INTRODUCTION:
Balanced scorecard is a management tool which is used by companies to gain complex information at a glance. According to Kaplan and Norton (1992), balanced scorecard is a set of measures that gives top managers a fast but comprehensive view of the business. The balanced scorecard allows managers to look at the business from four main perspectives: Customer perspective, internal perspective, innovation and learning perspective and financial perspective. This project will critically examine the usefulness of balanced scorecard with the four main perspectives as a base and a view of longer term perspective. I have used a case study of Tesco PLC in order to examine the usefulness of balanced scorecard.
LITERATURE REVIEW:
According to Kaplan and Norton, 1996 the balanced scorecard is a model which integrates financial and non-financial strategic measures. It is distinct from other strategic measurement systems in that it contains outcome measures and the performance drivers of outcomes, linked together in cause-and-effect relationships (Kaplan and Norton, 1996). The balance scorecard by Kaplan and Norton includes 4 main perspectives: Customer perspective, financial perspective, internal business perspective and innovation and learning perspective.
The Balanced scorecard above is prepared by Kaplan and Norton (1992) shows the four perspectives. In 2008, Kaplan and Norton prepared a balanced scorecard as Strategic Management System. The balanced scorecard relies on four processes to combine short time activities to long term activities. It shows a cause and effect relationship between the activities.
Translating the vision means managers build a plan around the organisation’s vision and strategy. The plan is the set of objectives and measures which is approved by all the senior executives of the company.
Communicating and linking process allows managers to communicate their strategy in the organisation and link into departmental and individual objectives. The scorecard gives managers a way of assurance that all the departments in the organisation understand the long-term strategy and both individual and organisational objectives are combined.
Business planning process enables the company to integrate and combine their business and financial plans. Feedback and Learning process of balanced scorecard enables managers to review the other process which are aligned with the organisation.
According to Marshal (2002), performance measurement has been dominated by balanced scorecard in the last decade. He also said that the measures of the objectives of the balanced scorecard are difficult to find. Kaplan and Norton also agree with this. They said that firms hesitate to link balanced scorecard to their objectives and strategy.
Apart from the uses and application of balanced scorecard there are some criticisms as well. Norreklit(2000, 2003) comments that there is no cause and effect relationship between the perspectives of the balanced scorecard. According to Colin Drury (2009) balanced scorecard is often used as a literature for reviewing the company’s performance so as to satisfy them. But the literature of the balanced scorecard by Kaplan and Norton focuses more on the manufacturing sector than the service sector. The measures of balanced scorecard focus more activities of develop target markets and upgrade staff capabilities but does not focus on the outcome.
Apart from the balanced scorecard there are other methods which are used by companies for performance management. Activity based Management is one of the method of performance management. This method basically focuses on customer satisfaction by adding value to the customer. Business process re-engineering is another method which some companies adopt for measuring their performance. It focuses on improving business processes by focusing on cost reduction, improved quality and customer satisfaction. According to Colin Drury (2009), in today’s global competitive environment companies are focusing more on customer satisfaction. One such important method is Total Quality Management (TQM) which is customer oriented process which focuses on improving products and services with high quality at perfect time. This project will show the use of balanced scorecard by a retail company Tesco Plc and how does the scorecard by Kaplan and Norton act as a framework for the balanced scorecard prepared by Tesco plc.
REVIEW OF TESCO PLC:
Tesco was founded in 1919 by Jack Cohen now led by David Reid the non-executive Chairman of Tesco plc and one of the boards of directors is the 3rd largest retailer in the world. Other boards of directors include Rodney Chase and Sir Terry Leahy to name a few. The first brand product sold by Jack Cohen was Tesco Tea. The name of Tesco comes from the initials of TE Stockwell who was a partner in the firm of tea suppliers and CO from Jack’s surname. In 1932, Tesco stores limited became a private company. Tesco stores (Holdings) Ltd floats on share markets with a share price of 25p in 1947. In the year 1956 Tesco’s first self-service supermarket opens in a cinema in Maldon. In 1979, Tesco’s annual sales reached £1 billion. Tesco stores (Holdings) becomes Tesco PLC in 1983. Company’s main strategy ‘EVERY LITTLE HELPS’ was introduced in 1992. In 1995 and 1996 Tesco enters many European countries such as Hungary, Slovakia and Poland and also enters Asia in late nineties. Tesco introduced loyalty card for their customers known as Clubcard in 1995. Tesco launched its ‘unbeatable value’ campaign in 1996 and went in for massive price reductions. The company adopted the strategy of ‘Everyday Low Pricing’ (EDLP), while continuing its other promotional activities. The EDLP program aimed at regularizing low prices for Tesco customers. It was not merely a strategy used for the occasional sale, but on a daily basis. In 2000, Tesco’s website Tesco.com was launched. At present Tesco Plc have more than 2300 supermarkets around the world and over 326,000 employees.Tesco has over 180,000 employees working in international businesses, serving in 2,026 stores and generating £17.9 billion sales and over £700 million profit. Tesco’s half of the selling space is now outside the UK. Tesco’s UK business is significant within the group and around 70% of group sales and profits come from the UK business.
