Coors Brewing Company
The Coors Case
Balanced Scorecard
Hugh Grove, School of Accountancy
Daniels College of Business, University of Denver
Tom Cook, Department of Finance
Daniels College of Business, University of Denver
Ken Richter, Product Quality Control Manager
Coors Brewing Company
By the end of 1997, Coors had finished the implementation of a three-year computer-integrated logistics (CIL) project to improve its supply chain management. Coors defined its supply chain as every activity involved in moving production from the supplier’s supplier to the customer’s customer. (Since by federal law, Coors cannot sell directly to consumers, Coors customers are its distributors whose customers are retailers whose customers are consumers.) Coors’s supply chain included the following processes: purchasing, research and development, engineering, brewing, conditioning, fermenting, packaging, warehouse, logistics, and transportation.
This CIL project was a cross-functional initiative to reengineer the business processes by which
Coors’s logistics or supply chain was managed. This reengineering project improved supply chain processes and applied information technology to provide timely and accurate information to those involved in …show more content…
supply chain management. The project objective was to increase company profitability by reducing cycle times and operating costs and increasing customer (distributor) satisfaction.
The software vendor used for this project was the German company Systems Applications & Products (SAP), which provided the financial and materials planning software modules. The SAP planning software became Coors’s load configurator software, which takes distributor demand forecasts and the production schedule and creates a shipping schedule for the following week. The following major supply chain problems were corrected by this CIL project:
• meeting seasonal demand,
• meeting demand surges from sales promotions,
• supporting the introduction of more than three new brands each year,
• filling routine customer (distributor) orders,
• filling rush orders,
• moving beer from production through warehouse to distributors before the beer spoiled.
(The shelf lives for Coors products were 60 days for beer kegs and 112 days for all other beer packages.)
Matt Vail, head of Coors’s Customer Service Department, had been the CIL project leader since the inception of the project. He had developed such expertise with supply chain management that he had just been hired by a supply chain consulting firm. In early 1998, on his last day of work for Coors, he was talking with Ken Rider, head of Coors Quality Assurance Department. Ken had just been placed in charge of the new balanced scorecard (BSC) project at Coors. The initial motivation for this project was to assess whether the supply chain improvements were being maintained. However, the project was broadened to become a company-wide BSC. Accordingly, the project strategy was to implement a performance measurement process that: (1) focused on continuous improvement, (2) rewarded reasonable risk taking and learning to improve performance, and (3) enabled employees to understand the opportunity and reward for working productively.
Matt: The supply chain management project was really challenging and rewarding. I hate to leave Coors, but the consulting firm made me such an attractive offer that I could not refuse it. I hope you have such positive experiences with this follow-up balanced scorecard project.
Ken: This new project will be a real challenge. We need to build on all the improvements made by your supply chain project.
Matt: My project team was excited to see that our CEO discussed the supply chain project in his 1997 shareholder letter. He said that significant productivity gains in 1997 were due to our project, which streamlined purchasing, brewing, packaging, transportation, and administration of the supply chain.
Ken: Perhaps an economic value-added (EVA) analysis could be done to assess these supply chain productivity gains.
Matt: That’s an interesting idea, to analyze performance in the financial quadrant of the balanced scorecard with EVA.
Ken: Another challenge for my project is how to translate the Coors vision statement and related business strategies into operational performance measures.
Matt: You also need to identify any gaps between the vision statement, business strategies, and current performance.
Ken: Do you have any experiences from your project that I could use?
Matt: Well, we did obtain some benchmarking data to develop targets for some performance measures for our supply chain project. I can give you these measures, but they are limited due to confidentiality problems in obtaining such data. Maybe Coors should join one of the commercial benchmarking databases.
Ken: Thanks. I am also aware of certain employee resistance to developing a new set of performance measures for this balanced scorecard approach.
Matt: We had similar employee resistance to changes in the business processes of the supply chain. We were able to use the following crisis motivation. At that time, Coors could not support all the new beer brand introductions proposed by our marketing people, due to the antiquated 1970s software that was then being used for our supply chain management. The marketing people wanted to introduce three new brands each quarter, and we could support only three new brands each year! We also learned that we needed to get more employee involvement in the project.
Ken: That’s a good idea. In fact, I’ve already developed a list of the most frequently asked questions (FAQs) about the balanced scorecard from initial meetings with employees involved in the supply chain.
Matt: You have lots of challenges awaiting you. Good luck in your new project. Make sure that today’s improvements in supply chain performance don’t become tomorrow’s problems!
Balanced Scorecard Background
The balanced scorecard is a set of financial and nonfinancial measures relating to the company’s mission, strategies, and critical success factors. The balanced scorecard puts vision and strategy at the center of the management control system. Vision and strategy drive performance measures, as op19 posed to the traditional performance measurement systems that provided their own limited measures to management whether they were needed or not. The goal is to maintain an alignment of an organization’s vision, strategy, programs, measurements, and rewards.
