INTRODUCTION TO THE BALANCED SCORECARD
According to renowned writer and academic Peter Drucker, what gets measured gets managed, what is managed is done, and you cannot manage what you cannot measure. The Balanced Scorecard is a strategic management approach used by businesses to measure their organisations performance against set objectives and goals. The researchers Kaplan and Norton wrote in an article in the Harvard Business Review in 1992, “The balanced scorecard includes financial measures that tell the results of actions already taken”. (www.hbr.org). It integrates financial measures with operational measures on customer satisfaction and internal processes, which are some of the factors that influence future financial performance. Private companies originally used the Balanced Scorecard but now governments and non-profit organisations are beginning to adopt its method.
Arthur M. Schneiderman who worked for Analog Devices, helped create the balanced scorecard in 1987. The researchers Robert S. Kaplan and David P. Norton developed it further in the early 1990s by proposing a method for choosing the content of the Balanced Scorecard based on answers to four generic questions about the strategies that organisations should follow. The four perspectives they suggested were Financial, Customer, Internal Business Processes, Learning and Growth.
Critics of the Balanced Scorecard argued that it was not a useful management tool, as it did not go far enough. The critics focused on five potential flaws in the Balanced Scorecard approach which were: (Bergquist, 2005)
(a) It was not a decision tool – it was unable to tell management how to deliver better performances. (www.axsellit.com)
(b) It can lead to managers taking a wait and see approach instead of trying to improve performance – some managers may resist it by seeing how other departments progress with it as they would be afraid of being held responsible for poor performance. (www.axsellit.com)
(c) It implies a top-down approach to management – where managers set the objectives without consulting others within the organisation. (www.axsellit.com)
(d) Users have little or no reference to what is achievable – it tells management how their organisation is doing in comparison to others within the industry but it is not a good reference to what is achievable within their own organisation. (www.axsellit.com)
(e) The possibility that the links between financial and non-financial metrics are non-existent – it shows what a company knows about itself at the present but this information may be insufficient or inaccurate. (www.axsellit.com)
INTRODUCTION TO VODAFONE GROUP PLC
In their vision statement, Vodafone Group Plc states that they want to be the communications leader in an increasingly connected world. (www.vodafone.com) With this in mind, some of their objectives for 2010 were to, introduced new products and services for example the 4G technology, the possibility of further acquisitions and increasing their ownership in existing investments.
Vodafone Group Plc is one of the world’s largest mobile communications companies by revenue operating across the globe providing a wide range of communication services. (www.vodafone.com) Vodafone Group Plc was originally listed on the London Stock Exchange on the 26th October 1988. It is also listed on the NASDAQ in the United States of America.
Vodafone Group Plc was incorporated in 1984 as Racal Strategic Radio Limited and after various name changes, 20% of Racal Telecom Plc’s capital was offered to the public in October 1988. Racal Telecom Plc was fully demerged from Racal Electronics Plc and became an independent company in September 1991 when it changed its name to Vodafone Group Plc. ( (www.vodafone.com, 2010)
Since 1991, Vodafone Group Plc has entered into various transactions aimed to consolidate their position as a leading mobile communication company in the United Kingdom and they have tried to enhance their international presence. They have achieved this by merging with companies such as AirTouch Communications Inc in 1999, Mannesmann Ag in 2000, which allowed them to acquire subsidiaries in Germany and Italy, which increased their indirect holding in SFR a French mobile phone company to 44%. Between 1994 and 2004 through a series of business transactions Vodafone Group Plc acquired 97.7% in Vodafone Japan, which they then disposed of in April 2006. Between the years 2007 and 2009 Vodafone Group Plc have acquired companies in India, Italy, Spain, Qatar, Ghana, South Africa and Australia. (www.vodafone.com, 2010)
One of the objectives of multinational companies like Vodafone is to save money how and wherever they can. Most of Vodafone’s business over the last twenty years has involved the acquisition of, or merging, with international companies. One such company was Hutchinson Essar an Indian based company.
In May 2010, Vodafone Group Plc received notice from the Indian Income Tax department regarding a regulatory battle with tax officials. The dispute is whether the Indian tax authorities have a right to tax a $10.9 billion buyout by Vodafone for two-thirds control in the mobile operator Hutchinson Essar. The deal was orchestrated as an acquisition by a subsidiary of Vodafone Group and a Hong Kong holding company of Hutchinson’s, in the tax haven of the Cayman Islands, so it was a transaction between two foreign companies of a business based in India. (Dagar, 2010)
The first of the four perspectives is the financial perspective, which is how the shareholders view the performance of the organisation.