LATEST NEWS:
Tesco celebrated its 15th anniversary of Clubcard and gave rewards of over £120 million to more than 14 million customers. There is a lot of demand for the clubcard so the company has decided to give customers double points across the store and online. Tesco staff share in £144 million payout from save as you earn share scheme. Tesco announced on 2nd February that it will spend over £100m with UK green technology companies which boost the economy and will create thousands of jobs.
VALUES AND STRATEGY AND BALANCED SCORECARD:
The main value of Tesco plc is to create value for customers to earn their lifetime loyalty. Their success depends on the people: the people who shop with them and the people who work with them. These values are then put in strategy of ‘Every Little Helps’. Tesco regularly ask their customers and staffs about what they can do to make shopping with them and working with them that little bit better. The strategy is to broaden the scope of business to enable it to deliver strong sustainable long term growth by following the customers into large expansion at home and in Asia and Europe as well. Every little helps is divided into four sections: A great place to work, shopping trip, the way they work and their community. One of my friends is working in Tesco. I asked him that Is Tesco a great place to work? He said he is very happy with company in the context of salary, respect given by his manager and also working as a team. Overall he is very satisfied.
The success of any company comes from behaving responsibly and earning the trust of the customers, suppliers and stakeholders. There are many different issues that a company have to face on a daily basis to ensure consistent standards across the markets. This applies to Tesco as well. Tesco manages all aspects of their business using their Steering Wheel – their balanced scorecard which consists of the 4 key elements which are Customers, People, Finance and Operations. By using a balanced scorecard they also give emphasis on the corporate social responsibility which is a longer term perspective on a daily basis. Managers are asked to monitor customers, operations, staff and finances using a traffic light system where green light indicates that the targets are being achieved and red sign shows a problem. Sir Terry Leahy, one of the boards of directors, learned the method of balanced scorecard when he picked up one of the books of Kaplan. In an article in 2004 in business times online, Sir Terry Leahy revealed the success of Tesco is because of its balanced scorecard. Tesco launched the fifth element of Community in their steering wheel in 2009.
Tesco set targets for each objective in every segment of the Steering Wheel and uses Key Performance Indicators (KPIs) to measure their progress. They review their KPIs annually to ensure they are still accurate and robust measurements of their performance. Tesco makes its balanced scorecard using these key performance indicators. According to Kaplan and Norton (1992), balanced scorecard is a set of measures that gives top managers a fast but comprehensive view of the business. The balanced scorecard allows managers to look at the business from four main perspectives: Customer perspective, internal perspective, innovation and learning perspective and financial perspective. Kaplan and Norton define balanced scorecard as a cause and effect relationship between the four perspectives.
Tesco is already preparing a balanced scorecard from many years. For me it becomes a bit difficult as I cannot just copy the balanced scorecard as done by the company. I have tried below the balanced scorecard for the company keeping in mind the four main perspectives of the Kaplan and Norton’s balanced scorecard.
