Tesco balanced scorecard

Introduction

  • Balance Scorecard

 

The balanced scorecard is a management mechanism scheme stimulated by Kaplan and Norton (2000) that has its roots in Porter’s concept of strategy as a reaction to competitive forces in an industry.

Targets are set, and these are then monitored via the ‘steering wheel’ which is the company’s term for their version of the balanced scorecard. Objectives are well-defined under four distinct titles of customers, operations, people and finance, which the corporation claims “is the best way to achieve results for our shareholders” also “allows the business to be operated and monitored on a balanced basis with due regard for all stakeholders” (Tesco Annual Report, 2004, p.10)

  • Tesco overview

Not too long ago, Tesco was heralded as Britain’s supermarket leader, in fact, one of every seven pounds spent in the UK went into the tills of Tesco (Winterman, 2013). Today it is a company with a scratched ego, low on confidence looking to regain its top spot. 2014 is a year Tesco could forget, former CEO Philip Clarke stepped down in July amid a slump in quarterly sales by 37%, its biggest fall in over twenty years ( Cockroft, 2014). The supermarket under pressure to return to its old model of “pile it high, sell it cheap.” As if this was not enough,  the serious fraud office (SFO) opened a case against the company about the £263 million shortfall in its profits. As a result, £2 billion was wiped off the supermarkets share value leading high profile investors such as buffet and David Herro selling their stakes in the company (Lynch, 2014).

Nevertheless, the supermarket is still impressive in some respects, the retailer is still one of the world’s largest retailers with over 500,000 colleagues, 7599 stores including franchises a combined group sales of £70 billion making £2.3 billion profit before tax as of May 2014. (Tesco annual report,2014,Pg.1).That being said,  the growth in sales has been surprisingly very weak standing at 0.3% in 2014, projected to be weaker in 2015 due to the accounting scandal.

Before the scandal, Tesco’s the chairman Sir Richard Broadbent recognised that the company needs to be very alert without being complacent with its position stating that “today is not a guarantee of value creation tomorrow. We need to ensure that we are tomorrow’s leading retailer.” As a result Tesco set out the following strategies;

  1. Continued investment in the UK

Two years ago Tesco launched the Building a Better Tesco plan and invested £1 billion in six key areas of the business:

  • Service & Staff: according the annual report of 2014, the retailer delivered training to more than 250,000 colleagues in the UK, helping them to make every moment with customers matter.
  • Stores & Formats: Tesco is also reinventing its largest stores to ensure they are worth the trip for customers.
  • Range & Quality: The supermarket giant has also tested over 5300 products and it was the first major retailer to offer tow year direct contracts to beef and lamb farmers.
  • Price & Value: Tesco has had a price promise for over a year and it provides instant reassurance to its customers that on fresh foods and own brand label products they will not lose out at Tesco.
  • Brand & Marketing: Tesco’s club card is used to deliver more value for customers .
  • Clicks & Bricks. Tesco is offering one hour delivery slots in over 98% of the UK and grocery click and collect available in over 260 locations.
  1. Establishing multi-channel leadership

In light of customers’ behaviours changing,  Tesco is introducing a multi-channel leadership which is about putting the customer at the centre of everything they are doing offering and building a seamless experience around them be it shopping in store, online, their restaurants, at the Bank or across a combination of them all.

  1. Pursuing disciplined growth

In South Korea, Malaysia and Thailand  Tesco thinks these markets have significant future potential and its betting on them for growth. In Ireland, Czech Republic, Hungary, Poland and Slovakia  Tesco is aiming to hold their position and improving returns where as in China, India and Turkey the retailer is refocusing their approach to generate profits.

 

 

Financial Perspective

From a financial perspective, Tesco’s strategy will be reviewed using the criteria below.

 

Continued investment in the UK

Strategic objective Measure Target
Increase sales/revenue Revenue Increase annual growth rate in revenue > £43 billion in the UK market. Growth rate currently stagnant at 0.0%
Increase returns  from Investment ROI 15% increase in ROI by 2016/2017
Return on capital  employed ROCE 15% in ROCE 2016/2017
Increase Economic value added EVA £300 million increase in EVA by 2018

 

Establishing multi-channel leadership

Strategic objective Measure Target
Lower operating cost from business operations Operating expenses  margin Lower operating expenses by 20%- 2016
Ensure that downstream (cost of sales) costs are lowered Gross profit Increase gross profit by 10% -2016

 

 

 

 

 

Pursuing disciplined growth 

Strategic objective Measure Target
Growth revenues from South Korea, Malaysia and Thailand Revenue Increase revenue  by 15% -2016
Improve profits in south Korea, Malaysia and Thailand. Net profit Margin Increase profits to £700 million-2016
Aggressively defend territory in Ireland, Czech republic and Turkey Turnover ratio Increase turnover by 10%-2016
Invest and change business strategy in China, India and Turkey ROCE 12% ROCE 2017/2018

 

Customer Perspective

According to Kaplan and Norton (1996) the customer and community perspectives, if it’s applied correctly, should gain successful results such as customer satisfaction, customer profitability, market share in targeted parts, customer conservation and new customer attainment. This can enable Tesco to recognize and measure the valued extents such as price, functionality, relationship, service and availability to targeted customers and market segments (Kaplan and Norton 1996).