According to the researchers Kaplan and Norton (1996), “the financial objectives serve as the focus, for the objectives and measures in all the other scorecard perspectives. Every measure selected should be part of a link of cause-and-effect relationships that culminate in improving financial performance”. (pg. 47) Shareholders of companies will be concerned about many parts of a company’s financial performance and they would be particularly interested in the company’s Return on Capital Employed, Gross Profit percentage, Net Profit percentage, Stock Turnover and Current ratio.
Return on Capital Employed compares earnings, which are the profit before interest and tax, with the capital invested, which are the shareholders funds and long-term liabilities in a company. In the year ended 31st March 2010, the ROCE for Vodafone Group Plc was 4.33% compared to 4.7% in 2009. Vodafone’s leading competitor is Deutsche Telekom Ag a German Telecommunication company. Their ROCE for the year ended 31st December 2009 was 4.19% compared to 4.96% in 2008. The shareholders of Vodafone will be concerned as their ROCE percentage is behind their competitors. Both Vodafone and Deutsche Telekom will be disappointed as their return is declining which could mean a lack of growth and/or decreased efficiency. (www.vodafone.com, 2010)
Gross Profit percentage is what remains of the revenue after deducting the cost of goods sold. For Vodafone the percentage for the year ended 31st March 2010 was 33.8% compared to 37% in 2009. The Gross Profit percentage for Deutsche Telekom AG for the year ended 31st December 2009 was 43.87% and in 2008, it was 43.9%. For every Euro Vodafone sold they kept 34 cent towards indirect expenses whereas Deutsche Telekom kept 44 cent. Vodafone’s shareholders will be concerned, as their percentage has fallen while Deutsche Telekom’s percentage has remained relatively unchanged. (www.vodafone.com, 2010)
Net Profit percentage is the amount of money earned after all the expenses have been deducted from the total revenue. For Vodafone the percentage for the year ended 31st March 2010 was 19.38% compared to 7.51% in 2009. The Net Profit percentage for Deutsche Telekom AG for the year ended 31st December 2009 was 1.35% and it was 3.28% in 2008. For every Euro Vodafone had in sales they earned 19 cent after all administration and distribution expenses were paid compared to Deutsche Telekom’s 1 cent. The shareholders of both companies would like to see this figure being as high as possible. Vodafone’s shareholders will be happy, as their percentage has increased whereas Deutsche Telekom’s is significantly lower and it has decreased. (www.vodafone.com, 2010)
Stock turnover is the amount of times a company replaces inventory and regains their investment in an accounting period. Vodafone’s turnover for the year ending 31st March 2010 is 69.59 times or every 5 days, compared to 62.27 or 6 days in 2009. Their competitor Deutsche Telekom’s turnover was 29.38 times or every 12 days in 2009 compared to 25.08 times or every 15 days in 2008. Vodafone will be happy as it only took 5 days to sell stock in 2010 compared to 6 days in 2009, which was faster than their competitors were. (www.vodafone.com, 2010)
Current ratio is used to show a company’s ability to pay back its short-term liabilities. It is a comparison of a company’s current assets against its current liabilities. Vodafone’s current ratio for the year ended 31st March 2010 was 0.50:1 compared to 0.47:1 in 2009. Deutsche Telekom’s current ratio was 0.93:1 in 2009 compared to 0.64:1 in 2008. Both companies are below the normal limits of 2:1/1.5:1. This could indicate a liquidity problem, as they may not be able to pay their debts as they fall due. (www.vodafone.com, 2010)
The second of the four perspectives is the customer perspective, which is how companies identify who their customers are and what their customers’ needs are.
According to the researchers Kaplan and Norton (1996), “the customer perspective enables companies to align their core customer outcome measures – satisfaction, loyalty, retention, acquisition, and profitability – to targeted customers and market segments. It also enables them to identify and measure, explicitly, the value propositions they will deliver to targeted customers and market segments. The value propositions represent the drivers, the lead indicators, for the core customer outcome measures”. (pg 63)
Meena Chavan a lecturer in Marketing and Management asked the question “how do you find out what customers’ expectations are”? (Chavan, 2009) The answer to this question is ‘ask’. Organisations like Vodafone need to ask their customers what their needs or wants are with regard to their telecommunication requirements. They can achieve this by using questionnaires or some other marketing method to find out what they needs or wants are.
The global mobile phone market grew by almost 22% in the first quarter of 2010. (IDC, 2010) The majority of new customers are in the emerging markets such as India and China. Vodafone has a 7% share of the global market. (www.vodafone.com, 2010)
The management of Vodafone recognises that in order to have customer’s satisfaction, their loyalty, be able to retain and to acquire new customers they need to earn their customers trust. According to Kaplan and Norton (1996) “companies that try to be everything to everybody usually end up being nothing to anyone” (pg. 64) Vodafone identifies three main factors that allows them to earn customers trust, which are, the reliability of their network, clear and fair pricing and protecting customer’s privacy and safety.
