m004lon_ end of module assessment

FINANCE, FUNDING, AND LEGISLATIVE FRAMEWORKS FOR SUCCESS

M004LON S4

BALANCED SCORECARD OF TULLOW OIL PLC

COVENTRY UNIVERSITY LONDON CAMPUS

April 2, 2012

ROBERT Z. SONKARLAYSTUDENT ID # 3995565

WORD COUNT (EXCLUDING TABLES, EXECUTIVE SUMMARY, AND LIST OF REFERENCES): 2,570

EXECUTIVE SUMMARY

A Balanced Scorecard (BSC) for Tullow that translates the company’s vision and

strategy into implementation, along with a strategy map that that shows relationships

amongst the perspectives have been developed in this paper. Sixteen objectives

comprising both qualitative and quantitative measures have been used in the

development of the scorecard and were underpinned by four key principles.

From an analytical review of the scorecard, and the critical cause and effect

relationship between the various perspectives from the strategy map, four key points

that encapsulate the sixteen objectives were recommended. Summary of the

recommendations are below.

The company should identify additional sources of demand for its products by

extending to new markets and new customers.

The company should conduct a customer satisfaction survey to understand

how customers feel about Tullow, the performance of its products, and the

customer’s expectations.

The company should expand its global operations through strategic

acquisitions and joint ventures with other companies.

The company conduct an employee satisfaction survey to gain a critical

understanding of the people that implement strategic decisions for the

company, their motivational factors (financial rewards, recognition, promotion,

independence, etc.) and what they think of management and leadership in

the company.

M004LON (C01) Coursework II Page 1

TABLE OF CONTENTS

I. Executive Summary……………………………………………………1

II. Introduction……………………………………………………………...3

III. Vision an Strategy of Tullow Oil PLC…………………………………4

IV. Balanced Scorecard (BSC) of Tullow Oil PLC……………………….4

V. Strategy Map of Tullow Oil PLC………………………………………..8

VI. Recommendations……………………………………………………….10

VII. Discussion and Evaluation of BSC……………………………………..11

VIII. List of References………………………………………………………..15


II. INTRODUCTION

This business report is a continuation of the research conducted on the financial

analysis of Tullow Oil PLC during 2009 and 2010. The report explores the use of not

just financial performance indicators but non-financial ones as well, to provide a

more plump methodology to managing business performance.

The paper first identifies the vision and strategy of Tullow Oil PLC and then moves

on to prepare a Balanced Scorecard that will be suitable for use by the directors and

managers of the company to align business activities to the identified vision and

strategy, and monitor performance against strategic goals.

A strategy map is then constructed to describe and explain how each objective in the

scorecard can assist Tullow achieve its goals and targets; recommendations are

proffered to the board for review and consideration. A critical discussion and

evaluation of the balanced scorecard as an effective tool for performance

management and monitoring follow.


III. VISION AND STRATEGY OF TULLOW OIL PLC

The vision of Tullow Oil is to be the leading global independent Exploration and

Production Company in the Oil and Gas industry. The overall objective is to deliver

substantial returns to shareholders. The strategy to accomplishing the vision and

objective is to achieve sustainable long-term growth through balanced funding,

exploration and production in core geographic areas (Tullow Oil 2010).

IV. THE BALANCED SCORECARD (BSC) OF TULLOW OIL PLC

The balanced scorecard for Tullow PLC is developed as below. The balanced

scorecard covers a scope of three years during which a review of the company will

be conducted to see if the objectives set out in the scorecard were achieved.

Financial Perspective

No.

Objectives Measures/KPIs Targets Initiatives

1. To increase return

on capital

employed

Return on capital

employed ratio

From 3.4% to 5%

(Sonkarlay et al

2012)

Design

mechanisms that

increase operating

profit without

increasing ROCE

2. To increase profit

margin

Profit margin ratio From 56% to 65%

(Sonkarlay et al

2012)

Implement an

effective cost-

reduction program

3. To grow revenue Sales revenue From 19% to 25%

(Sonkarlay et al

2012)

Identify additional

sources of demand

(new markets and

new customers)

4. To increase

operating cash

flow

Operating cash flow

ratio

From 30% to 40%

(Tullow Oil 2010)

Use more equity

placing to raise

capital

5. To increase asset

utilisation

Asset utilisation ratio From 15.8% to

25% (Sonkarlay et

Maximise use of

existing assets


al 2012)

Customer Perspective

No.


