The Balanced Scorecard Tool for Analysis Homebase Company - Coursework Example

Homebase Contents Contents 2 Executive Summary 4 Introduction 4 Vision and strategy 5 1 Vision 5 2 Strategy 5 2.Balanced Scorecard for Homebase6 3.Strategy Map of Homebase 11 4. Recommendations 13 5. The use of Balanced Scorecards for performance management and monitoring 16 5.1 Practical use of the balanced scorecard 16 5.2 Limitations of balanced scorecard 17 5.3 Evaluation and discussion 17 Financial perspective 17 Customer perspective 19 Internal Process perspective 20 Learning and Growth Perspectives 22 References 24 Executive Summary The report is prepared with the aim of analyzing the performances of a selected company through the use of the Balanced Scorecard Tool for analysis. The chosen company for the report is Homebase which is a leading home improvement retailer in the United Kingdom. The balanced scorecard model is applied to the company by referring to the Annual report published by Homebase in the year 2014. The balanced scorecard is descending for the business followed by the development of a strategy map for the company based on the results of the balanced scorecard analysis. The balanced scorecard tool is explained before designing the scorecard for the case company. Also the use of the balanced scorecard in the performance evaluation and monitoring of the modern businesses are discussed. Both the balanced scorecard outcomes and the designed strategy map are explained and analyzed to provide suitable recommendations to the Board of Directors of Homebase for deciding on the future strategic direction of the company. The recommendations are given with the aim of supporting the management of Homebase to take suitable corporate and business decisions and devise the appropriate strategies for the achievement of the business goals and objectives and for implementing the formulated strategies in the most efficient and value adding manner. 1. Introduction Homebase is a home improvement retail company based in the United Kingdom. The company operates in the segment of home improvement and garden centre and is a subsidiary of the famous Home Retail Group. Homebase operates with 323 outlets across different locations in the Republic of Ireland and the United Kingdom. The company is a highly successful retailer in the United Kingdom which has recorded a profit of GBP 18.9 million in the financial year 2013-2014. Also, the revenues for the company were recorded to have a value of GBP 1.46 billion in the financial year of 2013-2014 as per the annual report published by the company. Vision and strategy 1.1 Vision The vision of the company is to provide the customer groups in the country with a wide range of home improvement products and services within a differentiated environment. The company aims to provide both convenience and value for its customers through its operations (Crawford, 2008). 1.2 Strategy Homebase uses a number of strategies in its operational, financial, human resource management and other business functions for the purpose of developing consistency in its service provision and for creating competiveness and success in the dynamic business environment in which it functions. The main strategies used by the management of the company Homebase include the provision of adding value to its operations through the use of its business model. Figure 1: Business model for Homebase (Source: Home Retail Group, 2014) The main strategies are the creation of competitive value through developing compelling offers to the customer groups, development of digital strategies and multi channel retailing strategies, developing financial services, financial strength development, cost leadership, cost management and exclusive brand development. Other key business, financial and operational strategies taken up by the business include the establishment of a strong position in the digital retailing domain, taking up suitable currency risks and credit risk negating techniques, accessing group financing system, interest rate risk management, alignment of the organizational strategies with the corporate governance policies and focusing on creating enhanced customer value by forecasting the needs and demands of the customer groups on a prior basis. 2. Balanced Scorecard for Homebase Homebase Group Financial perspective Key Success Factors KPI Target Performance Level Summary Action Plan or Initiatives Profitability increase Profit Before Tax, NOPAT, Operating profit, Retained earnings for the company, sales revenue. The profit of the company increase by 71% The operating margin increased by 2.0%. Growth of multi channel retail sales, management of operational expenses (Norton. 2006) Sales revenue growth Basic benchmark Earnings Per Share (EPS), share price performances, market value of shares. The basic Earnings Per Share (EPS) to be increased by of 35%. Increase in the share price, maximization of shareholders’ wealth. Cash flows Liquidity ratio, cash balance, dividends paid. Dividend of 10%. A final dividend amount of 2.3 p would be recommended. 1  Invest in profit reaping areas. Management of assets. Market share Profit margin, net sales, percentage of market share. At least 6% increase in market share Concentrating on the profit reaping markets. Homebase Customer perspective Key Success Factors KPI Target Performance Level Summary Action Plan or Initiatives Brand image Advertising and promotion techniques, increase in turnover, goodwill valuation. 20% higher brand visibility Opening up of new stores, introduction of new products on a frequent basis, excellent customer service. Customer experience On time delivery, quick response cycles, feedback mechanisms. 