Overview: What Is the Balanced Scorecard? Term Paper

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Balanced Scorecard Analysis: Starbucks

What is the balanced scorecard?

The balanced scorecard is a method of conveying value to an organization through the use of performance measurement tools. "The balanced scorecard has evolved from its early use as a simple performance measurement framework to a full strategic planning and management system. The 'new' balanced scorecard transforms an organization's strategic plan from an attractive but passive document into the 'marching orders' for the organization on a daily basis" ("Balanced scorecard basics," 2014). It can be quantified according to a 'four quadrant' perspective analysis whereby a business is analyzed holistically from a financial, customer, process, and learning and growth perspective. It was designed to circumvent the frequently 'backward-looking' perspective of many modern organizations and to create a more forward-thinking perspective. "Traditional financial reporting systems provide an indication of how a firm has performed in the past, but offer little information about how it might perform in the future. For example, a firm might reduce its level of customer service in order to boost current earnings, but then future earnings might be negatively impacted due to reduced customer satisfaction" ("The balanced scorecard," 2014). For an organization to thrive in the modern, global economy, it cannot be always fighting the last consumer war or resting on its laurels. It must engage in continual environmental scanning and always be on the lookout for new opportunities to improve itself, even if it is not actively struggling at present.

This paper will specifically apply balanced scorecard (BSC) analysis to the Starbucks organization. Starbucks has long been lauded at a forward-thinking organization in the way that it relates to its customers and views its profitability. It attempts to market itself as an ethical company, offering everything from Fair Trade coffee to consumers as well as full health benefits even to part-time employees. However, as tastes have changed and customers have more options for specialty coffee, revenues have declined at times. Although Starbucks is currently on a financial upswing, benefitting from expansion in China and India, it cannot assume that this will continue indefinitely. The BSC thus seems uniquely suited to the Starbucks perspective and Starbucks' current organizational needs.

The financial perspective

First and foremost, the financial perspective of the organization cannot be ignored. Even though the BSC is a somewhat cutting-edge, idiosyncratic view of firm profitability, an organization's financial bottom line is not beyond its framework of concerns. For a long time, after a period of unprecedented early prosperity, Starbucks' fortunes began to falter in 2005. Starbucks was able to correct this by retraining its baristas, closing unprofitable stores domestically and expanding abroad. It created a much-publicized stunt of closing all of its stores for a day of comprehensive barista retraining, announcing "the retraining is part of Starbucks' plan to revive its brand and sales growth, which by one measure sank to an all-time low last quarter" (Allison 2005). The financial perspective of the BSC encompasses but is not limited to "measures such as operating income, return on capital employed, and economic value added" ("The balanced scorecard," 2014).

Operating income is defined as "the amount of profit realized from a business's operations after taking out operating expenses - such as cost of goods sold (COGS) or wages - and depreciation" ("Operating income," 2014). Starbucks has shown impressive operating income growth recently. In 2013 the company reported record expansion in this targeted area: "consolidated operating income grew 26% to $544 million" and it intends to continue this expansion at this pace ("Financial," 2013). Starbucks growth in this area is particularly impressive given that it is a food-based business. Depreciation costs of food are always very high given that inventory is perishable and also because customer tastes can be extremely fickle and seasonal.

Another benchmark in this area is store sales growth in general. In-store sales are a critical component of Starbucks' business model, although it has been expanding into supermarket sales, particularly internationally with its beans and instant coffee Via. In 2013, "global comparable store sales grew 6%, driven by a 4% increase in traffic…marking the 13th consecutive quarter of global comp growth greater than 5%" ("Financial," 2013). Although Starbucks' business model may be shifting to emphasize different areas of its business, the ambiance of Starbucks' stores remain a critical part of its marketing and image as an enterprise. While they can take on a very diverse character, depending on where they are located in the world, the idea that Starbucks offers a home away from home to consumers is a cornerstone of its positive image.

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A final financial benchmark is that of overall revenue growth, which has been thus far in the 10%-12% range in recent years ("Financial," 2013). Starbucks' expansion in the developing world has been a driving factor in this area. Avoiding market saturation, closing unprofitable stores while opening stores in desirable locations such as China and India, and continuing to make the company relevant even when faced with cutthroat competition and pressure to lower prices are all challenges to maintaining this operating growth.

With all of these influences, international expansion rather than domestic profitability alone must be the focus. Starbucks has acknowledged that closing unprofitable and redundant domestic sales while focusing on demand in Japan, China, India, and other developing markets has been critical to maintaining its profitability. However, each revenue model for each country must be slightly different. Starbucks has developed an effective strategy of pairing with local companies in regions in which it is expanding so it can gain a sense of local regulatory needs and local tastes. Part of this multicultural strategy, as well as offering green tea in China and Japan and more vegetarian, savory options in India is price-based. In India it has found that "smaller and cheaper beverages the fastest way to win local coffee drinkers from established rivals. The world's largest coffee chain will need options that are priced as much as 33% lower than its U.S. offerings to succeed in the Indian market" (Sharma 2012). In contrast, in China, where Starbucks markets itself as an aspirational brand for the emerging middle class, charging a high price for the product simply increases its attractiveness. "Thus, Starbucks has established itself as an aspiration brand and is able to charge premium prices" (Wang 2012). Focusing on international profits and assessing different price points is thus a critical component of increasing overall profitability.

Even the financial perspective is infused with cultural considerations such as the extent to which the market will bear specific prices. One component of the BSC is its acknowledgement that all the quadrants exist in dialogue: too often, only the financial perspective is emphasized or is viewed purely in isolation. "The point is that the current emphasis on financials leads to the 'unbalanced' situation with regard to other perspectives. There is perhaps a need to include additional financial-related data, such as risk assessment and cost-benefit data, in this category" ("Balanced scorecard basics," 2014).

The customer perspective

According to the balanced scorecard, "customer satisfaction, customer retention, and market share in target segments" are all critical components of this element of corporate success ("The balanced scorecard," 2014). For Starbucks, customer perspectives are particularly integral to its business model. Fundamentally, Starbucks is a service-driven organization. Customers pay for the experience of the stores -- their smell, ambiance, quality, and convenience -- and the experience of having their drinks made by baristas. This is very different from a conventional coffee sold by the canister such as Folger's or Maxwell House, which is more focused upon providing customer value by offering consumers low prices. Because service is a critical cornerstone of Starbucks, tracking customer satisfaction is essential.

Starbucks began by striving to offer the European cafe experience to America -- then to the world. Today, despite its emphasis on free trade and ethical treatment of its workers, however, Starbucks has been criticized for putting neighborhood coffee shops out of business. As a result of the risk of alienating its core customers, Starbucks must be especially mindful of customer satisfaction and how it perceives the image of the company. Purely based upon price, customers will not choose the Starbucks organization because it is sold at a higher price point than competitors such as Dunkin' Donuts and McDonald's. In fact, many of its competitors have specifically marketed themselves as the anti-Starbucks because of their lower prices and lack of pretentious Italian vocabulary for sizes and names of drinks.

However, Starbucks has an extremely loyal following because its customers like its product and believe that they are supporting a good company. It also has a reputation of offering a consistently high-quality product, whether their coffee is bought in an airport waiting room, a strip mall, or a free-standing store. Starbucks is not pricey, ultra-gourmet coffee, but it stresses its uniqueness as a product via offering specialty seasonal drinks like its pumpkin latte and its white chocolate bark and suggests it is a 'cut above' Dunkin' Donuts.

Thus, customer satisfaction is a critical measure of.....

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