Building a Balanced Score Card - Case Study Example

Building a Balanced Score Card Balance scorecard for Operations unit of South-West Airlines The South-West Airlines is one of the most popular and successful airlines company operating out of Dallas and targets the low cost market segment as its focus area in business operations. Being familiar with the working of the operation unit of the South-West Airlines, we will discuss the mission, vision, culture and goal of the organization and the objectives, targets and achievements of its operations unit (Southwest Airlines Co., 2013). The measurement of performance of South-West Airlines is based on a Balanced Score card model which takes into account the perspectives of operation, namely financial perspective, customer’s perspective, the company’s internal perspective, and the learning perspective of employees of the company. The Balance scorecard model can be explained from the diagram below. The Balance scorecard of South-West Airlines measures the strategic performance of the company in terms of metrics. Metrics are nothing but means of measurement of actual values of performance against the set target to fulfill the objectives of South-West Airlines. The financial perspective of South-West Airlines takes into account the growth of revenue, the operating profit, financial position of short-term and long-term solvency. The customer’s perspective takes into account the increase of customers, transaction size with the customers and the degree of customer satisfaction. Talking about the internal perspective of South-West Airlines, the main objectives are product improvement, maintenance of market size, ratio of equipments to new equipments, innovation in service, quality of operations and turn-around time. The learning and growth perspective takes into account the training of employees of South-West Airlines, the turnover of its employees, and the compensation for their employees. The objective set under the four perspectives for South-West Airlines in its Balanced scorecard model depends on the mission and vision of South-West Airlines. Mission of South-West Airlines states that the company is dedicated to provide customer satisfaction with its high quality of operational efficiency and service quality that would provide a sense of warmth, pride and friendliness in the rights spirits of the company. The goal of the South-West Airlines is aligned with its vision of being the largest player in low-cost market segment. The company plans to achieve this with high utilization of its aircraft and increasing the frequency of flights in the short-interval routes connecting secondary cities and destinations. After from providing service at low cost, South-West Airlines is also committed to provide high quality of customer service to the passengers. Reliability, informal communication and feedback, customer first, quality of operations are among the core values of South-West Airlines. South-West Airlines also has a separate mission statement for its human resource team that states to provide high learning and growth opportunities to its employees and support staff. The workforce of South-West Airlines is characterized by their abilities on innovation and creativity and also has characteristic traits of care and concern towards others. All these objectives and goals can be categorized into four perspectives as described above and target values may be assigned to create a comprehensive Balanced scorecard of South-West Airlines. The Balanced scorecard designed for South-West Airlines is given below: Perspective Objective Metric Target Value Financial Revenue growth Annual Growth Rate > 20%       Growth of operating profit % EBIT / Sales > 5%       Short term solvency Current Ratio > 2.5       Long term solvency Debt/Equity (Long-term) < 25% Customer Increase customers base Annual growth rate of number of customers > 5%       To maintaining transaction size Average Transaction Size > $600       Reduce customer complaints Median Score per 1 lac customers: Customer Survey 5%       Quality of service Average Turn Around Time (TAT) < 1min.       To maintain domestic market Share Market Share % >25% Learning Employee training Annual training hours of employees > 30,000       Employee turnover Employee turnover < 3%       Employee Compensation Average Compensation > $38,000 The Balance scorecard of South West Airlines has been designed or built in order to strike a balance between the short term and long term objectives of South West Airlines taking the external and internal factors into consideration and identifying the desired outcomes and performance drivers and also implementing financial or objective measures as well as non-financial or subjective measures. Strategic objectives with quantified target metric The Balanced score card of South West Airlines explains the strategic objective which are based on the core values and the mission as well vision statement of South West Airlines. Each objective has been supported by a quantified target metric for measurement. In this section, we shall discuss three strategic objectives classified as important for each of the four perspectives of South West Airlines, the information required for allotting target values and the ways to achieve the target for fulfillment of the organization’s goal. Looking at the financial perspective, South West Airlines’ objective is to increase the revenue that earns through its operation in the aviation