100% customer satisfactions scale by the next year from a 92% scale in the reported year. Focus on value creation, augmented and ancillary services. Quality Quality control, production efficiency, quality check and innovation. reduce the number of rejected items by 10% Establishing a dedicated deigns and quality control and quality check team. Widen customer base Number of cumulative customers, footfalls and purchases, number of new acquired customers. Acquire at least 10% of the existing customer base as a new customer groups for the company. Identification of the potential customers company. Homebase Internal Process perspective Key Success Factors KPI Target Performance Level Summary Action Plan or Initiatives Operational efficiency Production cycle time, operational costs, unit product procurement and sourcing costs Reduce the production cycle time periods by at least 6%. Forecast the market demands accurately, optimal inventorying. Procurement and supply chain management. Sourcing costs, delivery time, procurement time, supply chain costs, inventory level Decrease the operational and procurement expense by at least 15%. The employment of third party logistics and procurement service providers product portfolio Number of new products introduced per evaluation period, sales of products on a categorized basis. To improve the product sale cycle by 20% Reduce the number of defective items. Higher goodwill Community development and CSR. Contribute at least 10% of the total retained earnings towards CSR activities. Investing in giving back to the society. Homebase Learning and Growth perspective Key Success Factors KPI Target Performance Level Summary Action Plan or Initiatives Enhance the skills of employees. Motivation, focus and concentration. .A 15% increase in the level of participation Customized training to the employees. Business learning and training processes Training techniques, productivity and performance improvements. Continuous guidance and support. Development of training mechanisms, taking up latest training systems. Organizational culture Retention rate, attrition rate, promotion levels, individual performances, organizational performances. The development of an organizational culture that is indicative of the support provided to the employees Open door policy, 3600 feedback mechanism. Innovativeness and creativity New products, market knowledge, inputs from the employee groups, revenue per employee. Optimization of the innovation standards. Improved efficiency level of the employees and departments. 3. Strategy Map of Homebase The strategy map for Homebase is developed with the aim of developing the strategies for the business in the future years based on the performance evaluation of the company. Innovation and learning process Internal process perspective Customer perspective Financial perspective This strategy map indicates that the company can achieve the key objectives of improving the performance of the organization in the various dimensions of the enterprise by developing suitable actions and strategic plans to improve the performance of the company at each micro level of the departmental functions. The four perspectives as sued in the balanced scorecard and strategy map are interrelated and ultimately lead to the creation of enhanced profitability of the business (Person, 2010). 4. Recommendations The balanced scorecard approach is useful both for the purposes of measuring and monitoring the quantifiable and non quantifiable performance levels of a company over a fixed period of time. Thus, the management of Homebase can implement the results and findings of the tool and the analysis to improve the functioning of the business from various dimensions and approaches. The balanced scorecard tool is an important approach used in contemporary strategic management which not only helps to evaluate the efficiency and performance of a company through a holistic view but also helps in creating more effective and appropriate strategies and systems in the business (Balanced Scorecard Institute, 2014). As such, the management of Homebase can develop a suitable strategic direction for the company through the study of the balanced scorecard outcomes and through the devolvement of the strategy map. These initiatives would help the company to ensure continued success and create sustainable competitive advantage in the future years to come. The scorecard tool can be used by the management of Homebase to formulate valuable strategies and take suitable business decisions for improving the overall performance of the company through a consideration of the various indicators and perspectives like value creation for the stakeholder groups of the company, financial performances, customer relationship management, human resource management, operational efficiency and training and development in the organization (Nair, 2004). A strategy map is a diagrammatic representation of the strategic goals of a company as compared with the links between the various actions that can lead to the achievement of the strategic objectives of the business. The strategy map is an element of documentation which is built up on the basis of a balanced scorecard (Merl, 2007). The management of Homebase can follw the strategy map as an important guideline for formulating developing the future strategic direction of the business. The strategy map has helped to identify the gaps in the strategy formulation of the business like the immediate need for high amount of support and training in the learning and growth processes of the employees. The company