Measuring Performance - Situation Analysis, Planning and Forecasting, and Balanced Scorecard - Essay Example

?FOR Jenny Greer and Gordon Greer, Proprietors – Jengo Ltd. FROM here, Financial Consultant July 5, Situation Analysis; Planning and Forecasting; Balanced Scorecard Respectfully forwarding my report regarding a proposal for the conduct of situation analysis of Jengo Ltd. There is reason to believe that the findings of the situation analysis, selected forecasts and planning activities will offer a more transparent outlook of our revenue - generating potential in terms of company performance and future prospects. I am certain that Palisade Plc will not entertain second thoughts of acquiring half of the company if the aforementioned reports will be prepared and provided for the perusal. My recommendations consist of four parts: (1) situation analysis and forecasts; (2) planning and control; (3) balanced scorecard; and (4) literature from authoritative sources provided as an attachment to this report using Harvard style of documentation. Situation Analysis and Forecasts Business sense dictates that effective forecasting and planning can be achieved only if the officers in charge of accomplishing the task possess a full understanding of the present position of the company and its products. Situation analysis presents a systematic process to gain a profound insight of the company, its internal and external environment, and how the various factors interact and affect organisational performance. I would like to recommend three tools which will facilitate the situation analysis of Jengo, Ltd., namely: SWOT analysis, PESTLE analysis and Porter’s five forces analysis. SWOT Analysis. A SWOT analysis is a tool utilized to determine and measure a business organization’s strengths, weaknesses, opportunities, and threats. It is commonly used for organizational review and in the development of solutions for existing and potential problems (United States Department of Agriculture, 2008). A SWOT analysis reviews both internal and external factors in the organization’s environment to determine an organization’s structure in terms of what it can do (strengths) and cannot do (weaknesses), as well as environmental factors working for (opportunities) and against (threats) the business (Ferrel and Hartline, 2008). Organizations are normally able to exercise more control on internal factors. On the other hand, a business could influence its external environment but only to a limited degree (Bensoussan and Fleisher 2008). Figure 1 shows the framework of the SWOT analysis (Bensoussan and Fleisher, 2008, p. 185). Figure 1: The SWOT Analysis Framework An internal analysis facilitates the development of an organizational framework in terms of key dimensions such as: financial performance and resources; human resources; production facilities and capacity; market share; customer perceptions; product quality and availability; and organizational communications. On the other hand, an external analysis identifies crucial factors such as: customer and competition information; economic conditions; social trends; existing and emerging technology; and government regulations (Kern, 2001). A SWOT analysis provides a number of benefits such as: (1) gaining a better understanding about a product or service’s attributes; (2) getting to know more about the competition has to offer; (3) identification of sales opportunities; (4) determines key marketing and financial resources; (5) reveals marketing assumptions; (6) reduces false beliefs regarding marketing and sales strategies. In addition, it brings out facts which may not be pleasant but is still a crucial ingredient in an organization’s attempts to improve performance (Kern, 2001). Based on the information collected, management can derive informed decisions regarding strategies aimed at maintaining market competitiveness and consistently attaining organizational goals and objectives (Bensoussan and Fleisher 2008). PESTLE Analysis. PESTLE is an instrument used for analysis of the business’ external environment. Information is analyzed in terms of political, economic, social, technological, legal, and environmental aspects (Lutolf-Carroll and Pirnes, 2009). Figure 2 presents the PESTLE framework adopted from the Open University (2011). Figure 2: The PESTLE Analysis Framework Political analysis involves examining the effects of political events changes the way certain geographical area handle economic and industry issues (Lutolf-Carroll and Pirnes, 2009). Political factors include: government stability, regulations, and tax policies (Perry, 2007). Meanwhile, economic analysis investigates how global, regional, and local economic conditions provide positive and negative effects on organizations (Lutolf-Carroll and Pirnes 2009). Economic factors considered are: inflation, unemployment rates, trade cycles, interest rates, and levels of disposable income (Peer 2007). On the other hand, social analysis evaluates how demographic variables and trends influence business