A BALANCED SCORECARD FROM THE PUBLISHED FINANCIAL STATEMENTS OF JOHN LEWIS - Coursework Example

?A balanced scorecard from the published financial ments of John Lewis Introduction John Lewis Partnership, being one of the main retailers in UK, was created by John Spedan Lewis as a company focused on the happiness and satisfaction of the staff (John Lewis plc, 2011). Nowadays, the employee co-owned business numbers nearly 76,500 employees (John Lewis Plc, 2011). Business activity of John Lewis Partnership is differentiated by several directions, including: John Lewis full line department stores and John Lewis at home stores, Waitrose supermarkets, Waitrose convenience stores, and online store (John Lewis plc, 2011). The first shop of John Lewis has been opened in 1864; for 147 years, the company has achieved unbelievable growth, by opening 35 John Lewis shops and enabling customers to enjoy shopping online through the corporate website johnlewis.com. (John Lewis Partnership, n.d). In order to understand what are the key drivers of the growth of John Lewis and what its pledge of success is it is critical to understand the whole picture of the company’s activity. For this purpose it might be helpful to use the Balanced Scorecard tool. According to the official sources, the balanced scorecard is defined as: “a strategic planning and management system that is used extensively in business and industry, government, and non-profit organisations worldwide to align business activities to the vision and strategy of the organisation, improve internal and external communications, and monitor organisation performance against strategic goals” (Balancedscorecard.com, n.d.). It 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 (Balancedscorecard.com, n.d.). Thus, it might be very useful to apply the Balanced Scorecard measurement framework and to analyze company’s strategy and initiatives from four perspectives: financial, customer, internal business processes, and growth. Analysis of each of the perspective separately enables to understand cause and effect links and to develop the set of KPI’s that are necessary for measuring company’s progress and evaluate performance results. Strategy – Customer perspective Every profitable organization strives to achieve profit and/or maximize it. In Business-To-Consumer (B2C) model it is fairly difficult or even impossible to achieve financial objectives if the customer is neglected or treated by the company in not appropriate manner. John Lewis, being one of the UK’s retail giant, has achieved tremendous financial success mainly due to understanding “this rule of capitalistic world”. John Lewis is a company which strives to understand customer’s needs, to know their wants and relying on these, to continue to provide the best possible choice, value and service (John Lewis Partnership, n.d.). Thus, the company’s strategy is based on three pillars: 1. The best value, choice and service. John Lewis maintains competitive prices in order to retain existing customers and attract new ones, offers “an unrivalled product assortment” to customers, and provides excellent service through proper staff motivation (John Lewis Partnership, n.d.). 2. Accessible shops and service; John Lewis actively expands the territories of its shops in order to reach the maximum amount of potential customers. The key principles include easy access to shopping, either by visiting John Lewis’s locations or by ordering items through the website. Such multi-channel approach to retail enables company to increase customer’s satisfaction and loyalty to the brand. 3. Careful listening to what customers want (John Lewis Partnership, n.d.). John Lewis continuously maintains dialogues with its customers in order to understand what are their needs and wants, what are their interests and preferences. Thus, the company tracks its results in continuous improvement of the service and creates a long-term sustainable and successful business (John Lewis plc, 2011). In the meantime, customers highly appreciate that somebody listens to their comments and wishes and even give feedback in response. Such way of communication strongly encourages customers to come back again and again, thus increasing customer satisfaction and retention rate. KPI’s to measure the strategy from customer’s perspective Official sources of information of John Lewis often mention that the company is keen on proving the best value and excellent service to its customers. In order to measure its performance, John Lewis has developed a set of KPI’s in order to measure the strategy from the customer’s perspective. The list of KPI’s includes: Customer satisfaction by service, assortment, prices, and quality This KPI determines the level of customer’s satisfaction, which directly influences sales volumes of the company. Customer trust and loyalty Customers’ trust enables the company to increase customer’s loyalty. This KPI is crucial for long-term goals of the company, because when the customer is loyal to the company, he is less likely to switch to another competitor, and more likely to buy more and more and to share his experience with colleagues, friends, relatives, etc. Customer profitability This KPI also defines the company’s sales volumes, and thus has a direct impact on net earnings and partnership bonus. Customer retention Retail market swarms with substitute shops and supermarkets. This KPI is critical for John Lewis because the higher customer retention is the more predictable and stable its business is. Market share Many of these KPI’s are tracked and measured through the customer research and feedback, focus groups, surveys, and mystery shopping. Such KPI as market share is fully reflected in financial performance of the company. All the KPI’s have direct links to financial KPI’s because the number of customers is positively correlated with the revenue growth and with cost efficiency of John Lewis. Strategy – Internal Business Processes Effectively and efficiently set up internal business processes is a pledge of success of John Lewis business. For this purpose, John Lewis has developed a strategy which embraces the key processes of the company. These processes should enable the company to deliver