Balanced Scorecard and Strategy Map for TESCO - Essay Example

Balanced Scorecard and Strategy Map for TESCO Executive Summary Objective of this report is to develop balance scorecard and strategy map for Tesco Plc. The report has analyzed performance of the company in context to all four performance indicators in balance scorecard such as, financial perspective, customer perspective, internal business perspective and learning and growth perspective. Business background of Tesco Plc is studied in order to understand resource abilities and vision of the company that can help them to implement recommended balance scorecard and strategy map. In order to prepare the balance scorecard, published financial results and key performance indicators (KPIs) are used. Strategy map has been prepared on the basis of analysis done while preparing the balance scorecard. The strategy map is drawn in order to show how strategic objectives identified through balance scorecard and KPIs will work together in helping Tesco Plc achieve its business objectives. In the final part, on the basis of analysis done in the report, suitable recommendations are given to enable Tesco to improve business performance in a comprehensive manner. Table of Contents Table of Contents 3 1.0 Introduction 4 2.0 Tesco Plc 4 2.1 Vision and strategy- Tesco Plc 5 3.0 Balanced Scorecard and Strategy Map 5 4.0 Balance Scorecard: Tesco Plc 6 4.1 Financial perspective 6 4.2 Customer perspective 8 4.3 Internal business perspective 9 4.4 Learning and growth perspective 11 5. Balance of Balanced Scorecard (BSC) 12 6. Strategy Map 14 7. Recommendations 15 8. Critical Evaluation and Conclusion 16 Reference List 17 1.0 Introduction For last 20 years, interest in performance measurement and management (PMM) has increased among scholars and companies at an exponential rate (Valmohammadi and Servati, 2011). In such context, Kaplan and Norton (1996) proposed the concept of Balance Scorecard (BSC) in order to formulate a performance management framework, which can measure performance of all important business activities. Haapasalo, Ingalsuo and Lenkkeri (2006) stated that companies use the balance scorecard in order to formulate strategy map, which in turn provides direction to strategic initiatives. It is evident from the theoretical argument that companies use balance scorecard and strategic map as composite unit in order to control performance outcome and shape business strategies. In similar context, balanced scorecard and strategy map can be applied to Tesco in order to understand dimensions of their business strategies. Before going further into the main discussion, the study will discuss business operations of Tesco Plc so as to develop a functional background. 2.0 Tesco Plc Tesco Plc is a renowned British multinational general merchandise and grocery retailer, which has established more than 6000 retail stores across the globe (Tesco Plc, 2014). In UK, Tesco Plc is regarded as the largest retail chain, while worth of the brand is above £2.6 billion (Tesco Plc, 2014). The company was established in 1919 and is headquartered at Cheshunt, Hertfordshire, England (Tesco Plc, 2014). Employee base of the British retailing giant is over 5,00,000 in number. At present, Tesco Plc has established its operation in 12 different markets. The company uses both offline and online retail channels in order to sell its products to customers. Business success of the company is directed by following ‘Glocalisation’ model, where Tesco Plc used its global brand name to localize merchandises offering in accordance with local market requirements. Despite rise in revenue earning for Tesco Plc from its business operation, group trading profits have declined significantly due to rising operational expenditure and marketing cost (Hargreaves, 2014). In such context, the company has decided to revamp its operation so as to improve profit margins and gather adequate financial resources for financing further strategic initiatives. 2.1 Vision and strategy- Tesco Plc According to top level management in Tesco Plc, vision of the company involves long-term strategic directions and commitment to stakeholders (Tesco Plc, 2014). Vision of the company is characterized with making strong commitment towards customers and colleagues, generating multiple growth opportunities and improving quality of assets. As part of vision, the company wants to be regarded as most highly valued business by shareholders, customers, communities and committed colleagues (Tesco Plc, 2014). Vision statement of Tesco Plc is directed by key elements like, 1- establishing global want or need for Tesco merchandises, 2- achieving sustainable growth option for business with ample opportunities, 3- being up-to-date through integration of modern ideas and innovative initiatives, 4- fulfilling local demands effectively without losing the charm of being a global brand and 5- developing relationship based on trust and loyalty with customers, colleagues and communities (Tesco Plc, 2014). From strategy perspective, Tesco Plc focuses more on rejuvenating