strategies in order to attain set goals and objectives (Lutolf-Carroll and Pirnes 2009). Socio-cultural factors are consisted of: demographic trends, income distribution, lifestyle changes, customer attitudes, consumer behavior, and social mobility (Peer 2007). Technological analysis determines how emerging trends and innovations in technology can create competitive advantage in an organization (Lutolf-Carroll and Pirnes 2009). Technological factors include: research spending, industry focus on technology efforts, new discoveries and developments, speed of technology transfer, and obsolescence rates (Peer 2007). The legal aspect of the PESTLE analysis framework evaluates the reliability, credibility, and speed at which the legal process is conducted in a certain geographical area (Lutolf-Carroll and Pirnes 2009). Legal factors analysed are: competition laws, employment laws, health and safety laws, and product safety regulations (Peer 2007). Lastly, environmental analysis is concerned with issues regarding the environment which contribute significantly with how the business operates (Lutolf-Carroll and Pirnes 2009). Factors governing environment consisted of: environmental protection legislation, waste disposal regulations, and energy consumption (Peer 2007). Lutolf-Carroll and Pirnes (2009) suggested the following matters be considered in conducting PESTLE analysis: (1) external factors which exert significant influence on the organization; (2) factors which influence the environment surrounding the enterprise; (3) interrelatedness of the environmental factors; (4) most important factor at present; (5) most significant factors within a few years time and within a decade or more; and (6) pace at which these factors are expected to cause changes in society and the world. Porter’s Five Forces Analysis. Porter’s Five Forces Analysis is a tool used to determine and evaluate the different forces that influence the business which the organization may either develop strategies to circumvent the forces or take advantage of it. This tool grouped forces into five categories: (1) threat of new entrants; (2) threat of substitute products or services; (3) bargaining power of customers; (4) bargaining power of suppliers; and (5) regulatory and other forces (Cheverton, Hughes, Foss & Stone, 2005). Shown in Figure 3 is the framework of Porter’s five forces analysis (Cheverton, et al., 2005, p.29). Figure 3: Porter’s Five Forces Analysis Framework The introduction of new companies create more competition, often replacing traditional competitors which change how the dynamics of the market. Meanwhile, new products or services which may be presented as a low cost, more competitive alternative which could threaten an organization’s market share. The consolidation of various industries has created consumer groups with larger budgets which increase their buying power. These large groups usually have access to specialist expertise and are able to secure a stronger negotiation position. Lastly, suppliers offering specialized, high values, and/or unique services have more bargaining power compared to traditional suppliers (Cheverton, Hughes, Foss & Stone, 2005). Forecasting. The term forecasting is a quantitative procedure used to project demand for a product or service based on past data in order to plan and formulate future strategies (Saxena, 2009). Sproles (as cited in Jones, 2006) argued about the existence of a pervasive barrier towards the scientific analysis of the fashion cycle leading him to contend that “fashion is not susceptible to science” (p. 232). Conversely, Jones (2006) maintained that the fashion market may be scrutinised and forecasted in terms of the following six factors: (1) the size and growth rate of the fashion market; (2) the market structure; (3) consumer decision making behaviour exhibited in the market; (4) the pace at which demand for fashion products change; (5) the fashion cycle or the time between the introduction of new fashion and its replacement by a newer fashion; and (6) the direction of, and the means by which new fashion styles flow through society. While the forecasting framework presented by Saxena (2009) considered qualitative factors such as items (2), (3) and (6) above, there is currently no technology available to analyse them in an empirical sense. They are, however, under no circumstances unimportant. The following quantitative variables are recommended for inclusion in preparing forecasts for the year ended 30 June 2012: (1) market size for ladies fashion; (2) price trends; (3) disposable income, particularly working females; (4) season of the year; (5) consumer preferences; and (6) company sales volume considering product group, geographical area, time period and distribution channel (Jones, 2008; Wiren, 2008). The most common quantitative methods in use are causal, time series, smoothing, trend projection, and a variant of trend projection which is adjusted for seasonal influence (Anderson, et al., 2010). Planning and Control Grounded on