should try to implement the training and development processes on a priority basis. The management of Homebase should focus on the development of suitable departmental level strategies that would improve the overall efficiency and productivity of the organization. The company should especially focus in developing a customer oriented approach and leverage on the success factors of the business. For example, the financial performance of Homebase is already strong. Therefore, the company should start by focusing on the financial objectives and integrate the objectives defined in the other segments of the balanced scorecard and the strategy map. The balanced scorecard can be used as the platform to develop the strategy map for Homebase. The strategy map is designed for the purpose of developing the future strategies for Homebase. These include both the managerial and corporate strategies of the company which encompasses different business perspectives like operations, financial management, human resource management and internal business processes. The balanced scorecard aims at evaluating the financial, operational and other types of performances of a company on the basis of both quantifiable as well as non quantifiable metrics so that the future business strategies and decisions for the company can be taken appropriately. So this would help the management personnel of Homebase to identify the gaps in the strategic management of the company and in the implementation of the strategic planning processes of the business. This in turn can would enable the management to improve the goodwill, brand reputation, operational performances as well as meet the other strategic objectives of the business in a streamlined and integrated manner and as such take proper business decisions and achieve the desirable business goals and targets by improving the functioning and performances of the company in all the four major perspectives and metrics considered in the analysis tool (Niven, 2010). The use of a balanced scorecard tool in a business can lead to the creation of additional effectiveness and competiveness, of the company through the design of predefined visions and goals for the company and through the formulation of the necessary Key Performance Indicators (KPI) and the strategies and actions that should be used in order to achieve the pre defined goals (Banker, Chang and Pizzini, 2004). Thus, the case company can also use the balanced scorecard and the strategy map to develop a suitable strategic planning system for the company. The use of the balanced scorecard tool for the case company, Homebase would help to identify the drawbacks in the strategic management of the business and would also provide the scopes for creating the new strategies that can lead to sustainable competitive advantage creation for the business in the intensely competitive home improvement and home retail segment in the United Kingdom. 5. The use of Balanced Scorecards for performance management and monitoring 5.1 Practical use of the balanced scorecard The balanced scorecard tool is a major managerial tool that was invented by Kaplan and Norton. The balanced scorecard technique is used to measure the performances of a company by measuring and evaluating it from four different perspectives which are the financial perspective, customer perspective, internal process perspective and the learning and growth perspective. These perspectives of the balanced scorecard tool are represented diagrammatically in Figure 2. In its simplest form, this managerial approach is based on the four metrics and indicators as used in this strategic management tool. Each of these perspectives are further categorized into sub parts such as metrics, measures, initiatives, objectives and targets for developing an effective and value adding balanced scorecard design for any company (Campbell, 2008). Figure 2: Balanced scorecard framework (Source: Kaplan and Norton, 2006) 5.2 Limitations of balanced scorecard Today, all types of companies operating in the contemporary business environment have taken up the balanced scorecard tool as a major part of their strategic management processes due to the high level of significance found for the tool in improving the performances of the company and at the same time deciding the strategic direction of the company. However, this tool often does not account for the external business conditions and thus, becomes redundant in cases of shifts in the business environment. The implementation of the BSC also acts as a major challenge for extracting its full value. 5.3 Evaluation and discussion The balanced scorecard as designed for the case company, Homebase is given in the following tables where the four perspectives or indicators of the performance evaluation scorecard matrix for the company are analyzed in the basis of the goals or objectives, strategies, Key Performance Indicators (KPI) and actions and initiatives taken for achieving the pre defined goals. Financial perspective The key financial goal of the company includes the aim to enhance the overall profitability of the company through the control of the operating expenses and through the increase in the revenue generation in each of the stores of the business. The KPIs are Profit before Tax (PBT), Net Operating Profit after Tax (NOPAT), Operating profit, net profit, Retained earnings for the company, sales revenues, operating income are the main metrics used for this financial performance evaluation. The target performance level would be that the profit of the company increased by 71% or GBP 8 million from 2013 to 2014. While the cost of central activities and operations were controlled to a high extent. The operating margin increased by 2.0% which is quite optimistic in the competitive industry structure as noted in the period of analysis. The action plan for higher growth in profitability encompasses strategies like growth of the multi channel retail sales, more efficient management of the operational expenses, opening up of digital concept outlets (Norton. 