STEERING WHEELS VERSUS

THE BIG 6 KPIS: WHY TESCO

CHANGES ITS
PERFORMANCE INDICATOR
Contents
Abstract ................................................................................................................................................... 2
Introduction ............................................................................................................................................ 2
Balanced Scorecard and Steering Wheels .............................................................................................. 2
Key Performance Indicator and Tesco’s 6 Big KPI ................................................................................... 3
Comparison between Steering Wheel and 6 Big KPI as financial measures ........................................... 4
Conclusion ............................................................................................................................................... 7
Recommendation.................................................................................................................................... 7
List of References .................................................................................................................................... 8
Abstract
In the mid of global business that changes rapidly, organization is encouraged to be easily adapt and
quickly meet customer demand as well as easily swift trend. Markets eventually influence company
to create a standard, which made management setting benchmarks in attempt of motivating staff to
cooperatively reach organization goals. At the same time, those benchmarks also work as a warning
system if the target has been too far to reach. The standard is built by financial and non-financial
measures to give clear revelation if organization’s performance has met standard or not. This essay
tries to study the reasons Tesco changes its performance indicator measurement from balanced
scorecard known as Steering wheels to Key Performance Indicators. Explanation of financial
limitation of Steering Wheels, comparison between steering wheels and KPI as a financial measure,
as well as practical example of KPI in Tesco are presented in this essay.

Introduction
Tesco was established by Edward Cohen in 1932, originally as a small groceries stall. He named his
stall based on the name of the merchant whose shipment of tea product was ordered by Cohen,
namely T.E. Stockwell. Within 8 years, Tesco showed an outstanding performance by opening more
than 100 small shops, mainly in the London area (Tesco PLC,2019). Then, over the next two decades,
Tesco business eventually grew rapidly throughout UK. By acquiring other retail store networks,
including 19 Burnard stores (1955), and in next 2 years they bought 70 Wiliamsons Ltd. stores (1957)
as well as 200 branches of Harrow Stores Ltd. Thirty-four years after establishment, Tesco reached
its special achievement by opening its first supermarket in Maldon, Essex, which could offer fresh
food, in addition to traditional dry food (Sugiarsono,2011).

Now, Tesco spreads its wing throughout the world. In Europe, Tesco operates in the Hungary,
Poland, Czech Republic, Slovakia, Ireland and Turkey. In Asia, Tesco has branches in Japan, South
Korea, Taiwan, Malaysia and Thailand. Yet, UK is still Tesco's main business area Tesco is the largest
company in United Kingdom as well as the largest food retailer, operating around 2 thousand retail
stores.

Balanced Scorecard and Steering Wheels

Balanced Scorecard was first coined by Kaplan and Norton in 1996, as a mechanism contained in the
management system which is able to express organization's vision and strategy into a concrete
action in the real business activities. Researchers suggested that balanced scorecard is one of the
effective management tools to help companies in implementing its business strategies. Velnampy
and Balasundaran (2007) argued that Balanced Scorecard has a positive relation with organizational
performance in Srilankan company, especially in financial measure and learning. Simoes and
Rodrigues (ND) suggested that BSC improved the implementation of strategy management as well as
the communication between management and staff in delivering company mission.

Kaplan and Norton stated that BSC was built by 4 perspectives: financial, customer preferences,
business internal process, and learning and growth. In 1997, Tesco developed an internal balanced
scorecard known as Steering Wheels which based on BSC. However, in 2004, Tesco added another
dimension which is known as community to encouraged employees to be involved in the
communities it works and live. As shown in figure 1 below, Steering Wheels cascaded to 23
measures, which each is grouped to 5 different performances.
 Figure 1: Tesco’s Steering Wheels (Marr,2015)

Key Performance Indicator and Tesco’s 6 Big KPI

According to Iveta (2012), key performance indicators (KPI) is a quantitative gradual measure used
by company which have various perspectives and based on concrete data. In other words, KPI
become point of benchmark for determining objectives and deciding business strategy in
organization. Warren (2011) suggested that KPI is a measurement that assesses how an organization
executes its strategic objectives. The strategic objective refers to how organizational strategies are
interactively integrated into overall effective strategy of the organization.

Basically, KPI can be divided into two types, Financial KPI which measures performance related to
finance and Non-Financial KPI which measures indicator which do not directly affect the finances of
a company. Some examples of such Non-Financial KPIs such as Customer Satisfaction Metrics
(Customer Satisfaction metrics) and market share.

In 2015, Tesco decided to simplify its performance indicator from 23 matrixes composed in Steering
Wheels to 6 key performance indicators known as The Big 6 (Ourtesco,2015). David Lewis, CEO of
the company, suggested that Big 6 KPIs will create measurements which put greater focus on what
matter the most. Tesco’s 6 big KPI is comprised with performance indicator below:

a. Sales: Tesco chose Increasing volume of sales as the key to increasing sales.
b. Profit: Tesco suggested that improving shopping experience to customer will ultimately lead
to improving Tesco’s values and eventually it could get a stronger financial merit.
c. Cash Flow: Tesco realized that strong operating cash flow is a key to keep the run of business
and allow them to make a future investment estimation.
d. We build trusted partnerships: Tesco aimed to build a strong partnership with its supplier by
implementing a win-win, effective, and transparent relationship.
e. Customers recommend us and come back time and again: Tesco put more attention to what
customers want, need, and feedback from customer as well. This strategy helps Tesco reflect
if its service is improved and strengthen its offering power.
 f. Colleagues recommend us as a great place to work and shop: Tesco’s colleagues are
committed to shoppers a little better every day, therefore raising Tesco service in the eye of
the customer.