prospective investor, Palisade Plc’s misgivings about the company’s non-usage of forecasting and budgeting procedures, I respectfully recommend organisational budgeting to facilitate planning, management and control of Jengo’s inventory, recruitment and cash management procedures. I am aware that adding this task to our hectic schedules will present more challenge to our already limited time and energy. I am, however, positive that I can interest you in supporting this recommend-ation after I have elucidated on the benefits of budgeting. In a more general sense, budgeting helps business to enhance harmonisation of activities. Since the budget is prepared for the entire organisation, managers from various departments are kept aware of each others plans, and thus, duplication of tasks and resource allocation is avoided. Meanwhile, when tasks are subjected to budget plans, cost consciousness is inculcated among each member of the organisation which will result in the conservation of company resources. Using a budget plan will facilitate work organisation to be more systematic. If the organisation plan can not accommodate the implementation of an approved budget, necessary changes can be instituted. With a transparent organisational budget, managers and other individuals performing leadership functions will be able to visualise their goals based on the stipulations of the budget (Hermanson, Edwards, and Ivancevich, 2006). Thus, based on the company’s situation analysis and sound forecasting scheme, an appropriate budget can be developed and implemented to manage and control inventory, recruitment management and cash management. Inventory. There are time-tested benefits of carrying inventory. It serves as a shield against unwanted delays in the production process of the company’s fashion items just in case one or more parts or materials are damaged during the production process. Keeping a healthy inventory at hand also helps the company meet the demands from both customers and clients. But carrying more inventory than is actually needed also entails expenses, such as: building cost, carrying cost, change control cost, counting cost, damage cost, handling cost, insurance cost, obsolescence cost, pilferage cost, racking cost, etc (Bragg, 2004). It is, therefore, being proposed that Jengo should plan and budget inventory. Planning and managing inventory based on a budget, can not, however be implemented in just a flick of finger. It is suggested that Jengo keeps some additional inventory until planning is completed and the inventory budget is prepared. To cut up on some of the costs, Jengo can use express delivery to avoid storage fees, and drop shipping straight to customers to avoid storage costs as indicated in Bragg (2004). There is a need for a systematic analysis of Jengo’s current inventory practices. The first step would involve the calculation of safety stock and safety lead time based on Toomey (2000) considering the desired service level, number of exposures to stockouts per year, adjusted service level, and forecast error. Jengo should also scrutinise its reorder level and its inventory policy. An aggressive inventory policy is ideal but would necessitate diligent management of inventory levels. With such an aggressive inventory policy, lesser cash investment is required to maintain inventory (Kapil, 2011). Cash management. As explained by Shim and Siegel (2007), cash manage-ment involves “having the optimum, neither excessive nor deficient amount of cash on hand at the right time” (p. 101). Budgeting facilitates cash management since a sound cash management system requires an organisation to be aware of how much cash it needs, how much cash is available, and how such cash is being allotted. That will only be possible with a well-conceptualised budget. A company needs cash management for it to be able to invest any additional and available cash for a return, while leaving enough liquidity to finance future expenses. According to Bragg (2000), some of the best practices in cash management include the following: avoidance of delays in check posting, collection of receivables through lockboxes, consolidation of bank accounts, implementation of physical cash sweeping and controlled disbursements, negotiation of faster deposited-check availability, etc. Recruitment Management. The framework of recruitment management designed by Gatewood, Field, and Barrick (2008) includes sources, personnel, administration, and content. Budgeting influences recruitment management because a tight organisational budget would mean that advertising using the television and radio would be out of the question, while print and Internet would be more ideal in consideration of the cost involved. Other potent sources of candidates for would be trade associations and unions, colleges and secondary schools, employee referral programmes, etc. A pre-planned organisational budget also facilitates recruitment management from the point of view of the number of employees available and required for the