will compete and the measures of the business unit’s performance in these targeted segments” (Kaplan and Nortan 1996, p26). According to Kaplan and Norton (1996) the customer perspective, if implemented correctly, should have successful outcomes such as customer satisfaction, customer retention, customer profitability, new customer acquisition and market share in targeted segments. It also enables companies to measure and identify the value propositions (unique mix of product, price, service, relationship etc., offered to customers) that they will deliver to targeted customers and market segments (Kaplan and Norton 1996).
For this to work, businesses must identify the market segments in their existing and possible customer populations and then they must identify which segment they are going to compete in (Kaplan and Norton 1996). However, for many companies this may be difficult to implement but for Tesco it is easier as they have a value clubcard, which enables them to identify what their customers want. According to Liptrot (2005) Tesco attracts 15 million customers per week. When Tesco implemented the ‘Steering Wheel’ they appealed to all segments of the market instead of focusing on certain segments (Liptrot 2005). Tesco wanted to gain customer satisfaction and in order to do this; they decided to cater for all incomes. Tesco offer three distinct ranges of own-brand products to satisfy all their customers (Tesco 2009). It is far cheaper for Tesco to keep its customers than it is for it to gain new ones.
Tesco launched a Loyalty Clubcard in 1995 (Tesco 2009). The information gained by Tesco from its customers using the Clubcard allows them to understand their customers and offer them a variety of coupons to suit their needs (Tesco 2009). It was also found by Turner and Wilson (2006) that there was a positive moderate relationship between the Clubcard returns and customer loyalty. In May, Tesco offered a Double Up scheme, giving card holders a chance to turn vouchers into twice their face value, this incentive drew 500,000 extra shoppers in (Mirror 2009). Tesco also retain customers by marketing online grocery shopping as a convenience to its customers (Delaney-Klinger et al. 2003). This allows shoppers to shop from the comfort of their home and have their purchases delivered to their door.
According to Rowley (2003) Tesco online (tesco.com) has developed a sophisticated and extended shopping experience which sets new standards for retailing. If a customer has signed up for online shopping then they will receive offers on a regular basis. For example, they may receive free delivery codes to encourage people to shop with them. In the three months to November 2009, Tesco’s market share rose to 30.7% from 30.6% in the same period in 2008 (Finch 2009). Tesco’s sales increased in 2009 with a growth rate of 4.7% compared with a market growth of 4.4% (Finch 2009), which indicates that they acquired a great deal of new customers in 2009. Tesco took on board the fact that families were experiencing financial difficulties due to the current economic climate and targeted those areas which dually increased their market share.
Internal Business Process Perspective
In the internal business process perspective, managers identify the important internal processes that the business must succeed in, in order to implement its strategy (Drury 2004). Metrics based on this perspective let managers measure how successful their organisation is doing and whether its goods and services conform to customer needs (Papenhausen 2006). The internal business process measures should focus on the internal processes, which the organisation will need to achieve its customer and financial objectives (Drury 2004). According to Chavan (2009) a “well-oiled machinery” of internal processes is important in any business, and may not always correlate with external perceptions. Internal business processes are identified by three principal processes which are: innovation processes, operation processes and post-service processes (Drury 2004). Innovation:
The product development manager for Tesco is Seaneed O’ Neill (bbc news 2002). Seaneed O’Neil is constantly on the lookout for the latest trends regarding the food market so that it can be developed into a new line in Tesco (bbc news 2002). The latest range that Tesco have delved into is the healthy eating market with its finest range. The design and development of these new products can be timely for the organisation as they have to source suppliers and conduct market research (bbc news 2002). The company then has to measure the payback period of the new product and the sales from the new product (Drury 2004).
Traditionally, the operations process has been the major focus of an organisation’s performance measurement system (Drury 2004). Tesco needs to manage its transport better as it has 2,000 trucks (Tesco 2009). They identified issues with their drivers and fleets so they decided to start up a ‘Managing Transport Better’ project to reduce the cost of transport and to have one standard way across their depots (Tesco 2009). According to Tesco (2009) it saved millions of pounds on this project as it improved the efficiency of its systems by trailing the improvements over three months. Tesco then rolled out the new routines across the depots.
