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LIMERICK INSTITUTE OF TECHNOLOGY SCHOOL OF BUSINESS & HUMANITIES

ASSIGNMENT COVER SHEET

Student Name: Emmanuel Emeonye Student Number: k00122890 Course Name: Accounting & Finance Study Mode: Full-Time: AC CS: Lecturer Name: Michael Sheehan Subject Title: AF3 Management Accounting and Operations Research Assignment Title: Balanced Scorecard Project Number of Pages: Disk Included: Yes: No: Additional Information: Due Date: 31st January 2011 Date Submitted: Plagiarism Disclaimer:

I understand that plagiarism is a serious offence and I have read and understood the college policy on plagiarism. I also understand that I may receive a mark of zero if I have not identified and properly attributed sources that have been used, referred to or have in any way influenced the preparation of this assignment. Furthermore, I understand that I may receive a mark of zero if I have knowingly allowed others to plagiarise my work in any way. I hereby declare that this assignment is my work based on my personal study and /or research and that I have acknowledged all material and sources used in its preparation. I also declare that this assignment has not been previously submitted for assessment.

Signed: Date:

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Table of Content

Page 1 Plagiarism Disclaimer

Page 2 Table of Contents

Page 3 & 4 Introduction to Balanced Scorecard

Page 5 Brief History of the organisation

Page 6 & 7 Financial Perspective

Page 8&9 Customer Perspective

Page 9 & 10 Internal Business Process Perspective

Page 11 Learning and Growth Perspective

Page 12 Conclusion

Page 13 Bibliography

Page 14 Appendix

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Introduction to Balanced scorecard

The balanced scorecard is a strategic planning and management system that is used extensively

in business and industry, government, and non-profit organizations worldwide to align business

activities to the vision and strategy of the organization, improve internal and external

communications, and monitor organization performance against strategic goals.

www.balancedscorecard.org

According to the researchers “one of the original legitimizing aspects of the BSC as a

management control model is that it should enable organizations to become more oriented

towards long-term Revenue, rather than short-term costs, in their management control

routines.”(Johanson, Skoog, Backlund, Almqvist, 2006, pp.849-850) however, According to

(Chavan, 2009, pp.398-399) “Use of the balanced scorecard should improve managerial

decision making by aligning performance measures with the goals and strategies of the firm and

the firm’s business units. I do agree with both researchers, but would disagree on the quote “that

organization should more oriented towards long-term revenue as to short- term cost” on the basis

that for long-term revenue to be achieved, short-term cost and revenue should be met.

Balanced scorecard was originated by Drs. Robert Kaplan (Harvard Business School) and David

Norton as a performance measurement framework that added strategic non-financial

performance measures to traditional financial metrics to give managers and executives a more

'balanced' view of organizational performance. While the phrase balanced scorecard was coined

in the early 1990s, the origins go way back, for example to General Electric performance metrics

in the fifties and the French tableau de bord in the early 20th

century. Also in Analog Devices a

scorecard was introduced in 1988(www.schneiderman.com). It has matured from its early use as

a simple performance measurement tool to a full strategic planning and management system. The

“new” balanced scorecard gives the workers direction as how to work every day congruent to the

strategic plan. It provides a framework that not only provides performance measurements, but

helps planners identify what should be done and measured. It enables executives to really carry

out the strategies. Drs. Kaplan and Norton (1992, 1996), recognizing some of the shortcomings

of the traditional financial approach came with the balanced scorecard. The BSC provides a

guideline on how to balance out the pure financial perspective. The BSC is a management

system (Not just metrics) that enables organizations and managers to clearly cascade down their

vision and strategy and clarify the actions required to all. It gives the managers feedback on how

well the business processes are running and how and if the results and processes could improve.

It transforms the strategic planning from a scribble on a piece of paper to the dashboard of the

cockpit of the business showing the metrics that are required for the growth and survival.

However according to Voelpel, Leibold and Eckhoff (2006) „tyranny „ of the BSC as a

measurement “straightjacket” is starting to put at risk survival of companies, hinders innovation

and therefor adversely affecting customer value rejuvenation, share value and societal benefits.