Customer perspective: According to Kaplan and Norton (1992) customers tend to concern about four main things: time, quality, performance and service and the cost. Tesco articulates these concerns into their objectives and then it measures it objectives through its steering wheel. The main objectives of the Tesco regarding the customer are-
- Highest quality
- Lowest price
- Customer satisfaction with product quality and price
- Customer Retention
Tesco’s main aim or goal is to earn lifetime loyalty of the customers by giving them highest quality products. It is measured by the percentage of defective products returned to them by customers. Tesco can use Total Quality Management to improve their quality and decrease their cost which many companies have been successful in doing that. In order to earn the lifetime loyalty of the customers the prices of the products should be low as compared to other supermarkets such as Sainsbury and Morrisons. The prices of some products are cheaper than the other supermarkets. For example, bread is cheaper in Tesco than Sainsbury and Morrisons but it is costly than Asda. My sister does shopping at Tesco and she told me that she finds Tesco the best out of the other supermarkets as it is cheap and good place to be in shopping. Overall the prices are good which helps them to earn customer loyalty. The most important objective is customer satisfaction with product quality and price. Tesco measures this by asking questions to their loyal customer about the products and the staff. I found on Tesco’s website some videos of the customers who are really satisfied with the company. Customer retention is another objective of judging the customer who is repeating their purchases in Tesco plc. They took initiative by providing loyalty card to its customers. Tesco Clubcard is a world-leading loyalty card scheme, with around 15 million active cardholders. This Clubcard enables Tesco to better understand their customers and say a big thank you for shopping with them. Customer perspective is justified by increase in the number of clubcards or loyalty cards which has increased over the years. Many customers are happy with Tesco. I had prepared a questionnaire (APPENDIX) in which asked questions to some customers. On an average the customers are happy with the company.
Financial perspective: According to Kaplan and Norton (1992), financial goals of the company are profitability, growth and shareholders’ value. The main objectives of the Tesco regarding the financial perspective are:
- Grow sales
- Maximise profit
Every company wants to grow and earn more profit. It is one of the main objectives of every company. It is the same with Tesco PLC. Tesco’s main objective is to grow in sales. It measures by comparing the sales of the company as a five year summary. The sales of Tesco have increased considerably from £36957 m in 2005 to £59426 m in 2009. Another important objective is to maximise their profit which is measured through their income statement. The in 2005 was £1925m to £3128m in 2009. Financial perspective includes sales growth which is clearly justified by the increase in their sales (FIVE YEAR SUMMARY IN APPENDIX) in the last 5 years.
Internal perspective: According to Kaplan and Norton (1992), this segment of balanced scorecard consists of the factors that affect the cycle time, employee skills and productivity of the company. The main objectives of Tesco regarding the internal perspective are:
- Employee skills
- To improve product quality
Employee skills are one of the main objectives of any company. Tesco runs a training scheme called options programme for its employees to improve their skills and knowledge required for the job. They measure the employee skills on the basis of the employee gets selected for the next stage after the training. Product quality is an important objective of Tesco. It measures by regular checks on its production line. One of the customer shad got allergies with one of the products of Tesco. Tesco realised it and started “Free From” products which made life easier for people with food allergies. Internal and business perspective aims at enhancing employee skill and improving productivity is clearly seen in the increase of employee turnover and revenue of the individual employee. Revenue per employee has increased from £179,840 in 2008 to £196,436 in 2009. One of my friends is working in Tesco. He had also undergone an employee skill test or training programme which helped him to understand more about his job.
Innovation and Learning perspectives: According to Kaplan and Norton (1992) “global competition requires companies to make continual improvement to their existing products and processes and have the ability to introduce new products in order to deliver value for customers, improve operating efficiency and thereby increasing shareholder value”. The main objectives of Tesco regarding the Innovation and Learning perspective are:
- Improve employee capabilities
- Deliver consistently on time
- Product focus
A company in order to survive in the market has to be innovative and improve their standard so it can add to its value. Tesco tries to be innovative by improving employee capabilities by training scheme called option programme. They measure the employee’s skill and knowledge by this programme. Tesco always tries to deliver products consistently on time. They measure this by checking their stock on a daily basis. When I visited I did not find frozen pizza which I needed. After a day I visited Tesco again I found that Pizza. This shows that what they say is true. They indeed deliver on time. The other objective is product focus. Tesco measures it as percentage of products that equals percentage of sales.
