Formulation and Implementation of Balanced Scorecard of Procter & Gamble - Case Study Example

BALANCED SCORECARD WEEK 6 Executive Summary Balanced Scorecard is an important tool developed to measure the level of performance mainly of the employees in an organization. Procter and Gamble (P&G) is a reputed FMCG company which operates its business worldwide. It is headquartered at Ohio, United States. The company is engaged in the business of offering consumer goods to its customers in packaged form. The sales and marketing division of P&G group is committed towards providing best services to its customers. This study entails the preparation of a balanced scorecard for the strategies to be implemented in the sales and marketing division of the company keeping it aligned with the overall strategy of P&G. The Balanced Scorecard includes all the four perspectives of a balanced scorecard namely, the financial, customers, learning and internal business process perspectives. The purpose of this Balanced Scorecard is to look at three objectives in this organizational unit. These objectives will be measured using metrics appropriate for this discipline. Financial The primary goal or objective of this business unit is to increase the sales and add to the profits of the company. A lot of sales personnel are involved in the marketing of products of P&G and it needs to look at the objective of reducing the costs incurred in the various processes involved in this department as well. Customer Customers are the key towards the success and profitability of the company. Hence the company needs to have a well devised strategy leading to complete satisfaction of its customers. Internal Business The strategy related to this perspective would be to increase the efficiency of the marketing division so that it can serve for the better performance of the company. Learning and Development A well devised strategy related to this perspective is also required to be devised by the company. It would include various objectives like imparting training to the personnel in the department so that they can carry on their activities efficiently and help the company to have a sustainable growth and development. Table of Contents Table of Contents 4 Formulation and Implementation of Balanced Scorecard of Procter & Gamble 6 Financial Perspective 8 Sales Growth 9 Growth in Operating Activities 9 Free Cash Flow Productivity 9 Customer Perspective 10 Increase in Customer Retention 10 Improved Customer Service 10 Increase in number of Customers 11 Internal Perspective 11 Reductions in Inventory 11 New Product Developments 12 Improvement in Distribution Efficiency 12 Learning and Growth Perspective 12 Employee Turnover 13 High Skill Levels 13 Employee Satisfaction 13 References 16 Formulation and Implementation of Balanced Scorecard of Procter & Gamble Balance Scorecard was developed by Robert Kaplan and Dr. David Norton in the year 1992. It is a tool developed to measure the level of performance mainly of the employees in an organization. In a Balanced Scorecard system performance is measured on the basis of four perspectives, namely, financial, customers, learning and development, and internal business process perspectives. It contains both the target scores and the scores achieved based on the given category. So it becomes easy to measure high as well as low performances using Balanced Scorecard (Balance Scorecard Institute, 2012). This study entails about the preparation of a Balanced Scorecard for the sales and marketing division of Procter and Gamble (P&G). P&G is a reputed company which operates its business activities worldwide. It is headquartered at Ohio, United States. P&G is engaged in the business of offering wide range of FMCG products to its customers and they are delivered to them in packaged forms (Yahoo Finance, 2012). The sales and market division of the company constitutes a critical unit of the organization and Balanced Scorecard prepared in this study can help analyze and measure its effectiveness, thereby helping the company to have well devised strategy to attain the objectives of the company. The first step towards developing the Balance Scorecard for the sales and marketing division of P&G requires identification of the strategic objectives of the company as a whole. Those strategic objectives are then required to be utilized to formulate the strategic objectives of the sales and marketing unit of the company. As mentioned before Balanced Scorecard comprises of the formulation of the specific objectives relative to each of the four perspectives which are interlinked with each other. Then, it is required to assign metrics to help in the measurement of each of the objectives set to achieve by the marketing unit of P&G. Thereafter, using the metrics, target levels are needed to be assigned for each of the specific objectives. This would help in the performance measurement of the marketing unit and monitor the progress towards the attainment of its previously set objectives. Table: 1 shows the various objectives set for the marketing division viewed from all the four perspectives as required in the preparation of a Balanced Scorecard. The corresponding metrics and the annual target levels proposed for the upcoming financial year has also been mentioned in the table. The Balanced Scorecard so prepared includes three objectives set to be achieved in the upcoming year for each of the four perspectives. This is sometimes termed as the strategic map of the company and it greatly helps in simplification of the operations carried on by the company as a whole (Blokdijk, 2008, p.100). First let’s discuss about the organizational strategic objectives of P&G. P&G is committed towards its sustainable long term growth and development. Its objective is to improve the standard of living of its consumers all over the world