An innovative aspect is that the components of the scorecard are designed in an integrative manner to reinforce each other as indicators of both current and future prospects for the company. The balanced scorecard enables management to measure key drivers of overall performance, rather than focusing on short-term financial results. It helps management stay focused on the entire business process and helps ensure that actual current operating performance is in line with long-term strategy. Kaplan and Norton (1992) are generally given credit for creating the balanced scorecard in the early 1990s.
A recent survey found that 80% of large American companies want to change their performance measurement systems (Birchard 1995). Another recent survey found that 60% of Fortune 1,000 companies have or are experimenting with a balanced scorecard (Silk 1998). Such changes have been driven by the evolving focus on a team-based, process-oriented management control system.
The balanced scorecard has four perspectives or quadrants that generate performance measures to assess the progress of a company’s vision and strategy, as follows:
• Customer perspective: how do customers see us?
• Internal business perspective: what must we excel at?
• Innovation and learning perspective: can we continue to improve and create value?
• Financial perspective: how do we look to shareholders?
The BSC is a set of discrete, linked measures that gives management a comprehensive and timely evaluation of performance. The BSC tries to minimize information overload by providing a limited number of measures that focus on key business processes by level of management. For example, top management needs summarized, comprehensive monetary measures while lower levels of management and employees may need both monetary and nonmonetary measures on a more frequent basis.
Also, such measures need to track progress concerning the gap between a company’s performance and benchmarked targets.
The BSC considers frequency of measurement, depending on the type of measure. Generally, nonmonetary measures are reported more frequently than monetary measures. For example, nonmonetary operating measures, such as machine downtime, percentage of capacity used, and deviations from schedule, may be measured daily. Other nonmonetary measures, such as manufacturing cycle time, delivery accuracy, customer complaints, and spoilage, may be measured weekly. Some nonmonetary and monetary measures, such as inventory days, accounts receivable days, product returns, and warranty costs, may be measured quarterly. Other nonmonetary and monetary measures, such as new products introduced, market share, total cost of poor quality, return on investment and employee training, may be measured annually.
Company Background
Coors had been a family-owned and operated business from its inception in 1873 until 1993 when the first non-family member became president and chief operating officer. However, Coors family members still held the positions of chairman of the board of directors and chief executive officer and also held all voting stock. Only nonvoting, Class B common stock was publicly traded.
Coors has been financed primarily by equity and has borrowed capital only twice in its corporate history. The first long-term debt, $220 million, 8.5% notes, was issued in 1991, and the final $40 million of principal was to be repaid by the end of 1999. The second long-term debt, $100 million, 7% unsecured notes, was issued in a 1995 private placement. Of this principal, $80 million is due in 2002 and the last $20 million is due in 2005.
In the mid-1970s Coors was a regional brewery with an 11-state market, selling one brand in a limited number of packages through approximately 200 distributors. Traditionally, Coors beer had been a non-pasteurized, premium beer. (However, with a recently developed sterilization process, its products now have the same shelf life as its competitors’ pasteurized products.) The Coors plant in Golden, Colorado, was its only production facility, and it had no other distribution centers. Over the next 25 years, Coors changed dramatically by expanding into all 50 states and various foreign markets. By the end of the 20th century, Coors had production facilities in Golden, Colorado, Memphis, Tennessee, Elkton, Virginia, and Zaragoza, Spain. It had expanded to using 21 “satellite redistribution centers” in the United States before the CIL project reduced this number to eight. Beer shipments were made by both truck and railroad cars. Coors had approximately 650 domestic beer distributors, although about 200 of them accounted for 80% of Coors’s total sales. Coors also had several joint ventures and international distributors in Canada, the Caribbean, Latin American, Europe, and the Pacific.
Coors had 16 beer brands, including a specialty line, Blue Moon, that competed with the domestic micro brewing industry. However, Coors continued to focus on its four key premium brands: Coors Light, Original Coors, Killian’s Irish Red, and Zima. Coors Light was the fourth largest selling beer in the United States. In packaging, Coors had to compete with the major competitors’ value packaging, such as 12-packs and 30-packs. In 1959, Coors introduced the nation’s first all-aluminum beverage can and in the late 1990s, it had introduced a baseball bat bottle and a football pigskin bottle.
There were also numerous state labeling laws to meet, such as returnable information, and packaging graphics to reinforce the Rocky Mountains image for Coors beer.
Competition in the beer industry was strong, especially in the United States. Anheuser-Busch
(A/B) was the market leader with approximately 44% of the U.S. market, 80 million barrels sold, $8 billion beer sales, and $1 billion net profit. Due to its size, A/B was the acknowledged price leader in the industry. A/B also had 13 domestic production plants, including one in Ft. Collins, Colorado, to achieve its customer service goal of having no major domestic distributor more than 500 miles away from one of its beer production plants.
