This question and answer relates to an article by Daniel Clark, tutor and P5 subject manager at BPP, which was published in the Study Notes section of November's Financial Management magazine. Please read this article (PDF 89KB) before attempting the question.
The whole question and model answer is here in pdf form (PDF 35KB) if you prefer to download and print the question and answer out.
Question
1) In the publicly available information for Tesco, BT and HSBC, the links between mission, critical success factors (CSFs) and key performance indicators (KPIs) are not always clear. See if you can link together the published data to make these connections clear.
What SMART (specific, measurable, achievable, relevant and time bound) objectives do you think would be appropriate for these companies, bearing in mind there need to be a limited number? If these SMART objectives were in place, do you think some of the CSFs and KPIs would change and if so, to what?
2) Review the source documents below. Observe the differences in the information supplied and the way it is presented. Apart from the observations above, what might this tell you about the three companies' approaches to management and culture?
Principal sources:
BT Group 2008 Annual Report and form 20F p2, 3 and 66
HSBC Holdings 2007 Annual Report p10-13 and 323-324 (PDF 4.2MB)
Tesco 2008 Annual Report p8, 9, 26 and 27 (PDF 2.6KB)
BT 'Our vision strategy and values'
'Who is HSBC?'
Tesco 'Our values'
1) Suggested Solutions
To illustrate some ideas, I will just look at Tesco and BT.
Tesco
The mission statement is fairly clear. So taking this as our starting point, you could derive objectives as follows:
- Retain the loyalty of 80% of Tesco customers as measured by repeat business ('lifetime loyalty')
- Tesco prices to be at least 5% cheaper than the average of rival supermarkets' ('create value for customers')
Critical success factors relating to these objectives could be:
- stocking the goods that customers most want to buy
- refining internal processes to operate the business on a cost effective basis
- using economies of scale to obtain goods as cheaply as possible for customers
- making the shopping experience as pleasant as possible.
Example matching KPIs could be:
- stock turnover, or proportion of goods taking more than a week to sell
- overall cost measures and progress against savings targets
- cost savings in procurement and benchmark of prices or costs against rivals
- results of customer feedback surveys/overall sales.
To be SMART, all of these would of course need numerical targets and deadlines, ideally aiming at continuous improvement.
BT
The mission statement doesn't give us much to go on, so we could start with the objectives. Let's assume we have objectives relating to earnings per share, total shareholder return, free cash flow and customer service. Possible (although fairly generic) CSFs could be:
- win new customers
- increase existing customers' spend
- reduce costs/improve efficiency in delivering services
- rigorous appraisal of investment opportunities (to ensure good use of cash)
- improve/maintain skills of customer service staff.
This could be monitored by KPIs such as:
- market share, where the total market can be meaningfully defined
- overall revenue growth
- achieve targets for cost/income ratio
- results of post-completion project reviews ' did they achieve the financial returns expected?
- investment in customer service training for staff
- customer feedback as measured by surveys and complaints.
2) Ideas could be:
For most companies, the annual report is a key document in communicating with the outside world. They put a great deal of thought into its presentation and the image it conveys. BT's report has many more graphics, charts and use of colour than most. As a technology company, they see it as important to project a modern, lively image, showing that they are up-to-date with the latest developments.
At the other extreme, HSBC's report uses few graphics and little colour. Weighing in at a record 476 pages (more than four times the length of Tesco's), the HSBC report is a solid weighty document, full of numbers, notes and explanations.
This is no accident. As a bank, you do not necessarily want to project a lively image. You may want to be solid, dependable, reassuring - perhaps even a bit boring. Given how well HSBC has weathered recent events compared to many competitors, you could argue this approach has paid off well.
The Tesco report sits midway between the two, with perhaps its most striking feature being the Chinese image on the cover. No doubt this is a careful reminder to shareholders that Tesco is a global company, not entirely tied to the static UK grocery market, and its shares should be priced accordingly.
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