Understanding the Utility of the Balance Score Card in an Organization - Coursework Example

? Balance Score Card and Strategy Map Executive Summary The study has been prepared for understanding the utility and functioning of the balance score card in an organization. The balance score card is a strategic management tool which helps in evaluating the performances related to the financial as well as non financial factors, used extensively in many industries, businesses and other non profit seeking organization. The study will highlight the performance measurement objectives, measurements, targets and initiatives for Chevron Corporation using the balance score card model. For every aspect of the balance score card, the measurements, targets and initiatives for Chevron have been defined. The study will identify the measures to be taken for fulfilment of the objectives followed by the recommendations to Chevron for achieving the target. The study will also reflect the strategy mapping for Chevron Corporation followed by the link between each perspective (financial, customer, internal business process, learning & growth) and the perspectives and the objectives. In this study, it will be shown that how the four perspectives of balance score card are linked to each other and how the perspectives and objectives are linked to each other. Finally the study will be concluding with a critical analysis of the balance score card and the limitations of the balance score card. Table of Contents Executive Summary 2 Table of Contents 3 Introduction 4 Vision of Chevron 4 Strategy 5 Designed Balance Scorecard 5 Balance of Balance Score Card 10 Strategy Map 12 Links within Each Perspective and the objectives 13 Recommendation 14 Balance Score Card: A Critical Analysis 15 Limitations of Balance Score Card 16 Works Cited 17 Name of the student Name of the professor Course number Date Introduction Chevron Corporation is a multinational energy corporation whose headquarter is located in San Ramon, California. The company operates in more than 180 countries and is engaged in gas, oil and other geothermal sectors including production, exploration, marketing, chemicals manufacturing and power generation. It is one among the six major oil companies. From last five years, the company has been ranked as the third largest corporation (in Fortune 500) in America. Chevron is considered to be one of the largest corporations, in terms of revenue. Vision of Chevron The vision statement of Chevron is “At the heart of The Chevron Way is our vision …to be the global energy company most admired for its people, partnership and performance" (Chevron, “The Chevron Way”). The values of Chevron Corporation are: Integrity The company performs its operations with integrity and meets the highest standards of codes and ethics in its business dealings. The company believes in keeping its commitment and accepting the responsibilities (Chevron, “Values”). The company holds itself accountable for its work and its actions. Diversity Chevron respects the culture in which it works and learns from it. It values and respects the uniqueness of the individual and their varied perspectives and the talents they possess. It has an inclusive working environment. Protecting the people as well as the environment The company places its highest priority on the safety of the work force and the protection and proper care of its assets and environment (Chevron, “Corporate Responsibility”). The company aims to be admired for the world class performance by means of the Operational Excellence Management System. Trust The management and the employees of Chevron believe in respecting and supporting each other and they strive for earning the trust of the partners, the colleagues and the customers. Ingenuity The company seeks opportunities out of ordinary solutions. It utilises the creativity of the employees to find practical ways of solving problems. High performance The company is committed to the excellence in its performance. It strives to improve consistently and achieve results that exceed the expectations. Strategy Chevron states that its capital and exploratory budget (of $36.7 billion) combined with the strong financial position will support the long term growth strategy of the company and will reflect the confidence in the competitive advantages (Chevron, “2012 Annual Report”). Designed Balance Scorecard The study deals with the measurement of the performance of Chevron Corporation by means of the balance score card model. Before measuring the performance of Chevron based on the four perspectives, it is very important to determine the objectives of Chevron Corporation. The objectives are: Creating shareholder value and achieving sustainable financial returns from the operational activities which will help Chevron to outperform the competitors. Investing in the people for strengthening the organizational capability and developing an experienced global workforce. This will help to execute with excellence by means of the company’s capital stewardship systems, operational excellence and effective cost management (Chevron, “Strategies”). Financial perspective Balance score card helps to measure the financial validity of a particular business strategy. The performance gap will be measured through various activities like return on investment, asset utilization, revenue growth, cost reduction etc. This perspective helps in the determination of the profit of the organization and in analyzing whether the implementation of the strategy is being able to improve the bottom line result. Objective Measurement Target Initiative Growth in the revenue The growth in revenue can be measured by the comparison of the revenue and sales figure of the present year with the previous year. The company has set a target to increase the revenue by 3 % in the next year. Providing innovative products by improving the refining techniques. Cost reduction The cost reduction can be measured by comparing the total cost figure of the present year with the previous year. The company has decided to decrease the cost structure to a remarkable extent for the next five years. The concept of cost minimization should be used throughout the process. The variable cost is needed to be reduced. Asset utilization. The asset utilization of the company will be measured by comparing the net asset turnover ratio of the present year with that of the previous year. The net asset turnover ratio should be increased in comparison to the past three years. Attempts should be taken to increase the yearly net asset turnover ratio. Customers Perspectives Performance gap related to the customer retention rate, customer profitability, customer satisfaction level etc. are also measured by the implementation of the balance score card. Businesses identify their market segments and the targeted customers in order to meet their financial objective. The business unit managers require setting their business strategies in compliance with the customer’s demand. In such a case, the balance score card helps these businesses to plan for a perfect customer centric strategy. Objectives Measurement Target Initiatives Increasing the customer satisfaction 1. The level of customer satisfaction can be analysed by the use of median score of customer survey. 