Strategic Business Management

Chapter-4
Strategic performance management
Case example: Svenska Handelsbanken
Challenging costs is inevitably part of such a process. Hope and Fraser identified Swedish bank Svenska
Handelsbanken as a key exponent. Its low costs are the product of several factors:
(a) Small head office staff, and a flat, simple hierarchy
(b) People in regions and branches are self sufficient and well-trained and are measured by competitive
results, which has produced an attitude keen to weed out unwarranted expenses
(c) Lower credit losses because front line staff feel more concerned to make sure that the information
on which they base lending decisions is correct
(d) Central services and costs are negotiated rather than allocated
(e) Internet technology is used to reduce costs, with the benefit accruing to the customer's own branch
The European Vice President of Svenska Handelsbanken believes that 'devolving responsibility for results, turning
cost centres into profit centres; squeezing central costs, using technology and … eradicating the budgeting "cost
entitlement" mentality are just some of the actions we have taken to place costs under constant pressure'.

Case example: Tesco

The supermarket giant, Tesco, has three strategic priorities which are designed to help it deliver
sustainable growth: (i) continuing to invest in a strong UK business; (ii) establishing multichannel
leadership in all of its markets; and (iii) pursuing disciplined international growth.
At an operational level Tesco has identified that there are four core activities in its business:
 Using its insight to understand what customers want
 Buying goods and services from suppliers (to satisfy customer requirements)
 Moving goods through the supply chain to make them available to customers
 Selling goods and services to customers
In turn, Tesco has identified seven key ‘enablers’ which it believes enable it to carry out these core
activities more effectively, and in turn to increase sales and customer loyalty:
 Establishing a multichannel offer for customers
 Operating responsibly
 Leverage group skill and scale
 Using its scale for good
 Building the Tesco brand
 Developing its people
 Innovating its offer for customers
The need to understand customers – in order to change and innovate to meet their needs – reinforces
the need for an external orientation to management information.
However, alongside its strategic priorities and high level ‘enablers’ Tesco also sets more specific targets
that it monitors via the 'Steering wheel' – its own version of the balanced scorecard, which it uses for
controlling and managing performance.
Targets are defined under five separate headings: Customers, Community, Operations, People and Finance; and
these headings allow performance to be monitored with due regard for all the key stakeholders.

Heading Desired aspects of performance

Customers 'The staff are great; I don't queue; The prices are good; I can get what I want; The
aisles are clear; Earn lifetime loyalty'
Community Be responsible, fair and honest; Be a good neighbour

Courtesy: Saiful Islam Mozumder, Shiraz Khan Basak & Co, Cell-01515653940 Email:simbd@outlook.com
1
 Operations Try to get it right first time; deliver consistently every day; make our jobs easier to
do; know how vital our roles are; always try to save time and money
People An opportunity to get on; an interesting job; a manager who helps his staff; being
treated with respect
Finance Grow sales; maximise profit; manage their investment
Tesco recognises that good financial performance is the outcome of good performance in the other
areas of customers, community, operations and people (staff).
The importance of non-financial performance – and the company’s strategic focus on achieving greater
loyalty from customers in the new, multichannel world of retail – is also reiterated in Tesco’s key
performance indicators. It has five customer-focused KPIs:
 % of retained loyal customers: the percentage of last year’s customers who are still loyal to Tesco
 Number of new loyal customers as a % of last year’s loyal customer base
 % of customers shopping across different channels: the percentage of loyal customers who have
shopped across two or more channels in the last quarter
 % of customers shopping across the brand: the percentage of loyal customers who have bought
(or held) non-food products; eg bank, telecomms, or clothing.
 Customer advocacy. While the first four KPIs are functional measures, the final one recognises the
importance of customers engaging with the business, and promoting/recommending it to others.
This can be measured using a net promoter score: how likely it is that customer would recommend
Tesco’s products or services to a friend or colleague? www.tescoplc.com

