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Testing Strategy with Multiple Performance Measures

Evidence from a Balanced Scorecard at Store24

Presented ByBRIJESH SEHGAL J.K.YADAV SAJISEBASTIAN VIJAY KUMAR SANJEEV KUMAR SANJAY KUMARS.P. SINGH

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Agenda

• Introduction • Objective• Process• Analysis• Results• Conclusion• References/Credentials• Q&A8/2/2010

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Introduction

What the study is about?

Who did the study?

Why ?

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What the study is about?

Store24, a privately held convenience store retailer in New England, the 4th largest in the region. Whose primary product categories include cigarettes, beverages, snacks, prepared foods, and lottery tickets. It operates in a mature environment with competition from convenience stores, gasoline retailers, and drug stores. During FYs 1998 and 1999, Store24 formulated a strategy aimed at increasing sales and margins. To achieve this, Store24 changed its strategy to creating entertaining in-store atmospheres that would differentiate its stores from those of competitors. To implement the same Store24 used BSC & Strategy Map, but the strategy was unsuccessful .

This study is a follow up research to analyze the failure of above strategy focusing on following points:

investigate the role of the balanced scorecard in generating useful information for testing and validating an organization's strategy.

Testing and validation of assumption underlying BSC.

Finding the gap through statistical tests of the hypotheses underlying the firm's balanced scorecard and strategy map

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Who did the study?Name Designation/Organisation Paper PublishDennis Campbell associate professor in the Accounting and

Management unit at Harvard Business School

Srikant M. Datar Arthur Lowes Dickinson Professor of Accounting at Harvard Business School

V.G. Narayanan the Thomas D. Casserly, Jr. Professor of Business Administration at Harvard Business School

Susan L. Kulp Assistant Professor of Accountancy “Organizational Control Mechanisms: The Next Phase of Procurement Efficiency," Interfaces, May-June 2006

“Manufacturer Benefits from Information Integration with Retail Customers," Management Science, April 2004

“Supply-Chain Coordination: How Companies Leverage Information Flows to Generate Value," The Practice of Supply Chain Management: Where Theory and Application Converge, 2003

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Why?Understand to what extent do balanced

scorecards (BSC) provide useful information for testing and validating an organization's strategy?

Understanding the role of balance scorecard in the potential learning and feedback

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Objectives

• to explore whether, when, and how information about problems with strategy of Store24 was captured in Store24’s balanced scorecard.

• Find evidence that performance measurement of BSC provide useful and timely information for testing the efficacy of an organization's strategy.

• To stimulate new theories about the role of multidimensional performance measurement systems in the strategic feedback and learning processes of organizations

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Process Strategy Balance Scorecard (BSC)

Performance Measurement System

Strategy Map Hypotheses Underlying the

BSC8/2/2010

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Strategy of Store24

Traditional Strategy cleanliness, efficiency, freshness

Differentiation Strategy Greater Loyalty “end-caps”- contained high margin product Fun & Entertainment

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Balanced Scorecard Performance Measurement System

Performance measures were organized around the four traditional balanced scorecard perspectives – financial– customer – internal– learning & growth

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Balance Scorecard Financial Perspective Sales Revenue

MarginControllable ContributionEBIT

Customer Perspective Transaction Volume In-store Comment Card

Process Perspective Audit Score

Learning & Growth Perspective Managerial SkillCrew Skill

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Parameter Measurement Level Frequency

Return on Capital Deployed

EBITDA divided by value of equipment and leaseholds Corporate Quarterly

G&A Overhead Average G&A cost per store Corporate Quarterly

EBITDA Controllable contribution less rental or lease cost Store Quarterly

Controllable Contribution

Gross profit less utilities and labor expense Store Quarterly

Gross Profit Growth Growth in gross profit from same quarter in prior year Store Quarterly

Sales Growth Growth in sales from same quarter in prior year Store Quarterly

Inventory Turnover Days inventory for general merchandise and cigarettes Store Quarterly

Loyalty - Recommend Store24

% would recommend Store24 and % will visit Store24 soon based on telephone survey Corporate Quarterly

Primary Convenience Store

% stating Store24 as their primary convenience store based on telephone survey Corporate Quarterly

Enjoyable Experience

% viewing Store24 as fun and/or entertaining place to shop based on telephone survey Corporate Quarterly

Concept Development Net gross profit $ from new concepts Corporate Quarterly

Operational Excellence

Walk-through audit and mystery shopper ratings of compliance with basic operating standards Store Quarterly

Ban Boredom

Walk-through audit and mystery shopper ratings of compliance with Ban Boredom implementation standards Store Quarterly

Manager Skills Skill rating of store managers Store Every 6-months

Crew Skills Average Skill rating of non-management store employees Store

Every 6-months

Manager Tenure Number of years manager has been with Store24 Store Quarterly

Crew Tenure

Averge number of years with Store24 for non-management store employees Store Quarterly

