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
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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.
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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
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al 2012)
Customer Perspective
No.
Objectives Measures/KPIs Targets Initiatives
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.
Objectives Measures/KPIs Targets Initiatives
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
M004LON (C01) Coursework II Page 5
production) boepd (Tullow Oil
2010)
joint ventures
Innovation/Learning and Growth Perspective
No.
Objectives Measures/KPIs Targets Initiatives
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.
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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.
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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.
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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).
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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
M004LON (C01) Coursework II Page 10
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.
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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:
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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
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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
M004LON (C01) Coursework II Page 14
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
M004LON (C01) Coursework II Page 15
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
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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
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