1. To satisfy our

customer needs

Customer Retention A minimum of 75% Conduct customer

satisfaction survey

2. To increase

reliability

On-time deliveries 80% every quarter Product dispatch

automation

3. To improve

customer loyalty

Customer loyalty

rating

Minimum 75% Customer loyalty

program

Business/Internal Processes Perspective

No.


1. To increase

exploration and

appraisal success

Exploration and

appraisal success

ratio

Currently at 83% to

90% (Tullow Oil

2010)

Acquire more

exploration

licences; increase

operator’s interest

in jointly operated

fields

2. To improve

working capital

management

Cash-cycle period Reduce from 94.96

days to 23.64 days

(Sonkarlay et al

2012)

Encourage early

payment by offering

discounts to

customers

3. To develop more

cost-effective

methods of

production and

development

Cost of exploration

and development

Cut production and

development costs

by 30% (Tullow Oil

2010)

Research and

development

programs in

production and

development

technologies

4. Increase

production

profile(working

interest

Resource base Currently at 58,100

barrels of oil

equivalent per day

(boepd) to 70,000

Expand global

operations through

strategic

acquisitions and


production) boepd (Tullow Oil

2010)

joint ventures

Innovation/Learning and Growth Perspective

No.


1. To increase staff

competency

Hours in technical

skills training

20 hours per

quarter for

employees

Staff competency

profiling

2. To lead employee

satisfaction

Employee

satisfaction rate

At least 8 on a 10-

point scale

Employee

satisfaction survey

3. To reduce staff

turnover

Staff turnover ratio From 1.3% to 0.5%

(Tullow Oil 2010)

Staff recognition

and reward

program

4. To create a

company of

effective leaders

Number of

employees trained

Sixty employees

per quarter across

the group

Leadership training

programs

Justifications for Choice of ObjectivesThe objectives stated in the BSC above are geared towards achieving the vision and

strategy of the company.

A. The Financial Perspective is crucial to the survival of any company and is the

focus of all the business activities for Tullow.

a. The return on capital employed is the most significant to investors and

is the first objective to be met because it shows the rate at which the

business is making profit; if Tullow is to deliver substantial returns to

shareholders, this ratio has to be increased consistently.

b. The profit margin has been chosen as a financial objective because the

underlying reason for any company doing business is profit. It is

therefore important to increase this margin as it impacts the return on

capital.


c. Asset Utilisation is a key component of the financial objectives. Once

Tullow uses its assets efficiently, the company will be able to extract

more oil from its existing fields, thereby increasing its output which will

ultimately lead to increase in sales.

d. Tullow’s revenue growth is essential to supporting the deliverance of

value to its shareholders. Once there is a growth in the revenue

stream, the direct result is an increase in operating profit that leads to a

jump in the profit margin and the return on capital employed.

e. Tullow has a large requirement for capital to fund major project

developments and a very active exploration and appraisal program;

therefore, operating cash flow must be increased to fund substantial

proportion of capital expenditure (Tullow Oil 2010).

B. As an oil and gas company, Tullow’s Customer Perspective is in three fold.

Without the customers, Tullow has no business.

a. It is paramount for customers are satisfied and that their needs are met

as a business. Dissatisfied customers mean financial objectives will not

be achieved because these customers will look to competitors for

satisfaction. This may affect revenue and the ripple effect could mean

fall in profits and decline in returns to shareholders.

b. Reliability is essential in the oil and gas business. Customers must be

confident and sure that there would be constant supply of products,

and that the products are not only constantly supplied but also on a

timely basis to protect their own business interest as well.

c. The oil and gas market is a volatile market in terms of price fluctuation

and instability in oil producing regions; hence, loyal customers are very

crucial to the survival of Tullow. Just in case of a sharp increase in

price on the market or drop in supply from Tullow as a result of political

upheavals in regions where the company operates, which could trigger

a change in price to customers, only loyal ones would be in the position

to purchase the company’s product at the new price.

