A CASE ON THE BALANCED SCORECARD Financially we seem to be doing okay, said Rebecca to Theresa, her assistant store manager. This past year has been spent getting the new business going, including hiring people and determining the best- selling food and how business activities should be performed. Now that day-to-day operations are more routine, I don't know the best way to get us to focus on the business aspects that will make my store more successful. Do you have any ideas? A year ago, Rebecca Love opened Rebecca's Coffee and Tea House in Encinitas, California. Encinitas is an iconic beach town on the coast north of San Diego. The town enjoys idyllic weather year-round with temperatures in the 60s and 70s and about 10 inches of annual rainfall. With median home prices in the upper $800,000 range (2015; Wikimedia.org) and a population of approximately 63,000 (2015; Wikipedia.org), the town is comprised of affluent retirees, entrepreneurs, professional athletes, and other upper-income professionals. The town is easily accessible to downtown San Diego via Interstate 5 or the commuter train, the Coaster. Surfing, yoga, and the arts dominate the local culture. The area also attracts many tourists because of its beautiful beaches, renowned The Flower Fields, nearby Carlsbad Premium Outlets, and LegoLand. Rebecca wanted her coffee and tea establishment to be a favorite of the Encinitas locals. Before opening her store, she researched large chains (such as Starbucks Corporation and Caribou Coffee Company) as well as independently owned coffee houses. Rebecca had grown up in Encinitas and wanted to play into the affluent, eclectic, relaxed vibe of her hometown. Having worked in several different local coffee houses, she hoped to harness her experience to build a successful coffee and tea shop focused on giving customers a relaxed atmosphere with a quality experience. Rebecca purchased an abandoned building along the famous Route 101 just outside of downtown Encinitas. She chose not to be downtown because she wanted her clientele to be primarily locals and not tourists. She and her friends repaired the building and fashioned the place into a coffee and tea place that was fast becoming a favorite local hangout. Initially, Rebecca focused on selling various coffees, teas, and bottled drinks (i.e., high-end bottled water and juices) along with homemade pastries such as muffins, brownies, and pies. Rebecca's Coffee and Tea House has two types of seating. Indoor seating emphasizes Rebecca's love of art. She invites local artists to display their art on her walls and she receives a commission on every piece that is sold. Some customers comment that they like to come just to see what she'll have on display. This has been an unexpected revenue stream and the commission revenues from art sales contribute to Rebecca's profit-especially as there is no cost to Rebecca for these sales. Outdoor seating takes full advantage of the abundant California sunshine. This area has a garden atmosphere with shade trees and several potted flowers. In the middle of the outdoor seating area, there is a small fountain that helps build an atmosphere of peaceful tranquility. Wooden tables and chairs are used consistently for both indoor and outdoor seating. Customers order and pay for their food and/or drink at the front counter. All coffee and tea is brewed to order. Therefore, food and beverages are delivered to customers' tables as the items are completed. Rebecca strives to create an ambiance that invites people to sip their beverages, enjoy a snack, and engage in conversation while soaking in the California sunshine. Initially, Rebecca did everything in the shop with the help of one part-time employee. She baked the pastries, made coffee and tea, served the customers, and kept the books. She realized after a while that her strength was using her charismatic outgoing personality to engage her customers and make them feel at home. Additionally, with the growth in the business, Rebecca needed more help in running her business. Therefore, she recently hired several part-time employees to make the food and beverages and serve customers, and she hired a full-time assistant store manager to help oversee operations. In addition to focusing more on the marketing and planning of her establishment, Rebecca has shifted her focus to getting to know her customers. She walks around the shop interacting with customers and works tirelessly to know her customers by name. Her goal is for regular customers to feel cherished and return often- generating repeat business and more sales. She also loves for customers to invite their friends to her store; hopefully this will increase her business as well. She encourages her employees to take time to get to know the customers while customers are deciding what to order. Remember our customers' names as much as possible. People like to hear their name, Rebecca tells her employees. Rebecca feels that it is important to have highly satisfied employees. She thinks that employees who enjoy their job will smile more, be pleasant, and be more likely to have positive interactions with customers. She also trains her employees to serve customers as quickly as possible with excellent service. This should be a place that people can come to re-energize their batteries and enjoy a good cup of coffee and maybe a blueberry muffin in the morning or mid-afternoon, Rebecca continues. "We don't want customers frustrated with poor-quality products or service." Rebecca recently hired Theresa Hewitt as her assistant store manager. Theresa has experience in accounting and in managing people. Theresa and Rebecca have been discussing how the store has recently expanded. The employees prepare the food and drinks, grind and brew coffee, serve food, clean up the shop, etc. Because of the limited number of employees, it has been important to cross-train them. That is, an employee can't just operate the cash register or make coffee. Instead, employees need to be able to perform