“We always want to provide our customers with the best shopping experience and set the standard in the UK. Focusing on food first, we are making £ 1 billion commitment in the things that matter for customers – service, range, quality, price, availability and the store environment” (Tesco annual Report-2012, p. 11).

For identifying a range of (KPIs) the main measures of success, we might use :                             

Market share: This can be measured by this simple formula

MS = Number of customers* / Total customers x 100

Customer retention: The objective is to retain existing customers in the targeted segment to mainly increase their loyalty and sustaining their current relationships.

Customer acquisition: a business entity can measure the rate, at which it attracts or earns new customers in order to increase revenue,

Customer satisfaction: Customer satisfaction measures are Time, Quality, Price, responses, Customer profitability.

According to this strategy Tesco implemented the following ideas: more staff, better service, creating more jobs and careers, the fruit and Veg team, quality and innovation, the Big Price Drop, Online grocery, Tesco direct website, click & collect system.

 

With Tesco strategy on delivering even more loyalty from their customers, they place greater importance through the business on refining five customer-focused key performance indicators. Furthermore, for the continuation of tracking a range of financial and non-financial measures, the scales for the development are these five key performance indicators of their strategic performance. According to the Tesco’s 2014 annual report the KPI’s are as followed:

  1. Their customers come back time and again (70.0% retained loyal customers 29.1% of new loyal customers): Percentage of last year’s loyal customers *who are still loyal to Tesco.
  2. New customers choose them: New loyal customers* as a percentage of last year’s loyal customer base.
  3. Their customers can shop how they want: Percentage of loyal customers* who in the last 13 weeks have shopped two or more channels**
  4. Their customers use them for more (59.7% customers shopping across channels 64.3% shop the family brands) : Percentage of loyal customers* who in the last 13 weeks have bought / held products from Bank, Telecoms, Clothing***
  5. They are being loved by customers: Passionately loyal customers, supporters and fans of Tesco become excellent representatives and initiative word of mouth. In addition, there are many different ways of measuring maintenance .One way is simply asking the question -do customers like you enough to recommend you to others?

During this time of transition and transformation, It is believed that these five KPIs are more relevant today than some past and short-term measures.

These measures both allow monitoring progress and create value for the reason that they are completely focused on customers and how they prefer to shop. Moreover, for a greater lifetime value tracking the behaviours of loyal Clubcard customers is a core. (Tesco Annual Report,2014).

 

 

Internal Business Processes Perspective

According to Kaplan and Norton (1992) Internal perspective of balanced scorecard is being made up of the factors that affect employee skills, output of the corporation and the cycle time.

Tesco’s business process is the beating heart of the business with every method and system acting as a vein to circulate blood around the organisation. Any blockage or break down in a system or method means that blood will no circulate to some parts of the organisation leaving them fighting for life. That’s whys Tesco’s main focus is maintaining strict efficiency where the reward is in the form of customer satisfaction.

Tesco works with private teams of specialists to guarantee a continuous improvement and that their suppliers follow the codes. Tesco’s teams of experts also spend time with farmers and suppliers to improve standards and communication. Tesco’s main objectives on the subject of the internal perspective can be first employee skills and second to improve product quality. Employee skills are one of the main objectives of any company that is why Tesco runs a training scheme known as options programme that makes skills improvements to its employees and provide the required knowledge required for the job. Additionally, Product quality is an important objective of Tesco too.

Following Tesco’s strategies for the year 2014 to 2015, here how some of the targets will be reviewed.

 

 

 

 

 

 

Continued Investment in the UK- Service and Staff

Strategic Objective Measurement Target
Reduce customer turnover resulting from poor service Customer Turnover ( poor customer service related) 20% decrease in customer turnover resulting from poor service- 2015
Increase employee engagement ensuring that employees are fully absorbed and enthusiastic about work Employee engagement level 40% increase in the employee engagement level- 2020

 

  • Reasons for using the above measures

From a business operations perspective, Tesco’s give a lot of training to their new employees so that customers are experience a seamless service that’s quick. To know that employee training is working, the customer turnover rate will have to reduce. Customer turnover rate measures the rate at which a business losses customers due to given factor, in this case it would be poor customer service.

Similarly, it is believed that employees who are enthusiastic about work, produce better customer service. In fact, professional services group, ‘The Hay group’ found that offices with engaged employees were likely to be 43% more productive (Boekcerman, et al 2012). As such, for Tesco to know how service and staff will enhance business processes, employee engagement is a good measure to know how Tesco’s training paying off. For example, if employee engagement increases and customer turnover decreases, there is a negative relationship and Tesco would invest in employee engagement.

