Balanced Scorecard Design for J Sainsbury Plc

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Introduction

Any organisation to improve its functioning needs an assessment of its performance in various spheres of its activities. In the present day economy “where intangible assets have become the major sources of competitive advantage, calls for tools that describe knowledge-based assets and the value –creating strategies that these assets make possible”, (Kaplan & Norton, 2001) Well-developed performance indicators both financial and non-financial enable the managers of any organisation to assess and monitor the performance of the organisation.

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Such performance indicators also help managers in the decision-making process relating to various issues in the functioning of the organisation. Balanced scorecard approach developed by Kaplan and Norton is one of the management techniques that enables measuring the performance of organizations and provide an efficient strategic management. This paper presents a report on the application of balanced scorecard approach in J. Sainsbury Plc, one of the leading supermarket chain stores in the UK.

J. Sainsbury’s an Overview

J. Sainsbury Supermarket, started in the year 1869 is one of the longest functioning major foods retailing chain store in the UK. The company owns Sainsbury’ bank jointly, along with Lloyds Banking Group. The company has established a reputation for its brand among the customers “built upon a heritage of providing customers with healthy, safe, fresh and tasty food,” (Sainsbury Corporate Website, 2009). Sainsbury’s approach to business is one of combining quality and fair prices meeting its social responsibility. There are 504 supermarkets operated by Sainsbury employing around 150,000 people. Despite economic down turn the company could increase its profitability for the year 2009 with a turnover of £ 18,911 million (excluding VAT) and profit before tax of £ 543 million (Annual Report, 2009).

Mission Statement and Vision

“The organizational balanced scorecard encompasses the organizational mission, vision, core values, critical success factors, objectives, performance measures, targets and improvement actions” (1000Ventures, 2001). The mission statement of Sainsbury’s reads “Our mission is to be the consumer’s first choice for food, delivering products of outstanding quality and great service at a competitive cost through working ‘faster, simpler and together,” (BizEd, 1996).

The company realized that only by satisfying the changed preferences of customers and thereby improving the sales, it could achieve sustainable growth in terms of sales and profitability. Sainsbury’s has a passion for providing the customers safe and fresh food. The company strives to differentiate itself from the competitors by pursuing their value, innovation and sustained ethical approach to the business. These elements are reflected in the mission statement of the company.

The vision of the company is to enhance its performance in the core UK supermarket chain and in this process Sainsbury’s will explore the opportunities for growth available in the related sectors and markets. The company will ensure the implementation of the concept of “Managing for Value” which is expected to enable the company to enlarge its corporate ambitions. The activities of the company in this direction are expected to provide the company huge potential for delivering value to its customers. Sainsbury have adopted balance scorecard approach to meet its strategic objectives.

Dimensions/Perspectives

“The balanced scorecard enables manages to assess the performance of the business from four different perspectives,” (Kaplan & Norton, 1992). The balanced scorecard is a “top-down” approach for assessing the performance of an organization. It starts with the business strategic intent carried through the organization down the level in the form of targets meant to be achieved by several operational or functional units.

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According to Kaplan and Norton (1998), balanced scorecard “translates an organization’s mission and strategy into a comprehensive set of performance measures that provides the framework for a strategic measurement and management system.” This approach exhibits mere accounting exercise will not be able to reveal the financial success of an organization, as there is the need for several perspectives of the organization to perform efficiently to enable the organization to achieve the financial success. It is essential that all the key areas should be pulled in the same direction as that of the vision and strategy of the organization. It is also important to establish “strategic goals, critical success factors and measures in all scorecard areas,” (Holbeche, 2009, p 98).

Based on these key perspectives, the organization has to specify the objectives, measures, initiatives to achieve the objectives and target performances. The target performance levels for non-financial measures are based on competitor benchmarks. They indicate the performance levels necessary to meet customer needs compete effectively and achieve desired financial goals.

Financial perspective evaluates the profitability of the strategy. For instance, cost reduction relative to competitors and sales growth may be a key strategic initiative, since financial perspective focuses on how much of operating income and return on capital employed results from reducing costs and selling more units of production. When a company has different business units, it might follow different strategies.

“Thus it would be unlikely for one financial metric and especially a single target for a single financial metric to be appropriate across a wide range of business units. So when they start they developing the financial perspective for their Balanced Scorecard, business unit executives should determine appropriate financial metrics for their strategy,” (Action, 1996)

Customer perspective identifies the targeted market segments and measures the organisation’s success in these segments. Market share, number of new customers and customer satisfaction may be some of the key strategic initiatives.

Internal business process perspective focuses on internal operations that further both the customer perspective by creating value for customers and the financial perspective by increasing shareholders wealth. The internal business process perspective comprises of sub processes like

  1. The innovation process creating products, services and processes that will meet the customer needs.
  2. The operation process dealing with producing and delivering existing products in addition, services to customers.
  3. The post-sales service dealing with the providing of service and support to the customer after the sale or delivery of a product or service.

According to Bourne & Bourne, (2007, p 150) the improvements in the processes contribute to tangible improvements in the performance. These improvements in performance are more sustainable than the motivational programs for the employees.

