Phase 2: Qualitative Study
III. Performance and Engagement Appraisal and Feedback
7.3 THE BALANCED SCORECARD AND ORGANISATIONAL PERFORMANCE The quantitative analysis did not reveal any significant difference in mean scores on the
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7.3 THE BALANCED SCORECARD AND ORGANISATIONAL PERFORMANCE
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was low. Retek, although a major retailer in South Africa, has very strong competition from other retailers in terms of products and price. In addition, its diversification from apparel to other non-core products may have adversely affected its margins. Its volumes purchases for its non-core products is not as high as some of its competitors, and thus the negotiation power with certain suppliers is limited. Another reason is the frequency of mark-ups and promotions.
Promotions and mark-ups can have a significant impact of Gross Profit Margin. According to Darlington (2011), owners and managers do not fully understand the impact that reducing the price of a product can have on the bottom line. Reducing the selling price of a product affects profitability as the store now has to sell a product cheaper. According to Darlington (2011), people involved in the sales process should be upskilled on the importance of Gross Profit Margins on their business. One way, according to Darlington (2011), is the use of monthly reports reflecting what the sales and GP margins are, so that staff is aware of how the percentage discounts given away, affect their jobs.
The issue of low margins is not only specific to South Africa retailers alone. In India, for example, retailers have negotiated with global manufacturers such as LG, Samsung and Nokia among others for better manufacturing margins (Vijayraghavan, 2011). These are brands that are very popular in South Africa, and are part of Retek’s business as well. According to Vijayraghavan (2011), one of the main reasons cited by retailers were rising operating costs on business such as rent, employee costs. In the US for example, clothing retailers also experience issues with low margins that impact on their profitability. A recent analysis of 18 retailers in the US, showed that 11 of the companies suffered decreased margins due to a combination of heavy markdowns, low sales and logistic costs (Zaczkiewick, 2015).
Even if retailers manage their Gross Profit Margins effectively, they still need to take it a step further by managing trading margins. According to Theobald (2015), although retailers may increase their gross profit margins, if they do not manage their trading margins, then it impacts on their profitability. For example, in comparing two similar food retailers in South Africa, Theobald (2015) found that while one improved its gross profit margin from 16.6% to 17.5%
over the year, its overheads increased significantly relative to sales. On the other hand, the other retailer showed a fairly slight increase in its gross profit margins from 20.1% to 20.8%, but it managed to decrease its overheads, which ultimately resulted in it being more profitable.
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Therefore, as indicated by the results of the analysis, an increase in sales does not mean an increase in profitability.
In this study, the store managers felt that although they had control over sales and store costs, they had no control over the gross profit margins as this was the responsibility of the merchandise team. The merchandise team negotiated with the suppliers regarding the costs of the products, and based on these negotiations, dictated the price the products should sell for.
There was no meaningful collaboration between the merchandise teams that purchase the products and the store managers who sell the products. Therefore, it was highly possible that the gross profit margins for purchasing products from suppliers versus selling the products to consumers could be very low, or vice versa. A high gross profit margin is most desirable as a low gross profit margins would result in managers needing to significantly increase the sales of that product to make a profit. The qualitative finding indicated that store managers had no control over gross profit margins, or were advised on the whether certain products have a high or low profit margins. The implications for this was that store managers did not know which products they should place their focus on to increase sales so as to increase organisational profitability. From the above discussion, it can therefore be inferred that gross profit margin and trading margins may have affected the profitability of Retek even though its store managers improved their individual performance.
7.3.2 Credit and Sales
The Retek business is made up of both cash and credit sales. Credit sales pose the greatest risk to the business’s profitability as customers may not pay their accounts due to a variety of reasons. In order to mitigate this risk, Retek changed their credit business model to become increasingly stringent. The aim of the new credit model was to curb the severity of bad debt that Retek was facing due to the economic instability. While the new criteria assisted in curbing the amount of bad debts, Retek still experienced the issue of customers not paying their accounts. However, the impact of bad debt on credit sales did not form part of the store managers’ individual performance, but reflected on the organisational performance (as measured by the trading profit). In other words, store managers were encouraged to open as many new accounts as possible to increase their sales, and if any these new accounts resulted
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in bad debts, the store manager was not held accountable nor did it affect their sales figures negatively. This misalignment could be another reason why an increase in employee performance many not lead to an increase in organisational performance. This misalignment was highlighted by some of the managers interviewed who felt that there was no or little alignment of the BSC to the organisations strategy. These managers felt that the BSC KPI’s measuring their performance was not directly linked to the profitability of the store.
In order to mitigate this risk, this impact of credit sales should form part of the store managers KPI’s. While the organisation may have an effective credit management policy, the store manager must be responsible for properly validating the details of people opening new accounts to curb the risk of bad debts. Although this may seem difficult, it is possible. For example, in comparing two credit retailers in South Africa, Theobald (2015) found that the ability of one retailer to manage its bad debts effectively resulted in it writing of R700m is bad debts, as opposed to the other retailer that wrote off R2.9bn. It is a very difficult scenario to manage as on one side one want’s to increase sales through less stringent measures on giving credit, but on the other hand one has to manage the risk of bad debts, as this ultimately affects profitability.
According to Theobald (2015), serious tension is created when both functions operate together, with the retailing side demanding loose credit granting criteria, and finance overlooking spikes in bad debt.
Magwaza (2014) similarly highlighted another fashion retailer that through its focus on its credit risk management practices, increased its credit sales by 5.7 percent. According to its CEO, its strategy of tighter credit scorecards, and checking up on credit bureau information on a monthly basis as opposed to quarterly, has resulted in the number of new credit accounts dropping by 10 percent. According to Magwaza (2014), the retailer’s gross margin in all categories was maintained while the operating margin from continuing operations reduced from 18.7 percent to 17.9 percent due to tight credit market conditions. Therefore, while an increase in credit sales may create an impression that the stores sales are good, the potential bad debts accompanying those credit sales negate the sales figures. A good credit management policy and the ability of store managers to drive the process will ensure that there is a better alignment between credit sales and actual sales.
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7.4 THE BALANCE SCORECARD (BSC) AND INTRINSIC MOTIVATION