Comparison between Steering Wheel and 6 Big KPI as financial

measures
In order to find the limitation of Steering Wheels and how it affected Tesco to relaunch its
performance measures to Big 6 KPIS, it is necessary to analyze several perspectives in Steering
Wheels which lead to financial decision made by Tesco’s management:

a. Financial Perspective

Financial measurement in BSC has two important roles, one is as a matrix for all perspectives to
reveal if the implementation of a strategy that has been planned run well, and the second is to
encourage the other three perspectives regarding the targets to be achieved by the company. One
of main measurements of Steering Wheels financial perspective is growing sale.

In order to grow sales, Tesco decided to attracted customer by lowering prices and spent significant
capex program to change hypermarket to become destination shops (BBC, 2013). However, this
strategy was criticized because it did not offer product wanted by customer as well as it did not set
the right pricing. Subsequently, Tesco’s market-share significantly declined from the interval 2010 to
2014 (Tesco,2014). In addition to profit decrease, Tesco showed a downward trend of its cash flow
(Tesco,2014), whilst it is widely known that cash is necessary for company’s financial and to make
estimation for future funding. It also an important tool for investor to see if the company is able to
keep its sustainability. The downward trend of cash-flow as well as profit which may trigger
dissatisfaction from shareholder, and this led Tesco to manipulate its financial statement in 2014
(Persiani et al., 2017). Steering Wheels missed cash flow as its matrixes and it also gave little
concentration for designing work plan to improve productivity and right pricing.

This incident resulted in the introduction of cash flow as one of Tesco’s Big 6 KPI. Three years after
its introduction, Tesco recorded a significant improvement in its operating cash flow, with 9,1 %
growth from 2016 to 2017 fiscal year (Tesco PLC,2017). In 2015, Tesco also begun its new financial
strategy by increasing volumes to boost sales. Tesco decided in increasing its volume of food market
product, and CVP analysis helps its manager to find the costing for the product (Art Columbia, 2015).
Through this analysis, Tesco not only explored direct and indirect cost of a particular food product,
but it also included economic condition like inflation which accounts for entire cost. Since the
implementation of this strategy, Tesco experienced a strong volume growth in food market, with 1.6
percent increase in year and considered as significant improvement (Megaw, 2017). Referring to
figure 2 below, it can be found that Tesco experienced an overall profit growth around 10% from
2015 to 2019, 4 years after implementing Big 6 KPIs.
 Figure 2: Tesco’s financial performance from financial year 2016 to 2019 (Tesco,2019)

b. Customer Perspective

In this perspective, the company identifies the customer and the market segment to be entered. It
needs to decide kind of service and products customer needs and minimizing product cost to
maximize its profit. Organization also focuses on how the organization pays attention to customer
feedback as way to increase its value.

In Steering Wheels, Tesco tried to gained customer loyalty and expanding international business.
Despite its effort, Tesco saw a drop of market share in 2014, fall from 30,1 % of UK’s market to 28%.
Compare to other competitors such as Saisbury’s, Aldi, and Waitsore, Tesco had most significant
downward (Tesco PLC,2014). It was suspected that Tesco’s false strategy for new market and lack of
supply chain development made UK’s customers divert their preferences to other stores.

In 2016, one year after Tesco introduced Big 6’s KPI, there was a raise of customer from 77 % in 2015
to 78,2 % in the following year (Tesco PLC,2017). Tesco gained this number not only by focusing its
service and putting more attention to customer’s feedback, but also improving its budgeting system.
Opting to zero-based budgeting, Tesco did not used previous year’s total expenditure and able to
input all relevant cost from each department into budgeting. This initiated effective cost-cutting of
private brand product, which lead to lower operational cost and eventually able to meet customer’s
wishes to buy product at lower or stable price market (Global retails, 2018). This type of budgeting
also allows Tesco to reevaluate metric performance and spending level every budgeting period and
starting at zero, which gives a more accurate spending cost projection. ZBB also helps Tesco in
calculating product cost and pricing for their private-own brand such as ‘Finest’ at low price. Kantar
Wordpanel (2016) revealed that private own brand has helped Tesco maintain market growth
performance.

c. Business internal operation process perspective

In the business internal process perspective, company measures if the internal conditions all carried
out in accordance with the method specified or even deviated from the rules. There are three things
that need to be considered in the perspective of internal business processes, including:

a.) The process of deals with idea about the production of goods, and also consider chain supply
of goods.
b.) The process related to activities and daily routines carried out by internal parts.
c.) The post-sales process related to the right selling method to increase sales turnover.

