Discuss about the Completeness of Strategic Performance Management.
The Australian government has introduced various legislations relating to climate change. As a result, companies have incorporated environmental sustainability measures in their Strategic Performance Measurement Systems (SPMS). Ideally, these firms have not been disclosing their SPMS adoption in their annual reports. However, after enacting of the legislations by the government, many organizations have shown their willingness to disclose their SPMS adoption. If the disclosure of SPMS adoption is not linked to rewards systems or compensation plans, then it is just a mechanism to brainwash the shareholders or investors (Aguinis, 2009). This research paper has two sections. Part 1 looks at the profile of two Australian public companies and discusses the criteria that I have chosen in deciding whether those two businesses have adopted a multi-perspective SPMS. Besides, this section examines the SPMS disclosure of those two companies, discusses whether there have been any changes made in SPMS disclosures between 2014 and 2015 concerning the objectives, perspectives, targets and measures set and compares the SPMS disclosures of the two enterprises. Section 2, on the other hand, looks at the performance of the two companies and links their performance to rewards or compensation plans. Ideally, it analyses their financial results, investigates whether they link their SPMS targets or measures with rewards or compensation plans and explains whether the two businesses have strengthened their competitive advantage or not.
In this analysis, I choose Telstra Corporation Limited, which comes from the telecommunications industry, a non-environmentally sensitive industry, and BHP Billiton Inc, which is in the mining sector, an environmentally sensitive industry (Araz, and Ozkarahan, 2007, pp.585-606). Telstra Corporation Limited is an Australian telecommunications firm which offers communications services. Telstra Corporation Limited is traded on the Australian Stock Exchange (ASX) with ticker symbol TSL. BHP Billiton Inc, on the other hand, is an Australian multinational company traded on the Australian Stock Exchange with ticker symbol BHP. As of 2015, this business was the largest mining company by market values (Bhagwat, and Sharma, 2007, pp.43-62). It mines products such as iron ore, coal, petroleum, nickel, natural gas, uranium, and copper.
According to Elijido-Ten and Tjan (2014), companies use the balance scorecard approach as a performance measurement system to define their strategies and objectives thus allowing the management to supplement financial measures with a mix of non-financial metrics. Ideally, there are four performance measurement perspectives, which include financial perspective, internal process perspective, customer perspective, and learning and growth perspective (Daley, 2006, pp.120-134). The financial perspective describes whether a company’s mission, strategy, vision and objectives have led to its improved economic and fiscal success. Here, the management performs an economic analysis to determine whether the firm is succeeding or failing. The customer perspective looks at what a company does to keep its customers that is its customer relationship. If a corporation has a strong customer relationship, then it is performing well (de Waal, Kourtit, and Nijkamp, 2009, pp.1242-1265). However, if its customer relationship is weak and there are no return customers, then it is failing. The internal business process perspective monitors the internal processes of a business and the internal control system in those processes to determine whether the firm is succeeding or not. Here, the business looks at factors such as the quality of the products, the innovation used by the company and distribution services. A weak internal control system at these processes will indicate that a company is failing, while a strong internal control system would mean a successful business.
Elijido-Ten and Tjan (2014) further states that to determine the SPMS disclosures of the firms, one looks at three essential features that is a distinct mission, vision, and strategy statement, relevant and measurable targets (prospective financial statements) and indicators of past and current performance (backward-looking statements). Back looking statements usually communicate a firm’s previous sustainability initiatives, performance measures, and targets while forward-looking looks at predicted sustainability goals and objectives that have been recognized by the enterprise (Elijido-Ten, 2011). Finally, strategy statements summarize how the non-financial targets can be linked to the financial goals.