Case example: Business failures

During the global recession in 2008-9 there were stories about business failures almost every day in the
newspapers. These articles often mentioned the reason given for the failure, and the state of the
economy was often viewed as the number one cause.
However, this tended to obscure a rather more painful truth. The reason for the business failure was
usually the business itself.
An article in a local newspaper in Tupelo, Mississippi illustrated this point. The article looked at three
food outlets in the town which had failed in 2009, and noted the owners' reasons for the failure. In each
case, the reasons given were 'poor timing and the economy'.
However, customers who had been to the businesses noted that all three had three things in common:
high prices, poor service and mediocre food.
One in particular – a sandwich shop – stood out. It had an ordering process that involved standing in
line to order, and then moving to another station and standing in line to repeat your order and pay for
it. The total wait for an expensive and really poor take-out sandwich was over 45 minutes. The shop was
located in a mall, and was four units away from a Mexican restaurant that was not only surviving but
positively thriving. So it seems the economy was not the main reason for business failure after all!
The more pertinent point is that businesses – and particularly small businesses – are often launched and
operated without the resources needed to succeed. To be successful, a business needs to supply a cost
effective solution to customer needs.
If businesses don't understand their markets, their customers or their competition, and if they don't have
a clear vision or direction which is executed by management, they are likely to fail.
(Adapted from article: Harshberger, M. (2010), Who's to blame for most business failures, 19 January,
www.articlesbase.com)
Case example: WPP shareholder revolt
In June 2012, Sir Martin Sorrell suffered a humiliating defeat at the hands of WPP shareholders, when nearly
60% rejected his annual pay package of nearly £13 million at the advertising agency's annual general meeting.
The total figure comprised £6.8 million in salary, bonus, deferred shares and other benefits, plus nearly £6
million in shares (although those had been awarded in 2006 and were closely linked to performance targets).
Sorrell, who is viewed by many critics as a poster boy for excessive pay, had infuriated shareholders with
his proposed payout, and they rejected the remuneration report which authorised the deal. Their

Courtesy: Saiful Islam Mozumder, Shiraz Khan Basak & Co, Cell-01515653940 Email:simbd@outlook.com
2
protest was the largest rebellion by shareholders at a blue-chip company since 90% voted against Sir
Fred Goodwin's pension arrangements at Royal Bank of Scotland in 2009.
The WPP chief executive's showdown with investors was the latest in a series of clashes between UK
publicly listed companies and shareholders over boardroom pay in what has been dubbed the
'Shareholder Spring'.
Sorrell's defeat was the sixth remuneration report to be rejected by shareholders in 2012 – a record tally
of defeats since the opportunity for shareholders to vote on the pay policies of UK public companies was
introduced almost a decade ago. Other companies where pay reports have been voted down include
Cairn Energy, car dealer Pendragon and insurer Aviva.
The WPP chief executive, who founded the company in 1985, dismissed any suggestions that he might
consider resigning in the wake of the defeat. 'I have [a share stake worth] £140m riding on it, which people
tend to forget,' said Sorrell, who received about 98% backing for his reappointment as chief executive.
'I'm obviously disappointed at the vote on the remuneration report. It is a democracy and the
shareholders have spoken … that is their right,' he said. Nonetheless, Sorrell still believes he is worth his
high salary, and in the year 2011–2012 WPP cemented its place as the world's biggest marketing
services group, with its best ever annual results. It achieved £1 billion profits and £10 billion revenues for
the first time over the year.
WPP also pointed out that Sorrell had not had an increase in his basic pay since 2007, and that he is
paid less than his major international rivals.
Louise Rouse, a director at campaigning group FairPensions, who attended WPP's AGM, said: 'It is
difficult to know whether the WPP board underestimated the level of shareholder anger or simply chose
to ignore it.' She pointed out that 42% of shareholders had voted against WPP's pay report last year,
which 'should have served as a wake-up call to the board that the company's remuneration practices
need to be overhauled'.
Investment banker Jeremy Rosen, the head of WPP's remuneration committee, also came under fire with
a quarter of shareholders voting against his reappointment or withholding their vote.
Rosen defended his decision to award Sorrell such a large pay rise – which included a 30% increase in
his basic pay to £1.3m – saying he had consulted shareholders and that 'in the end we came up with
what we think is right for the company and the shareholders'.
He added: 'The package did not meet with overwhelming support but [we] felt it was something that
was appropriate in the circumstances.'
However, shareholder lobby group PIRC said, 'This result should be no surprise to WPP as it has been
clear for some time that shareholders were not happy with recent changes to the remuneration policy. It
is very important that as a high-profile FTSE 100 company, WPP responds constructively to the vote.'
PIRC suggested that the vote represented a key moment in the relationship between shareholders and
companies over executive pay, and it urged WPP to respond positively to it.
Guy Jubb, global head of governance at one of WPP's investors, Standard Life Investments, said investors
would now push for real change to the company's approach to pay: 'The message from shareholders
was unambiguous and cannot be ignored.'
Based on: Sweney, M (2012) WPP shareholders vote against £6.8m pay packet for Sir Martin Sorrell, The
Guardian, 13 June, www.theguardian.com
Salmon, J. (2012) Shareholder spring strikes again: WPP shareholders vote by 60% to reject Sir Martin
Sorrell's £13m pay deal, www.thisismoney.co.uk, 13 June