multiple jobs to help out around the store. Additionally, based on feedback from customers, she has recently added simple sandwiches and soups to the menu that are made in-house. She also added some pastries that would be very difficult to bake in-house (such as bagels and croissants), so she purchases these from local vendors. Theresa responded to Rebecca's earlier statement. In the last few months, you've added several new employees. You've also added new menu items including items that we don't make in the shop. I know that quality is important to our customers. If we fail to control quality, we could have costs associated with that failure. I've been studying this in one of my business classes. Here is a document I have that discusses costs of quality. (See Appendix A.) Theresa continued, As an example, when we are preparing sandwiches, we may notice that we have some poor-quality lettuce. At that point, we scrap the lettuce and that cost is an internal cost of quality. However, if we don't notice the poor quality lettuce and we give the sandwich to the customer, then that is an external failure. The customer may complain, want a new sandwich or even avoid the store in the future or spread negative reviews about the store, which could lead to lost sales." One of the reasons I started this coffee and tea house was because I wanted to provide a high-quality product and service in my hometown. I have often seen other coffee shops adopt the 'profit at all costs' mentality. Of course, I am in business to make a profit, but my business philosophy stems from my passion for quality. I believe that if we provide a quality product and service to customers that customers will be happy and return and profits will follow. Therefore, one of my main goals is providing high- quality products and service," said Rebecca. "With all of these new employees and menu items, what do you think we can do to minimize quality problems? Theresa replied, In order to control quality, we can make sure that we have implemented both prevention and appraisal activities. For example, we use only certified organic coffee producers whom we've worked with and we've tested their coffee beans. This is one of the ways that you've chosen to control the quality of the coffee beans that we purchase. Additionally, we periodically inspect some of the coffee beans that we receive from our suppliers to ensure they meet our quality standards. Thus, we invest monies up front in quality control procedures in order to maintain our high-quality product and service in the long-term. Rebecca said, Those are good points. We'll need to find a way to make sure that we continue to offer a high-quality experience for our customers. Our store has a certain 'feel' or culture to it that our customers really appreciate and which I don't want to lose. I think that investing in these quality control activities will help us continue to provide this positive experience for customers, along with still making a profit and planning for future expansion. With all of the changes to the business and the new employees, how can we make sure that everyone is focusing on the right aspects of the business? I know that you want to open another store in a year or two. That will take more money to build the store and stock the inventory. While we need to make sure that this operation is profitable and making a good return on your investment, I know that your philosophy is that focusing on quality will make for a great in-store experience for customers that should lead to more sales and profits. A balanced scorecard could help provide a framework for giving us and the employees measures to focus on that could emphasize the aspects that are important to the success of this business, Theresa remarked. Rebecca replied, While I need the business to be profitable, other aspects of the business are extremely important to me. Tell me more about how the balanced Scorecard could help us focus on these success factors." Theresa responded, A balanced Scorecard can be used to measure a company's performance on dimensions beyond just the financial side. I have a description of the balanced Scorecard that I was reading about. That sounds perfect for my business, said Rebecca. Can we just use a balanced scorecard from a book or get one from the internet? Theresa explained, It's not very helpful to use a generic balanced scorecard. That's because a company's balanced scorecard should tie to their specific strategy. A valuable first step in designing a balanced scorecard is to create a strategy map. This map would visually show how the coffee house creates value by connecting your strategic objectives in cause-and-effect relationships with each of four perspectives. We would then use the strategy map to develop the balanced scorecard. For each balanced Scorecard perspective we would identify several measures to tie to the strategic objectives on the strategy map. Target performance would be compared to actual performance on these measures and we would follow up on any discrepancies. Last, we need to clearly communicate these measures to our employees and how they tie to the company's strategy." Rebecca said, I like how the balanced Scorecard communicates my strategy to my employees through a linked set of understandable and measurable targets. Let's work on developing a balanced Scorecard for the Coffee and Tea House." REQUIREMENTS 1. Rebecca has chosen a strategy of product differentiation with high-quality goods and service. Using this strategy, develop a strategy map. As you prepare the strategy map, be sure to consider the cause-and- effect relationships between various aspects of the business. For each balanced Scorecard perspective, explain why you believe the strategic goals you list are important to the success of Rebecca's store. 