The approach of Telstra focuses on improving customer experience, building new business units and driving client value. Telstra achieves improved customer advocacy by providing their customers with outstanding mobile service in Australia. Their strategy statement indicates that they are committed to maintaining their market share as a network leader (Elijido-Ten, 2013). This is evident because they invested $ 1.1 billion in 2015 in their mobile network and they have considered expanding their 4G mobile. This is the first SPMS disclosure that Telstra Corporation has made in its annual report. Besides, the company has launched a global managed network services as well as a global Infrastructure service. This is evidenced by the fact that they have established a new business unit, Global Enterprise, and Services, which aims at delivering innovation and globalization. Telstra Corporation has disclosed its customer perspective in that in its strategy; the management stated that they were committed to improving the services and experiences of clients and this is evidenced by the fact that they have implemented a Net Promoter System (NPS) program, which seeks feedback from customers and helps them measure their progress. This is the second SPMS adopted by Telstra Corporation (Elijido-Ten and Tjan, 2014). The 2014 annual report of Telstra Corporation contains backward-looking statements, as the past and current data is evident.
The strategy BHP Billiton focuses on owning and operating large, cheap and expandable diversifiable assets (Ferreira, and Otley, 2009, pp.263-282). They have managed to achieve this strategy by positioning itself to continue to meet the ever-changing needs of the consumers. Besides, their plan involves ensuring the health and safety of their workers and ensuring that they maintain their ethical and responsible behavior. With this strategy, it is evident that BHP Billiton has adopted SPMS by making sure that they achieve the customer, the financial and learning, and growth perspective. The 2014 annual report of BHP Billiton also contains forward-looking statements that is trends in commodity prices, exchange rates, plans, products demand, forecast, anticipated production, capital costs, operating costs, anticipated projects and so forth. This is evident by the use of words such as anticipate, believes, plan, expects, intend, estimates, aims, projects or similar words.
During the year ended 2015, Telstra Corporation has aimed at maintaining their focus on improving customer advocacy, driving value and building new growth businesses. This means that their SPMS disclosures have not changed. Their goal of ensuring employee involvement, everyone connected and environmental leadership has not changed from 2014 to 2015. BHP Billiton has also not changed on its SPMS disclosure measures in 2015. This is because the management has still embarked on the same sustainability as in 2014 that is putting health and safety first, supporting their communities and being environmentally responsible (Franco-Santos, Kennerley, Micheli, Martinez, Mason, Marr, Gray, and Neely, 2007, pp.784-801).
A comparison of BHP Billiton Inc and Telstra Corporation would indicate that BHP Billiton performs forward-looking statements while Telstra has backward-looking statements. Both companies have strategy reports (Kaplan, and Norton, 2007, p.150). BHP Billiton aims at operating huge, low-cost, long-life and expandable diversifiable assets while Telstra Corporation aims at improving the advocacy customers, driving value and building new initiatives.
Based on the balanced scorecard, one can analyze the financial performance of BHP Billiton and Telstra Corporation. On the economic perspective, the revenue of Telstra has increased by 20% from 2014 to 2015. Its costs have also increased by 4.6%, which implies that Telstra is not performing well (Need, 2006). The return on investment on Telstra was 18.9% in 2015, which is not a good indicator as it decreased from 20.4% in 2014. The return on equity of Telstra amounted to 30.3% in 2015, which was a decline from 32.3% in 2014. This led to a drop in stock price, thus a small remuneration for its executives. The revenue of BHP Billiton, on the other hand, has decreased by 21%. This means that BHP Billiton is a poor performing company than Telstra Corporation regarding revenue.
The annual report of 2015 of BHP Billiton gives a summary of their key performance indicators (KPIs). These KPIs enable them to measure their financial performance and sustainable development. The first KPI of BHP Billiton is total recordable injury frequency (TRIF). During the period, the number of injuries reduced from 4.18 million to 4.1 million. This is a reduction by 2%. This KPI links to the strategy of BHP Billiton in that they have ensured the health and safety of their people. Second, BHP Billiton has involved itself in community investment (Need, 2006). In 2015, their community investment totalled $ 225 million, which comprised of $ 142 million in cash and a contribution of $ 83 million to the BHP Billiton Foundation. This links to their strategy in that they believe in operating an ethical and socially responsible firm. Third, total shareholder return is a capital management KPI of BHP Billiton. In 2015, the company’s total shareholder return was -27% because of a decline in share price. This links to their strategy in that they measure their performance concerning shareholder wealth generation. Lastly, BHP Billiton green gas emissions were 38.3 million which represented a reduction of 6% from 2014. This links to its strategy in that the company aimed at achieving the global challenge of climate change.