2006). The second target is the creation of sales revenue growth is an essential objective for the company in its present situation. The main financial objective of the company would be to maximize the sale volumes of the company so that the revenues are adequately generated for the business. The KPIs are Basic benchmark Earnings per Share (EPS), share price performances as measured over a one year time period, market value of shares, number of shares floated in the market. The target performance level would be based on the basic Earnings per Share (EPS) for the company is created to 10.4 p which is an increase of 35%. The action plan includes increase in the share prices of the company automatically lead to the maximization of shareholders’ wealth. The increase in the value of the company is also a desired objective because it would increase the prices of the stocks. The third objective is to improve the cash flows into the business. The KPIs are liquidity ration, cash balance, dividends paid. Te target performance level are decided on the basis of the cash balance of the company at the end of the reported year is GBP 331 million The company would be able to pay a dividend of 10%. A final dividend amount of 2.3 p would be recommended. The action plan includes investing in profit reaping areas, forecasting the market demands accurately, managing the assets of the business in an effective way and employing the working capital in the business on a prioritised basis. The last financial objective for the year is to increase the market share of the company. The KPIs for this purpose are profit margin, net sales, percentage of market share as compared to the main competitors of Homebase. The target would be to achieve at least 6% increase in market share by the next reporting year. The strategic initiatives for this gaol would be concentrating on the profit reaping and emerging product markets of the industry. Customer perspective The first objective of Homebase in the customer perspective of the balanced scorecard includes the improvement of the brand image among the target customer groups and the global stakeholders. The KPIs for this target are: advertising and promotion techniques, promotion expense, increase in turnover, goodwill valuation for the business. This can be done through the use of strategies like investing more in the CSR initiatives, advertising and brand value creation activities so that at least 20% higher brand visibility are achieved. The expected outcomes would be a significant improvement in the goodwill and brand image of Homebase. The other strategies would include opening up of new stores, introduction of new products on a frequent basis, excellent customer service, fast response to customer queries, CSR and periodic offers and new facilities. The second objective would be to improve the experience levels of the customer groups. The KPIs for this measurement are: on time delivery, quick response cycles to customer demands and complaints, ranking and feedback mechanisms. The action plan for the achievement of this goal would include enhancing the level of satisfaction of the customer to reach a 100% customer satisfactions scale by the next year from a 92% scale in the reported year and focussing on value creation, augmented and ancillary services and employing highly skilled front end customer service executives to guide the customers in their purchase processes and decisions. Another objective would be to offers better quality products and services for the customer groups. The KPIs are quality control, production efficiency, quality check and innovation. The strategic action plan would encompass controlling the quality issues in the company and reducing the number of rejected and returned items by 10% in the next reporting period and dealing with the quality in a stringent manner, establishing a dedicated deign and quality control and quality check team. The last goal for this perspective is to increase the customer base of the company. The target is to acquire at least 10% of the existing customer base as a new customer groups for the company. The key KPIs are number of cumulative customers as per the records in each of the stores, footfalls and purchases in each of the stores, sales, number of new acquired customers. The strategic action plan would involve the identification of the potential customers which can be transformed from non customers to active customers of the business and introduction of customized and compelling products and services by the company. Internal Process perspective The Internal Process perspective for Homebase would include four key objectives. These are the improvement of the operational efficiency levels. The main KPIs are Production cycle time, operational costs, unit product procurement and sourcing costs. The action plan would encompass to reduce the production cycle time periods, and speed up the procurement and inventory management cycle periods by at least 6% by next year. These can be done by forecasting the market demands accurately, accounting for the demand level changes and maintaining optimal inventorying techniques. Another objective is to improve the procurement and supply chain management processes. The main