sector. The growth in revenue will reflect growing performance of the company in the sector of low-cost civil transportation. Since South West Airlines focuses at offering no frills service to its customers, it is also important for them to see that the sale of their tickets also grow in volume. The information on the revenue growth of South West Airlines can be given by the annual rate of growth of revenue of the company. The annual rate of growth of revenue can be obtained from the annual reports and financial statements for the past three years for South West Airlines. The income statement of South West Airlines for the years 2010, 2011 and 2012 are given below (Yahoo Finance, 2013). The income statement shows the revenue earned by South West Airlines in 2010, 2011 and 2012. Based on the compounded annual growth of 18.82% calculated for revenue earned, a target value of greater than 20% is assigned looking at the short term and long term goals of South West Airlines. The growth in revenue can be obtained by increasing sales as compared to previous year which can be done by proper planning on determining appropriate ticket size according to the destination, providing improved customer service, increasing frequency of flights as per market demands, etc. The next financial objective included in the Balance score card is the growth of operating profit. This is obtained by the earnings of South West Airlines before interest and tax with respect to the revenue earned by the company in the respective years of 2010 to 2012. Again, with the help of comparative study of the income statement for previous years of South West Airlines, we have found that the operating profit of South West Airlines have decreased by 20.59% annually in a compounded manner. This shows that although the revenue generated has increased, the operating profit of South West Airlines has declined. Based on the results, the target for operating profit of South West Airlines has been fixed at greater than 5%. This can be achieved by planning and implementing strategies on cost effectiveness and at the same time not allowing the quality of service to fall from the standards. The third objective of solvency has been included in the financial perspective of South West Airlines. By solvency, we understand short term as well as long term solvency. Short term solvency of South West Airlines can be determined with the help of current ratio of the company. Long term solvency can be explained with the help of long term debt to equity ratio. These information can be obtained from the balance sheet of South West Airlines which is present in its annual reports for the years 2010, 2011 and 2012. The balance sheets for the years 2010, 2011 and 2012 are given below. In order to determine the present short term and long term status of solvency, we have considered the balance sheet for 2012 only. The required information for short term solvency is the current assets and the current liabilities whose ratio is known as the current ratio. By considering the figures of the balance sheet, we have found that the current ratio of South West Airlines for 2012 is 0.90. Also the information required for long term solvency is long term debts and equity. By considering the figures of the balance sheet, we have found that the long term debt-equity ratio of South West Airlines for 2012 is 0.41. The ratio found from the above balance sheet is given below. South West Airlines  2012 Current ratio 0.909032 Long term debt/ Equity 0.412328 Based on this information, the target value for current ration has been set at greater than 2.5 and the target value for long term debt - equity ratio has been set at lesser than 25%. Thus, from the balance scored card, it is understood that South West Airline can achieve their targets of short term solvency by increasing their short term assets and cash in hand cumulatively to double the amount as compared to their short term liabilities. South West Airlines can achieve their target of long term solvency by reducing their long term debts to around 25% of their total equity. The customer perspective in the Balanced score card of South West Airline includes objectives of increasing their number of customers which is determined by the metric of their annual rate of growth of their customers. The South West Airline is known to carry around 44 million passengers annually. Based on this information, a target of 5% increase in their customer handling capacity has been allocated. This can be done through improved customer service, determining appropriate size of tickets, offering comfort and convenience to their customers during transit, etc. The second objective under customer perspective is the maintenance of transaction size that is determined by a metric of average size of transaction or the average ticket size. The information on approximate value of average ticket size has been found by dividing the total revenue of 2012 by its 44 million passengers. The average ticket size has been found to be close to 400. A target of average ticket size of > $600 has been allotted to this category. The third objective of reducing customer complaints is determined by the metric of average customer complaints per 100000 passengers. The information obtained under this category is 0.21 and has been set a target of reducing customer complaints to less than 0.1 per 100000 passengers (Writework, 2013). The three objectives under internal perspective are product innovation, quality