its customer perspectives, and in result achieve financial goals. The strategy of John Lewis is to develop the network of reliable and socially responsible suppliers, who will provide products at lower prices, but not compromising quality characteristics of the product. Provenance and safety of products sold to John Lewis customers enables the company to built customer’s trust (John Lewis plc, 2011). That is why there are established certain internal processes, like: inspections, farm assurance schemes, sourcing policies and others (John Lewis plc, 2011). Thus, for example, the database of John Lewis is comprised of 5000 thoroughly selected suppliers, who provide the company with quality products, supported by environmental and ethical policies and standards (John Lewis plc, 2011). Large number of suppliers allows the company to improve conditions of supply (terms, price, discounts, storage, etc.) by enabling it to choose best out the best. Also, having few potential suppliers reduces the risk of dependence on supplier. All these factors impact the financial side of the business, and the lower the risk are for the company, the better. John Lewis helps this group of stakeholders by helping them to reinvest in their businesses (John Lewis plc, 2011). In annual report of the company is mentioned that “John Lewis focuses on the new raw materials, manufacturing processes and durability of its products, as well as responsible product disposal options and increasing its range of sustainable products such as energy-efficient electrical appliances” (John Lewis plc, 2011, 19). Additionally, company’s processes are aimed at reduction of operational CO2 equivalent emissions, improvement of the energy efficiency at new locations, reduction of transport CO2 equivalent emissions, reduction of direct refrigeration and cooling CO2 equivalent emissions, recycling of waste and waste reduction through the supply chain; recovering and recycling of product packaging; appliance of effective managing of water consumption measures (John Lewis plc, 2011). In other words, company is continuously working on adopting new ways of saving costs for energy, water, electricity, etc. and on minimizing negative environmental impact. KPI’s to measure the strategy from processes’ perspective To the above described internal business processes of John Lewis, it is possible to drawn up a list of KPI’s for this perspective: Number of reliable suppliers Reduced operational CO2 equivalent emissions Transport CO2 equivalent emissions (tonnes/pounds mil. Sales) Savings on using alternative resources (fuels, renewable energy, etc.) Reduced carbon footprint Reduced and recycled waste Water consumption per square foot of trading floor area Shop energy efficiency Thus, John Lewis and Partnership concentrates its efforts on reducing the costs and reducing the negative environmental impact of the business. All above described processes have significant impact on both customer and financial perspective because ethical, socially and environmentally responsible behaviour of the company increases customer’s loyalty and trust, and consequently results in higher sales volumes; reduction of costs and optimization of internal business processes saves company’s money, improves overall financial performance and allows to grow business more dynamically. Strategy – Growth and Learning perspective Growth and Learning perspective: Geographical expansion John Lewis’ strategy on growth is based on geographical expansion by opening new locations, and growing online business (John Lewis Partnership, n.d.). There are plans to open new department stores for Leeds, Portsmouth, Birmingham, and Oxford, and at home shops in Chichester, Newbury Chelmsfor, and Ashford (John Lewis Partnership, n.d.). By opening “at home” format of shops, John Lewis will not focus on fashion assortments but on home technology assortments, and home electrical assortments (John Lewis Partnership, n.d.). The company actively works on differentiating its business not only by opening new locations but also by opening new formats of locations. Thus, for example, John Lewis is aimed at developing flexible format, which sits between “at home stores” and “full size department stores (John Lewis Partnership, n.d.). John Lewis Partnership has strategic plans to open its first flexible format shop in Exeter city centre in 2012 (John Lewis Partnership, n.d.). This location will promote sale of Home and Consumer electronics as well as Fashion. However, national geographical expansion is only a part of the growth strategy of the company. Dublin – is the first target point for John Lewis, who is committed to open its first John Lewis shop, overcoming national borders. Northern Ireland also represents a good opportunity for international development (John Lewis Partnership, n.d.). Despite geographical penetration strategy, John Lewis has developed a multi-channel growth strategy, particularly online shopping through johnlewis.com. (John Lewis Partnership, n.d.). Opening of new locations requires investments at the start up stage, mainly for CAPEX, however investment can be returned in fairly short term if location of the shop has been chosen adequately and market has a potential for growth. By opening new locations John Lewis expects to improve its financial performance in a middle-term perspective, due to having access to more customers and growing brand awareness. It is critical to set up measurable and right KPI’s which will reflect the company’s efforts and enable to develop further strategy for business development. KPI’s to measure the strategy from growth perspective: New locations within UK and abroad Opening of flexible format shops ROI of new locations Share of new market Increase of customer base Market share (both national and international) Growth and Learning perspective: Human resources As it has been already mentioned, John Lewis Partnership is an employee co-owned organization. It can be assumed that this is one of the key drivers of the company’s success. It is human resources on which successful delivery of key strategic projects depends (John Lewis plc, 2011). Without well trained and motivated staff, the company will fail to reengineer its major