Financial reporting and Business Performance Indicators

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Introduction

Nike, founded on January 25, 1964 by Bill Bowerman and Philip Knight as Blue Ribbon Sports, officially became Nike, Inc. in 1978. It has highly recognized trademarks of "Just Do It" and the Swoosh logo.

My internship at Nike had the objective of creating a balanced business scorecard for the organization. This scorecard should show how the organization is doing with respect to various important indicators, thereby showing a complete picture of its performance at a glance.

Business scorecard is a performance management tool developed by Harvard Business School professor Robert S. Kaplan and management consultant David P. Norton. It outperforms the traditional methods of performance evaluation owing to its ability to give an integrated view of the organization, by incorporating both the financial and non-financial parameters. The balance reflected in a scorecard is in terms of a combination of financial and non-financial parameters and lagging and leading indicators. Balanced Scorecard helps an organization focus on areas that need the most attention and clarify its vision.

Various components of a scorecard are perspectives (groupings of high-level strategic areas), objectives (goals pulled out of a strategic plan), measures (Key Performance Indicators), and stoplight indicators (red, yellow, or green symbols that provide an at-a-glance view of a Measure's performance).

Method

Development of a balanced scorecard begins with the company's overall strategy or vision. It is important to consult with top management, along with managers, to obtain a clear picture of where the company wants to be in three to five years.

For evaluation of each of the perspectives, key performance indicators for that are identified and given weights. Score obtained for a perspective is a weighted score of all the KPIs under that perspective. Final score for the business is a weighted score of the perspective scores.

Results

The project objective of creating a balanced business scorecard was achieved. A model was created with provisions for the future that caters to the needs of the organization.

Chapter 1: Introduction

Nike Inc.

Nike, Inc. is a major sportswear and equipment supplier based in the United States of America. The company is headquartered in Beaverton, Oregon. It is the world's leading supplier of athletic shoes and apparel. It is also a major manufacturer of sports equipment with revenue exceeding $18.6 billion USD in the fiscal year 2008 (i.e. ending May 31, 2008).

The company was founded on January 25, 1964 by Bill Bowerman and Philip Knight. Its first name was Blue Ribbon Sports, and it officially became Nike, Inc. in 1978. The company takes its name from Nike, the Greek goddess of victory. Nike markets its products under its own brand as well as Nike Golf, Nike Pro, Nike+, Air Jordan, Nike Skateboarding and subsidiaries including Cole Haan, Hurley International, Umbro and Converse. Nike also owned Bauer Hockey between 1995 and 2008. In addition to manufacturing sportswear and equipment, the company operates retail stores under the Niketown name. Nike sponsors many high profile athletes and sports teams around the world, with the highly recognized trademarks of "Just Do It" and the Swoosh logo. Nike is also the official kit sponsor for the Indian cricket team for 5 years, from 2006 till end of 2010.

Mission Statement: To bring inspiration and innovation to every athlete* in the world

*If you have a body, you're an athlete

Project Objective

My internship at Nike had the objective of creating a balanced business scorecard for the organization. This scorecard should show how the company is doing with respect to all the important indicators, thereby showing a complete picture of the company's performance at a glance.

It involves finding the applicable key parameters for evaluation of each department. Then analyzing how much weight should be given to each of those identified metrics. This would give an overall score for the company and thereby depict how business is doing.

Such an exercise finds relevance across all industries irrespective of the line of business. Though the parameters and weights for each of the identified ones might vary, the concept has relevance.

Balanced Scorecard

Origin of Balanced Scorecard concept

Business scorecard (BSC) is a performance management tool developed by Harvard Business School professor Robert S. Kaplan and management consultant David P. Norton, in 1992. It not only tells about the past performance through lagging indicators (like financial measures) but also gives an insight into what might be in store for the future through some leading indicators. For this purpose it balances between hard traditional financial indicators and soft operational measures. It works on the logic that traditional measures are not enough to provide an accurate picture of the company's performance in today's dynamic business environment.

Kaplan and Norton have recommended looking at the business from various perspectives: the consumer's perspective; an internal business perspective; an innovation and learning perspective; and the financial perspective. Using the overall company strategy and vision, three to five indicators are derived related to each perspective identified. Specific measures are developed to support each indicator.

A balanced scorecard enables a balance between the concerns of various stakeholders in order to improve the company's overall performance. The 'balance' is the balancing between traditional financial and non-financial operational, leading and lagging, and action-oriented and monitoring measures.