It is known that retailers cannot sell product to customer without the role of supplier. During the
implementation of Steering Wheel, Tesco’s main focus for business process was to restock its
shelves fast and sustainably, which eventually put so much pressures to its supplier. In 2013, Tesco
faced accusation of squeezing suppliers and delayed payment to support its profit maximization
(Butler, 2013). In Steering Wheels, Tesco missed the chance to build positive relationship with its
partner and some matrixes strategy overlap with other matrix, i.e. “we try to get it right first time
“matrix and “we deliver consistently every day “matrix, which both matrixes mean creating an
effective delivery and distribution. It also failed to point what matter the most in retailer business
process, which are supply chain and logistic process.

This area was replaced with KPI’S improving better partnership which focus to strengthen
relationship with supplier as well as finding a way to improve the effectiveness of supply chain and
logistic process. Tesco management inspired to increase operating margin for financial year
2019/2020 and one of the ways is by cutting logistic cost at various position in supply chain. It was
projected that there will be a 4 % rise of operating profit margin if Tesco cut its logistic cost by 450
million GBP (Tesco PLC, 2019). Lewis outlined several initiatives for reducing logistic cost by doing
partnership, integrating supply system, and lower stock holding. Moreover, to reduce procurement
cost, Tesco decided to takeover Booker wholesaler and expected to save more than 200 million GBP
each year (Telegraph, 2018). Since its acquisition, it is reported that underlying operating profits
increased by 24% to 933 million GBP (Whymark, 2018). This step was also followed by creating
strategic partnership with Carrefour, with the goal to provide lower price across its private-label
band for its customer by combining its spending on groceries and build a collaborative procurement
program (Ladd,2018).

d. Learning and Growth Perspectives & Community

This perspective gives benchmark for worker capability with worker satisfaction, productivity, and
skill as measurements in order to support the implementation of previous three BSC’s indicators.
However, this perspective gave too many indicators of the learning and growth standard which
eventually lead to the failure of Tesco in investing in their employee’s skill growth and job allocation
effectiveness.

In order to achieve 4% profit margin by financial year 2020, Tesco insisted on cutting 1.5 billion GBP
of cost base. One of the ways is by redundancies, which steps including cutting of employees and
work hour. In 2017, Tesco was reported cut 1,200 job at its head office and support center (Megan
and Vandevelde, 2017). However, to ensure that direct labor show a good performance in order to
reach Tesco new KPIs “Colleagues recommend us as a great place to work and shop the right “,
Tesco plans to increase basic hourly wage for floor staff store and warehouse workers to £9.30 over
the next two years (Key, 2019), Under this cost-cutting decision incorporated with Tesco’s KPI
indicators, Tesco is expected to save more than 170 Million GBP a year but continuously try to raise
staffs service to customer.

Conclusion
Comprised with more than 20 different metrics, it can be understood that Steering Wheels was too
difficult for employees to follow and to handle. Even though it was well planned, in reality steering
wheels fail to adapt financially to changing market as well as customer buying power. Steering
wheels also missed some important indicators which affect company performance, for example a
strong relationship with its supplier and cash flow monitoring.

In respond to this, Tesco relaunched its performance indicators to 6 Big KPI in an attempt to be
more focused in priorities which boost its profit as well as improved its measurement approach. The
simplification of Tesco’s performance indicator proved to bring significant improvement to financial
measure, which can be identified in its increasing operating cash flow, ROI, and lead to better margin
sales and profit. In conclusion, Tesco’s new Big 6 KPIS allows the company to prioritize on what is
necessary for its customer, employees or colleagues, and supplier around them. Focusing on what is
important not only for company but all stakeholders, Tesco is able to take a strategic financial
decision in its business process and subsequently based on “right on the target” benchmark, and is
able to deliver against the key financial requirements such as sales, profit, and eventually cash flow.

Recommendation
Even though Key performance indicator has been proved to be an effective strategy measurement in
the organization, Tesco should be aware that KPIs may have several limitations which may not cater
to global business demand.

In term of budgeting of private brand production, Tesco may try to implement Activity- Based
Costing (ABC) instead of Zero-Based Budgeting (ZBB). ABC uses more cost drivers compared
traditional budgeting and help managers to assign overhead as well as relevant cost for certain
product much more accurate, and eventually lead to strategic decisions for determining selling price
of product, product lines, markets and capital expenditures. To put it simply, ABC could help Tesco
to forecast sales revenue more accurately from each product and maximize its profit than ZBB.

Referring to KPI implementation, Tesco may need to enhance its IT system as well, so all the
personnel can access the KPI system anywhere and be reminded to the company benchmark and set
its goals. One of the factors which lead to the failure of KPI performance management is KPI
monitoring system. Tesco needs to reassure that KPI realization data should be recorded every
month accurately and avoid an error of data input which may lead to false business condition
forecasting and false strategic business decision.

It is also recommended that there is an expert training or seminar together with the implementation
of Big 6’s KPI in different business units since there may be different values in certain regions.
Moreover, there should be a further study about implementation of KPI in retail industry to assert its
credibility.
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