Question 2

Company information

Erthworth is a fashion clothing retailer which caters for both male and female customers of all adult age groups. Erthworth has 15 retail stores. The companys information systems are basic for a business of its size and focus solely on financial information. Erthworths strategic objectives are To maximise shareholder wealth by increasing the number of retail stores, making our customers completely satisfied, ensuring our stores are attractive and offering the widest range of fashion clothing in our market.

The Erthworth board has seen little need for non-financial performance indicators (NFPIs) so far, preferring instead to focus attention on cost control and working capital management. As a result, all senior managers are appraised against targets for operating profit margin, inventory turnover and the current ratio

Customer satisfaction

Following a period of poor financial performance, Erthworth began collecting data on one aspect of non-financial

performance, customer satisfaction, as the board had been advised that this is a key driver of financial performance. The data collection began at the start of Quarter 3 20X3 and there is now data available for two complete years (Appendix 1).

Erthworth has found it difficult to interpret this qualitative data and also the trends in this data. Some board

members question its usefulness and propose reverting back to reporting just the financial indicators which they are used to. Erthworth collects this data by asking customers to rate their satisfaction with their visit to the store as they are paying for their items. The scores range from 1 (completely dissatisfied) to 5 (completely satisfied). The mean score is the performance indicator reported to the board and the senior managers. Customers are encouraged to leave a score by having their names entered into a quarterly prize draw to win tickets to major football matches, concerts and amusement parks.

Balanced scorecard

A consultant has suggested to the board that the introduction of a balanced scorecard approach may improve business performance, as Erthworth is unlikely to achieve all of its strategic objectives in the near future. The board has already heard what the benefits of the balanced scorecard are, but are sceptical about these.

The board has asked for your advice on the problems of implementing and using the balanced scorecard approach at Erthworth. One aspect of this advice should focus on the selection of suitable performance measures and the consultant has already chosen some performance measures which could be included in a balanced scorecard at

Erthworth (Appendix 2).

These have been provided to help you illustrate your advice on the problems of using the balanced scorecard.

Note: The board would welcome your advice on how to refine the performance measures as part of your advice on the problems of using and implementing the balanced scorecard, but does not want you to give a detailed evaluation of the advantages and disadvantages of each performance measure, or to suggest completely new measures.

Required:

Assess the difficulties in using and interpreting the customer satisfaction data at Erthworth (10 marks)

Appendix 1

Customer satisfaction data

Percentage of customers giving customer satisfaction scores* between 1 and 5

Appendix 2

Perspective Performance measure

Financial Operating profit margin

Inventory turnover Current ratio

Customer Customer satisfaction

Market share

Internal business processes Stock out percentage1

Learning and innovation Total employee training days2

Notes:

Stock out percentage is the percentage of product lines which are unavailable for sale in each store at the beginning of each trading day.

The human resources department already records the total number of employee training days. Employee training covers the three main areas of health and safety training, training in handling customer complaints and training staff to understand the range of products available and how to display them attractively in the store

Note: The board would welcome your advice on how to refine the performance measures as part of your advice on the problems of using and implementing the balanced scorecard, but does not want you to give a detailed evaluation of the advantages and disadvantages of each performance measure, or to suggest completely new measures. Required: Assess the difficulties in using and interpreting the customer satisfaction data at Erthworth (10 marks) Appendix 1 Customer satisfaction data Percentage of customers giving customer satisfaction scores* between 1 and 5 * Satistaction scores were collected trom a large number of customers when paying tor their items. Note: The board would welcome your advice on how to refine the performance measures as part of your advice on the problems of using and implementing the balanced scorecard, but does not want you to give a detailed evaluation of the advantages and disadvantages of each performance measure, or to suggest completely new measures. Required: Assess the difficulties in using and interpreting the customer satisfaction data at Erthworth (10 marks) Appendix 1 Customer satisfaction data Percentage of customers giving customer satisfaction scores* between 1 and 5 * Satistaction scores were collected trom a large number of customers when paying tor their items