target would be to decrease the operational and procurement expense by at least 15% in the next year. The KPIs for this are sourcing costs, delivery time, procurement time, supply chain costs, inventory level. The action plan would include steps like the employment of third party logistics and procurement service providers to speed up the processes of delivery and transport. The target set for the internal processes is to extend and deepen the product portfolio and service offerings to the customer groups and to improve the product sale cycle of the company by approximately 20% in the next yarer of operations. The KPIS are the number of new products introduced per evaluation period, sales of products on a categorized basis, revenues generated in the same evaluation period. The action plan includes the reduction of the number of defective items and removal the products which stay on shelf for too long. The last target for this perspective includes the development of higher goodwill value and socially responsible image of the enterprise. The KPIs are community development initiatives and other outcomes of the CSR initiatives, increase in goodwill, environmental compliance, sustainability ranking. The main gaols would be to contribute at least 10% of the total retained earnings of the company towards CSR activities like community development initiatives, sustainability initiatives and compliance related activities. The main initiatives would be investing in giving back to the society, adding value to the communities in which the company operates, taking up environment friendly practices and processes and investing towards environment friendly initiatives. Learning and Growth Perspectives The Learning and Growth perspective of the balanced scorecard for Homebase would include four main targets. The first target is to enhance the skills of all levels of employees in the organization. The KPIs would be the motivation of the employees, focus and concentration of the employees, increase in contribution and participation in the jobs. The initiatives for the achievement of this goal are the improvement of the skills and efficiency of the employees and improvement in the business from the cultural and functional perspectives. A 15% increase in the level of participation is expected for the next reporting year. The action plan would follw the processes of providing customized training to the employees according to their requirements by identifying and assessing the level of skills present among different groups of employees. The second objective is the creation of higher value in the business learning and training processes. The KPIs are training techniques, productivity and performance efficiency improvements. The action plan would include steps like Continuous guidance and support provided by the training personnel and human resource managers to all levels of employees without any discrepancy, development of training mechanisms, taking up latest training systems including modes and processes of training that would add maximum value to the performances of the employee groups. The third objective is to create a robust and open corporate culture. The KPIs are Retention rate, attrition rate, promotion levels, individual performances, organizational performances. The target achievement plan would include the development of an open and flexible organizational culture that is indicative of the support provide to the employees by the management, unbiased treatment of the human resource groups, rewards and recognition, periodic appraisal, open door policy, 3600 feedback mechanism. Another objective would be to boost innovativeness and creativity. The KPIs are Product lifecycle, innovation of new products, market knowledge, inputs from the employee groups, revenue per employee. The target achievement plan would include the optimization of the innovation standards of the company and the revenue per human resource unit in the business. The expected outcomes would be the improved efficiency level of the employees and departments and reduction in the downtime. References Balanced Scorecard Institute. 2014. Balanced Scorecard Basics. [Online]. Available at http://balancedscorecard.org/Resources/About-the-Balanced-Scorecard [Accessed on 26 March 2015] Banker, R. D., Chang, H. & Pizzini, M. 2004. The Balanced Scorecard: Judgmental Effects of Performance Measures Linked to Strategy. The Accounting Review. Vol.79 (1), pp.49-60. Campbell, D. 2008. Testing Strategy with Multiple Performance Measures: Evidence from a Balanced Scorecard. Journal of Accounting Research. Vol. 4(2), pp.31-36. Crawford, D. 2008. The Balanced Scorecard and Corporate Social Responsibility: Aligning Values for Profit. Stamford: Cengage learning. Home Retail Group. 2014. Annual Report and Financial Statements 2014. [Pdf]. Available at https://www.homeretailgroup.com/media/198098/2014_home_retail_group_annual_report.pdf. [Accessed on 26 March 2015] Kaplan, R. S. & Norton, D. P. 2006. The Balanced Scorecard: translating Strategy into Action. Boston: Harvard Business Press. Merl, A. 2007. Analysis of the Balanced Scorecard as a strategic controlling instrument. Stamford: Cengage learning. Nair, M. 2004. Essentials of Balanced Scorecard. New Jersey: John Wiley & Sons. Niven, P. L. 2010. Balanced Scorecard Step-by-Step: Maximizing Performance and Maintaining Results. New Jersey: John Wiley & Sons. Norton, D. P. 2006. Alignment: Using the Balanced Scorecard to Create Corporate Synergies. Boston: Harvard Business School Press. Person, R. 2010. Balanced Scorecards and Operational Dashboards. 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