2. The level of customer satisfaction can also be measured by measuring the number of loyal customers of Chevron. 3. The level of customer satisfaction can be measured by understanding their expectation from the company’s products. 4. The level of customer satisfaction can also be measured by assessing the level of competition in the market. Increasing the customer retention and the customer loyalty to a remarkable extent. Recognition of the needs and demands of the customers. Product differentiation for the purpose of increasing the level of customer satisfaction. Increase in the total number of customers Finding the total number of customers. Increase in the number of energy producers by 5 % and other consumers like oil distribution centres, petrol pumps by 7 %. The company should expand its operations in more and more countries for attracting new customers. Internal Business Processes In this perspective, the balance score card focuses on different issues for achieving the objectives of the stakeholders. The balance score card helps to identify the performance gap which is associated with the generic value chain of the organization. The value chain of a particular organization is generally complemented by three most important issues: innovation, operation and the post sale service. Objectives Measurements Targets Initiatives Improvement in the products and services Measurable from the level of customer satisfaction as well as the % of expenses involved in Research & Development to revenue. Better refinery techniques and decreased wastage of extracted oil. Providing innovative products by improving the refining techniques. Increase in the market share 1. Percentage of increase in market share in the present year as compared to the previous year. 2. Measuring the increase in sales volume in the current year from the previous year. Increase in the number of customers by 5 percent and also area of operations within next year. By catering services to more customers and performing product diversification. Manufacturing excellence Yield. Reducing the error by the implementation of the TQM system to reduce the error to 0.0004 % within next year. Implementation of Total Quality Management to reduce the error to 0.0004 %. Increasing the productivity Engineering efficiency Increasing the production of the company by 3 % within next year. Increasing the bpd extraction of the oil. Reduction in the delays of product availability in the market Making plans according to the actual launch date. Increasing the accuracy in the product availability to the customers in accordance to their demand. Planning should be made according to the date of launch. Learning & Growth perspectives This portion provides various guidelines for making investment which should be made by an organization for facilitating the long term objectives. It determines the factors like organizational information system, capability of the employees and various other relevant (developing) factors. The learning & growth has a direct relationship with the structure of an organization. This perspective helps in measuring the performance gap in respect of the business strategy specifications. The organizations use this learning concept for fostering control over the non financial factors of the balance score card. Senge proposed a learning model for the correction of the performance gaps: The leaders should motivate the employees in the team in using their personal talents, mastery and experience for facilitating the individual objectives. The top level management should make a common vision statement for its employees in order to increase the collective capability. When all the employees will share a common value, it will result in increasing cooperation between them. This will increase the level of commitment and engagement of the employees. This strategy (if implemented) will help to reduce the performance gap of the balance score card. Objectives Measurements Targets Initiatives Increasing the knowledge and skills of the employees. Number of hours spent by the employees in training. Targeting total 15 training and development programs in one year. Training and development programs in regular interval. Providing satisfaction to the employees Median score related to the employee satisfaction survey. Increasing the customer retention and the customer loyalty to a remarkable extent. Increasing the percentage of in house promotion. Reduction in the attrition rate of employees. Comparison of the attrition rate of the current year with the previous year. Reduction in the attrition rate to 8 percent. Providing good compensation, followed by proper appraisal. Balance of Balance Score Card The growth in revenue can be measured by the comparison of the revenue and sales figure of the present year with the previous year. The cost reduction can be measured by comparing the total cost figure of the present year with the previous year. The asset utilization of the company will be measured by comparing the net asset turnover ratio of the present year with that of the previous year. The level of customer satisfaction can be analysed by the use of median score of customer survey. The level of customer satisfaction can also be measured by measuring the number of loyal customers of Chevron. The level of customer satisfaction can be measured by understanding their expectation from the company’s products. The level of customer satisfaction can also be measured by assessing the level of competition in the market. Finding the total number of customers. Measurable from the level of customer satisfaction as well as the percentage of expenses involved in Research & Development to revenue. Percentage of increase in market share in the present year as compared to the previous year. Measuring the increase in sales volume in the current year from the previous year. Measuring the yield. Measuring the engineering efficiency Making plans according to the actual launch date. Measuring the number of hours spent by the employees in training. Measuring the median score related to the employee satisfaction