C. The Internal Business Perspective of Tullow concentrates on how the

company can improve its core business activities of exploration and appraisal,

and production and development to deliver maximum shareholder value.


a. Increasing exploration and appraisal success will put the company in a

strong position to becoming the number one independent Exploration

and Production Company. Successful exploration and low risk

appraisal add transformational resources to the growing resource base,

thereby creating value for shareholder.

b. Developing cost-effective methods of production and development will

turn oil and gas resources into reserves and then into production

revenues and cash flow to fund the business activities at minimum

cost, which in turn will increase operating profit.

c. The production profile of Tullow drives revenue growth and underpins

future cash flow generation. In this light, strong focus is placed on

increasing the production profile to ensure sustained contribution to

value creation.

d. In addition to exploration and production activities, Tullow’s working

capital management is pivotal to the success of the company.

Shortening its cash cycle indicates that the company has ready cash to

run day-to-day activities of the company and will have a positive effect

on the return on capital.

D. Learning and Growth Perspective drives all the activities in the company for

the fact that Tullow is built around the employees.

a. Tullow operates in an industry that requires efficient technical and

managerial know-how. When staff competencies are increased, the

employees have the ability and knowledge of the industry and would

contribute to the development of the company by enhancing business

practices through new ideas and innovative work processes.

b. A satisfied workforce means increased productivity, the result which

springs up in increased revenues and profit margins. Satisfying

employees is cardinal to the growth and development of Tullow.

c. The goal of Tullow is to be the employer of choice in the industry so

that the company can attract and retain the best people. By reducing

the number of employees leaving the company, Tullow avoids skills

shortage and can use its motivated workers to achieve company

objectives.


d. Leadership in the oil and gas industry is the hallmark of any

responsible exploration and production company. Creating a company

composed of employees who have leadership abilities guarantees

effective delivery of strategy and adherence to best industry practices.

V. STRATEGY MAP OF TULLOW OIL PLCThe strategy map below evolves from the four perspectives model of the balanced

scorecard above. It is a visual representation of the cause-and –effect relationships

among the components of Tullow’s strategy; it adds a second layer of detail that

illustrates the time-based dynamics of strategy and how an organisation creates

value (Kaplan & Norton 2004).


Substantial Returns to

Shareholders

Increase ROCE

Grow Revenue

Increase Profit

Margins

Increase Operating Cash Flow

Improve Asset

Utilisation

Customer Satisfaction

Customer LoyaltyReliability

Increase Exploration &

Appraisal Success

Improve Working Capital

Management

Develop Cost-effective

Methods of Production

Increase Production

Profile

Effective Leadership

Employee Satisfaction

Reduce Employee Turnover

Increase Staff

Competency

FP

CP

IP

LG

NOTE: FP = Financial Perspective; CP = Customer Perspective; IP = Internal

Perspective; and LG = Learning and Growth Perspective


Leading Global Independent Exploration and Production Company

VI. RECOMMENDATIONSTo deliver substantial shareholder value, and to effectively translate Tullow’s vision

and strategy into implementation, the recommendations below should be taken into

consideration.

a) The company should identify additional sources of demand for its

product by extending to new markets and attracting new customers. By

expanding its presence in different markets which will increase its

customer base, sales revenue of the company will grow as oil prices

are set to increase further in the coming years due to increasing

demand for oil and gas and their related products, worldwidely.

Revenue growth translates into higher profit margins and can be an

indication of efficient use of assets; undoubtedly, this impacts the

return on capital employed. Strong growths in revenues support the

primary ratios that create direct shareholder value.

b) The company should conduct a customer satisfaction survey to

understand how customers feel about Tullow, the performance of its

products, and the customer’s expectations. Customer satisfaction is a

key to retention of the company’s already existing customer and this

has the ability to also generally create customer loyalty. Satisfied

customers indicate that the company’s services are reliable and that

delivery of products is on time. Greater customer satisfaction has a

direct relationship to revenue growth in that customers have the ability

to promote the company to others by word of mouth, and this could

attract new customers to the company (Kotler et al. 2009).