2. Using your strategy map, design a balanced scorecard for Rebecca's Coffee and Tea House. Be sure to include three to five measures for each perspective and your reasoning for the selected measures. A CASE ON THE BALANCED SCORECARD Financially we seem to be doing okay, said Rebecca to Theresa, her assistant store manager. This past year has been spent getting the new business going, including hiring people and determining the best- selling food and how business activities should be performed. Now that day-to-day operations are more routine, I don't know the best way to get us to focus on the business aspects that will make my store more successful. Do you have any ideas? A year ago, Rebecca Love opened Rebecca's Coffee and Tea House in Encinitas, California. Encinitas is an iconic beach town on the coast north of San Diego. The town enjoys idyllic weather year-round with temperatures in the 60s and 70s and about 10 inches of annual rainfall. With median home prices in the upper $800,000 range (2015; Wikimedia.org) and a population of approximately 63,000 (2015; Wikipedia.org), the town is comprised of affluent retirees, entrepreneurs, professional athletes, and other upper-income professionals. The town is easily accessible to downtown San Diego via Interstate 5 or the commuter train, the Coaster. Surfing, yoga, and the arts dominate the local culture. The area also attracts many tourists because of its beautiful beaches, renowned The Flower Fields, nearby Carlsbad Premium Outlets, and LegoLand. Rebecca wanted her coffee and tea establishment to be a favorite of the Encinitas locals. Before opening her store, she researched large chains (such as Starbucks Corporation and Caribou Coffee Company) as well as independently owned coffee houses. Rebecca had grown up in Encinitas and wanted to play into the affluent, eclectic, relaxed vibe of her hometown. Having worked in several different local coffee houses, she hoped to harness her experience to build a successful coffee and tea shop focused on giving customers a relaxed atmosphere with a quality experience. Rebecca purchased an abandoned building along the famous Route 101 just outside of downtown Encinitas. She chose not to be downtown because she wanted her clientele to be primarily locals and not tourists. She and her friends repaired the building and fashioned the place into a coffee and tea place that was fast becoming a favorite local hangout. Initially, Rebecca focused on selling various coffees, teas, and bottled drinks (i.e., high-end bottled water and juices) along with homemade pastries such as muffins, brownies, and pies. Rebecca's Coffee and Tea House has two types of seating. Indoor seating emphasizes Rebecca's love of art. She invites local artists to display their art on her walls and she receives a commission on every piece that is sold. Some customers comment that they like to come just to see what she'll have on display. This has been an unexpected revenue stream and the commission revenues from art sales contribute to Rebecca's profit-especially as there is no cost to Rebecca for these sales. Outdoor seating takes full advantage of the abundant California sunshine. This area has a garden atmosphere with shade trees and several potted flowers. In the middle of the outdoor seating area, there is a small fountain that helps build an atmosphere of peaceful tranquility. Wooden tables and chairs are used consistently for both indoor and outdoor seating. Customers order and pay for their food and/or drink at the front counter. All coffee and tea is brewed to order. Therefore, food and beverages are delivered to customers' tables as the items are completed. Rebecca strives to create an ambiance that invites people to sip their beverages, enjoy a snack, and engage in conversation while soaking in the California sunshine. Initially, Rebecca did everything in the shop with the help of one part-time employee. She baked the pastries, made coffee and tea, served the customers, and kept the books. She realized after a while that her strength was using her charismatic outgoing personality to engage her customers and make them feel at home. Additionally, with the growth in the business, Rebecca needed more help in running her business. Therefore, she recently hired several part-time employees to make the food and beverages and serve customers, and she hired a full-time assistant store manager to help oversee operations. In addition to focusing more on the marketing and planning of her establishment, Rebecca has shifted her focus to getting to know her customers. She walks around the shop interacting with customers and works tirelessly to know her customers by name. Her goal is for regular customers to feel cherished and return often- generating repeat business and more sales. She also loves for customers to invite their friends to her store; hopefully this will increase her business as well. She encourages her employees to take time to get to know the customers while customers are deciding what to order. Remember our customers' names as much as possible. People like to hear their name, Rebecca tells her employees. Rebecca feels that it is important to have highly satisfied employees. She thinks that employees who enjoy their job will smile more, be pleasant, and be more likely to have positive interactions with customers. She also trains her employees to serve customers as quickly as possible with excellent service. This should be a place that people can come to re-energize their batteries and enjoy a good cup of coffee and maybe a blueberry muffin in the morning or mid-afternoon, Rebecca continues. "We don't want customers frustrated with poor-quality products or service." Rebecca recently hired Theresa Hewitt as her assistant store manager. Theresa has experience in accounting and in managing people. Theresa and Rebecca have been discussing how the store has recently expanded. The employees prepare the food and drinks, grind and brew coffee, serve food, clean up the shop, etc. Because of the limited number of employees, it has been important to cross-train them. That is, an employee can't just operate the cash register or make coffee. Instead, employees need to be able to perform