Towards the end of the 2010 financial year starting using the Net Promoter Score, which they will use to monitor customer satisfaction. (Vodafone Annual Report, 2010) Net Promoter Score is a straightforward metric that holds companies and employees accountable for how they treat customers. (www.netpromoter.com) One-way in which Vodafone tried to meet the objectives of their customer’s perspective was to agree to an upgrade of their network reliability and capacity in Australia, this was due to complaints from frustrated customers who for months experienced problems with their network connections. (Australian Communications Consumer Action Network, 2010)
Both Vodafone and their competitors Deutsche Telekom Ag recently announced their pricing plans for the new Long Term Evolution (LTE) service in Germany. Both companies are initially rolling-out the service in rural areas so that any quality issues that may arise will have few repercussions to their customers compared to a trial conducted in a major city. (www.tarifica.com)
The security of customers’ information is vital for any organisation and in order to protect their customers Vodafone has adopted ISO 27001 a recognised international standard for information security. (www.vodafone.com, 2010)
INTERNAL BUSINESS PROCESS PERSPECTIVE
The third of the four perspectives is the Internal Business Process Perspective, which is, at what processes should the organisation excel?
According to the researchers Kaplan and Norton (1996), “the objectives and measures for the internal business perspective are derived from explicit strategies to meet shareholder and targeted customer expectations”. (pg. 94) The internal business process perspective asks the question “what do we need to correct within our own business to ensure we deliver the value propositions the market needs and expects” (Capstone Manager Guide (pg. 3)
In the Internal Business Process Perspective – The Generic Value Chain Model firstly identifies the customers’ needs, then in the Innovation Process it identifies the company’s market where they then create the products and services that they want to offer. In the Operations Process, it builds the products/services and then delivers those products/services. Finally, in the Postsale Service Process it provides customer services, which leads to a satisfied customer. (Kaplan, 1996)
One way in which Vodafone is looking to excel is by offering fixed and mobile phone and internet services to both private individuals and business organisations. For businesses, they offer a fully managed integrated communications package of fixed and mobile communications where organisations can reduce their costs as Vodafone maintain the entire service for them. For the private individual they have new products and services like Vodafone 360, which allows customers access to broadband, social networking sites and their email on their phones. (www.vodafone.com, 2010)
Vodafone’s competitors Deutsche Telekom Ag have their own team of experts working with researchers at a university in Berlin on new products and solutions that will enable the simple, fast and secure communication of the future. (www.telekom.com)
As the telecommunications industry is very competitive, both Vodafone and their competitors need to be fully aware that in order to stay on top, they have to be continually making advances in technology, and as already mentioned Deutsche Telekom Ag is doing this by working with university researcher on new products and solutions. Organisations like Vodafone will have to be carefully, that while they spend time and resources on the innovations that they do not neglect the products and customers they already have especially those who cannot afford to keep up with new technology.
LEARNING AND GROWTH PERSPECTIVE
The fourth and final perspective is the learning and growth perspective, which is, how an organisation plan “to develop and grow in order to continue to create value”. (Capstone Manager Guide (pg. 4)
According to Kaplan and Norton (1996) the Learning and Growth Perspective “develops objectives and measures to drive organisational learning and growth”. (pg. 126) Based on the measures that are selected in the first three perspectives; financial, customer and internal, management can identify the objectives that are going to create long-term improvement and growth by reviewing their employees knowledge and skills and whether they need to be retrained. The management will also review the information technology systems they have in place and whether they need to invest in an upgrade.
One way in which organisations like Vodafone can continue to develop and grow is by investing in their employees learning and development. Vodafone employs on average 85,000 people worldwide and in the financial year ending 31st March 2010 and they had an employee turnover rate of 13%. (www.vodafone.com) Vodafone has launched an initiative called The Vodafone Way where their aim is to be “an admired company and put the customer and innovation at the heart of our business” (pg. 48). It sets the values and behaviours for all employees stressing the need for speed in brining products and services quickly to the market, in making things simpler for their customers and business partners, and trust where the employees act with honesty, integrity and fairness, in being reliable and transparent and valuing the confidence that people place in the company. Employees are continually assessed as to whether they meet these conditions as part of their performance reviews. (www.vodafone.com)
Vodafone’s competitor Deutsche Telekom Ag has on average 259,920 employees worldwide. (www.telekom.com) Deutsche Telekom Ag has a system called Ask Me where they are able to inquire about compliance related questions if they are unsure as to how to behave in any given situation. They also have a Tell Me system where employees can anonymously give information if they believe there is any actual or potential misconduct. (www.telekom.com)
There are advantages and disadvantages to the Balanced Scorecard. It can show an organisation how they are or are not progressing within the areas of the main four perspectives. On the positive side, it allows an organisation to focus not only on their financial results but also on the other areas within the organisation that influences those results. On the negative side, it does not show an organisation how to solve any problems that may arise.
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