PART A: FORTUNE MOTORS (TAIWAN): IMPLEMENTING STRATEGY CHANGE USING THE BALANCED SCORECARD

Jung Hua Li, chief executive officer (CEO) of Fortune Motors, the largest Mitsubishi dealership in Taiwan, sat in his office in eastern Taipei on a chilly day in January 2004, thinking carefully about his vision for the survival of his company. He knew that Fortune Motors' sales in 2003 had fallen below 50,000 units for the first time in 10 years. Fortune Motors' market share had in fact been falling for several years, which Li attributed in part to Toyota's aggressive growth. With long experience of selling and financing new Mitsubishi cars and small commercial vehicles throughout Taiwan, Li had what he thought was a good plan to enter the business of financing used-car purchases. He thought the "Balanced Scorecard" would be a very useful tool to help implement this change. The first step would be to construct a corporate scorecard. But what should the corporate scorecard look like? What critical variables should he monitor carefully to give him a clear picture of how well his change plan was proceeding?

TAIWAN IN THE EARLY TWENTY-FIRST CENTURY

Taiwan, with a population of 22 million in 2000, was one of the so-called "Asian Tigers" that had experienced enormous economic growth since 1960. Per capita gross domestic product (GDP) had doubled approximately every five years until the mid-1990s, exceeding $1,000 for the first time in 1976. (This value was considered by some to indicate that a country was no longer "developing.") Even the Asian financial crisis of 1997 had only put a small dent in that decade's average annual growth rate of approximately 7 per cent: growth in 1998 had been 4.5 per cent, but had recovered to nearly 6 per cent the following year. Part of this increase had been attributed to the growth of the People's Republic of China (mainland China). Taiwanese companies were active and enthusiastic investors in the mainland economy, despite political differences between their respective governments, which created difficulties for the Taiwanese. For example, except for holiday specials, no direct flights were available from Taiwan to the People's Republic of China; travelers had to fly via Hong Kong. The new millennium had brought more difficulties. For the Taiwanese economy, 2001 had been an annus horribilis: GDP per capita had fallen 2.2 per cent, and by the end of 2003, had still not recovered to 2000 levels.

THE AUTOMOTIVE INDUSTRY IN TAIWAN

Several major automakers were represented in domestic auto manufacturing industry in Taiwan. Toyota, Nissan, Ford/Mazda, Mitsubishi, Suzuki and Honda all had local assembly plants, which primarily served the local market, though Ford exported approximately 4,500 units (7 per cent of output), and Mitsubishi exported approximately 1,500 units (1.5 per cent) of production in 2003. This domestic manufacturing industry operated under the protection of an import tariff, which had been 30 per cent during most of the 1990s, but in 2002, had been reduced by one percentage point per year.

The total market for new cars in Taiwan was approximately 400,000 vehicles per year. The market had been in steady decline during the late 1990s and had fallen drastically in 2001. Sales had recovered to some degree in the two following years, but 2003 sales had still not recovered to their 2000 level. Toyota was the most successful local manufacturer, with sales of about 100,000 units (28 per cent market share) in 2003. Mitsubishi's share was nearly 24 per cent market share, or about 86,000 units. Various reasons for this decline had been suggested, including high oil prices and the fact that in recent years, many Taiwanese businesspeople had either temporarily or permanently immigrated to China. Exact numbers of immigrants were difficult to obtain, but some estimated the number at between two million and four million.

As in most countries, new cars in Taiwan were sold through dealerships appointed by the manufacturers and were usually exclusive to a single automaker. Financing for new car purchases was provided by both banks and the dealers (or by automakers through their dealers). Auto loans in Taiwan were a small part of most banks' business, so they usually subcontracted the credit evaluation to outside companies, which relied on public credit data and were paid based on the number of applications processed, not on the accuracy of their risk assessment. As a result, banks' bad auto loans were about 3 per cent per year, whereas Fortune Motors, for example, with a close relationship with its customers, enjoyed a bad loan rate of only 1.3 per cent on its new car loans. Consequently, new car financing was a profitable business for dealers.

The used-car market, however, operated differently in Taiwan. Because new car dealers were registered for tax purposes, when they sold cars, they were required to charge 5 per cent sales tax on both new and used cars. However, when private individuals sold their used cars, the transaction attracted no tax the purchaser simply registered the new ownership. As a result of this 5 per cent price advantage, the market for used cars was served by approximately 3,000 unregulated small, often family-owned, used-car dealers who were not and did not need to be registered for sales tax purposes. Thus, when a new car customer wanted to trade in an old car, the new car dealer did not typically buy it. Instead, the salesperson would put the customer in touch with a reputable used-car trader to complete the transaction. If someone wished to buy a used car and needed financing, finding a source of finance was often difficult. Used-car buyers were perceived as high-credit risks by banks, and banks did not have the expertise to evaluate that risk. The only sources of used-car financing were family or the illegal underground financing market where interest rates could be up to 1 per cent per day. In contrast, a low-risk customer would pay about 20 per cent per year for a personal loan.

