Performance Measurement Systems And Balanced Scorecard System: A Case Study Of Nestle

Overview of Nestle Company

Discuss about the Traditional Performance Measurement System.

A system of performance measurement helps in making and handling key performance indicators which should be at the priority of the company’s management. It has to excite the most suitable behaviour (David and Joseph, 2014). Fruitful performance measures cover a logically balanced set of measures of the organization which offers an impartial procedure performance assessment that results in the 3 Rs of the business that is everyone one performs right things, by doing it right at right time. Performance metrics which are also the part of performance measurement system of organization can also result in unwelcome behaviors if performed in separation from the total needs of the enterprise (Smarter Solution, 2018). This report is being prepared in order to understand the performance measurement systems and their operations that support business organizations to resolve identified issues. The system which will be discussed in this report is Balanced Scorecard system and its implementation in the Nestle Company to analyze whether it is suitable for the company or not. An overview of the Nestle Company will also be provided to know more about the company. Further, a discussion will be done to know the difference between traditional performance measurement system and balanced scorecard system.

Nestle is a Swizz drink and food company with headquarter in Vevey, Vaud, Switzerland. It is the world’s biggest company of food, in terms of revenue, since 2014. In the Fortune Global 500 list of biggest public company Nestle was ranked on No. 64 in 2017 and in 2016 it was ranked at 33 positions. The product range of the company comprised of medical food, coffee and tea, snacks, bottles water, baby food, ice-cream, dairy products, pet foods, confectionery, breakfast cereals, and frozen food. Around 29 brands of Nestle has yearly sales of US$ 1.1 billion, comprising Kit Kat, Nesquik, Maggi, Nespresso, Vittel, Smarties, Nescafe, and Stouffer’s. Nestle operates in 194 countries by owning 447 factories and hires around 339,000 people. Nestle is one of the key L’Oreal’s shareholders, which is the world’s major cosmetics company.

Nestle company was established in 1905, through the merger of the Milk Company i.e. Anglo-Swiss, which was established by the brothers Charles page and George in 1866. The company developed majorly in the time duration of First World War and followed the Second World War, increasing its products beyond its initial condensed milk and baby formula products. Nestle has been involved in various corporate acquisitions, comprising Findus in 1963, Rowntree Mackintosh in 1988, Gerber in 2007, Crosse & Blackwell in 1950, and Libby’s in 1971. The company is called as largest company of food and beverages. They have around 2000 brands from global icons to domestic favorites. Singapore was unbiased in the war and developed progressively isolated in Europe. Due to distribution issues in Asia and Europe, Nestle started factories in emerging countries in Latin America. Production of the products increased intensely after America arrived in the war and Nescafe turn out to be the key beverage for the soldiers of America in Asia and Europe. From 1938 to 1945, the overall sales of the company increased by $125 million (Nestle, 2018).

Balanced Scorecard System

In 2002, there were two main acquirements in North America, the ice cream business of U.S was sold by merging into Dreyer’s. In August, acquisition of USD 2.6 bn was announced of Chef America, Inc.

The purpose of the company is to improve the life quality and adding something to the healthier future. They want to help people in living and providing healthier and better world. They desire to influence people to live life healthier (Nestle, 2018). Nestle Company is listed on the SIX Swiss Exchange and is a component of the Swiss Market Index. Along with this, on Euronest it has a secondary listing.

A management system which is focused towards translating the strategic goals of a company into a fixed performance objective that are evaluated, controlled, and changed if required to confirm that the strategic goals of the company are met is known as Balanced Scorecard (Zizlavsky, 2014). A main evidence of the balanced scorecard system is that the companies of financial accounting metrics usually track to observe their strategic objectives are inadequate to maintain companies on track or right direction. Financial outcomes spread light on what has occurred in the past, and where the business should move towards. The system of the balanced scorecard is focused towards offering a more inclusive vision to the executives by completing financial evaluations with extra metrics that device performance in regions like product innovation and customer satisfaction (Rouse, 2018).

The balanced scorecard framework was established in 1992 in the paper printed in the Harvard Business review by David P. Norton, and Robert S. Kaplan, who are broadly accredited with having established the system of the balanced scorecard (Malgwi and Dahiru, 2014).

The financial analysis comprised of measures like sales growth, return on investment, and operating income.

Customer analysis consider retention and satisfaction of the customers (Yilmaz, 2013)

The internal analysis concentrates on how the processes of business are associated with the strategic goals. 

Learning and growth analysis measures the satisfaction of employee and retention along with information system performance (Clark, 2017).

Norton and Kaplan stated two major advantages of the balanced scorecard approach. First, the scorecard collects all the dissimilar elements of the competitive agenda of the company in a sole report. Second, by taking all the essential operative metrics, executives are obligatory to look at whether one development has been attained at the expense of another (Balanced Scorecard Institute, 2017).