The Board of Telstra Corporation believes that total shareholder return is an appropriate performance hurdle or measure because it relates executive rewards or compensation plan to its share price performance about its competitors (Elijido-Ten and Tjan, 2014). This is an SPMS measure that Telstra has adopted, and it is, therefore, evident that it links to executive rewards. From the annual report of BHP Billiton, it is clear that the board has not connected their SPMS measures with the executive compensation plan.
Telstra has accomplished to enhance its competitive advantage since it has achieved its strategy, an increase in revenue and linked its SPMS measures to rewards despite having a declining ROI, ROE (Elijido-Ten, 2013). BHP Billiton, on the other hand, has failed to strengthen its competitive advantage since it has not been able to link its KPIs to rewards.
Conclusion
SPMS measures determine a company’s financial performance. An analysis on BHP Billiton and Telstra Corporation indicated that Telstra had succeeded in strengthening its competitive advantage as it achieved its strategy that is to improve customer advocacy, to build new businesses and to drive value. Besides, it managed to link SPMS measures to rewards. BHP Billiton, on the other hand, failed to strengthen its competitive advantage, as it did not link its SPMS measures to rewards.
References
Aguinis, H., 2009. Performance management. Upper Saddle River, NJ: Pearson Prentice Hall. Retrieved on 16th January 2017.
Araz, C. and Ozkarahan, I., 2007. Supplier evaluation and management system for strategic sourcing based on a new multicriteria sorting procedure.International journal of production economics, 106(2), pp.585-606. Retrieved on 16th January 2017.
Bhagwat, R. and Sharma, M.K., 2007. Performance measurement of supply chain management: A balanced scorecard approach. Computers & Industrial Engineering, 53(1), pp.43-62. Retrieved on 16th January 2017.
Daley, D.M., 2006. Strategic human resource management. Public Personnel Management. Current concerns, future challenges, 5, pp.120-134. Retrieved on 16th January 2017.
De Waal, A., Kourtit, K. and Nijkamp, P., 2009. The relationship between the level of completeness of a strategic performance management system and perceived advantages and disadvantages. International Journal of Operations & Production Management, 29(12), pp.1242-1265. Retrieved on 16th January 2017.
Elijido-Ten, 2011. The impact of sustainability and balanced scorecard disclosures on market performance: Evidence from Australia’s top 100. Retrieved on 16th January 2017.
Elijido-Ten, 2013. Determinants of strategic performance measurement system disclosures in Australia’s top 100 publicly listed firms. Retrieved on 16th January 2017.
Elijido-Ten and Tjan, 2014. Sustainability balanced scorecard disclosures: an Australian study. Retrieved on 16th January 2017.
Ferreira, A. and Otley, D., 2009. The design and use of performance management systems: An extended framework for analysis. Management accounting research, 20(4), pp.263-282. Retrieved on 16th January 2017.
Franco-Santos, M., Kennerley, M., Micheli, P., Martinez, V., Mason, S., Marr, B., Gray, D. and Neely, A., 2007. Towards a definition of a business performance measurement system. International Journal of Operations & Production Management, 27(8), pp.784-801. Retrieved on 16th January 2017.
Kaplan, R.S. and Norton, D.P., 2007. Using the balanced scorecard as a strategic management system. Harvard business review, 85(7/8), p.150. Retrieved on 16th January 2017.
Need, W.C.D.H.P., 2006. Human Resource Management: Gaining a competitive advantage. Retrieved on 16th January 2017.
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