Management Control System Case Study Homework Help
- July 20, 2017
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- Category: Accounting QA
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PART 1
X-FUEL was the US marketing and refining division of a large global petroleum company. It operated five refineries and had more than 7,000 branded gasoline stations around the United States, which sold about 25 million gallons of gasoline per day. Historically, X-Fuel marketed a full range of products and services. It did, however, match the prices of discount stations operating near an X-Fuel station so that it would not lose market share. X-Fuel’s CEO Brian Roberts had recently learned that X-Fuel was the least profitable marketing and refining company in the US. He decided to turn around the company by implementing a strategy based on a marketing study that had revealed five distinct consumer segments among the gasoline-buying public (see exhibit 1).
Exhibit 1 Road Warriors (16%) Generally higher-income middle-aged men who drive 25,000 to 50,000 miles a year, buy premium gasoline with a credit card, purchase sandwiches and drinks from the convenience store, will sometimes wash their cars at the carwash.
True Blues (16%) Usually men and women with moderate to high incomes who are loyal to a brand and sometimes to a particular station; frequently buy premium gasoline and pay in cash.
Generation F3 (27%) (F3 – fuel, food and fast) Upwardly mobile men and women – half under 25 years of age – who are constantly on the go; drive a lot and snack heavily from the convenience store. Homebodies (21%) Usually homemakers who shuttle their children around during the day and use whatever gasoline station is based in town or along their route of travel.
Price Shoppers (20%) Generally aren’t loyal to either a brand or a particular station, and rarely buy the premium line; frequently on tight budgets; the focus of attention of marketing efforts of gasoline companies for years.
X-Fuel’s executives saw that price-sensitive consumers constituted only 20% of all US gasoline purchasers. Another segment, Homebodies, had little loyalty to any brand or station. But three segments wanted more than a commodity purchase. After considerable discussion, X-Fuel decided on a strategy to offer a superior buying experience to the three top-tier segments: Road Warriors, True Blues, and Generation F3. Also, it would no longer seek to attract price-sensitive consumers by lowering prices to compete with discount gasoline stations. Furthermore, it was spotted the opportunity to sell products other than 2 gasoline to customers. New revenue could come from sales of automobile services and products such as car washes, oil changes, minor replacements, lubricants, etc. and other products sold at the convenience stores.Roberts faced the challenge of realigning X-Fuel to the new customer-focused strategy. The realignment could not be done just at the top. It had to take place at the grass roots. For its strategy to succeed, X-Fuel would have to make everyone aware of the strategy and accountable for its success. A survey had revealed that employees felt internal reporting requirements, administrative processes, and top-down policies were stifling creativity and innovation. Relationships with customers were adversarial, and people were working narrowly to enhance the reported results of their individual, functional units. Roberts expressed the problem as follows
I am accountable for a large organization, spread over a large geographic area. At the end of the day, success comes from individuals at the frontline of operations. You’ve got an operator at a refinery, sitting in front of a computer screen controlling a process unit at 3 a.m. on Sunday morning when management is not around. My fate is determined by the person’s attitude, whether that person is paying attention. Thirty seconds of inattention at the wrong time can shut down that refinery, stopping production. If you’re going to drive the business you have to drive it down to that individual who is at the frontline, making the decision.
X-Fuel had operated for decades with a centralised structure, organized by functions, such as purchasing, supply chain, manufacturing (refining), distribution, and marketing. Only two people, Roberts and his executive vice president, among X-Fuel’s 7,000 employees had accountability for a profit and loss statement. Managers of a refinery, pipeline, or distribution facility were responsible for achieving cost targets, while managers of sale districts had to meet revenue targets. To create a more agile organization, Roberts decentralised X-Fuel into 17 strategic business units (including regional gasoline sales districts and specialized product units, such as for jet fuels and lubricants) that would be closer to customers. Each business unit would have its own profit and loss accountability. Roberts now faced the problem of how to upgrade the skills of the newly appointed business unit heads who had all grown up within a structured, top-down functional organization
We were taking people who had spent their whole professional lives as managers in a big functional organization, and we were asking them to become the leaders of entrepreneurial profit-making businesses, some with up to $1 billion in assets. How were we going to get them out of their historic area of functional expertise to think strategically, as general managers of profit oriented businesses?