FORTUNE MOTORS LTD.

Fortune Motors was the larger of the two Mitsubishi retail dealers in Taiwan and was the exclusive supplier of Mitsubishi's line of small commercial vehicles (less than 3.5 tons). The typical price of these vehicles was approximately NT$300,000. Fortune Motors was 40 per cent owned by China Motors Corporation, the Taiwanese manufacturer of Mitsubishi vehicles, and 60 per cent owned by three local families.

In 2004, Fortune Motor Company operated 89 sales centres throughout the country and dominated the market for small commercial vehicles, with 80 per cent market share. Within Mitsubishi vehicles (including passenger cars), Fortune held 60 per cent share (Shung Ye Group, which sold only the Mitsubishi car line, held the remaining share). In the previous two years, the market for new vehicles in Taiwan had rebounded, growing at about 9 per cent per year after several years of decline. Mitsubishi's share had declined from 25.4 per cent in 2002 to 20.8 per cent in 2003, and within that, Fortune Motors' share from 15.8 per cent to 12.1 per cent.

The company sold and financed new cars (about 40 per cent of Fortune's new car sales were also financed by them) and provided service. Selling new cars was unprofitable, but the financing was profitable, so overall, Fortune Motors' new car sales and financing activity broke even. Servicing was profitable and made about as much profit as financing new cars.

A critical part of financing was the accurate assessment of the credit risk of the customer. Historically, approximately 10 per cent of applications were not approved for credit risk reasons.

Li attributed the company's success over its 30-year history to its strong core values, which centered on its careful attention to customer service and satisfaction. Fortune Motors' service motto was "Get it right the first time or it is free."

THE BALANCED SCORECARD

The Balanced Scorecard was a tool first proposed by Professor Robert Kaplan and others, based on field research into best practice performance measurement. Each company's scorecard was unique, reflecting the company's corporate strategy, with a limited number of (typically four) measures on four interrelated dimensions or perspectives: Financial, Innovation, Customer and Internal Processes. Senior management would usually prepare each company's corporate scorecard. Sub-units of the company would then build their own lower-level scorecard, informed by and linked to the corporate scorecard. Often, the process of identifying the key measures and their interrelationships was a valuable process in its own right, clarifying the role of sub-units in the corporate strategy. The ongoing annual review and fine-tuning of the scorecard was also a valuable strategy communication and implementation process.

THE NEW STRATEGY

Li's vision was to build on the company's expertise in financing new cars and on the powerful network of relationships between its 1,500 salespeople located in the 89 sales centres with the thousands of small and medium-sized used car sellers around the country. These two strengths would allow Fortune Motors to sell used-car financing profitably through the thousands of small and medium-sized used car dealers in Taiwan. The dealers that would offer Fortune's financing would not merely be a more attractive source of financing than the illegal market or relatives but would need to meet strict requirements for cleanliness of their premises and for quality and safety standards.

Li envisioned a nationwide umbrella branding of used-car dealers that Fortune Motors would approve as vendors of its financing service. The name-mark he proposed for this venture was SUM, which stood for "Serve Your Motors." SUM-appointed car dealers would be required to maintain high ethical and customer service standards, compatible with Fortune's own values. Not all used car dealers would be able to become members of the SUM family. Li felt it important that the SUM dealers share his values of the importance of customer service. For this reason, Li believed that husband-and-wife owner-managed small dealerships were most suitable. (The very largest used-car dealers would typically be run by hired managers and were already too large to be able to easily change their existing values, so they would not be appointed. Very small dealers were excluded because they would probably not be economical, since signing up a dealer required considerable effort on the part of Fortune Motors). Li estimated that approximately 3,000 dealers would qualify. In effect, the SUM brand would become a quality and integrity certification of a used-car dealer. For warranty purposes, certified dealers would only be permitted to sell Taiwanese-made vehicles less than five years old. Li did not plan to charge a fee to the used-car dealers for the use of the SUM brand, unless their volume was very small.

Customers buying from a SUM dealer would know that they would be receiving a guaranteed high-quality used car, and if they were financing their purchase, a fair interest rate. In fact, customers would be able to buy an additional warranty if they wished. All this would make purchasing (and financing) a used car from a SUM-certified dealer far less stressful and risky than was the case at present.

IMPLEMENTING THE PLANNED BALANCED SCORECARD

Li was aware that he needed to first recruit used car dealers over the next several years and, through them, build up the used car loan business. At the same time, he was concerned about the downturn in the economy, the pressure from Toyota, and the risks of the new business. His management team fully supported the new strategy. He knew that as CEO, it was his responsibility to create the corporate scorecard. How could he best measure the effectiveness of his new strategy?

(Source: Ivey Publications, 2011)

Required:

Explain each of the following points or inquires separately:

1-Evaluate the strengths and weaknesses of the used-car financing business proposal.

2-What must Jung Hua Li do well in order for the new business to succeed?

3-Prepare a balanced scorecard for the implementation of this business and discuss the linkage between the measures. (