These were four perspectives of the balanced scorecard of Tesco Plc. Tesco makes Corporate Responsibility integral of their business which is essential in applying their values as a responsible business. They believe that corporate social responsibility as a long term perspective is also an opportunity for growth of their business. Their long term strategy includes (Tesco Annual Report 2009):
- To be a successful international retailer;
- To grow the core UK business;
- To be as strong in non-food as in food;
- To develop retailing services – such as Tesco Personal Finance, Telecoms and tesco.com; and
- To put community at the heart of what we do.
Tesco wants to be the most successful retailer in the world and grow to core in United Kingdom. Tesco’s sales has increased by 31% in 2009 in international markets which shows that they adjusted to the international markets and have the experience to be successful in international markets. In the core UK markets which was affected by recession largely did hamper the growth but to a smaller extent. Their savings scheme called Step change has led to saving of £540m of their productivity. Non-food is one of the main segments of Tesco’s strategy and it continues to grow in sales and market share. They had sales of 12.5bn in the Non-food segment which was more than the previous years. Steering Wheel or balanced scorecard of Tesco gives them the tools to deliver their strategy in context with the customers, people and finance along with the impact on their community. They measure their community segment by their Key Performance Indicators. Tesco developed Community KPIs in the UK in the year 2007, since they have been working upon to use them across the Tesco Group. In 2008 they introduced Group-wide KPIs in addition to their UK KPIs so that they could measure the success of their newly established Community Plans and Policies. In 2009 Tesco will be working to deliver Group targets that will reflect their five Community Promises. Their new KPIs reflect their business across the world and show the importance they attach to being a responsible and successful business wherever they operate.
Reduce CO2 emissions from existing stores and distribution centres by at least 50% by 2020- Their target for 2008 was 5% whereas there actual performance was 7%.
This target is measured against a baseline of their stores and distribution floor space in 2006
Donate at least 1% of pre-tax profits to charities and good causes- This year they donated 1.9% of their pre-tax profits
This year they donated £57m to charities and good causes, i.e. to 1.9% of pre-tax profits.
Percentage of store waste recycled: Their target was 80% in UK whereas they achieved 85% in UK
It is difficult to measure the waste recycled for them but trying hard to develop a Group wise target for their Stores in the world.
Tesco recognises that running their business responsibly is most important for their customers and it is very necessary for their growth. They are working within their communities to develop their plans as well as involve their customers in the plans. Tesco has five core promises: actively supporting local communities; buying and selling products responsibly; caring for the environment; giving customers healthy choices; and creating good jobs and careers (Tesco Annual report, 2009).
Tesco’s ‘Steering Wheel’ was very successful in guiding Tesco towards the completion of its strategic objectives. But Tesco’s rapid growth in the 2000s attracted many criticisms for its HR policies and procurement policies. Tesco rates itself as people-centred organization; there were reports that said that the company paid very low wages to its employees. Tesco emphasis more on customer satisfaction but customer satisfaction is not always going to yield good financial results (Norreklit, 2000). Tesco has been criticised in terms of pricing and advertising strategy. Tesco used the increase the price of the product on one day and then decrease the price of that product to original value and advertise it as a “price cut”. Their main aim is to customer loyalty but by fooling the customers they cannot earn their loyalty. So their loyalty scheme had once been stopped. But they gained the respect of the customers again and loyalty scheme was re-launched in 2009 which had lots and lots of membership. Balance scorecard in general focuses a lot on customer needs and shareholders needs but does not focus on the employee’s needs. But Tesco prepares its balanced scorecard with employee needs as well. It means that balanced scorecard is just a framework where any company can add its own perspective to the framework of balanced scorecard. Many critics mentioned that balanced scorecard became popular because of the advertisements of renowned people and reputed institutions (Norrekilt, 2003). Norreklit (2003) also believes that there is no cause and effect relationship between some of the segments of balanced scorecard specifically between customers and loyalty and loyalty and financial results. Another disadvantage of balanced scorecard is that it takes a lot of time and effort to prepare the balanced scorecard.