of service and domestic market share of South West Airlines. The key metric for determining product innovation is the expenditure on research and development in comparison to the revenue earned and has been set a target of greater than 5%. The metric for determining quality of service is the Turn Around Time and has been set a target of lees than 1 minute. The domestic market share of South West Airlines has been found to be 25%. The target set under this category is greater than 25%. The three objectives set under the learning perspective are the employee training, employee turnover and the average compensation of the employees. The employee training is determined by the metric of average annual hours of employee training and has been set a target of greater than 30000 annual hours. The employee turnover which gives us the attrition rate of South West Airlines has been set a target of less than 3% of its employee base. The average compensation of employees has been set a target of greater than 38000 dollars looking at the growth in operations of South West Airlines. Methodology for calculating actual value of metric The method for calculating the actual values of the metric designed in the Balance scorecard and thereby evaluating the absolute performance of South West Airlines with respect to the set targets has been described below. The metric assigned to each objective has been assigned a weightage looking at the policies, strategic objectives and goals of South West Airlines. The actual values for each of the metric available has been found from the reports available for the year 2012 and also comparative data from 2010 to 2012 for South West Airlines. The information and data which has been used to calculate the value of each metric is found in the annual reports, performance reports, technical reports, professional reports and also one-time reports. In line with the set targets in the Balance scored for South West Airlines, the maximum value for each metric is allotted as given in the table below. The figures considered in the table are in terms of absolute values for both the value calculated and the maximum value for each metric. For example, the revenue growth year after year as calculated for South West Airlines is 18.82% but the same is represented in the ‘value’ column of table as 18.82 and similarly the maximum growth of revenue is written as 21 instead of >20%. Similarly the table has been filled up for all the objective metric based on the availability of information on the categories that could be managed for illustration. The relative performance of South West Airlines is obtained by dividing the value calculated by the maximum value. The absolute performance of South West Airlines on each metric is obtained by multiplying the weight assigned to each objective to their relative performance values. The sum of absolute performance of each objective metric of South West Airlines gives us the absolute performance of South West Airlines with respect to the target assigned. The above method as described has been followed and absolute performance of South West Airlines is calculated in the table given below. CALCULATION OF ACTUAL VALUES Objective Indicator Metric Value Weightage Maximum value Relative Performance Absolute Performance               Revenue Growth Annual Rate of Growth 18.82 0.2 21 89.62% 17.92% Operating Profit Growth % EBIT/Sales -0.2 0.1 0.06 -333.33% -33.33% Short-term Solvency Current Ratio 0.9 0.1 2.51 35.86% 3.59% Long-term Solvency Long-term Debt/Equity 0.41 0.1 0.24 170.83% 17.08% Increase Number of Customers Annual rate of Customers Increase 44000000 0.2 46200000 95.24% 19.05% Maintaining Transaction Size Average Transaction Size 388 0.1 601 64.56% 6.46% Reduce customer complaints Median Score per 1 lac customers: Customer Survey 0.21 0.1 0.09 233.33% 23.33% Maintain Domestic Market Share Market Share % 25 0.1 30 83.33% 8.33%           Total 62.43% Thus, it can be observed that based on the available data and information on each objective metric, South West Airlines has been able to achieve 62.43% of the set target as per Balance score card (Rohm, 2002). Recommendation The Balance score card is an important tool to realize the goals of South West Airlines in line with their mission and vision statement and their core values. The Balanced score card helps us to understand the degree of importance and weightage given to the array of its objectives under the financial, customer, internal and learning perspective of South West Airlines. The Balance card of South West Airlines provides an idea of targets to achieve for efficient operation and sustainable growth and at the same time provides a measure of the absolute performance of South West Airlines with respect to the set target. References Rohm, H. (2002). Developing and Using Balanced Scorecard Performance Systems. Retrieved from: http://glennschool.osu.edu/faculty/brown/home/812%20Strategy/2010/Balanced%20Scorecard.pdf. Southwest Airlines Co. (2013). The Southwest Experience. Retrieved from: http://www.southwest.com/html/travel-experience/index.html?int=GNAVSWATVLEXPERIENCE&disc=&ss=0&cid=&companyName=&memberName=. Writework. (2013). Balanced Scorecard and Strategic Analysis of Southwest Airlines. Retrieved from: http://www.writework.com/essay/balanced-scorecard-and-strategic-analysis-southwest-airlines. Yahoo Finance. (2013). Southwest Airlines Co. Retrieved from: http://in.finance.yahoo.com/q/is?s=LUV&annual. Read More