 Continued investment in the UK- Stores and Format

Strategic objective Measurement Target
Efficient store arrangements Rework level Limit the level of store arrangement to less than 2 times (<2 times) –  2015
Better  utilisation of facilities by customers Capacity utilisation rate 92% capacity utilisation rate – 2016

 

 

  • Reasons for using the above measures

Rework level measures the amount of rework that has to take place in a process and it is an indicator of internal operation efficiency. Tesco’s  according to its strategy is re-inventing it’s large stores. To measure how efficient the reinvention is, the rework levels is a good guide. If Tesco rework their store arrangement more than two times in a given period, it would signal inefficiency .

At the same time, the new arrangements are supposed to be to the benefit of the customers and better process for Tesco. This means that customers will use a specific facility to the fullest if it is worthwhile. That’s why the level of capacity is important to measure the success of Tesco’s  reinvention programme. Similarly, Tesco’s productive capacity should increase as the new format will help the internal business process.

Continued investment in the UK – Clicks and Bricks

Strategic Objective Measurement Target
Deliver customers goods full and on time DIFOT (Deliver in full, on time) 98% DIFOT – 2015
  • Reasons for using the above measure

Tesco’s provide one-hour delivery time slots that cover 98% of the country and also provide grocery click and collect. To measure how successful these systems are, the level of DIFOT is important. If customers do not recive there order on time or receive orders with missing products, they will be frustrate and may stop using Tesco’s one hour deliver slots and grocery click and collect facilities. As such, it is important that DIFOT is 98% or greater.

 

Establishing Multi-channel leadership

Strategic Objectives Measurement Target
Efficient and effective channels to reduce costs Process waste level 50% decrease in process waste levels – 2020
  • Reasons for using the above measure

Tesco’s is establishing multi-channel avenues such as online shopping, restaurants and banks all of which are supposed to work seamlessly for customers and reduce costs for  Tesco’s. This is why process waste level is a good indicator to understand how successful Tesco is with its business processes. A decrease in process levels would mean that Tesco’s is a lean organisation.

 

Learning & Growth Perspective

 

Tesco’s aim has always been improving customer service as they believe the customers are at the centre of their business. They aim to improve the customers experience at their stores every year. In fact in the period 2013 to 2014, according to the chief executives report, customer satisfaction improved by 40%. (Tesco annual report, 2014). Their model has been hiring more people, train them and expect improved service delivery. In 2013 for example, Tesco hired 8000 new colleagues in their stores, the retailer at the same time provided further customer service training to new recruits.  To keep customer satisfaction high, the same model needs to be applied but more efficiently as customer satisfaction can always be improved.

 

Continued investment in the UK- service and staff

 

Strategic Objective Measure Target
Hire more employees Time to hire An average of less than 7 days to acquire required personnel- 2016
Improve employee training Number of training hours passed Increase average employee  training hours to 8 hours annually.- 2016
Improve Customer satisfaction Customer satisfaction index 50% increase in the customer satisfaction index – 2016
Improve employee satisfaction Employee satisfaction index 20% increase in employee satisfaction index-  2016

 

  • Reasons for using the above measures

 

Tesco’s is an expanding organisation that needs to hire new employees per new store opened. To evaluate Tesco’s  success rate, the time taken to hire employees should be low as a longer period would a affect operations and future growth. That’s why the time to hire measure is suitable.

 

As already mentioned in the strategy section, Tesco is big on customer satisfaction and this is primarily based on training employees to deliver a good service. To evaluate this notion; if the number of hours trained increase customer satisfaction should increase.

 

Customer service satisfaction is also a good measure to under if Tesco’s strategy is  profitable. An increase in customer satisfaction signals that employee training and Tesco’s processes are efficient.  At the same time employee satisfaction is important for future growth because customer service will be affected if employee satisfaction was to decrease.

 

 Establishing multi-channel leadership

 

As aforementioned, Tesco is actively responding to customers’ expectations and behaviours particularly when it comes to online shopping. This is a major development because online shopping is a move away from Tesco’s traditional bricks and mortar format. Today Tesco has introduced channels such as click and collect with one hour delivery slot where customers can buy products seamlessly. The future completion is going to be cut throat, innovation, and time to market and efficiency of Tesco will be under the pressure to get it right for the customers.

 

Strategic Objective Measure Target
Better/quicker new product availability on the market Time to market Under 3 weeks – 2016
High system efficiency to reduce customer complaints Overall Equipment effectiveness Improve systems efficiency by 10% -2016
Innovate improved delivery systems to stay above competition Innovation pipeline strength New systems produced after every 24 months

 

  • Reasons for using the above measures

Time to market is important because Tesco’s channels are supposed to help streamline new products especially technology products on the market as soon as possible. This is very important to rival and manage future completion. That’s why a time to market measure is suited to evaluate the effectiveness of the multi-channel processes. The new systems also have to be efficient and there is a need to improve systems after a period of time and this can be done through innovation monitoring.

 

Conclusion

This balanced scorecard of Tesco’s Plc can be considered as a performance measurement tool which can be used by different companies for their performance management. This Balanced scorecard by referring to  Kaplan and Norton had four perspectives that is financial perspective, customer perspective,  internal business perspective and learning and growth perspective. Along with the introduction and overview of the company presented.  Our carefully selected strategies and measurements will ensure that Tesco’s strategies are properly managed.

 

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