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They propose a more systemic alternative. The companies‟ fate is determined by the health of

other firms that are in its business ecosystem. We have to consider whether the BSC in its current

form has any value at all.

www.bing.com

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Introduction of the organisation

Anglo American is one of the world‟s largest mining companies and their head office has been in

London since 1999 when Luxembourg-headquartered Minorco merged with Anglo American

Corporation of South Africa to form Anglo American plc. They have a portfolio of high-quality

mining assets and natural resources includes platinum group metals and diamonds, with

significant interests in copper, iron ore, metallurgical coal, nickel and thermal coal, as well as a

divestment portfolio of other mining and industrial businesses. Anglo American has operations

in Africa, Europe, South and North America, Australia and Asia. www.angloamerican.com Anglo

American started its operations in Johannesburg; South African in 1917.their thermal coal, iron

ore and platinum businesses have operations in South Africa, with a corporate office in

Johannesburg and have projects or operations in Namibia, Botswana and

Zimbabwe.www.angloamerican.com

Recently, Anglo American has been criticized by some shareholders and stakeholders for selling

off some of its assets in Africa, South America, Australia and Europe by the group's chief

executive Cynthia Carroll, as a part of her strategy to ditch businesses that do not contribute to

growth. www.dailymail.co.uk. I would disagree with the notion of selling off parts of the

business empire as it would create unemployment and thereby lead to high street crime and

drugs. In the case of South Africa where there is high street crime and it contradicts their aim to

make real and lasting contribution to the communities in which they operate.

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Financial Perspective

The financial perspective is the viewpoint of the shareholder. Usually goals are set around cash

flow (for survival), profitability (for success) and sales/market share (for growth). The balanced

scorecard does not supplant such measures, but rather complements them with others, which tend

to be longer term in their focus. www.irishtimes.com

According to the researcher, “In the for-profit domain the objectives in this perspective

represent the end in mind of our strategic story, typically culminating in objectives such as

increase shareholder value, revenue growth and lower cost.” (Niven, 2008) however, According

to the researcher)” A balanced view of the various Non-financial, as well as financial perspective

is necessary. However, it has become evident that the word “balanced” does not mean that the

four perspectives are equally important.” (Johanson et al., 2006, pp.844-845) I am of the opinion

that the four perspectives should work together equally and dependently towards the overall

corporate strategy. For instance, Anglo American declared force majeure on its coal mines in

Queensland, Australia due to recent torrential rains. From a customer perspective, the customers

might not be satisfied as their goods or services will not be delivered on time. The customers

might consider looking elsewhere for prompt services which will reduce revenue and profit,

thereby affecting the financial perspective.

Measures for financial perspectives

Net Profit percentage

The net profit percentage for Anglo American in 2008 was 23% as compares to their competitor

Bhpbilliton which was 27%. In 2009 the net profit percentage for Anglo American was 14% and

for Bhpbilliton was 13%. Anglo American‟s net profit dropped from 23% down to 14%

indicating that something is seriously wrong in the business. However their reduction is in

profitability, not as dramatic as their competitor. In comparison to their competitor they have

done better. (Appendix 2)

Return on Capital Employed

In 2008 the R.O.C.E for Anglo American was 25% and 41% for BhpBilliton. In 2009 the

R.O.C.E for Anglo American was 9% and 18% for BhpBilliton. The R.O.C.E for Anglo

American dropped dramatically from 25% to 8%. In comparison with their competitors who

dropped from 41% to 18%. Both companies have a huge drop in their R.O.C.E which is not good

to the business (Appendix 1)

Current ratio

In 2008 the current ratio for Anglo American was 0.70:1 as compared to BhpBilliton to

1.32:1.The current ratio for Anglo American in 2009 was 1.54:1and BhpBilliton 1.89:1.In 2009,