administration of the recruitment process, including the content which will be communicated to the prospective applicants. Moreover, a long-range organisational budget also helps forecast additional manpower requirements. Balanced Scorecard It is also important that Jengo gages its performance based on a robust measure such as the balance scorecard framework, which Pinterits (2008) referred to as today’s most important measurement concept. The balance scorecard approach will benefit Jengo since it establishes goals but works on the assumption that employees will adopt behaviours and will act accordingly towards the attainment of these goals. The framework of the balanced scorecard makes it possible for the translation of strategic goals into target performance values. Moreover, the inclusion of non-financial measures in the framework makes the balanced scorecard as a more realistic procedure of measuring performance. Under the financial quadrant, enhancement of Jengo cash flow and return on capital employed will benefit the company by facilitating the generation of funds to expand its shop portfolio over the next three years. Meanwhile under the business process quadrant, improvement of Jengo’s planning and control processes such as use of forecasting and budgeting will result in more systematic handling of the company’s past and present statistics to visualise future operation requirements. Accordingly, benefits from the business process quadrant will translate towards the customer quadrant. It will be recalled that Palisade Plc is entertaining second thoughts about investing with Jengo grounded on the absence / deficiency of Jengo’s planning and forecasting processes. Hence, being able to address Palisade’s apparent requirements will help win back their interest to invest in the company. Moreover, gaining larger investments will fuel Jengo’s expansion plans for higher profitability in the next few years. Finally, under the learning and growth quadrant, an organisational alignment brought about by the synchronisation of forecasting, planning, strategising and management of the company’s budget will result in higher awareness of its operations. Such awareness coupled with experience in directing efforts towards company strategies will enhance core competencies and skill among both employees and managers. The end results of the outcomes from the four quadrants will be higher productivity and profitability for Jengo. References The following references were used in the preparation of this report: Anderson, D.R., Sweeney, D.J., Williams, T.A., Camm, J.D., & Martin, J., 2010. Quantitative methods for business. 11th ed. Mason: South-Western Cengage Learning. Bennsoussan, B.E. and Fleisher, C. S., 2008. Analysis without paralysis: 10 tools to make better strategic decisions. Upper Saddle River: Pearson Education / FT Press. Bragg, S. M., 2000. Accounting best practices. 6th ed. Hoboken: John Wiley and Sons. Bragg, S.M., 2004. Controller’s guide to planning and controlling operations. Hoboken: John Wiley and Sons. Carroll, C.T. and Pirnes, A., 2009. From innovations to cash flows: Value creation by structuring high technology alliances. Hoboken: John Wiley and Sons. Cheverton, P. Hughes, T., Foss, B. & Stone, M., 2005, Key account management in financial services: Tools and techniques for building strong relationships with major clients. London: Kogan Page. Gatewood, R. D., Field, H.S. and Barrick, M., 2008. Human resources selection. 6th ed. Mason, OH: Thomson Higher Education. Ferrell, O.C. and Hartline, M. D., 2008. Marketing strategy. 4th ed. Mason: Thomson Higher Education. Hermanson, R.H., Edwards, J.D., and Ivancevich, S.D., 2006. Managerial accounting: A decision focus. 8th ed. St. Paul: Freeload Press. Jones, R.M., 2006. The apparel industry. 2nd ed. Oxford: Blackwell Publishing. Kapil, S., 2011. Financial management. New Delhi: Dorling Kindersley / Pearson Education. Kern, R.M., 2001. S. U. R. E. – Fire direct response marketing: Generating business-to –business sales lead from bottom-line success. New York: McGraw-Hill. Perry, B., 2008. Organisational management and information systems. Oxford: CIMA Publishing / Elsevier. Pinterits, A., 2008. Coordinating Internet sales with other channels: A performance measurement model. Weisbaden: Gabler / Springer Science + Business Media. Saxena, J.P., 2009, Production and operations management. 2nd ed. New Delhi: Tata McGraw-Hill Education. Shim, J.K. and Siegel, J.G., 2007. Schaum’s outline: Financial management. 3rd ed. New York: McGraw-Hill. The Open University, 2011. Discovering management: PESTLE. [online] Available at: [Accessed 3 July 2011]. Toomey, J.W., 2000. Inventory management: Principles, concepts and techniques. Norwell: Kluwer Academic Publishers. United States Department of Agriculture (USDA), 2008. SWOT analysis: A tool for making better business decisions. Washington, DC: USDA, Risk Management Agency. Wiren, J., 2008. Fashion forecasting – Example: Hope Sweden. Master’s Thesis. Lund Institute of Technology. Read More