Traditional Performance Measurement System

The balanced scorecard approach is utilized to strengthen organization’s good behavior by dividing four separate parts that should be analyzed. These four areas are also known as legs of balanced scorecard approach which are discussed above i.e. business processes, finance, learning and growth, and customers. The balanced scorecard is utilized by a company to attain purposes, capacities, wits, and objectives that can be resulted from the four major functions of the company (Simister, 2011). Companies can simply recognize factors that are hampering the performance of the company and frame the strategic changes or variations traced by future scorecards. With the help of balanced scorecard approach, the company has been looked as a whole when watching the objectives of the company. A company can make use of balanced scorecard approach in order to execute strategy mapping to look at the added value of the company. It can also be used to create strategy objectives and strategic initiatives (Charter Management Institute, 2018).

• A good balanced scorecard performs as a tool for communication that simply defines that target of the company and strategic objectives to every employee. With the support of this, each employee recognizes their responsibilities in the organization. Additionally, this balanced scorecard must have a managing light for every member of management when they get trapped in an inexperienced condition or when the objective becomes indistinct (Pietrzak and Paliszkiewicz, 2015).
• An effectively balanced scorecard is very flexible. It does not frame inflexible boundaries nearby the strategic objectives. In its place, it permits the Management of the company to do the essential changes every time the necessity gets up (Servizio, 2014).
• A good balanced scorecard determines the cause and effect relationship of numerous purposes to its employees and stakeholders. The explanation of the objective of the company and its target must be simply explained as to decrease the probabilities of any future clashes.
• An effectively balanced scorecard must be capable enough to talk about the harm due to short-term decisions on the potential development of the business. As sometimes the conditions arise that few executives are incapable to have the foresight and they end up spending or investing in the short-run plans. However, a good balanced scorecard provides them a simple and clear view of cause and effect relationship that support them in knowing the consequences of their actions.
• The finest part of a good balanced scorecard is that it does not maintain the executives’ regularly involves in different measures. In fact, executive can involve other essential functions such as coordinating employees, staffing, planning, and checking risk factors.
• The balanced scorecard reduces the number of measures utilized by recognizing only the essential ones. Evading a propagation of measures emphases the attention of the management on the key aspects of the implementation strategy.
• The companies that are majorly concerned about the profit, the balanced scorecard approach provides a strong influence on the financial measures and objectives. Every so often executives provides too much significance to the quality, satisfaction of the customer, innovation yet they might not create tangible benefits. An effectively balanced scorecard observes non-financial measures as a major portion of the programme or strategy to attain and enhance future financial performance. When non-financial and financial measures of performance are correctly related in the balanced scorecards, several non-financial measures assist as foremost pointers of upcoming financial performance (Agarwal, 2018).

Perspectives	Objectives	Goals	Measurement
Customer Perspective	Make use of qualitative raw material and offering online products	Improvement of quality and Easy accessibility of the product	Increased revenue and good health of the customers
Internal business perspective	Payment convenience	Increasing sales	Payment methods
Learning and Growth	Employee efficiency and retention	Improving efficiency of employees and their productivity	Employee’s satisfaction
Financial Perspective	Sales leadership in dairy products and financial stability	Higher returns and cost-cutting	Operating margin ratio and return on investment

Growing competition, altering external demand along with responsibilities is compelling the companies to inspect and develop their management systems and strategies. Today, the environment in which businesses are being operated is very dynamic and achievement is dependent on meeting the altering needs of every stakeholder, a company cannot create a self-centered system of performance measurement. Organizations make use of traditional performance measurement system which does not provide an overall evaluation. Therefore, diverse systems performance measurement i.e. balanced scorecard was developed to overawe the faults of the traditional systems of performance measurement (Striteska and Spickova, 2012).

The system of traditional performance measurement concentrate only on the financial measures. The reports of the 1980s reflect that the holistic financial data is not sufficient to gratify the Performance Measurement in the fresh economy due to the augmented organization’s complexities and the marketplaces in which businesses compete. Because the financial statements and reports are less revealing of shareholder’s value. As reflected by Cumby and Conrod (2001), justifiable shareholder value is instead determined by the factors which are non-financial, like the satisfaction of employee, innovations of the organization, the loyalty of the customer, and internal processes. According to the standard, only 10-15% of the market value is covered by traditional accounting measures (Striteska and Spickova, 2012). Therefore, today it can be seen that there is increasing influence on the non-financial measures that are forward-looking.

The balanced scorecard is one of the forward-looking performance measurement systems which are different from traditional measurement system because it not only considers the financial measures but also non-financial measures. It is a tool used to explain, execute and handling strategy at every level in the company. The Balanced Scorecard system guides the company in creating a better and improved performance measurement system than one exclusively reliant on financial measures such as Traditional performance measurement. Additionally, balanced scorecard meets the organization’s fundamental functions: the system of strategic management, communication tool, and measurement system

Difference between Traditional Performance Measurement System and Balanced Scorecard System

In traditional performance measurement systems, the financial measures are also called as lag indicators, as they only show the historical data and signify historical performance. However, the metrics of quantitative performance can manage and enhance the internal performance of the company and can result in wrong decision making in the future (Pourmoradi and Niknafs, 2016). Therefore, today only depending on the single measure i.e. financial measure is unsuitable because this measure does not consider or evaluate intangible assets, does not evaluate the problem of competitive rivalry (Suvarna, 2012). On the other side, the essential aspect of the balanced scorecard is the expansion and execution of the organization’s vision and the plan into a set target and comprehensible set of non-financial and financial indicators of performance. The overview of balanced scorecard reflects that the aims, the pointers, and the planned actions are allocated to a real point of view (Schmeisser and Clausen, 2011).