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Anglo American were within the normal required limit 1:32:1 which is a big improvement from

being below the required limit in 2008 by 0.70:1.however their competitors seems to be doing

very well as they were within the required limit both in 2008 and 2009(Appendix 3)

Acid Test Ratio

In 2008 the acid test ratio for Anglo American was 0.50:1 and BhpBilliton a leading competitor

1.30:1. Also, in 2009 the acid test for Anglo American was 1.06:1 and BhpBilliton, 1.88:1.Anglo

American improved in 2009 as they were within the required limit 1.06:1, as compares to 2008

when they were below the required limit by 0.50:1.their leading competitor is within the required

limit both in 2008 and 2009 which is a good result.(Appendix 4)

Earning per share

In 2008, earnings per share for Anglo American was $4.34 and BhpBilliton $275.3. In 2009

earnings per share for Anglo American was $2.02 and BhpBilliton $105.6. In 2009 both

companies dropped in their earnings per share which is no surprise as revenue has reduced. In

comparison to their competitor, Anglo American is behind (Bibliography)

Performance

In 2009 as compares to 2008, Anglo American‟s profit from platinum and diamonds dropped to

99%, industrial minerals fell to 83%, while coal fell to 2%. As a result of the performance which

lead to the sharp declines in commodity prices against the prior year and anticipated reductions

in volumes, partially offset by exchange rate benefits compared to 2008, they did not declare an

interim or recommend a final dividend in 2009 and 2010 for the first time since the Second

World War. It could make the prospective investors not to invest in the company as they have

not paid dividend to shareholders in 2 years. The shareholders will be disappointed with the

underperforming share price and non payment of dividend, especially the shareholders who rely

on the dividend as their only source of income. www.dailymail.co.uk

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Customer perspective

The customer perspective is designed solely to measure how well the company is meeting the

demands of the customer and its market segment. By measuring customer satisfaction, loyalty,

retention, acquisition, and profitability, a company can excel in their market segment and plan

for the future. (Kaplan and Norton, 1996)

“The customer perspective describes the ways in which differentiated, sustainable value is to be

created for targeted customer segments, how customer demand for this value is to be satisfied,

and why the customer will be willing to pay for it” (Gurd and Gao, 2008, pp. 12-13) in addition,

According to Kaplan and Norton (2005, pp. 41-42) “the customer perspective defines the drivers

of revenue growth. It includes generic customer outcomes, such as satisfaction, acquisition,

retention, and growth, as well as the differentiating value proposition the organization intends to

offer to generate sales and Loyalty from targeted customers.”

Measures for customer perspective

Customer satisfaction and customer retention

Customers satisfied with the business product and service of the company tends to pay on time

and build business relationship as it is profitable for them. Customers not satisfied with the

product or service of the company will not care about the continuing relationship with the firm

tend to pay late. Anglo American‟s debtor‟s days went from 42days in 2008 to 62 days in

2009(See appendix 5 for calculations) indicating that the customers did not make their payment

within the required 30-60 days which shows that the customers might be in financial difficulty or

have issues with the price and services rendered. According to the Daily mail

(www.dailymail.co.uk), in South Africa where they supply power generation and thermal coal to

industrial sectors, the country's electricity system is in crisis. Prices have shot up and there have

been increasing numbers of blackouts which may have caused the reduction in turnover of

thermal coal from US$M 3,051 in 2008 to US$M 2,490 in 2009(of which the turnover in South

Africa in 2008 US$M 2210 and in 2009 US$M 1748). However, BhpBilliton only dropped from

US$M 6,560 in 2008 to US$M 6,524 in 2009. Both companies in other to increase their turnover

might conside reducing their cost of production for example purchase of cheaper and good

quality raw materials, which will enable them to reduce their selling price and also to supply

quality goods and services. Therefore, when customers are happy and satisfied it culminates to

customer satisfaction and retention

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Image

Anglo was awarded the platinum band in the Corporate Responsibility Index in 2009 for its

corporate and social responsibility activities (www.angloamerican.com). This puts the company

in a better position for potential customers that favour suppliers with a commitment to ethics and

sustainable development.