Roberts believed that a major impediment to change was the company’s historic focus on achieving short-term financial performance.The financial metrics gave us a controller’s mentality, reviewing the past, not guiding the future. I wanted metrics that could communicate what we wanted to be so that everyone in the organization could understand and implement our strategy. We needed metrics that could link our planning process to actions, to encourage people to do the things that the organization was now committed to accomplishing.
Roberts struggled with how he could change the performance measurement framework at X-Fuel into one that would be better aligned with its strategy and organizational structure. He decided that the Balanced Scorecard (BSC) was the right approach to help him to communicate X-Fuel’s strategic objectives and to motivate employees to achieve them. He formed a leadership team that included himself, the heads of several business units and functional departments (such as human resources, finance and information technology), and a project manager from the finance function to create the company’s strategy and BSC. The team met several times over a three-month period to define the strategic objectives for the strategy map and the accompanying scorecard of measures.
The leadership team started by setting an ambitious financial target for the new strategy to achieve: double return on capital employed to 12% within three years from its current depressed level of 6%. The company would achieve its return on capital employed (ROCE) target by using two financial levers: productivity (which involved the components cost reduction and asset intensity); and revenue growth. Next, the leadership team asked XFuel’s market research to identify the attributes that constituted a great buying experience for customers in the three targeted segments
• Friendly employees
• A convenience store, stocked with fresh, high-quality merchandise
• Immediate access to a gasoline pump (to avoid waiting for service)
• A speedy purchase, including self-payment mechanisms at the pump (to avoid waiting to pay)
• Covered area for gasoline pumps (to protect customers from rain and snow)
• 100% availability of product, especially premium grades (to avoid stockouts)
• Clean restrooms
• Attractive exterior station appearance
• Safe, well-lit station
• Ample parking spaces near convenience store
• Availability of minor car services.
X-Fuel summarised these attributes as offering customers “a fast, friendly serve”. To measure the attributes of the fast, friendly serve buying experience, X-Fuel hired an independent third party to send a representative (the mystery shopper) to every X-Fuel station, every month, to purchase fuel and a snack, and evaluate the experience based on specified attributes of a “perfect buying experience”. However, X-Fuel did not sell directly to its end-use consumers. Like companies in many industries, X-Fuel worked through intermediaries, such as wholesalers, distributors, and retailers to reach the end-use consumer of its products. X-Fuel’s immediate customers were independent owners of gasoline stations and distributors of its other petroleum-based products (such as distillates, lubricants, home heating oil, and jet fuel). Franchised retailers purchased gasoline and lubricant from X-Fuel, and sold to consumers in X-Fuel branded stations. If end-use consumers were to receive a great buying experience, then the independent dealers/distributors had to be aligned to X-Fuel’s new strategy and capable of delivering that experience. Dealers were clearly a critical part of the new strategy.
X-Fuel equally selected objectives and measures related to environmental, health and safety (EHS) performance. Roberts believed that safety incidents were an important leading indicator, believing that if employees were careless, leading to personal harm, they were not likely paying attention to the physical assets of the company either. The EHS measures also contributed to X-Fuel being a good citizen in all of the communities in which it produced and sold its products, and for enabling the well-being of its employees.
REQUIRED:
Help Roberts and other members of X-Fuel’s leadership team to
1- Translate company’s vision and strategy into a visual representation of the causeand-effect linkages of strategic objectives across the four perspectives
2- Create a comprehensive Balanced Scorecard that measures performance for each strategic objective.
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PART II
Present a critical account of the Balanced Scorecard approach (maximum of 6 pages length using Times New Roman letter, size 12, and line space options of 1.5).
Note: An important source of information that you are encouraged to use, is academic journals, particularly the following:
• The European Accounting Review
• Management Accounting Research
• Qualitative Research on Accounting and Management
• Journal of Accounting and Organizational Change
• Journal of Management Accounting Research
• The British Accounting Review
• Accounting, Organizations and Society
• Accounting and Business Journal
• Accounting, Auditing and Accountability Journal
• Accounting Review
• Any other academic journal from the Association of Business Schools raking
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