and it strives to become the top performing companies offering consumer products worldwide. The primary strategic objectives set for the company to achieve includes organic sales growth which is 1% to 2% more than its competitors in the market, high EPS growth and generation of productivity related free cash flows amounting to 90% and more (P&G, 2012, p.1). To achieve the above mentioned strategic objectives of P&G, all its organizational units need to perform accordingly with high level of coordination amongst each other. The sales and marketing division of P&G is one such organizational unit which forms an integral part of the organization and its performance has a significant impact on the overall performance of the organization. Balanced Scorecard prepared for the sales and marketing unit of P&G can prove to be a powerful tool for the company to achieve its overall strategic objectives. Balanced Scorecard has its own advantages and its effective implementation can help the company perform and sustain its growth for long term. Balanced Scorecard helps a company to monitor and measure how each of the set objectives are being achieved in the company and helps to identify any type of issues related to it. Moreover it helps the company to communicate its business strategies to all of its employees in a lucid way (Epstein, & Manzoni, n.d., p.9). The Balanced Scorecard of the sales and marketing unit of P&G requires setting up of objectives relative to each of the four perspectives as required in its formulation. First of all, three objectives have been identified relative to each of the four perspectives and the corresponding metrics to measure the performance corresponding to each of the set objectives have also been identified. Next the target values assigned for the objectives to be achieved have also been included in the Balanced Scorecard. It has been discussed in details in the next section. Financial Perspective P&G is a profit making company. It strives to maximize the returns of its shareholders. There are two important ways to enhance the financial performance of a company. They are the growth of revenues and increased productivity (Kaplan, & Norton, 2001, p.90). Keeping this in mind three such objectives have been identified for the sales and marketing unit of P&G. These objectives are considered to be devised from the financial perspective and are set to be achieved by the organizational unit at the end of the upcoming financial year. This would result in the achievement of overall financial strategic objective of P&G. The three objectives along with the metrics and the set target levels have been discussed below: Sales Growth The sales and marketing unit of P&G is mainly responsible for the sales and revenue growth of the company. The performance level corresponding to the strategic objective of increasing the growth of sales of the company could be measured effectively using the metrics of annual growth rate of the company calculated in percentage terms. The target level set for the upcoming financial year is 6% annual growth rate or more as compared to the sales revenue generated in the last financial year. It is worthwhile mentioning the fact that the annual sales growth rate was 5% last year. Growth in Operating Activities Growth in operating margin is set to be the other strategic financial objective of the business unit. It can be measured using the metric of operating margin which is the ratio of operating profit and net sales of the company. The target value for the next financial year is set to be 22% of operating margin. This objective could be achieved through the reduction in operating expenses of the company, most of which is incurred by the sales and marketing unit of P&G. Free Cash Flow Productivity This objective of increasing the free cash flow productivity is in alignment with the overall strategic objective of P&G. Its performance level could be effectively measured using the metric percentage of free cash flow productivity which can be calculated as the free operating cash flow generated as a percentage of the net earnings of the company. Its target value is set to be 90% which is to be achieved at the end of upcoming financial year. Customer Perspective Customers are the key to any profit making organization including P&G. Setting up objectives from the customer perspectives of the company requires identification of the market segments where the company decides to operate its business activities and the target customers (Caudle, 2008). The three objectives relative to this perspective have been discussed below: Increase in Customer Retention P&G has already developed a wide customer base and it needs to retain those loyal customers of the company to ensure its growth and performance in the long run. This objective could be measured effectively using the metric of percentage retention which is calculated as the percentage of existing customer retained by the company. The annual target value set for this objective is 80% retention of customers at the end of the upcoming financial year. The achievement of this objective would ensure that P&G maintains its competitive advantage in the market. Improved Customer Service This objective is set in alignment with the objective to increase the customer satisfaction and thereby contributing to the increased growth of P&G. The metric that could be used to measure the performance relative to the measurement of this objective is survey rating corresponding to the customer survey conducted for the purpose. The annual target value that needs to be achieved is set to be 85% rating in accordance with the customer survey conducted for the purpose. Increase in number of Customers This specific objective is set for the purpose of increasing the existing customer base of P&G which could enhance the profitability of the