Employee Satisfaction Gallup survey of employee satisfaction on 5-point scale Corporate

Every 6-months

Information System Use

Regional manager evaluation of store utilization of front and back-office technology Regional

Every 6-months

Fina

ncia

l Pe

rspe

ctive

Fina

ncia

l Pe

rspe

ctive

Cust

omer

Pe

rspe

ctive

Cu

stom

er

Pers

pecti

ve

Inte

rnal

Pe

rspe

ctive

In

tern

al

Pers

pecti

ve

Lear

ning

& G

row

th

Pers

pecti

ve

Lear

ning

& G

row

th

Pers

pecti

ve

Balance Scorecard of Store24

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EBITDA

ROI

Contribution

Gross Profit

Increase Sales Fin

an

cia

l P

ersp

ecti

ve

Asset Utilization

Cu

sto

me

r

Pe

rsp

ecti

ve

En

joy

ab

le

Exp

erie

nce

Inte

re

sti

ng

Pro

mo

tio

n

Qu

ali

ty

, V

alu

e,

Cle

an

lin

ess,

Se

lecti

on

Frie

nd

ly

Inte

ra

cti

on

Differentiators Basic Requirement

Inte

rn

al

Pe

rsp

ecti

ve

Differentiation in-store

Experience

Create Fun, entertaining in-store atmospheres

Increase Customer Value

Enhance the Customer experience with flawless operation

Ban Boredome Walk-Through Audits

Net Gross Profit From New Concepts

Walk-Through Audits

Mystery Shoppers

Le

arn

ing

&

Gro

wth

Pe

rsp

ecti

ve

Competencies

Required competencies are build on capable employees

Technology

Focus on technology is on information system use

Climate for Action

Ability to implement relies heavily on employee satisfaction

Strategy Map

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Hypotheses Underlying the BSC & Strategy Map

Explicit

Implicit

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Explicit Hypotheses H1: Ceteris Paribus strategy inputs are positively related to

financial performance.

H2: Ceteris Paribus strategy inputs are positively related to strategy-specific customer outcomes.

H3: Ceteris Paribus strategy-specific customer outcomes are positively related to financial performance.

H4: Ceteris Paribus measures of employee capabilities are positively related to measures of strategy inputs.

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Implicit HypothesesH5: Ceteris Paribus the impact of increases in

strategy inputs on strategy-specific customer outcomes is positively related to the level of employee capabilities.

H6: Ceteris Paribus the impact of increases in strategy-specific customer outcomes on financial performance is positively related to the level of employee capabilities.

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Summary of Hypotheses Underlying the Scorecard and Strategy Map

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Financial Performance

Strategy-Specific Customer Outcomes

Strategy Input

Employee Capabilities

Financial Perspective

Customer Perspective

Internal Perspective

Learning & Growth Perspective

H1

H2

H3

H4

H5

H6

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Analysis

Financial PerformanceNon Financial Performance

Measure of Strategy Inputs Measure of Basic Operational Compliance Measure of Strategy –Specific Customer

Outcomes Employee Capability

Customers Performance Measure

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Strategy-Specific Input Measure

Q1 FY99 Q2 FY99 Q3 FY99 Q4 FY99119%

120%

121%

122%

123%

124%

125%

Wal

k T

hro

ugh

Au

dit

Sco

re

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Strategy-Specific Customer Outcome Measure

Q1 FY99 Q2 FY99 Q3 FY99 Q4 FY995.5

5.6

5.7

5.8

5.9

6

6.1

6.2

En

joya

ble

Exp

erie

nce

Rat

-in

g

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RESULT

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Result• These results highlight that the hypothesized link in the scorecard between internal implementation of the

action plans related to the new strategy and financial performance does not exist (H1). However, it is unclear whether the strategy was poorly formulated or poorly implemented.

• although the strategy was well implemented, the strategy formulation may have been flawed.

• suggest problems with the fit of the differentiation strategy with Store24’s employee capabilities. Crew skills determine the magnitude of the relationship between strategy outcomes and financial performance, but the relationship is only greater than zero for high levels of crew skills

• information in the scorecard reveals that the primary role of employee capabilities is not necessarily in ensuring store-level execution of the strategy (e.g. H4), but rather in ensuring that even if executed well at the local level, the differentiation strategy ultimately translated into the desired financial outcomes.

• Tables 3-5 offering evidence that formal analysis of the data generated by Store24's balanced scorecard provides timely information about strategic problems relative to the firm's quarterly strategy review process.

• the operating standards which Store24 executives eventually abandoned were not, while those they retained were, drivers of financial performance.

Overall, these results provide evidence that Store24 executives learned about the underlying drivers of store performance despite a lack of reliance on formal statistical analysis of the assumed relationships underlying their scorecard.

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Conclusion

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Q & A

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