Reference no: EM13978720

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 days, 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 geographical 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 decentralization 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 buy Global gas but also shop 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 segment, mystery shopper, etc.), Internal (safety incident, 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.

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.

Required:

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?