Internal Business Process Perspective

This perspective refers to internal business processes, and aims at satisfying shareholders and

customers by excelling at some business processes. Metrics based on this perspective allow the

managers to know how well their business is running, and whether its products/services conform

to customer requirements. (Bigliardi and Bottani, 2010, pp.252-253)

“To satisfy customers, you may have to identify entirely new internal processes rather than

focusing your efforts on the incremental improvement of existing activities.” (Niven, 2005)

Further more, “the balanced scorecard should not only consider operations processes, but also

innovation processes. By incorporating innovation process measures, the BSC provides

managers with a set of tools that can add value in both the short and long term.” (Bose and

Thomas, 2007, pp. 661-662)

Measures for internal business process perspective

Safety

In 2009 Anglo American‟s fatal-injury frequency rate showed a 33% improvement from 0.015

in 2008 to 0.010 in 2009. Also, lost-time injury frequency rate reduced to 27%, showing a year-

on-year improvement from 1.04 in 2008 to 0.76 in 2009 which conforms to their slogan that any

loss-of-life is unacceptable after loosing 20 of their employees in 2009. As a part of fall of

ground management, Anglo Platinum introduced in-stope bolting and in-stope netting as a means

of preventing injury from falls of ground at all operations and also, Smart Cap was introduced

across Anglo American Metallurgical Coal mine sites. The Smart cap does not prevent fatigue –

but when a danger level is reached, the Cap transmits via Bluetooth to an in-cab monitor that

alerts the driver and suggests a rest stop. However, Bhpbilliton also lost 7 employees due to work

related incidents in 2009. They have made in incremental improvement in total recordable injury

(which comprises of fatalities and lost time cases) to 5.6 per million hours worked. In

comparison to their competitor they a high death rate. However, the introduction of SMART Cap

and fall of ground management would be an important tool towards reducing the number of

death rate, work related incidents and fatal injuries. Which as stated by (Niven, 2005) and (Bose

and Thomas, 2007) that innovation is a major tool to improve internal business perspective, a

quote that I do agree with as it adds value to both short and long term strategy of a business.

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Health

Their goal is that no employee is harmed by working at their operations, and that the health of

those who work for them is improved. It is a good internal control perspective as when

employees are free from occupational disease it mitigates absenteeism, customer targets are met

through consistent production, thereby achieving revenue and profit. Also, the failure to maintain

the required high levels of safety management could result in fines and penalties, liability to

employees and third parties for injury, impairment of the Group‟s reputation, temporary or

permanent closure of mines by the government in authority, industrial inability to recruit and

retain skilled employees. Noise-induced hearing loss rose from 62 in 2008 to 367 in 2009 and

also the new cases of Hand-Arm Vibration Syndrome, occupational lung diseases and

tuberculosis reported. The incidence rate of occupational disease per 200,000 hours worked has

risen from 0.126 in 2008 to 0.483 in 2009. Bhpbilliton are progressing with their health

performance as they had 215 new cases of occupational disease reported in 2009, 51 fewer cases

compared with 2008.

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Learning and Growth perspective

The Learning & Growth Perspective focuses on the intangible assets of an organization, mainly

on the internal skills and capabilities of the employees that are required to support the value-

creating internal processes www.theclci.com

“This perspective includes employee training and corporate cultural attitudes related to both

individual and corporate self-improvement”. (Bigliardi and Bottani, 2010, pp.252-253) however,

“Objectives in the learning and growth perspective are the drivers for achieving excellent

outcomes in the first three scorecard perspectives”. (Kaplan and Norton, 2002)

Measures for learning and growth perspective

Skills development

In 2009, Anglo American invested $84.1 million (2% of total employee costs) in direct training

activities, and supported more than 4,500 supernumeraries, bursars, apprentices and graduate

trainees. Nearly 5,700 employees, contractors and community members in South Africa have

enrolled in adult basic education, training and a further 2,600 employees were provided with

'portable' skills training, which involves developing employees' non-mining skills so that they are

employable outside of the industry after mine closure. www.angloamerican.com it is a good

measure for learning and growth as the employees will be highly motivated, committed and

diligent towards their work as their employer provided the necessary mining skills development

so that they are employable after working in Anglo American. Their competitor is also

responsible for providing employees with the right opportunities to enhance their skills and take

on more challenging roles and greater responsibilities.