their business portfolio in UK market; whereas, in context to international markets, the company focuses on increasing sales and profitability in existing markets. Seven strategic principles of Tesco Plc can be stated as, 1- strengthening market leadership position in UK market, 2- achieving outstanding business success in terms of sales and profitability in international markets, 3- ensuring equal strength in all product portfolio including food merchandises, 4- expanding retail operations in all existing markets, 5- taking responsibility and accountability for their actions towards communities they serve, 6- creating brands that are highly valued by stakeholders and 7- developing team collaboration approach in order to ensure higher value creation (Tesco Plc, 2014). As part of global leadership strategy, the company concentrates on creating truly diverse workforce with capability to deliver high performance as well as leadership roles so that the company can achieve sustainable growth in future (Tesco Plc, 2014). In the next section, components of balance scorecards will be discussed in order to provide theoretical depth to the discussion. 3.0 Balanced Scorecard and Strategy Map According to Kaplan and Norton (1996), financial matrices are primary component of balance scorecard; while other three parameters like, customer, internal process and learning and growth, are supplement indices for measuring performances. Kaplan and Norton (1996) pointed out that these three supplementary indices are used to create long-term values for shareholders. Research scholars have criticized balance scorecard for not including supplier performance parameter; while according to stakeholder theorists, suppliers are one of the most important external stakeholders for the company (Neely and Adams, 2002). In support of balance scorecard, Kaplan and Norton (2008) argued that suppliers and employees can be considered as process perspective in context to strategy map derived through BSC. For example, companies like, Wal-Mart, Nike and Toyota, create separate position for suppliers in strategy map after measuring performance through balance scorecard (Kaplan and Norton, 2008). Kaplan and Norton (1996) proposed BSC; but at that time, they had remained silent about the casual relationship between strategic objectives that are identified through balance scorecard. In more refined works, Kaplan and Norton (2008) employed the concept of strategy map in order to define cause-and-effect relationships between strategic objectives. For example, when a company becomes successful in providing training to employees; trained employees would be able to provide customer services properly; improved service delivery would meet requirements of customers efficiently and in turn would improve customer satisfaction; retention and spending can be achieved from satisfied customer pool; ultimately, higher margins and revenues will be earned by the company (Kaplan and Norton, 2008). Therefore, it can be said that strategy map reflects the casual relationship between objectives identified through balance scorecard; while the relational loop starts at an internal level and ends in financial performance (Kaplan and Norton, 2008). Financial analysis of key performance indicators (KPIs) for Tesco Plc has already been done in previous tasks. Thus, in the next section, the researcher will formulate the balance scorecard for Tesco Plc. 4.0 Balance Scorecard: Tesco Plc 4.1 Financial perspective Table 1: BSC Financial Perspective Goal KPI/Measurement Target performance level Initiative/Action plan Increase revenue from group sales operation Sales of merchandises Increase group sales revenue by +0.5% in 2014. As of 31st December 2013, growth of sales revenue is 1%, while the target is to achieve 1.5% sales growth in 2014. Strengthening competitive position in UK through adjustment of marketing mixes, while increasing sales and profitability in international markets where the company is performing poorly. Increase gross profit ratio for the company Gross Profit Aim is to increase profit margin by 2% in 2014. As of 31st December 2013, profit margin for the company was 3% for UK operations, while target is to achieve 5% profit margin in 2014. Augmenting sales volume and lowering operating expenses by streamlining value chain activities. Converting e-commerce retailing division of the company into fully functional business units that can contribute to revenue growth Rise in online merchandises order frequency and sales revenue. Achieve annual 7% to 8% rise in e-commerce merchandises selling of the company. The company has already invested significant amount of capital in order to establish and promote online retailing division of Tesco. In coming years, the company should invest further on marketing activities so as to support online sales. (Source: Tesco PLC, 2013) It is evident from the annual report published by Tesco Plc (2013) that current ratio or ability to pay off debts of the company has increased. However, financial analysis shows inability of the company to generate