Question
Section B – BOTH questions are compulsory and MUST be attempted
2 Company information
Veyatie is a fashion clothing retailer which caters for both male and female customers of all adult age groups. Veyatie has 10 retail stores. The company’s information systems are basic for a business of its size and focus solely on financial information.
Veyatie’s strategic objectives are ‘To maximise shareholder wealth by increasing the number of retail stores, making our customers completely satisfied, ensuring our stores are attractive and offering the widest range of fashion clothing in our market.’
The Veyatie board has seen little need for non-financial performance indicators（NFPIs）so far, preferring instead to focus attention on cost control and working capital management. As a result, all senior managers are appraised against targets for operating profit margin, inventory turnover and the current ratio.

Customer satisfaction
Following a period of poor financial performance, Veyatie began collecting data on one aspect of non-financial performance, customer satisfaction, as the board had been advised that this is a key driver of financial performance.
The data collection began at the start of Quarter 3 20X3 and there is now data available for two complete years（Appendix 1）. Veyatie has found it difficult to interpret this qualitative data and also the trends in this data. Some board members question its usefulness and propose reverting back to reporting just the financial indicators which they are used to.
Veyatie collects this data by asking customers to rate their satisfaction with their visit to the store as they are paying
for their items. The scores range from 1（completely dissatisfied）to 5（completely satisfied）. The mean score is the performance indicator reported to the board and the senior managers. Customers are encouraged to leave a score by having their names entered into a quarterly prize draw to win tickets to major football matches, concerts and amusement parks.

Balanced scorecard
A consultant has suggested to the board that the introduction of a balanced scorecard approach may improve business performance, as Veyatie is unlikely to achieve all of its strategic objectives in the near future. The board has already heard what the benefits of the balanced scorecard are, but are sceptical about these.
The board has asked for your advice on the problems of implementing and using the balanced scorecard approach at Veyatie. One aspect of this advice should focus on the selection of suitable performance measures and the consultant has already chosen some performance measures which could be included in a balanced scorecard at Veyatie（Appendix 2）.
These have been provided to help you illustrate your advice on the problems of using the balanced scorecard.
Note: The board would welcome your advice on how to refine the performance measures as part of your advice on the problems of using and implementing the balanced scorecard, but does not want you to give a detailed evaluation of the advantages and disadvantages of each performance measure, or to suggest completely new measures.
Required:
It is now 1 September 20X5.
（a）Assess the difficulties in using and interpreting the customer satisfaction data at Veyatie.（10 marks）
（b）Advise the board as requested of the problems of implementing and using the balanced scorecard approach at Veyatie.（15 marks）
（25 marks）

Appendix 1
Customer satisfaction data
Percentage of customers giving customer satisfaction scores* between 1 and 5
* Satisfaction scores were collected from a large number of customers when paying for their items.

Appendix 2

Notes:
1. Stock out percentage is the percentage of product lines which are unavailable for sale in each store at the beginning of each trading day.
2. The human resources department already records the total number of employee training days. Employee training covers the three main areas of health and safety training, training in handling customer complaints and training staff to understand the range of products available and how to display them attractively in the store.

Mind set

Answer
2（a）Subjectivity
Customers’ own assessments of satisfaction are subjective. Different customers could buy the same goods in the same store and at the same time, but still score their satisfaction differently.
Different customers may have different expectations of their visit to the store and will attach different levels of importance to different aspects of their visit. Some may place a high importance on being able to move around the store and access goods easily, whereas to others this may be unimportant and would not affect their satisfaction.
Another reason why the data may be misleading is that, when rating their satisfaction, customers may tend to use the middle scores and be reluctant to use the highest and lowest scores. This appears to be the case in the data given where in most quarters customers do not give the scores of 1 or 5.

Aggregated and mean data
The collection of data of a single measure of customer satisfaction does not indicate what aspect of their visit to the store customers are satisfied, or dissatisfied, with.
Customers may consider the price, design and quality of the goods, the comfort and layout of the store or the friendliness and product knowledge of the staff when scoring their satisfaction. Without knowing which aspects of their visit customers are satisfied with, it will be hard to know what to do to improve customer satisfaction.
Using the mean score may also make the data hard to interpret. For example, in Quarter 1 20X4, 50% of the customers are completely satisfied（a score of 5）and 50% of the customer are completely dissatisfied（a score of 1）. This may be due to an error in collecting or compiling the data, but the mean score of 3 indicates that, overall, customers are satisfied, whereas 50% of them are completely dissatisfied. The calculation of the median or modal score may be preferable because this reduces the distortion to mean scores caused by very high or low scores.