survey. Comparison of the attrition rate of the current year with the previous year. Strategy Map Reduction in rat Links within Each Perspective and the objectives If the objectives of the customer’s perspectives are fulfilled, it will automatically result in the fulfilment of the financial perspectives as the increase in the number of customers and the customer’s level of satisfaction will result in the increase in the revenue of the company. Similarly fulfilment of the objectives of internal business processes will result in the fulfilment of the objectives of the customer’s perspectives as the improvement in the products and services, manufacturing excellence, increasing productivity etc will result in the increase in the customer’s level of satisfaction and the number of customers too. A proper objective that has been set in the learning and growth perspectives can only fulfil the objectives of the internal business processes perspectives. Thus a balance score card is a model where the objectives and initiatives of all the perspectives are linked to each other. (Source: Flamholtz 18) The linking within the activities of an organization can be shown as: (Source: Flamholtz 19) Recommendation Providing innovative products by improving the refining techniques. The concept of cost minimization should be used throughout the process. The variable cost is needed to be reduced. Attempts should be taken to increase the yearly net asset turnover ratio. Recognition of the needs and demands of the customers is very important. Product differentiation is needed to be performed for the purpose of increasing the level of customer satisfaction. The company should expand its operations in more and more countries for attracting new customers. The company should increase its market shares by catering services to more customers and performing product diversification. Implementation of Total Quality Management to reduce the error to 0.0004 %. Increasing the bpd extraction of the oil. Product Planning should be made according to the date of launch. Training and development programs for the employees should be conducted in regular interval. Increasing the percentage of in house promotion. Providing good compensation, followed by proper appraisal. Balance Score Card: A Critical Analysis The balance score card is a strategic management tool which helps in evaluating the performances related to the financial as well as non financial factors. It is used extensively in many industries, businesses and other non profit seeking organization for aligning the business activities according to the vision or the strategy of the organization. It also helps in improving the internal and the external communications and monitoring the performance of the organization against the strategic goals. A balance score card provides new strategies for the purpose of performance management. It was created by David Norton and Dr. Robert Kaplan for measuring the performances and adding the strategic non financial factor related performance measures to the traditional financial metrics for giving the executives and the managers a balanced view of the performance of the organization. It has evolved from the early use of the simple performance measurement framework and now is used in the strategic and management system within an organization. It not only helps in performance measurement but it allows the business planners in identifying what should actually be done. It provides a clear view of what a company should measure for balancing the financial perspective. It is not only a management or measurement system; it enables the organization in clarifying the vision and the strategy and translating them into action. The balance score card enables retention of the traditional financial measures. The balance score card measures the performance of an organization based on four main perspectives. The four perspectives are the financial perspective which focuses on the cash flow, return on the equity, sales and income growth, customer’s satisfaction perspective which measures the product development, defect levels, time delivery and warranty support, business process perspectives measuring the efficiency related to the internal business processes (which is measured by means of quality, productivity, cycle time and downtime) and finally the learning and growth perspectives which measures organizational as well as innovation learning based performance based on various dimensions including technological leadership, product development cycle, operational improvement etc. (Source: Kaplan and Norton 76) Limitations of Balance Score Card Norton and Kaplan have found various obstacles which have resulted in the failure of the balance score card. The key success issues for the balance score card can be explained as below: The scorecard only emphasizes on the four perspectives of performance management. Measuring only the perspectives like Financial, Customer, Business and Learning & Growth measures are always not sufficient for measuring and defining each and every aspect of performance management. Organizations require introducing some more perspectives for creating a holistic performance measurement framework. The balance score card focuses on balance of the performance instead of reflecting a viable strategy to be implemented for the betterment of the organization. This model should develop a quantitative linkage in between the financial outcomes (that are expected) and the non-financial factors. Balance score card fails in indicating the commitment from the entire senior management. Very few people get involved during the implementation phase of this model. This situation results in the decrease of the motivation level as well as the communication transparency among the internal stake holders. Implementation of the balance score card is a time consuming process and does not guarantee completely on the future business success. Works Cited Chevron. “2012 Annual Report.” Chevron. Chevron Corporation, 2013. Web. 14 June. 2013. Chevron. “Corporate Responsibility.” Chevron. Chevron Corporation, 2013. Web. 14 June. 2013. Chevron. “Strategies.” Chevron. Chevron Corporation, 2013. Web. 14 June. 2013. Chevron. “The Chevron Way.” Chevron. Chevron Corporation, 2013. Web. 14 June. 2013. Chevron. “Values.” Chevron. Chevron Corporation, 2013. Web. 14 June. 2013. Flamholtz, G. Eric. “Putting Balance and Validity into the Balanced Scorecard.” JOURNAL OF HUMAN RESOURCE COSTING AND ACCOUNTING 7.3 (2003): 15-26. Emerald Database. Web. 14 June. 2013. Kaplan, A. Robert, and David P. Autor Norton. The Balanced Scorecard: Translating Strategy into Action. Harvard: Harvard Business Press, 1996. Print. Read More