revenue without selling its inventory. Despite setting optimistic revenue earning target, sales revenue growth of the company has not shown considerable improvement in recent past. In 2014, from financial perspective, the company should formulate three strategic objectives such as, increasing revenue from group sales operation, increasing gross profit ratio for the company and lowering CAPEX (Capital expenditure). The company should focus on strengthening market leadership position in UK through product diversification, advertising, online sales channel optimization and change in pricing policy. In international market, the company should further localize its retail merchandises in accordance with local demand and optimize marketing initiatives to drive sales revenue. In order to curtail operating expenses, Tesco Plc should shift focus from non-revenue generating operational activities or even eradicate certain redundant value chain activities (Tesco PLC, 2013). The company has already started investing on business initiatives like, ‘Click & Collect’ facilities, drive-through in car parking lots, online sales channel and has also lowered order shipment time in online ordering of merchandises. These strategic initiatives require low capital investment and provide quick and high return on capital invested. Therefore, Tesco Plc should focus more on such initiatives in order to get high ROI (Return on Investment). As part of capital expenditure reduction initiative, the retailing giant needs to avoid capital intensive strategic initiatives such as, investing huge amount of money in brick and mortar store expansion, wasting money in redundant product innovation and using high priced real estate as store location. 4.2 Customer perspective Table 2: BSC Customer Perspective Goal KPI/Measurement Target performance level Initiative/Action plan Improve repurchase frequency of customers Shopping frequency of customers. Improve repurchase frequency of customers by 10%. Increase variety in available merchandises and roll out loyalty card scheme for customers, irrespective of money spent on shopping. Increase up selling and cross-selling frequency Amount spent by customers during shopping with Tesco Plc. To rise inside store shopping expenditure of customers by at least 15% in next 1 year. Providing discount on up selling and placing of impulse sales merchandises in front of customers. Improve customer loyalty Average revenue per customer and annual retention rate for customers. Customer retention rate should be increased by at least 30% in coming years; while average revenue per customer should increase by 15%. Aggressively use Tesco Bank concept, provide training to employees for offering superior quality services to customers characterized with minimal response time, empathy towards customers and lesser waiting time. (Source: Tesco PLC, 2013) Consideration of annual report published by Tesco Plc (2013) reveals the fact that the company is facing challenges in retaining existing customers and driving higher revenue. Additionally, there are customer complaints regarding poor staff behaviour and inadequate staff in Tesco stores for attending to their requirements. In such context, Tesco Plc needs to establish three customer driven strategic objectives in order to drive growth, such as, improving repurchase frequency of customers, increasing up selling and cross selling frequency and enhancing customer loyalty. Tesco Plc (2013) reported that the company already uses Tesco Bank for providing shopping loans to customers and employs additional staffs or trains existing staffs in order to deliver more efficient and responsive services to customers. 4.3 Internal business perspective Table 3: BSC Internal business Perspective Goal KPI/Measurement Target performance level Initiative/Action plan Improving collaboration with suppliers Lowering cost of sourcing and long-term supplier contract. In 2012-13, the company was successful in retaining more than 50% of previous suppliers; while in 2014, the target will be to reduce supply sourcing cost by 10%. Developing support centres for suppliers, providing best supplier award, using discourse historical analysis (DHA) approach to align interest of suppliers with strategic objectives of the company. Developing strong private label brand Sales revenue earned from selling Tesco labelled merchandises. In the year 2012-13, more than 35% of sales revenue is generated through sales of own labelled brand; while for 2014, the target will be to reach 42% of sales revenue from own labelled brand. Every day low price can be used for own brands and the company should design specialized marketing campaign so as to strengthen the position of private labelled merchandises among customers. Environmental sustainability Reduction in CO2 and greenhouse gas emissions from key value chain activities. Reduce carbon emission, green house gas emission and water usage by 50% within next 7 years. Use recyclable energy sources, electric vehicles and substitutes of papers, during value chain activities. (Source: Tesco PLC, 2013) From