Incomplete data
The data may not represent the views of a wide range of customers. The scores are collected when customers are buying goods at the till. This does not reflect the views of the customers who were so dissatisfied that they did not buy anything.
The prizes offered in the draw to encourage customers to leave the satisfaction score may appeal differently to male and female customers and to customers of different ages. For example, tickets to amusement parks may appeal more to younger customers than to older ones. Using this data as if it represents a wide range of customers’ views may be misleading and lead to incorrect decisions being taken.

Identifying trends
Identifying trends is one way of overcoming some of the problems of interpreting the customer data, but it may be difficult to identify trends. In a fashion retailer such as Veyatie, there may be seasonal and short-term or cyclical trends, which make it hard to interpret what the long-term trend is.
In the limited data given, there appears to be a seasonal trend where customer satisfaction is worse in Quarter 4 than in any other quarter in each year. Overall there seems to be a downward trend, with every quarter being worse than the same quarter in the previous year.

（b）Problems of implementing and using the balanced scorecard
Selecting measures
Veyatie’s strategic objectives are to maximise shareholder wealth by increasing the number of retail stores, making customers completely satisfied, ensuring its stores are attractive and offering the widest range of fashion clothing in the market. Measures must be selected which are congruent with Veyatie’s critical success factors（CSFs）and strategic objectives.
Though it is unclear what the CSFs are, at least one of the strategic objectives, to increase the number of stores, is not reflected at all in the measures selected. The lack of a suitable measure for this objective could be the reason why Veyatie is unlikely to open new stores in the near future.
Measures must not be selected just because they are easy to measure. The human resources department already records the total number of employee training days, so this measure could have been selected just because the data is readily available.

The number of days spent on the different types of training is unclear. Though clearly important, staff health and safety training does not directly help Veyatie achieve its strategic objectives. It may simply reflect Veyatie’s legal obligations and so would not help gain competitive advantage. It would be better to measure the days spent training staff to understand the range of products available and how to display them attractively in the store, as this directly relates to Veyatie’s strategic objectives.
One of the benefits of the balanced scorecard approach is that it presents a holistic view of a business, covering financial and non-financial and internal and external factors. The measures selected do cover all four perspectives of the balanced scorecard, but do not seem to be well balanced as there are more measures in the financial perspective than in each of the other perspectives. Also, most of the measures are internally focused.
The bias towards financial measures may reflect the fact that the board has so far seen little need for non-financial indicators.
Financial measures, however, are backwards looking and measure the results of actions taken in the past. It is non-financial factors, such as customer satisfaction, which drive future performance and which will enable Veyatie to achieve its strategic objectives.

Conflicting measures
When selecting measures to use in the balanced scorecard, care must be taken to select measures which do not conflict with each other. Otherwise, without further guidance, managers will not know which measure to focus on, or may simply ignore one measure and focus on another.
Several of the measures selected by the consultant may potentially conflict with one another. For example, in order to achieve a low stock out percentage, Veyatie may have to hold higher levels of inventory which may worsen inventory turnover. This could apply at the overall company level or at individual stores.
The financial measure of operating profit margins conflicts with some of the measures in the other perspectives. The total number of employee training days has been selected to measure the learning and innovation perspective. The cost of this training, at least in the short term, will reduce operating profit margins. Similarly, having a high market share may imply that Veyatie will have to be competitive on price, which will also lower operating profit margins.

Board commitment
If the introduction of the balanced scorecard approach is to be successful, the commitment of the board is essential. Without this, other managers in the business are unlikely to work hard to implement and use the approach.
The board is already sceptical about the benefits of the balanced scorecard. There is the danger that it may simply be abandoned if it is found difficult to use, as was proposed for the collection of customer satisfaction data which was found to be difficult to interpret. The board’s apparent disregard of non-financial performance measures is also clearly inconsistent with a successful introduction of the balanced scorecard approach.

Collecting and interpreting data
Interpreting the measures used in the balanced scorecard may be difficult, for example, for qualitative data such as customer satisfaction, which Veyatie has already had difficulties in interpreting. A lack of expertise in interpreting this data, may lead to wrong decisions being made.
The collection and interpretation of the data for the balanced scorecard will take time and resources. There may be staff resistance to the change, though this may be overcome by training in the benefits and use of the balanced scorecard.
Veyatie’s information systems are basic for a business of its size and focus just on the use of financial information. They will need to be replaced or upgraded in order to collect and process non-financial and external data required for the balanced scorecard. The cost of implementing and using the balanced scorecard should be compared to the benefits of doing so.