infrastructure development or business processes (John Lewis plc, 2011). Having not appropriate people on workplace, John Lewis will be unable to provide excellent service to its customers and thus to generate profit. Human resource factor plays a critical role in future development and growth of John Lewis, reinforcing its role in growth strategy development. John Lewis’s personnel strategy is to ensure that the company processes the appropriate skills and resources required to deliver development projects (John Lewis plc, 2011, 25). That is why HR department of the company continually reviews and aligns HR resources with the critical priorities of business (John Lewis plc, 2011). Also, the company provides first-class training and development in order to address skill gaps because skills sets are of paramount importance for commercial success and further business development (John Lewis plc, 2011). KPI’s to measure the strategy from learning and growth perspective includes: Training and development programs; Satisfaction of employees; Retention of employees; Financial reward to employees; Corporate cultural attitudes; Addressing skills gaps. To summarize, Learning and Growth perspective of John Lewis is based on two key strategic pillars: geographical expansion of the stores with introduction of new formats and adjusting multi-channel distribution strategy. However, growth strategy is not worth a brass farthing if the personnel strategy will be neglected or paid not enough attention and invested not enough money in employee’s training and development. Strategy – Financial perspective The company’s strategy from the financial perspective is very common to any private profitable organization – to be profitable, to increase profit and to maximize profit and to minimize costs. To be more detailed, John Lewis Partnership gives such a description of its financial strategy: “The Partnership aims to make sufficient profit from its trading operations to sustain its commercial vitality, to finance its continued development and to distribute a share of those profits each year to its members, and to enable it to undertake other activities consistent with its ultimate purpose” (John Lewis Partnership, n.d.). These words find absolute support in previously described perspectives, and once again prove that business is comprised of integral processes which are interrelated among each other. John Lewis has designed a set of financial KPI’s in order to better understand how effectively the company’s assets are used and where efficiency is achieved (John Lewis plc, 2011). Below are listed the KPI’s to measure the strategy from financial perspective (John Lewis plc, 2011): KPI’s to measure the strategy from financial perspective Gross sales growth (excluding the impact of branch openings and closures); Operating margin; Gross sales per selling FTE; Operating profit per FTE; Number of stores; Average selling space (m sq ft); Gross sales per selling sq ft; Operating profit per selling sq ft; Operating cash flow before Partnership bonus; Capital expenditure; Interest cover; New assets; Net debt; ROI (Return on Invested capital) Statement of company cash flows Below is presented statement of John Lewis’ cash flows for the year ended 29 January 2011: Analysis of the above presented statement of company cash flow enables to evaluate the company’s ability to produce cash, to pay for its operations and to invest in future growth (McClure, n.d.). Cash Flows from Operating Activities Here we see that the 307.6 millions of pounds came from sales of JL goods and the net cash flow from operating activities is positive. However, comparing with the previous year, net cash is lower than in 2011, because of contribution to the Pension Scheme. Cash Flows from Investing Activities Here we see that the company has invested more cash than it has generated from operating activity: 167.6 vs. 105.4 millions of pounds. The greatest stake has been spent on capital expenditures of the company, including not only property, but also plant and equipment. This activity is in accordance with the above described growth strategy of the company, mainly geographical expansion for opening new stores. Cash Flow From Financing Activities Cash flow from borrowings is the main source of John Lewis’ cash inflow. Even though the company relies on outside financing, its cash flow position seems to be relatively strong. Summary table: Cause and effect analysis Table presented below summarizes in one scheme the key perspectives and strategies, which enable John Lewis to achieve its corporate goals and objectives. This table visually demonstrates the close relationships among four perspectives and all strategic initiatives. FINANCIAL PERSPECTIVE CUSTOMER PERSPECTIVE INTERNAL BUSINESS PROCESSES PERSPECTIVE GROWTH & LEARNING PERSPECTIVE Conclusion Balanced scorecard is a helpful tool in developing strategic direction of the company, forming strategic objectives and initiatives, setting realistic and measurable targets, tracking company’s performance results and reviewing strategic plans, and initiatives in order to be more competitive and profitable on the market. There are four main perspectives, including: financial, customer, internal business processes, and growth. Analysis of each of the perspective separately enables to understand cause and effect links and to develop the set of KPI’s that are necessary for measuring company’s progress and evaluate performance results. By using Balanced score card it is possible to measure the effectiveness of each of the initiatives, to track the results, to increase targets reasonably and to change strategy if necessary. References: Balancedscorecard.com, n.d. What is Balanced Scorecard? Balanced Scorecard basics. [online] Available at: John Lewis Partnership, n.d. Our strategy. [online] Available at: [Accessed 5 Nov 2011]. John Lewis Partnership, n.d. Future expansion. [online] Available at: [Accessed 5 Nov 2011]. John Lewis plc, 2011. Annual report and accounts 2011, London: John Lewis Partnership [online] Available at: [Accessed 5 Nov 2011]. McClure B., n.d. Fundamental Analysis: The Cash Flow Statement. Investopedia. [online] Available at: [Accessed 5 Nov 2011]. Read More