internal business perspective, Tesco Plc needs to stress on three strategic objectives, such as, 1- improving collaboration with suppliers in order to access low cost sourcing related benefits, 2- developing strong private label brand so as to facilitate rise in sales revenue earning and 3- increasing environmental sustainability of value chain activities. For the year 2014, Tesco Plc should try to develop core competencies like, strong supply chain network, high sales revenue earning opportunity from own labelled brand and resource capabilities to compete with prices of competitors. According to Tesco Plc (2013), the company has already planned environment sustainability as part of their CSR initiatives. For example, Tesco Plc has incorporated green building concept in retail stores, reduced water consumption and paper usage in operational activities and installed heat-transfer systems as part of their environment sustainability initiatives. On the other hand, inexpensive inside store advertisements blended with billboard placements, electronic display and sales discounts can be employed by the company to promote its own label brands. 4.4 Learning and growth perspective Table 4: BSC Learning and growth Perspective Goal KPI/Measurement Target performance level Initiative/Action plan Encourage innovation in research and development Developing innovative, own brand merchandises Developing at least five new merchandises that can be sold under private label Investing money on research and development activities. Establishing partnership with educational activities in order to access intellectual capital that can drive innovation. Lower employee attrition rate Employee retention rate In 2014, the target would be to reduce employee attrition rate to 6%. Employees would be provided with training, coaching, mentoring, career development opportunities and rewards for lengthening their stay in the organization. Achieve domestic business growth Achieve sustainable business growth for Tesco Plc in UK Improve average annual sales of all merchandises in UK market by 3%. The company has already invested huge amount of financial capital in ‘Building a Better Tesco’ initiatives. In case of UK, Tesco needs to expand multichannel sales network for achieving sustainable business growth. (Source: Tesco PLC, 2013) From learning and growth perspective, Tesco Plc needs to concentrate on three strategic objectives such as, 1- encouraging innovation in research and development, 2- reducing employee attrition rate and 3- achieving domestic business growth. Tesco Plc (2013) reported that the company has already achieved success in reducing employee attrition rate to 9%; while for 2014, the target is to reduce employee attrition rate to 6% through career development program and customer focused training. According to Tesco Plc (2013), the company has planned to strengthen the research and development unit through collaboration with scientific and academic institutes. In 2014, the company can reassert such initiatives in order to increase depth of merchandises under own brand level. Lastly, in order to improve business growth in UK, Tesco needs to focus equally on both offline and online sales channels. Multichannel network should be used by the company in order to lessen shelf life of merchandises and boost sales for all product lines inside the store. 5. Balance of Balanced Scorecard (BSC) Table 5: Balance of Tesco Plc Balance Scorecard Perspective # of Metrics Weight Financial 3 25% Customer 3 25% Internal business 3 25% Learning and Growth 3 25% 12 measures 100% Figure 1: Balance of Tesco Plc Balance Scorecard Equal proportion of balance is given to all four metrics of balance scorecard for Tesco Plc. In the previous years, unequal distribution of weight ton performance matrices were done by top level management in Tesco Plc as their focus was more on achieving business expansion, rather than delivering value to customers. In such context, equally weighted balance score card would allow Tesco Plc to assign equal importance to its strategic performance verticals and invest equal amount of financial and non-financial resources for the strategic objectives. 6. Strategy Map Figure 2: Strategy Map for Tesco Plc The abovementioned strategy map shows the interconnection between different strategic objectives in balance scorecard. Kaplan and Norton (2008) rightly pointed out that strategy map loops passed through process coordinates in order to establish link between different performance objectives. One of the interactions between performance objectives in the balance scorecard for Tesco Plc can be explained, so that rest of the interconnections can be understood. For instance, Tesco Plc becomes successful in improving collaboration between suppliers; collaborative supplier network will lower cost of sourcing for the company; with reduction in cost of sourcing, Tesco will be able to use its additional financial resource to implement more customer focused marketing initiatives; these customer focused marketing initiatives will attract more customers to Tesco stores as well as increase sales revenue for the company; due to overall fall in supply chain cost, the company will be able to realize more profit margin from increased sales revenue. 