c) Tullow should expand its global operations through strategic

acquisitions and joint ventures with other companies. Even though the

company currently operates in twenty two countries around the world,

achieving the company’s vision requires building a world-class portfolio

of exploration and development licences, which now stands at ninety

(Tullow Oil 2010). This will ultimately increase the production profile of

the company; the production profile drives revenue growth and

underpins future cash flow generation, and in turn supports future

production growth opportunities.


d) The company should conduct an employee satisfaction survey to gain

a critical understanding of the people that implement strategic

decisions for the company, their motivational factors (financial rewards,

recognition, promotion, independence, etc.) and what they think of

management and leadership in the company. Employees that are

satisfied exhibit positive attitudes and behaviours that influence the

activities of the company and are evidenced by profitability and the

level of customer satisfaction. Employees will be enthusiastic about

programs initiated by the company and be willing to contribute whole-

heartedly to business processes once they are happy and satisfied.

This will in turn drive productivity and efficiency, reduce employee

turnover, and enhance leadership in the company.

VII. DISCUSSION AND EVALUATION OF THE BALANCED SCORECARD

The Balanced Scorecard (BSC) developed by Robert S. Kaplan and David P. Norton

is a strategic approach and performance management system that enables

organisations to translate a company’s vision and strategy into implementation. The

BSC uses strategic and financial measures to assess the outcome of a chosen

strategy, and acknowledges the different expectations of the various stakeholders

and it attempts to use a scorecard based on four prime areas of business activity to

measure the results of the selected strategy (Lynch 2009).

According to Lynch (2009) the BSC combines qualitative and quantitative measures

of the selected strategy. There are four key principles behind the BSC:

Translating the vision through clarifying and gaining consensus

Communicating and linking by setting goals and rewards for success

Business planning to align objectives, allocate resources and establish

milestones

Feedback and learning to review the subsequent performance against plan

Kaplan and Norton recognised that every strategy is distinct, yet identified four

strategic perspectives that should appear on every scorecard (Kaplan & Norton

1996) and are summarised below:


Financial Perspective translates the purpose of the organisation into action

and includes measures such as operating income, return on capital employed,

and economic value added.

Customer Perspective purpose needs to be seen in the context of customer-

oriented strategy and includes measures such as customer satisfaction,

customer retention, and market share in target segments.

Business Process/ Internal Perspective concerns internal performance

measures related to productivity, capital investment against cost savings

achieved, labour productivity improvements and other factors that will indicate

the way the organisation was undertaking the strategy inside the company.

Innovation/Learning and Growth Perspective provides feedback and learning

through strategy reviews and includes measures like employee satisfaction,

employee retention, personnel development, skill sets, etc.

Integrated Four Perspectives of the BSC

The four perspectives in the balanced scorecard are interrelated and should be

integrated as is demonstrated in the diagram below.

Source: (Balanced Scorecard Institute 2011)

Benefits of the Balanced Scorecard


Considered as an improved performance measurement system, the BSC soon

became a useful management system to implement strategy. According to Proctor,

the major objective of the BSC is to align organisational objectives and activities in

order for the organisation to achieve continuous improvement through effective

strategy implementation (Proctor 2009).

There have been several organisations that have been successful in using the BSC,

such as CIGNA Property & Casualty Insurance, Brown & Root Energy Services,

Chase Retail Bank, etc. (MAAW 2012). A survey conducted by the International

Institute of Management of 500 companies indicated that using the balanced

scorecard as an integral part of strategic planning gave a breakthrough result of

100% (IIM 2002).

Malina and Selto (2001) argue that BSCs can make other significant contribution to

improve business performance by expounding strategy through quantifiable

measures; communicating strategic objectives by turning high level objectives into

operational objectives; planning, setting targets and aligning strategic initiatives

through ambitious but achievable targets for each perspective and initiatives; and

obtaining strategic feedback and learning on whether the strategy implementation is

going on according to plan.

Limitations of the Balanced Scorecard

The use of the balanced scorecard has been subject to increasing scrutiny and

criticism in academic literature; even the authors of the balanced scorecard concept

admit that it may not be suitable for all firms. Research has shown that BSC users

are not very knowledgeable of the cause and effect relationships that govern the

selection of performance measures; moreover, the BSC model is not theoretically

innovative, convincing or valid (Norreklit 2003).