company with increased sales revenue generated by the company. The metric that can be utilized for the purpose of measuring this objective is the annual growth rate of customers of the company. The target value set for the purpose of achievement of this objective is annual growth rate of customers of 4% or more at the end of the next financial year. Internal Perspective Internal perspective relative to the business processes carried on by the marketing unit of P&G corresponds to the skills and abilities of the internal employees of the business unit. The effectiveness of the internal employees and the activities carried on by them can help boost the performance of the company as a whole. The three specific objectives relative to this perspective has been mentioned below: Reductions in Inventory The achievement of this objective could help the company to reduce its inventory costs thereby increasing the profit of the company. It requires improved management of the inventories by the employees in the organization. Inventory as percentage of sales could be used as metric to measure the performance relative to this objective of the company. The target value set for the purpose is set to be less than 7% inventory at the end of the financial year. New Product Developments This objective can help measure the innovativeness of the employees of the organization. It would help in building up the core competencies of the company and thereby increasing the competitive advantages of the company. The metric that can be used to measure this objective is the number of new products developed by the company. The employees of the marketing division could contribute towards the fulfillment of this objective through their feedbacks about the specific requirements and improvement sought by the customers of P&G. The target value set for the financial year is 5 or more number of new products launched by the company. Improvement in Distribution Efficiency Distribution network of P&G needs to be strong enough to ensure efficiency in delivering the products to the customers. The corresponding metric set for the purpose is the percentage of defective products delivered by the sales personnel of the company. The annual target value assigned for the purpose is less than 5% of defective orders. Learning and Growth Perspective This perspective is critical for the company to sustain its growth and have the ability to be proactive in its decision making related to the business activities in the organization. The three set objectives relative to this perspective is mentioned below: Employee Turnover The company needs to have low employee turnover through increased satisfaction provided to its employees. The metric used for the purpose is the employee turnover rate in the marketing division of P&G. The target value set for the purpose is less than 2% employee turnover rate during the upcoming financial year. High Skill Levels High levels of skills of the employees are also necessary to increase the effectiveness and efficiency of the business activities carried on by them. Skill set ratio calculated in percentage terms could be used as a metric for the purpose. The annual target value is set to be 75% or more skill ratio possessed by the employees of the marketing unit of P&G. Employee Satisfaction This objective is in alignment with the overall objective of increasing the efficiency the marketing employees of P&G. The metric that could be used for the purpose is the survey index from the annual employee survey conducted by the company. The corresponding target value is 80% or more employee satisfaction as calculated through the measurement of the survey index of the employee survey. Table: 1 Balanced Scorecard Perspective Objective Metric Target Value Financial Sales Growth Annual Growth Rate Greater than 6% Growth in Operating Activities Operating Margin Greater that 22% Free Cash Flow Productivity % Free Cash Flow / Net Earnings Greater than 90% Customer Increase in Customer Retention %age Retention Greater than 80% Improved Customer Service Survey Rating Greater than 85% Increase in Number of Customers Annual Growth Rate of Customers Greater than 4% Internal Reductions in Inventory Inventory as %age of Sales Less than 7% New Product Developments Number of New Products Launched More than 5 Improvement in Distribution Efficiency Percentage of Defective Orders Less than 5% Learning Employee Turnover Employee Turnover Rate Less than 2% High Skill Levels Skill Set Ratio Greater than 75% Employee Satisfaction Survey Index Greater than 80% References Balanced Scorecard Institute. (2012). Balanced Scorecard Basics. Retrieved from http://www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx. Blokdijk, G. (2008). Balanced Scorecard 100 Success Secrets, 100 Most Asked Questions on Approach, Development, Management, Measures, Performance and Strategy. North Carolina: Lulu.com. Caudle, S. (2008). The Balanced Scorecard: A Strategic Tool in Implementing Homeland Security Strategies. Homeland Security Affairs, 4(3). Retrieved from http://www.hsaj.org/?fullarticle=4.3.2. Epstein, M. J., & Manzoni, J. F. (no date). The Balanced Scorecard and Tableau De Board: A Global Perspective on Translating Strategy into Action. Retrieved from http://www.insead.edu/facultyresearch/research/doc.cfm?did=46617. Kaplan, R. S., & Norton, D. P. (2001). Transforming the Balanced Scorecard from Performance Measurement to Strategic Management: Part I. Accounting Horizons, 15(1). Retrieved from http://www.qa.au.edu/page2/research/BSCTranslatingBSCPerfMgtToStrategicMgtPt1.pdf. P&G. (2012). Innovating for Everyday Life. Annual Report 2011. Retrieved from http://annualreport.pg.com/annualreport2011/_files/pdf/PG_2011_AnnualReport.pdf. Yahoo Finance. (2012). Procter & Gamble Co. (PG): Profile. Retrieved from http://in.finance.yahoo.com/q/pr?s=PG. Read More