Balance reflected in the Scorecard

Short and long term objectives

Financial and non-financial measures

Lagging and leading indicators (i.e. outcome measures vs. performance drivers)

External and internal performance perspectives

Need for a Balanced Scorecard

Increase focus on strategy and results

Improve organizational performance by measuring what matters

Align organization strategy with the work people do on a day-to-day basis

Shows people how their daily job directly impacts the organization's key performance areas

Shows relative importance of certain measures versus others

Focus on the drivers of future performance

Improve communication of the organization's Vision and Strategy

Prioritize Projects / Initiatives

Components of a Balanced Scorecard

Perspectives (groupings of high-level strategic areas),

Objectives (verb-noun phrases pulled from a strategic plan),

Measures (also called Metrics or Key Performance Indicators/KPIs), and

Stoplight Indicators (red, yellow, or green symbols that provide an at-a-glance view of a Measure's performance)

Initiatives (time-specific projects undertaken)

These specific components help ensure that a Balanced Scorecard is inherently tied to the organization's critical strategic needs.

Perspectives

A perspective is a view of an organization from a specific vantage point. The organization's business model, which encompasses mission, vision, and strategy determine the appropriate perspectives.

Some perspectives that are relevant to all kinds of business to measure their performance are the customer perspective, an internal business process perspective, an innovation and learning perspective, and the financial or shareholder perspective. Additional perspectives may also be important in certain types of businesses. Perspectives can also be added at a later stage as and when business grows or evolves.

The Financial Perspective

There is no doubt that financial data is needed to see how business is performing and to see whether the initiatives taken up have borne expected results. Timely and accurate funding data will always be a priority, and managers will do whatever is required to provide it. Often there is more than enough handling and processing of financial data. The point is that the current emphasis on financial figures leads to the "unbalanced" situation with regard to other perspectives. There is a need to include additional financial-related data, such as risk assessment and cost-benefit data in the category.

The Customer Perspective

Recent management philosophies have shown an increasing realization of the importance of customer focus and customer satisfaction in business. These are leading indicators meaning if customers are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator representing future decline, even though the current financial outlook may be good.

In developing metrics for satisfaction, customers should be analyzed and classified in terms of their kind, along with the kinds of processes for which a product or service is provided to those customer groupings.

The Business Process Perspective

This perspective refers to internal business processes. Metrics based on this perspective allow managers to know how well business is going, and whether its products, services and processes conform to customer requirements. These metrics have to be carefully designed under guidance by those who know these processes most intimately.

The Learning & Growth Perspective

This perspective includes training for employee and cultural attitudes related to both individual and corporate self-improvement. In a knowledge-worker organization, people are the only repository of knowledge and are the main resource. In the current age of rapid technological change, it is becoming a basic necessity for knowledge workers to be continuously in a learning mode. Metrics can be put in place to guide managers in focusing training budgets where they can help the most. Learning and growth constitute the essential foundation for success of organizations especially knowledge-worker.

It is emphasized that 'learning' is more than 'training'; it also includes components like mentors and tutors within the organization, along with that ease of communication among workers that allows them to get help readily on a problem when needed. It also includes technological tools many a times referred to as "high performance work systems."

Objectives

Objectives are the 8-10 most important organizational goals grouped by Perspectives. This grouping is done based on what is achieved by focusing on each of the objectives identified. Identification of objectives is a critical step as it determines how well the scorecard suits the organization. Grouping of objectives under Perspectives is important to clarify the vision and strategy of the organization.

Performance goals should be based on the organization's mission, the performance trends that have been displayed to-date, and the expected effect of the system improvements (and external system changes) that make up the annual plan. The performance goals should be challenging. Scorecards are not cast in stone - they can change as the systems change as long as people understand why and play a part in making the change decision.

Measures

This represents measures that will best determine if you are on track to achieve each objective. Measures are also called KPIs (Key Performance Indicators) or metrics. Some (1-3) measures are aligned as indicators of achievement to each Scorecard Objective.

Stoplight Indicators

These are red, yellow, or green symbols that provide an at-a-glance view of a Measure's performance. To achieve this purpose, targets are set or benchmarking is done in some form to indicate performance appropriately.

Initiatives

Initiatives are time-specific projects (with identified start- and end-dates) that should be aligned to critical underperforming measures or objectives. This component is added to the scorecard only if a need is felt.