“However, the fact that a handful of supermarkets control access to consumers means that they are increasingly in a position to exercise buyer power” (Fearne, Duffy and Hornibrook 2005) p571. According to Irish Times journalist Cullen (2010), Tesco has been demanding millions from Irish suppliers in return for the sustained stocking of their items on Irish shelves. Tesco are putting great pressure on their suppliers, which may in turn push Irish suppliers out of the market (Cullen 2010). Cullen (2010) also found that if suppliers did not pay the sum demanded by Tesco then the space allocated to the supplier’s products in store would be significantly reduced.
According to Cullen (2010), suppliers have suggested the demands by Tesco may have something to do with improving its figures as Tesco’s financial year runs to the end of February. Tesco’s financial year runs to the end of February, which has made suppliers believe the demands by Tesco are a move to improve its figures before the year end. It has been a difficult trading year for Tesco as the retail market is down by 7 percent and profits have tight due to the price war (Cullen 2009)
Learning & Growth Perspective
The learning and growth perspective includes employee training and employees learning from within the organization so that the company will continue to please customers in the future (Drury 2004). According to the Balanced Scorecard Institute (2010), learning and growth metrics can be put into place to guide mangers in centering training funds where they can help the most in the organisation. Kettunen (2005) presented in his research paper that the learning and growth perspective included three principles: “the capability for R&D”, “environmental scanning and customer knowledge” and “quality and assessment capabilities, and in-house training”. Tesco employs staff from a multitude of different backgrounds and all employees are given the opportunity to develop in tandem with the company.
The majority of companies fail to measure the outcomes of learning and growth but Tesco are different as it regularly measures the performance of its staff. Employees are able to apply for training through yearly appraisals to improve their knowledge and skills (Thetimes100 2010). However, it has been noted that training is not one of Tesco’s primary focuses. According to Tesco (2009), training is tailor to its employees.
They treat their employees like they treat their customers as persons with their own specific requirements (Tesco 2009). Tesco (2009) have a off the job training and development program known as ‘Options’. Options is an accommodating program that is tailored to the employees needs, which can last between 6 months to 2 years (Tesco 2009). This program aims to develop a combination of broad skills, leadership and operating skills through off’ the job experiences and a clear procedure that is designed to provide clear feedback and schooling (Tesco 2009).
Tesco also offer their staff on the job training (Thetimes100). On the job training techniques would include shadowing, coaching, mentoring and job rotation (Thetimes100). The method of shadowing is used for many reasons but it is mainly used for the training of cashier staff and aisle staff. The trainee employee is shadowed by a more experienced employee until they are competent in their new role. On the job training is directly related to the employees work and is usually favoured over off the job training as it is cheaper for Tesco to implement (Thetimes100).
The researchers Van Der Klink and Streumer (2002) found that from a study of on the job training, the results of the study were only partially successful in realising training goals. On the job training may not be a great success as more experienced employees often see it as a way to reduce their work load. Hayman and Lorman (2004) found that most graduates entered companies directly from further education and had a solid academic background. They found that training made sure graduates were prepared with a working knowledge to complete their job role (Hayman and Lorman 2004). Tesco offer graduate programmes where the employees training depends on its graduate programme (Tesco 2009). Tesco (2009) also provide training in specialised areas for example in Finance they offer to pay for the employees CIMA qualification.
“Although there are some criticisms concerning the balanced scorecard approach, many of these seem to represent problems of practical application rather than fundamental flaws” (Atkinson 2006). The ‘Steering Wheel’ strategy has assisted Tesco in accomplishing big goals by breaking them down into smaller, more achievable goals. While Tesco have achieved their targets for 2009, the manner in which they have done so can be considered to be
slightly furtive, including demanding money from suppliers for shelf space in their shops.
Even though Tesco’s employee training programmes are held in high regard, training is not their primary concern. Instead Tesco adopt a more customer-oriented focus, with the intention of getting customers into their store in any conceivable way. The fact that Tesco have delved into new markets, e.g. healthy eating, in order to satisfy their customers’ needs, exemplifies the above statement. In general, the balanced scorecard has proven to be an effective and successful tool, in the achievement of Tesco’s respective goals.
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University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 13 November 2016
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