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Learning and growth perspective identifies the capabilities in which the organization must excel in order to achieve superior internal processes that create value for customers and shareholders. Employee capabilities, information system capabilities, and motivation and empowerment may be some of the key strategic elements of learning and growth perspective. Intense competition at the global level necessitates the organizations to improve their potential to meet the changed needs and preferences of the customers and enhance the customer value as well as the shareholder value. There are three main sources, from which a firm can derive its learning and growth.

They are:

  1. people,
  2. systems and
  3. organizational procedures.

The objective of balanced scorecard is to enable the firm to understand the gap between the existing capabilities of the firm concerning people, systems and procedures and the level expected to be achieved by the organization through break-through performance. Firms have to enlarge their investment in the areas of improving the skill level of the people, introducing enhanced information technology capabilities of the firm and aligning the procedures and routines of the firm (Kaplan & Norton, 1996).

Knowhow is a fast perishing resource, it is important for the firms to decide on the core competencies to be cultivated by the organization so that it becomes helpful for the future development of the firm (Hamel & Prahalad, 1994). This calls for the identification by the organization of its strategic directions for the future and develop the required skills among the employees and in retaining them by improved motivation. The employee perception of the workplace is influenced largely by the extent to which the organization is willing to invest in the training and career planning of its employees.

Strategic Objectives

In the year 2000, Sainsbury’s realized that the company was not able to achieve the financial success as anticipated. The poor financial performance, where the operating fell by 23.3% as against the previous year affected the value of the company’s shares in the stock market. The board of directors felt the dire need of bringing radical changes in the company’s operations to ensure turnaround of the company. Sir Peter Davis was appointed as the new CEO of Sainsbury’s and under his leadership; the board identified three broad areas where improvements were required to regain the lost market position of the company.

The areas identified were:

  • enhancing the service quality in stores and consumer service,
  • improving the efficiency of supply chain performance, which is essential for the success of any retail organization, and
  • increasing the overall efficiency of the organization through introducing enabling IT capabilities.

Business transformation followed a six point strategic program. The steps involved were:

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  1. Creating a new and differentiated market position for the company which will ultimately enhance the shareholder value on a continuous basis
  2. Bringing a dramatic change in the customer shopping experience and achieving this by an in-depth study of the target customers, operational business models and revamping the service drivers
  3. Bringing radical changes in the roles of the store managers and their teams to improve the customer shopping experience at the store level
  4. Breaking the complex systems and processes into simpler ones with a view to improve the organizational efficiency
  5. Making the organization set an example for the community and employee base with high level performance supported by rigorous infrastructure and customer-centric business decisions
  6. Taking full advantage of the potential synergies of the group and benefiting from the prospects of B2B, E-commerce and B2C channels.

Strategic Measures

The expansion activities of Sainsbury’s affected its ability to sustain the competitive edge in its core markets. This and the aggressive marketing strategy of Tesco made Sainsbury’s lose its number one slot in the retail industry. The company launched a recovery programme in 2004, which helped the company recover slightly. In the mid of 2009, the company was having 15% market share with an increase in the profits of up to 15% over the previous year. “Sainsbury’s had historically adopted a market approach of retaining a middle-to-upper-class image, with such a wide lead on quality, that it did not need to position itself to customers on price as it was not interested in attracting lower-income customers,” (McLoughlin & Aaker, 2010).

However, the fact that the company had lost its leadership position in 1995 to Tesco made the company reconsider its strategic measures. The company adopted new strategic measures in the areas of providing “great food at fair prices, accelerating growth of complementary non-food and services, reaching more customers through additional channel, growing supermarket space and active property management,” (McLoughlin & Aaker, 2010).

Performance Targets

Performance targets or Key Performance Indicators (KPIs) were organized in respect of four traditional balanced scorecard perspectives. A number of accounting-based performance indicators were selected as measures for the financial perspective. The sales growth and increase in profitability including gross profits, earnings before interest, tax and depreciation and return on capital employed were some of the targets fixed under the balanced scorecard. All financial metrics were gathered and reviewed on a quarterly basis. The financial metrics can be collected at the store level and can be gathered at the regional and corporate level for monitoring the performance over the period.

Well-designed POS system collects all the customer-based information for control and monitor purposes. Performance targets in the form of improvements in customer satisfaction were fixed and customer surveys through telephones and email surveys point out the improvements in customer satisfaction levels. The rating of shopping experiences by the customers compared against specific customer outcome metric enable the company to measure the performance in respect of customer perspective. Even though there is no practice of routinely collecting the information on customer perspective at store level, the company undertakes a one-time survey project to collect store-level customer experiences at the store level.

The internal perspective of Sainsbury’s balanced scorecard consists mainly of improving the efficiency of its supply chain, which is very large. The efforts on improving the performance of online sales were another internal perspective, for which the company established performance measures. Increase in the online sales revenue was one of the metrics against which the internal performance is measured. Number of racks that went empty in a week and the number of times there was disruption in the supply chain were the performance metrics developed by the company for measuring the internal perspective.

