Question 1v
Kolmog Hotels is a large, listed chain of branded hotels in Ostland. Its stated mission is: ‘to become the No. 1 hotel chain in Ostland, building the strength of the Kolmog brand by consistently delighting customers, investing in employees, delivering innovative products/services and continuously improving performance’. The subsidiary aims of the company are to maximise shareholder value, create a culture of pride in the brand and strengthen the brand loyalty of all stakeholders.
The hotels in the Kolmog chain include a diverse range of buildings and locations serving different customer groups (large conference venues, city centre business hotels and country house hotels for holidays). For reporting purposes, the company has divided itself into the four geographical regions of Ostland as can be seen in a recent example of the strategic performance report for the company used by the board for their annual review (see appendix 1). At the operational level, each hotel manager is given an individual budget for their hotel, prepared in the finance department, and is judged by performance against budgeted profit.
Kolmog is planning a strategic change to its current business model. The board has decided to sell many of the hotels in the chain and then rent them back. This is consistent with many other hotel companies who are focusing on the management of their hotels rather than managing a large, property portfolio of hotels.
In order to assist this strategic change, the chief executive officer (CEO) is considering introducing the balanced scorecard (BSC) across Kolmog. He has tasked you, as a management accountant in the head office, with reviewing the preliminary work done on the development of the scorecard in order to ensure that it is consistent with the goal of meeting the strategic objectives of the company by tying operational and strategic performance measurement into a coherent framework.
The CEO is worried that the BSC might be perceived within the organisation as a management accounting technique that has been derived from the manufacturing sector. In order to assess its use at Kolmog, he has asked you to explain the characteristics that differentiate service businesses from manufacturing ones.
Senior executives at the head office of Kolmog have drawn up a preliminary list of perspectives and metrics as an outline of the balanced scorecard in table 1:
| Table 1 | |
|---|---|
| Key strategic perspective | Metric |
| Strategic financial performance | – financial performance benchmarked to Kolmog’s main competitors (share price and return on capital employed) |
| Customer satisfaction | – customer satisfaction survey scores |
| Hotel performance against budget | – variance analysis for each hotel |
| Employee satisfaction | – staff turnover |
The history of rewards at Kolmog has not been good, with only 1% of staff receiving their maximum possible bonus in previous years and 75% of staff receiving no bonus. This has led to many complaints that targets set for the reward system are too challenging.
Under a new performance reward system, employee targets are to be derived from the above BSC strategic measures depending on the employee’s area of responsibility. The new system is for hotel managers to be given challenging targets based on their hotel’s performance against budgeted profit, industry wide staff turnover and the company’s average customer satisfaction scores. The hotel managers will then get up to 30% of their basic salary as a bonus, based on their regional manager’s assessment of their performance against these targets. The CEO wants you to use Fitzgerald and Moon’s building block model to assess the new system. He is happy with the dimensions of performance but wants your comments on the standards and rewards being applied here.
Appendix 1
Strategic performance report for review
Kolmog Hotels Year to 31 Mar 2013
| East Region | West Region | North Region | South Region | Total | Total 2012 | As % of revenue for 2013 | |
|---|---|---|---|---|---|---|---|
| $m | $m | $m | $m | $m | $m | ||
| Revenue | 235 | 244 | 313 | 193 | 985 | 926 | |
| Cost of sales | 28 | 30 | 37 | 21 | 116 | 110 | 11·78% |
| Gross profit | 207 | 214 | 276 | 172 | 869 | 816 | |
| Staff costs | 61 | 65 | 78 | 54 | 258 | 245 | 26·19% |
| Other operating costs | |||||||
| hotels | 68 | 70 | 97 | 54 | 289 | 270 | 29·34% |
| head office | 158 | 150 | 16·04% | ||||
| Operating profit | 78 | 79 | 101 | 64 | 164 | 151 | 16·60% |
| Financing costs | 78 | 73 | 7·92% | ||||
| Profit before tax | 86 | 78 | 8·73% | ||||
| Growth Year on Year | |||||||
| Capital employed | $1,132m | $1,065m | 6·29% | ||||
| EPS | $1·36 | $1·27 | 7·09% | ||||
| Share price | $12·34 | $11·76 | 4·93% | ||||
| ROCE | 14·49% | 14·18% |
Required:
Write a report to the CEO to:
(v) explain the purpose of setting targets which are challenging, and evaluate the standards and rewards for the hotel managers’ performance reward system as requested by the CEO. (14 marks)
Professional marks will be awarded for the format, style and structure of the discussion of your answer. (4 marks)