Problems BSC Helps To Solve

Unclear Vision & Strategy

Non-Alignment of long-term and short-term goals

Non-Availability of feedback

Excessive Focus on Financial Parameters

Communication Gaps

Measurement Issues

Primary Implementation Success Factors

Having support of the top management

Involving a broad base of managers, leaders and employees in scorecard development

Agreeing on terminology

Encouraging interactive (two-way) communication

Viewing the scorecard as a long-term focus rather than a short-term project

Planning for and managing change

Keeping the vision and objective of the organization in mind during the development of the scorecard

Chapter 2: Method

Data Collection

Development of a balanced scorecard begins with the company's overall strategy or vision. It is important to consult with top management, along with managers, to obtain a clear picture of where the company wants to be in three to five years. The next step is to define a linked set of strategic objectives that will lead the company toward that vision. These objectives should be true drivers of performance for the business as a whole.

The source of information for scorecard building should cover a broad base to make the scorecard as comprehensive as possible. Two levels of information were collected.

Managers and employees - they know what all information is captured at ground level, what are the limitations faced, and can give a proper view of the current state of affairs

Top management - they define a vision for the organization, the goals to be achieved, what their focus would be in the future

It is necessary that the scorecard has whatever is looked at in the present and also the future outlook. If needed provisions should be made for keeping the long term future in mind. Covering the two levels is therefore important.

The steps undertaken for development of scorecard:

Basic research on the concept of scorecard

First level of understanding of the various departments and inter-linkages between them

Understanding of the measures used for control and monitoring in departments

Further research on the most appropriate measures used in organizations and sample scorecards

Assignment of weights to perspectives and objectives grouped within them

Discussions on the critical measures and benchmarking/ target setting for the same. Top management was also involved at this step

A first draft of scorecard created

Further refinement of the scorecard based on suggestions

Evaluating Performance

Each of the perspectives is evaluated individually and scores generated for them. These perspectives are then given weights according to the nature of business and organization. This is done to reach a final score for the business.

For evaluation of each of the perspectives, key performance indicators for that are identified and given weights.

In most organizations, there is a common set of key performance areas. For example, in manufacturing, these areas might be safety, quality, cost, people, and efficiency. Different terms might be used (for example rework or waste instead of quality), but the focus is the same. Service organizations have similar areas of focus, especially when these five more generic terms are used. In some cases, there is also a sales or revenue growth performance area included on the scorecard, especially at the company level. Another option involves looking at the 'People' area only on a quarterly (or less frequent) basis, as it is more difficult to get a good regular measure here (such as internal customer satisfaction percentages from an employee survey). The key thing is that most organizations have a common set of five or six key performance areas similar to the categories of safety, quality, efficiency, people, cost, and sometimes, growth.

For evaluation of KPIs, ratings are given to them based on benchmark slabs or targets. A rating scale is used. Sample: 1 - Poor, 2 - Good, and 3 - Excellent. Illustrations of the same are given below.

Target will be set for Avg. No. of Training Hours. If the Actual is greater than the target, the rating will be 3 otherwise 1.

For Delivery on Time, there will be a benchmark lets say <85%, 85-90%, >90%. If the Actual is <85% then rating of 1, if between 85% and 90% then rating 2, and 3 for Actual >90%.

Score obtained for a perspective is a weighted score of all the KPIs under that perspective. Final score for the business is a weighted score of the perspective scores. The key is as follows.

0-1 means Poor

1-2 means Good

2-3 means Excellent

Each individual perspective score can also be used to analyze the company's performance pertaining to that dimension.

The rating scale as given above can be modified as per the business requirements and agreed terminology between the different stakeholders.

Chapter 3: Results

The project objective of creating a balanced business scorecard was achieved. A model was created with provisions for the future that caters to the needs of the organization.

Based on discussions with managers from ground level right to the top management, performance goals were identified and benchmarked. Some measures used in the organization are as follows.

Balanced Scorecard for the organization

The balanced scorecard for Nike has been made using Ms Excel. The scorecard shown below bears a resemblance to the one prepared for Nike, but it is not the exact one. Numbers and parameters have been modified keeping in mind the confidentiality policy of the organization. The weights, numbers and keys have been changed for illustration purpose. Worksheet components of the BSC are as follows

Composite Picture

This sheet shows the perspective scores and weighted scores and composite score for business. It also contains graphical representation of scores.

The graph shows both the rating color obtained for each of the perspectives along with the percentage (weighted score wise) contribution to the composite score.

Business Performance

This worksheet shows details of perspective scores and its composition in the form of Objectives under them, their weights and scores.

The details supporting Actuals used in the sheet above are given in the department sheets (as indicated by Reference). The department sheets have the relevant details, a template for month highlights, year outlook, opportunities and challenges, along with the keys (target or benchmark) being used to rate the indicators.

Department Sheets

These sheets show the details required in support of Objective Scores and the benchmark/ target keys used for the department measures.Example, every department sheet has a key that explains, like the one below.

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