Conclusion:
Balanced scorecard is one of the performance measurements tools which are used by different companies for their performance management. Balanced scorecard by Kaplan and Norton had four perspectives that is customer perspective, financial perspective, internal business perspective and innovation and learning perspective. There were criticisms as well. Norreklit (2003) said that balanced scorecard did not have a cause and effect relationship which Kaplan and Norton defined. Norreklit is one of the critics of balanced scorecard. The question that was raised was that Is balanced scorecard useful for the retail companies such as Tesco. The answer is yes it is useful for the company. Sir Terry Leahy one of the executives of Tesco revealed that the success of Tesco lie in its balanced scorecard with its four perspectives and a long term strategy. The five year summary of Tesco shows that it has grown from strength to strength. One of the main objectives was to grow sales which are very much achieved by the company. Tesco is successful in preparing the balanced scorecard with a longer term perspective as well. Balanced scorecard has helped Tesco to measure its performance from the four perspectives of the balanced scorecard and also its community segment which it added in 2007. Tesco gives importance to customer loyalty and high quality but there some criticisms attached to it such as pricing and advertising, paying low wages to its employee. But when we look at a broader perspective balanced scorecard has helped Tesco to for a proper performance management and to achieve its objective and be a successful retailer in the world.
APPENDICES:
The field research and observations below further justifies the balance scorecard of Tesco to be a successful one. But some areas are definitely to be improved upon which has a lot impact on the company.
Field Research and Questionnaire:
I visited Tesco for my field research in Reading. My main aim was to have an experience myself, analyse the customer behaviour and staff. Following were the observations I had when I visited Tesco:
-Good and Up-to-date customer services- The staff are ready to help every time you need a help which shows that strategy of Every little helps (Shopping trip) is worth.
– Prices of some products are cheaper as compared to other supermarkets. Example, price of bread are cheaper in Tesco as compared to Sainsbury and Morrisons.
-Price tags are sometimes confusing- I was looking at a T-shirt in a rack which had a price tag of 6 GBP but the same t-shirts in the rack had a price tag of 12 GBP which is very unusual and confusing in Tesco.
-Slow checkout points- This has been a worry for Tesco for many years now. Some of the checkout points in Tesco were closed which created a long queue in other checkout points.
According to these observations I have prepared a questionnaire which was used as a survey for this project. I had questioned 4 people who are regular customers in Tesco. One of them works in Tesco.
Do you like shopping at Tesco?
Ans) Customer 1: Yes, Customer 2: Yes, Customer 3: Yes
Are you satisfied with quality of the products? Rate on 1to 10.
Ans) Customer 1: 7, Customer 2: 9, Customer 3: 8
How do you rate Tesco as compared to Sainsbury or Morrisons?
Ans) Customer 1: 5, Customer 2: 9, Customer 3: 7
Do you get what you want?
Ans) Customer 1: Yes generally, Customer 2: Yes all the time, Customer 3: Yes
Are the checkout points really slow?
Ans) Customer 1: Yes they really slow as compared to Sainsbury, Customer 2: Sometimes but its fine all the time, Customer 3: Yes, it is only part i don’t like about Tesco.
Do you find the job interesting? ( My friend is working in Tesco)
Ans) Yes I do find the job interesting. Working with people of different cultures is good and we work as a team which is the best thing about Tesco.
Are the timings of your work flexible?
Ans) Yes sometimes. But if there festivals such Christmas or Easter then the timing are less flexible as the customers increase during these periods.
REFERENCES:
Kaplan RS and Norton DP (1992) ‘The Balanced Scorecard – Measures that Drive Performance.’ Harvard Business Review, January-February, pages 71-79.
Kaplan, R.S. and Norton, D.P. (2007) ‘Using the Balanced Scorecard as a Strategic Management System’, Harvard Business Review.
Kaplan, R. S. and Norton, D.P. (2008) “Mastering the management system”, Harvard Business Review, vol. 86 Jan. pp63-77.
Meyer, M. M (2002) Rethinking performance measurements,Cambridge university press. Cambridge
Drury, C (2009) Management Accounting for business, 4th edition, Singapore -Seng Lee press
Norreklit, H. (2000) “The balance on the balance scorecard – a critical analysis of some of its assumptions”, Management Accounting Research, vol. 11, pp 65-88.
WEBSITES USED:
business.timesonline.co.uk/tol/business/industry…/article496014.ece –
http://www.axsellit.com/Default.aspx?tabid=74
http://www.articlesbase.com/management-articles/why-balanced-scorecard-is-not-a-measurement-tool-253778.html
davidsonconsulting.co.nz/index_files/pres/bsc.pdf