Another criticism of the balanced scorecard is that its goals are highly aggregated

and typically influenced by several causal factors, and that goals are merely hopes

that may not be feasible within the current system (Schonberger 2008). Although the

balanced scorecard promises to outline the theory of the firm by clearly linking the

driver/outcome measures in a cause and effect chain, the precise cause and effect


relationships between measures for each of the perspectives on the balanced

scorecard will be complex because the driver and outcome measures for the various

perspectives are interlinked (Brabazon 1999).

Other writers argue that the balanced scorecard is too fixed and that a more

effective, systemic perspective in measuring/managing intangible assets needs to be

adopted. They view the balanced scorecard as a tyrannical model that is beginning

to endanger the survival of firms, hinder much-needed business ecosystem

innovation, thereby negatively affecting customer value rejuvenation, shareholders’

benefits, other stakeholders as well as societal benefits in general (Voepel et al

2006).

Other limitations of the balanced scorecard model include choice of strategy, that is,

getting the right strategy in place; quality of the management information system;

time lags; subjectivity because the BSC is designed and actioned by people;

semantics and language, which could lead to an objective been interpreted

differently by different people; and management guru ethos (Proctor 2010: 466-467).

LIST OF REFERENCES


1. Balanced Scorecard Institute (2011) Balanced Scorecard Basics [online]

available from

http://www.balancedscorecarg.org/BSCResources/AbouttheBalancedScoreca

rd/tabid/55/Default.aspx> [15 March 2012]

2. Institute of International Management (2002) Strategy Alignment and

Performance Management Tool [online] available from <http://www.iim-

edu.org/executiveeducation/executive_seminar_havard_balanced_scorecard.

pdf> [16 March 2012]

3. Kaplan, R.S & Norton, D.P. (2004) Strategy Maps: Converting Intangible

Assets to Tangible Outcomes. Boston: Harvard Business School Publishing

Corporation

4. Kaplan, R.S & Norton, D.P. (1996) The Balanced Scorecard. Boston: Harvard

Business School Press

5. Kotler, P; Keller, K.L; Goodman, M; Hansen, T. (2009) Marketing

Management. Harlow: Pearson Education Limited

6. Lynch, R. (2009) Strategic Management, 5th edn. Harlow: Pearson Education

Limited

7. Malina, M.A., Selto, F.H., (2001), ‘Communicating and Controlling Strategy:

An Empirical Study of the Effectiveness of the Balanced Scorecard’, Journal

of Management Accounting Research, 13: p47

8. Management and Accounting Web (2012) Article Summaries [online]

available from

<http://www.maaw.info/ArticleSummaries/ArtSumKaplanNorton2001.htm> [12

March 2012]

9. Norreklit, H. (2003) ‘The Balanced Scorecard: What is the Score? A

Rhetorical Analysis of the Balanced Scorecard’ Journal of Accounting,

Organisations, and Society, 28(6): p591-619

10.Proctor, R. (2009) Managerial Accounting for Business Decisions, 3rd edn.

Harlow: Pearson Education Limited

11.Schonberger, R.J. (2008) ‘Lean Performance Management (Metrics don’t add

up)’ Cost Management Journal, p5-10

12.Sonkarlay, R.Z; Aboagye-Wiafe, E; Sumaila, N. (2012) Financial Analysis of

Tullow Oil PLC. Unpublished Coursework: Coventry University London

Campus


13.Brabazon, T. (1999) The Balanced Scorecard [online] available from

<http://www2.accaglobal.com/students/student_accountant/archive/2000/2/43

995> [18 March 2012]

14.Tullow Oil, PLC (2010) Annual Report and Accounts 2010 [online] available

from <http://www.tullowoil.com> [20 March 2012]

15.Voelpel, S.C; Leibold, M; Eckhoff, R. (2006) ‘The Tyranny of the Balanced

Scorecard in the Innovative Economy’ Journal of Intellectual Capital, 7(1):

p43-60


m004lon_ end of module assessment

Documents

identify additional sources

reduce employee turnover

deliver substantial returns

employee satisfaction survey

customer satisfaction survey

increase operating profit

implement strategic decisions

tullow oil plc