Equality and diversity

Promoting diversity within their workforce remains a vital pillar to the human resources

principles of Anglo American. Management ranks within South Africa with respect to women

grew from 45% in 2008 to 46% in 2009. Recently, the number of women working in mines at

Anglo Platinum has increased from near zero in 2004 to 2,700. Metallurgical Coal‟s initiatives in

Australian operations have focused on attracting and retaining more female employees across all

levels of the organisation, particularly in male-dominated disciplines. 50% of their 2010

scholarship programme intake was female and plans are in place to increase the number of

women in „non-traditional roles‟ through the apprentice, graduate and scholarship programmes.

www.angloamerican.com according their competitor, Employment decisions based on attributes

other than a person‟s qualification to perform a job for instance race, sexual, orientation gender,

disability, are prohibited. www.bhpbilliton.com

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Conclusion

The notion of the Balanced Scorecard is simple but extremely powerful if implemented well.

Anglo American had a huge drop from 2008 to 2009 in their net profit percentage, Return on

Capital Employed and Earnings per share. They improved in their current and acid test ratio in

2009. In 2009, debtor‟s days increased. In 2009, they had a high mortality rate and occupational

disease increased. To achieve their “aim to be the leading global mining company - through

world class assets in the most attractive commodities, operational excellence and a resolute

commitment to safe and sustainable mining”. www.angloamerican.com Customer acquisition

through expansion of marketing strategy and achieving a set target of $2 billion in annual cost

savings and efficiency initiatives must be prioritized. This will be aimed at achieving

profitability, cash flow and organizational growth. However, effectiveness of internal control

and risk management is needed to for monitoring performance, Skills development, health,

safety, customer satisfaction and customer retention. Overall, Anglo American‟s performance is

good, not as good as their competitor (Bhpbilliton).

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Calculation Appendix

1. Workings for return on capital employed

Is calculated as follows: Total profit from operations and associates*100/

Capital employed (total issued share capital+ reserve+ non-current liabilities)

Anglo American

2008

8972*100/ (21,756+14,778) = 25%

2009

4436*100/ (21303+28069) = 9%

BhpBilliton

2008

24,145*100/ (39,043+20,487) = 41%

2009

12,160*100/ (40,711+26,209) = 18%

2. Net profit margin/percentage

Is calculated as follows: Profit for the year * 100/Sales

Anglo American

2008

6,120*100/26311 = 23%

2009

2,912*100/20,858 = 14%

BhpBilliton

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2008

15962*100/59,473 = 27%

2009

6338*100/50,211 = 13%

3. Current ratio

Is calculated as follows: Current Assets/Current Liability

Anglo American

2008

9,305/ 13,124 = 0.71:1

2009

10,411/6,745 = 1.54:1

BhpBilliton

2008

21,680/ 16,478 =1.32:1

2009

22,486/11,850 = 1.89:1

4. Acid test ratio (quick ratio)

Is calculated as follows: (Current Assets – Closing Inventory)/Current Liabilities

Anglo American

2008

(9,305 – 2702) /13,124 = 0.50:1

2009

(10,411 – 3212)/ 6,745 = 1.06:1

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BhpBilliton

2008

(21,680 – 232)/ 16,478 = 1.30:1

2009

(22,486 – 200)/11,850 = 1.88:1

5. Receivables days’ ratio

Is calculated as follows: receivables*365/credit sales

Anglo American

2008

(94+2,929)*365/26,311 = 42 days

2009

(206+3,348)*365/20,858 = 62 days

BhpBilliton

2008

(9,801+720)*365/59,473 = 65 days

2009

(5,153+762)*365/50,211= 43 days

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