7. Recommendations Based on the above analysis, four particular areas are recognized as most important for Tesco in order to achieve sustainable business growth. Based on the four perspectives, following recommendations can be made. Multi channel retailing- In present scenario, Tesco still assigns higher emphasis on costly offline retail channels backed by brick and mortar stores, real estate property and buildings for selling products to customers. As a result, operating expenses and capital expenditure of the company is found to increase (Tesco PLC, 2013). In such context, the company is suggested to invest more capital in developing online retailing channels, logistic and supply chain arrangement delivering ordered materials to customers and social media advertising. Incorporating such low CAPEX activities will not only augment revenue earning opportunity for Tesco Plc, but will also boost their profitability. Customer loyalty- On the basis of the above analysis, it can be considered that Tesco Plc has significant amount of scope to improve customer loyalty and drive sales revenue through repeat purchase of loyal customer base. The company can involve in different activities to enhance customer loyalty such as, loan from Tesco Bank to customers, sales discounts, loyalty card scheme and co-branding with airline companies. Environmental sustainability- In order to satisfy requirements of ethical consumers, Tesco Plc can adopt green supply chain concept so as to improve overall environmental sustainability of value chain activities. As part of green supply chain model, different activities can be incorporated by the company such as, use of renewable energy sources in operational activities, lower water and paper usage and reduction in greenhouse gas emission. Domestic business growth- As part of domestic business growth, it is suggested for Tesco Plc to concentrate more on selling own labelled brands and multi-level sales channel for providing merchandises to customers in UK. The company can even implement aggressive marketing strategy backed by competitive pricing and integrated marketing communication (IMC) in order to secure constant sales growth in UK market. 8. Critical Evaluation and Conclusion It can be said that a robust view of business performance of companies cannot be obtained through balance sheet evaluation; rather, using balance scorecard helps to link KPIs of the company to its financial and non-financial performance objectives. As the KPIs for Tesco Plc are already identified in previous tasks, it has become easier for the report to set less speculative targets in balance scorecard. Recently, Tesco Plc has sold out less profitable international strategic business units (SBUs) in order to increase overall profitability from business operation. In such context, the retailing giant should try to achieve the strategic objectives mentioned in BSC in context to UK market. The 2012-13 financial year has been analyzed for developing the balance scorecard and during this time period, market leadership position of the company has been perturbed. According to developed BSC, Tesco Plc needs to focus on its existing customer pool and lower CAPEX for conducting low ROI activities. Using both balance scorecard and strategy map has helped the study to realize ways in which Tesco Plc can link its performance objectives through strategic initiatives. Identified performance objectives for Tesco Plc through BSC will allow the company to achieve future business success as well as retain market leadership position. In conclusion, it can be stated that Tesco Plc needs to learn from previous mistakes and put higher stress on delivering value to customers so as to attain sustainable business success. Reference List Haapasalo, H., Ingalsuo, K. and Lenkkeri, T., 2006. Linking strategy into operational management: A survey of BSC implementation in Finnish energy sector. Benchmarking: An International Journal, 13(6), pp. 701-17. Hargreaves, R., 2014. Can Tesco PLC Make £5 Billion Profit? [online] Available at: [Accessed 19 March 2014]. Kaplan, R. S. and Norton, D. P., 1996. The balanced scorecard: Translating strategy into action. Boston: HBS Press. Kaplan, R. S. and Norton, D. P., 2008. Mastering the management system. Harvard Business Review, January, pp. 62-57. Neely, A. and Adams, C., 2002. Performance prism: The scorecard for measuring and managing stakeholder relationships. New Jersey: Financial Times/Prentice Hall. Tesco PLC, 2013. Annual Report and Financial Statements 2013. [pdf] Tesco PLC. Available at [Accessed 19 March 2014]. Tesco Plc, 2014. About us. [online] Available at: [Accessed 19 March 2014]. Valmohammadi, C. and Servati, A., 2011. Performance measurement system implementation using Balanced Scorecard and statistical methods. International Journal of Productivity and Performance Management, 60(5), pp. 493-511. Read More