multiple jobs to help out around the store. Additionally, based on feedback from customers, she has recently added simple sandwiches and soups to the menu that are made in-house. She also added some pastries that would be very difficult to bake in-house (such as bagels and croissants), so she purchases these from local vendors. Theresa responded to Rebecca's earlier statement. In the last few months, you've added several new employees. You've also added new menu items including items that we don't make in the shop. I know that quality is important to our customers. If we fail to control quality, we could have costs associated with that failure. I've been studying this in one of my business classes. Here is a document I have that discusses costs of quality. (See Appendix A.) Theresa continued, As an example, when we are preparing sandwiches, we may notice that we have some poor-quality lettuce. At that point, we scrap the lettuce and that cost is an internal cost of quality. However, if we don't notice the poor quality lettuce and we give the sandwich to the customer, then that is an external failure. The customer may complain, want a new sandwich or even avoid the store in the future or spread negative reviews about the store, which could lead to lost sales." One of the reasons I started this coffee and tea house was because I wanted to provide a high-quality product and service in my hometown. I have often seen other coffee shops adopt the 'profit at all costs' mentality. Of course, I am in business to make a profit, but my business philosophy stems from my passion for quality. I believe that if we provide a quality product and service to customers that customers will be happy and return and profits will follow. Therefore, one of my main goals is providing high- quality products and service," said Rebecca. "With all of these new employees and menu items, what do you think we can do to minimize quality problems? Theresa replied, In order to control quality, we can make sure that we have implemented both prevention and appraisal activities. For example, we use only certified organic coffee producers whom we've worked with and we've tested their coffee beans. This is one of the ways that you've chosen to control the quality of the coffee beans that we purchase. Additionally, we periodically inspect some of the coffee beans that we receive from our suppliers to ensure they meet our quality standards. Thus, we invest monies up front in quality control procedures in order to maintain our high-quality product and service in the long-term. Rebecca said, Those are good points. We'll need to find a way to make sure that we continue to offer a high-quality experience for our customers. Our store has a certain 'feel' or culture to it that our customers really appreciate and which I don't want to lose. I think that investing in these quality control activities will help us continue to provide this positive experience for customers, along with still making a profit and planning for future expansion. With all of the changes to the business and the new employees, how can we make sure that everyone is focusing on the right aspects of the business? I know that you want to open another store in a year or two. That will take more money to build the store and stock the inventory. While we need to make sure that this operation is profitable and making a good return on your investment, I know that your philosophy is that focusing on quality will make for a great in-store experience for customers that should lead to more sales and profits. A balanced scorecard could help provide a framework for giving us and the employees measures to focus on that could emphasize the aspects that are important to the success of this business, Theresa remarked. Rebecca replied, While I need the business to be profitable, other aspects of the business are extremely important to me. Tell me more about how the balanced Scorecard could help us focus on these success factors." Theresa responded, A balanced Scorecard can be used to measure a company's performance on dimensions beyond just the financial side. I have a description of the balanced Scorecard that I was reading about. That sounds perfect for my business, said Rebecca. Can we just use a balanced scorecard from a book or get one from the internet? Theresa explained, It's not very helpful to use a generic balanced scorecard. That's because a company's balanced scorecard should tie to their specific strategy. A valuable first step in designing a balanced scorecard is to create a strategy map. This map would visually show how the coffee house creates value by connecting your strategic objectives in cause-and-effect relationships with each of four perspectives. We would then use the strategy map to develop the balanced scorecard. For each balanced Scorecard perspective we would identify several measures to tie to the strategic objectives on the strategy map. Target performance would be compared to actual performance on these measures and we would follow up on any discrepancies. Last, we need to clearly communicate these measures to our employees and how they tie to the company's strategy." Rebecca said, I like how the balanced Scorecard communicates my strategy to my employees through a linked set of understandable and measurable targets. Let's work on developing a balanced Scorecard for the Coffee and Tea House." REQUIREMENTS 1. Rebecca has chosen a strategy of product differentiation with high-quality goods and service. Using this strategy, develop a strategy map. As you prepare the strategy map, be sure to consider the cause-and- effect relationships between various aspects of the business. For each balanced Scorecard perspective, explain why you believe the strategic goals you list are important to the success of Rebecca's store. 2. Using your strategy map, design a balanced scorecard for Rebecca's Coffee and Tea House. Be sure to include three to five measures for each perspective and your reasoning for the selected measures