Case example: The impact of pension deficits on strategic decisions

Royal Mail
In the UK, various governments have considered privatising or part-privatising the Royal Mail, before
legislation passed in the Postal Services Act 2011 finally paved the way for the sale of the business.
Royal Mail was subsequently privatised through a flotation on the London Stock Exchange on 15 October 2013.
The Postal Services Act stipulated that 10% of the shares should be given to Royal Mail employees with
the remainder being sold via an Initial Public Offering.
However, a pre-requisite to the privatisation was the transfer of the Royal Mail's pension scheme to the
State. It was announced in 2012 that the transfer of the pension fund assets added £28 billion to the

Courtesy: Saiful Islam Mozumder, Shiraz Khan Basak & Co, Cell-01515653940 Email:simbd@outlook.com
3
 Exchequer, but that the liabilities of the fund totalled £37.5 billion, which was added to the UK national
debt. Without the transfer of the pension fund deficit, no buyers would have been found for the Royal
Mail, given that the ongoing business was valued at £3.3 billion when the initial purchase offer was
launched. Although some critics argued that Royal Mail had been undervalued at its flotation, with
suggestions that its value should have been in the region of £6 – 8 billion, this is still considerably lower
than the £9.5 billion pension scheme deficit.
British Airways & Iberia
In the private sector, a similar issue needed to be resolved between British Airways and Iberia prior to
their merger in 2010. British Airways' two final salary schemes had a combined deficit of £3.7 billion at
the time of the merger despite having been closed to new members for many years.
The larger scheme, which closed to new members in 2003, still had members contributing into it, as well as
pensioners. In 2007, the scheme became less generous to contributing staff, but poor investment returns, as
well as changes in life expectancy, outweighed the impact of the scheme changes. In 2010, British Airways
agreed new plans with unions to increase pension contributions in order to try to reduce the deficit.
Nonetheless, the reported deficit at the time of the merger with Iberia (£3.7 billion) was around £1
billion more than BA's market capitalisation. In order to smooth the deal, it was agreed that the British
Airlines part of the new 'International Airlines Group' would be solely responsible for making additional
pension contributions to close the funding gap. The merger agreement also reportedly gave Iberia an
option to walk away from the deal if it did not deem BA's pension recovery plan to be satisfactory.
The situation at British Airways ahead of the merger was so bad that it led some analysts to joke that
'British Airways was basically a large pension fund that flew a few aeroplanes'.

