Reference no: EM13936445

Global Oil

In 1995 Global Oil Corporation's Marketing and Refining (M&R) Division was the fifth largest U.S. refiner with 7,700 Global-branded service stations selling about 23 million gallons per day, or 7 percent of the nation's gasoline. All the service stations are company owned. In 1990, M&R ranked last among its peers in profitability and was annually draining $500 million of cash from the corporation.

In 1993, M&R reorganized from a centralized functional organization (Refineries, Transportation, Warehousing, Retail, and Marketing) into 17 geographic business units (sales and distribution) and 14 service companies. The functional organization was slow to react to changing market conditions and the special customer needs that differed across the country. The new decentralized organization was designed to better focus on the customer. New marketing strategies could be better tailored to local markets by giving local managers more decision-making authority.

A new corporate strategy to focus on the less price-sensitive customer who would not only buys Global gas but also shops in its convenience gas-store outlets was implemented simultaneously with the reorganization. Global's new strategy was to redesign its convenience stores so they would become a "destination stop," offering one-stop shopping for gas and snacks.

The old organization used a variety of functional measures: manufacturing cost, sales margins and volumes, and health and safety metrics. After changing its corporate strategy and organizational structure, M&R decided to change its performance metrics and began investigating the balanced scorecard.

Balanced scorecard (BSC) at M&R

M&R formed project teams of managers to design performance metrics for its operations. Thirty-two different metrics were identified. These included Financial (ROA, cash flow, volume growth, etc.), Customer (share of the segment, mystery shopper, etc.), Internal (safety incidents, refinery ROA, inventory level, etc.), and Learning (strategic skills accumulation, quality of information system, etc.). The "mystery shopper" is a third-party vendor who purchases gas and snacks at each station monthly. During each visit, the mystery shopper rates the station on 23 items related to external appearance, rest rooms, and so forth. A brochure describing the BSC was prepared and distributed to M&R's 11,000 employees in August of 1994. Extensive meetings with employees explained the new metrics and the BSC concept.

Compensation plans

All salaried employees of M&R received up to a 10 percent bonus if Global ranked first among its seven competitors on ROA and earnings per share (EPS) growth. In addition to this existing plan, a new program was added that awarded bonuses up to 20 percent to managers. The size of the bonus depends on the average performance of three factors:

• Global's competitive ranking on ROA and EPS growth.
• M&R's balanced scorecard metrics.
• The own business unit's balanced scorecard.

In 1995, M&R generated more income per barrel of oil than the industry average, and its ROA exceeded the industry's average.

(a). Critically evaluate M&R's implementation of the balanced scorecard. Identify any strengths and weaknesses of the program.

(b). Was the adoption of the balanced scorecard at M&R responsible for the turnaround in its financial performance?

(c). Prepare a presentation (and write and executive summary, see below) based on a topic chosen from a list of different managerial accounting concepts. It is to include concepts covered in the classroom, specifically:

How the concepts affects the decision making and decision control of the firm

The opportunity costs of choosing the next alternative

How the concept will enhance the budgeting and/or forecasting effort

Any and all cost allocation implications

How absorption costing could be applied to the concept

How overhead is treated under the chosen concept?

Other attributes of the concept that make it an attractive.

Content of the Final Presentation:

Select one of the innovations described in Chapter 14. You may also use Activity-Based Costing or another similar method. *** I selected to continue with balance score card

If you select Global Oil and Balanced Scorecard, you must justify why Global Oil should continue to use Balanced Scorecard.

Prepare a presentation for the company based on the innovation you selected. The assignment consists of two parts: an executive summary and the presentation

The concept of a balanced scorecard (BSC) illustrates how firms are attempting to link the firm's business strategy to one particular leg of the three-legged stool - performance measurement. In the M&R case, Global had already decided to change its strategy and had already reorganized its decision rights assignment. The BSC sought to link strategy to performance measurement.

(a). Strengths and weaknesses of BSC

Strengths of the BSC include:

• Helped articulate the new strategy M&R adopted to become a destination stop.
• Helped train managers to become more general managers, not narrow functional managers.
• Focuses managers more externally.
• Blends own-unit and divisional performance to reduce free-rider problems of divisional performance measures only.
• Links business strategy to performance measurement and compensation plans.

Weaknesses of the BSC include:

• The balanced scorecard, per se, does not explicitly address the third leg of the stool - decision rights assignment. M&R had already done this.
• Too many measures. The system is overly complicated which increases the data collection costs and increases the opportunity for gaming and influence costs. Multiple measures can conflict causing managers to emphasize one measure to the exclusion of others. Managers will work on those measures that are easiest to influence and de-emphasize others.
• Not clear that tying compensation to all 32 BSC metrics maximizes firm value. Pilots need to know the plane's altitude, but why base part of their pay on altitude or oil pressure? In other words, are all measures equally important? Should they be weighted equally in determining compensation?
• Basing compensation on Global's performance and on M&R's performance creates free-rider problems for lower-level employees whose individual efforts have little affect on Global's and M&R's performance.

(b). M&R changed its strategy and all three legs of its organizational architecture. You can't attribute its success to any one change.