Traditional performance measures are not related to the strategy of the organization. The strategy is linked to the long-term organizational objectives, the possibilities of the activities of the organization, the matching, and assignment of the activities of the organization to its resource competencies and needs of the business, and thought of the stakeholder’s expectations and value of the organization (Agarwal, 2018). Traditional performance measurement system concentrates on the short-run financial performance, causing in detach between the short-term actions and long-term strategies of the organization. Organizations should evaluate performance in the method that not just imitate past constructive performance. Nowadays, the business environment is considered by the strong competitive challenge and as an outcome businesses need to become adaptive and flexible in order to attain a competitive advantage.

On the other hand, the balanced scorecard is majorly focused towards the strategy of the organization and how much they have been achieved. The normal balanced scorecard observes the organization from the four perspectives or legs i.e. customer, business processes, financial and learning and growth; all the perspectives should be balanced (Pramudita, 2016). The balance refers to the equability among the long-term and short-term goals, required outputs and inputs, external and internal performance factors, and non-financial and financial indicators. The selection of these four perspectives has not been done randomly, it provides a clear sight of interconnection between the success of the organization and performance drivers. Therefore, they make a flexible system in the established strategy.

Therefore, in the end it can be said that the major difference between traditional performance measurement system and balanced scorecard approach is that the traditional performance measurement system is not effective in today’s business environment because it only considered one perspective i.e. financial and on the other side balance scorecard consider both financial and non-financial measures which are very important for successful survival in the market.

Use of Balanced Scorecard System in Nestle Company

Balanced Scorecard can be established by Nestle Company in its business operations in order to align all the activities. This system of performance management will add value to the non-financial measures of Nestle to traditional financial metrics and will make the company the market leader. If the company follows balanced scorecard approach then it will support in tracking the non-financial measures such as relationship evaluation between employees, customers, suppliers and company, and the ability of the company to handle a sustainable business (Giannopoulos and Holt, 2013). Elements that state the suitability of balanced scorecard in Nestle is:

Covers Operational Activities- The balanced scorecard approach will support Nestle Company to determine its main strategies and anticipated outcomes. These areas will help employees in understanding what they have to do and what should be kept aside. Deprived the automated data collection and reporting procedures that are linked with scorecard generation every department would have followed their own strategy. A balanced scorecard unites and rules the operations of the company.

Allows Performance Analysis- Doing the correct thing at the correct time with the correct person takes skill and experience. Creating a balanced scorecard supports company to control how employees are implementing the present plans. By applying a SWOT analysis, a business can recognize its strengths to develop and the opportunities to explore. It may also expose the weaknesses and threats to the company. Creating a scorecard and allotting every activity can be a transformation. It shows and links the values, vision, and mission of the company.

Refine Measures and Metrics- Studying a balanced scorecard as a portion of the procedure of strategic management might expose whether the business is tracing the wrong thing or right.

Communicates Vision and Mission- A balanced scorecard approach support manager of the company to communicate the vision and mission of the whole company at each level. Prioritization and decision making becomes simpler because the scorecard introduces the criteria for appropriate programs.

Clarifies Strategic Objectives- A balanced scorecard approach supports in creating the strategies of the organization by determining what is essential for the company. Program operations, service delivery, and reporting production metrics support company to measure how well it is performing and where there is need to pay extra attention, depending on the mission and vision of the company. For instance, if the satisfaction of the customer is a major priority then strategies need to be enhance (Duggan, 2018).      

Perspectives, Objectives, and Goals in Balanced Scorecard System

Conclusion

In the conclusion, it can be said that balanced scorecard is one of the modern performance measurement systems which support companies in measuring its non-financial and financial activities which are very important for today’s business environment. The above report is comprised of various aspects which will be very beneficial for the future perspective of the business. The report involves the overview of the Nestle Company which reflects that Nestle is one of the top company offering foods and beverages to the customers. Nestle involve various activities in its business operation that can be categorized into non-financial and financial activities. Therefore, to maintain all the activities and gain a competitive advantage in the market Nestle need to adopt balanced scorecard approach in its business operations. Moreover, the report also highlights the concept of the balanced scorecard and its important features. Along with this implementation of the balanced scorecard has been done on Nestle Company. Further, an explanation has been provided about how balanced scorecard is different from traditional performance measurement system and how it is suitable for Nestle Company.

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