Case example: BP
In 2001, the global energy company formerly known as British Petroleum, rebranded itself as BP, and
adopted the tagline 'beyond petroleum.'
By the mid-1990s, in the aftermath of the Exxon Valdez oil disaster, and with global warming being
recognised as a major environmental concern, 'green' issues were firmly on the agenda, and there was a
perception it was profitable to be 'green.'
As part of its re-launch campaign, BP erected a massive billboard in Times Square, New York which read:
'Solar, Natural Gas, Wind, and Hydrogen. And, oh yes, Oil.' In doing so, BP was trying to highlight its
promise to deliver energy that doesn't damage the environment.
But in reality, BP's alternative energy generation is miniscule. BP currently produces about 2 gigawatts of
solar energy and 1.2 gigawatts of wind power annually, whereas, for context, total global electricity
generation in 2008 was over 20 million gigawatts.
Despite the rhetoric, BP's activities are still primarily focused on the oil industry. The fact that it is trying
to position itself as something more than this suggests there is a degree of 'greenwashing' involved.
One of BP's claims 'beyond petroleum', is that it is the largest producer of solar energy in the world. Yet
BP achieved this position by spending $45m to acquire the Solarex solar energy corporation in 1999.
However, the amount spent on that acquisition was a tiny fraction of the $26.5 billion spent to acquire
ARCO, in order to increase oil production capacity. It was also significantly less than the $200m which
BP spent between 2000-2 re-branding its facilities.

Ultimately, despite the rhetoric about social responsibility, profits still count in the corporate world. The
'Deepwater Horizon' oil rig disaster in the Gulf of Mexico (April, 2010), has called into question BP's
sincerity in delivering on its brand promise. Critics have argued that cost-cutting and recklessness by BP
contributed to the disaster. Yet, if BP chooses to stand for energy that 'does not damage the
environment', then it must enforce environmental standards that support this (even though they may
be more costly than the lower standards that may be legally required by relatively lax government
regulations). Therefore, it appears that BP's actions have not matched the standards suggested by its
brand promise, and BP has very visibly failed to produce energy that 'doesn't damage the environment'.
In 2010, BP suffered its first annual loss for nearly 20 years, following the catastrophic explosion at
Deepwater Horizon, which will cost it at least £25 billion. Some analysts think the total cost to
shareholders could exceed £40 billion over ten years (2010–2020). However, the financial cost was not
the only reason that made 2010 one of the most damaging years in BP's history, because the
devastating explosion also shattered the company's reputation.

Courtesy: Saiful Islam Mozumder, Shiraz Khan Basak & Co, Cell-01515653940 Email:simbd@outlook.com
4
Case example: Hyundai Engineering & Construction
In its Sustainability and CSR Report (2012), the Korean company Hyundai Engineering & Construction
appears to apply the ideas of the triple bottom line directly to its plans for business sustainability and
sustainable management.
Hyundai summarises the elements of its 'sustainable management' activities in a grid as below:

Management Business Achievement & Future Growth

Policy Management Evaluation

Green Value Carbon Energy reduction Responses to Expansion of R&D

Management design; energy climate change budget
strategy reduction projects
R&D Development of
Enforcing Green achievements in eco- friendly
purchasing relation to technology
process reductions in
energy use and
emissions; and
increased use of
renewable energy
Social Value 'Win win' Co- Selection of Economic value Securing human
operation with suppliers distribution resources
suppliers among
Safety awareness Training to
stakeholders
and prevention of develop future
accidents leaders
Economic Value Ethical Job creation and Ranking of Reinforce
management and production company's expansion by
anti-corruption through business marketing to
policies infrastructure management skill developing
investment and performance countries
Fair Trade
compliance Reinforce entry
programme into eco-friendly
markets

Courtesy: Saiful Islam Mozumder, Shiraz Khan Basak & Co, Cell-01515653940 Email:simbd@outlook.com
5