Under learning perspective of the balanced scorecard, employee capabilities at various levels were identified as the metrics that were to be met. The strength of store level operational performance was to be measured based on the tenure of store managers and crew, as the employee retention was set as the performance measure. Employee capabilities were also measured through half-yearly evaluation performance measures. “Managers were rated, on a five-point scale, on many dimensions including ability to retain, train, and interact with crew; customer service; merchandising; time and labor management; maintaining store safety; and technology use,” (Campbell et al., 2008).

Improvement Project

In the year 2000, a study by the management of Sainsbury has revealed that the supply chain and the warehousing system need a complete revamp, in order to enable the company to improve the efficiency of the supply chain management. There was a significant difference between the infrastructure of Sainsbury’s and its competitors. The company with a view to regain the market share lost to its major competitor Tesco, embarked on a large project of revamping the supply chain. Sainsbury’s was under tremendous pressure to enhance the sales growth as well as the efficiency of the supply chain.

The company launched a program to rejuvenate the supply chain with the following objectives:

  • “To replace the current depots with automated fulfilment factories and primary consolidation centres;
  • To manage transportation in an integrated fashion from the factory gate through to the store backdoor;
  • To replace core supply chain systems which were old and inflexible; and
  • To ensure that there were clear ways to measure performance by reorganizing the supply chain structure and processes.”

Despite huge investments in IT infrastructure and outsourcing the IT part of supply chain and warehousing the company made only a small improvement of 1.7% in the year 2005, three years after the initiatives in this area were started. The company had to appoint 3000 additional staff to achieve this improvement during 2004-05.

After the assumption of office as CEO by Justin King, the management identified the strategic measures of offering better food at affordable prices, speeding up the growth of non-food range, getting to more number of customers and efficient property management as internal business perspective of the balanced scorecard. The company identified the need for a reliable and cost-effective IT infrastructure for managing its online food retail business as well as the supply chain efficiently.

With over 100,000 deliveries in a week, Sainsbury’s is the second largest online operator in food retail business in the UK. Therefore, the online revenue is one of the important elements of the total earning avenues of the company. “All Sainsbury’s stores plus four business centres, 34 depots and a disaster recovery site rely on the company’s network to process customer payments, manage the supply chain and support internal/external communication.” (Corsten, 2005)

The company’s network service provider was responsible for running and maintaining this wide area network and all other local area networks connected to the larger wide area network. Sainsbury’s was also operating a DMZ (de-militarised zone) network consisting of 100 servers for communicating with thousands of suppliers and for placing orders with these suppliers. These networks were also managing the online shopping services.

A significant improvement in the IT area was to ensure that there is no disruption in the DMZ service, as downtime in the system would mean detrimental to the growth of the company as well as to its reputation among the customers. In 2008, Sainsbury adopted a network management solution, which enabled the company to ensure a comprehensive visibility of all its IT devices and to have a proactive problem management. The system adopted by the company could maintain the hardware management system and mainframe environment flawless. “As a result, Sainsbury’s is able to safeguard the availability and performance of its DMZ environment, which in turn helps to:

  • Ensure that around 100,000 online orders are processed promptly every week
  • Provide staff with continuous access to email and Internet
  • Prevent disruption to the supply chain.” (Ca Customer Success Program, 2009).

References

1000Ventures, 2001. Balanced Scorecard (BSC). Web.

Action, T.B.S.T.S.i., 1996. The balanced scorecard: translating strategy into action. USA: Harvard Business Press.

AnnualReport, 2009. Financial Review. Web.

BizEd, 1996. Sainsbury’s: What is its mission statement? Web.

Bourne, D.M. & Bourne, P., 2007. Balanced Scorecard. USA: Hodder Arnold.

CaCustomerSuccessProgram, 2009. Customer Success Story. Web.

Campbell, D., Datar, S.M., Kulp, S.L. & Narayan, V.G., 2008. Testing Strategy with Multiple Performance Measures Evidecnce from a Balanced Scorecard at Store 24. Web.

Corsten, D., 2005. Hisotry in the Making. ECR Journal, 5(1), pp. 70-78.

Hamel, G. & Prahalad, C.K., 1994. Competing For The Future. Boston MA: Harvard Business School Press.

Holbeche, L., 2009. Aligning Human Resources and Business Strategy. Oxford UK: Butterworth-Heinemann.

Kaplan, R.S. & Norton, D.P., 1992. The Balanced Scorecard: Measures That Drive Performance. Harvard Business Review, January-February.

Kaplan, R.S. & Norton, D.P., 1996. The Balanced Scorecard: Translating Strategy into Action. Boston: Harvard Business School Press.

Kaplan, R.S. & Norton, D.P., 2001. The strategy-focused organization: how balanced scorecard companies thrive in the new business environment. USA: Harvard Business Press.

McLoughlin, D. & Aaker, D.A., 2010. Strategic Market Management: Global Perspectives. New York: John Wiley & Sons.

Sainsbury Corporate Website, 2009. Company Overview. Web.

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