Number two in this market was Miller, owned by Philip Morris, with approximately 22% market share, 40 million barrels sold, $4 billion beer sales, and $460 million net profit. Miller had seven domestic production plants. Coors was number three with an 11% market share, 20 million barrels sold, $2 billion beer sales, and $80 million net profit. Coors had three production plants in the United States. Its Colorado plant was the largest brewery in the world and served 70% of the U.S. market with its 10 can lines, six bottle lines, and two keg lines.
No other domestic brewers had market share in excess of 5%. In the late 1990s, there had been consolidation of the larger companies in the domestic beer industry. The most recent example was Stroh Brewing Company (SBC) with about 5% market share. SBC had signed agreements to sell its major brands to Miller and the remaining brands to Pabst Brewing Company. SBC would then exit the beer industry by 2000.
From 1983 through 1998, Coors was the only major U.S. brewer to increase its sales volume each year, although industry sales had grown only about 1% per year in the 1990s. Coors had outpaced the industry volume growth rate by one or two percentage points each year. Coors had accomplished this growth by building its key premium brands in key markets and strengthening its distributor network, recently with improved supply chain management.
Coors’s Vision Statement and Business Strategies
Coors’s vision statement was as follows:
Our company has a proud history of visionary leadership, quality products and dedicated people which has enabled us to succeed in a highly competitive and regulated industry. We must con21 tinue to build on this foundation and become even more effective by aligning and uniting the human, financial and physical aspects of our company to bring great tasting beer, great brands and superior service to our distributors, retailers and consumers and to be a valued neighbor in our communities. Our continued success will require teamwork and an even stronger dedication by every person in our organization to a common purpose, our Vision. Achieving our
Vision requires that we begin this journey immediately and with urgency for it will require significant change for us to thrive and win in our industry.
Using this vision statement, top management had decided to focus on four fundamentals: improving quality, improving service, boosting profitability, and developing employee skills. In the 1997 Coors annual report, both the CEO and the president discussed the following general business strategies or “six planks” to drive these fundamentals in the future:
1. Baseline growth: we will profitably grow key brands and key markets.
2. Incremental growth: we will invest selectively to grow high potential markets, channels, demographics, and brands.
3. Product quality: we will continuously elevate consumer perceived quality by improving taste, freshness, package integrity, and package appearance at point of purchase.
4.
Distributor service: we will significantly enhance distributor service as measured by improved freshness, less damage, increased on-time arrivals, and accurate order fill at a lower cost to Coors.
5. Productivity gains: we will continuously lower total company costs per barrel so Coors can balance improved profitability, investments to grow volume, market share and revenues, and funding for the resources needed to drive long-term productivity and success.
6. People: we will continuously improve our business performance through engaging and developing our people.
The operations and technology (O&T) department of Coors was in charge of the supply chain management and had developed its own vision to elaborate the overall Coors vision statement as
follows:
We are partners with our internal business stakeholders, with our suppliers and with our communities. With our partners, we have developed an aligned and integrated supply chain that delivers our commitments and meets the requirements that delight our distributors, retailers, and consumers, establishing our company as the supplier of choice. The processes required to design, safely produce, and deliver great tasting beer at its freshest, with superior packaging integrity, competitive cost, are well-defined, understood, consistently followed, and continually improved by every person in our organization. The quality and innovation we employ in all we do encourage beer drinkers to seek out our brands and make Coors the envy of our competition. Our use of current, accurate information and appropriate technology enables all individuals in our organization to monitor and control their work, be flexible and move with speed. We value learning and exercise a tenacious approach to eliminate waste and reduce cost. We realize that in a competitive world, we must bring value to our brands and continually aspire to a higher level of performance to compete successfully.
The O&T department had also adopted and extended the following supply chain guiding principles from the work of the CIL supply chain project team to create its own business strategies:
• Simplify and stabilize the process.
• Eliminate non-value-added time and waste.
• Relentlessly pursue continuous improvement.
• Inventory is a liability, not an asset.
• People doing the work are critical to lasting improvement.
• Short cycle time + reliability = flexibility.
• Find and fix the root cause.
• Know your costs.
• Know your customers’ expectations.
• Make decisions where work is performed.
• Balance and optimize the overall process.
• What gets measured gets done.
Benchmarking and Performance Gaps
Only limited benchmarking information was available since Coors had not yet decided to join any of the commercial benchmarking databases. (The largest one in the United States, the Hackett Group Study, sponsored by the American Institute of CPAs, has about 700 participating companies.)
Performance gaps with Coors’s two major competitors were noted by the following financial information obtained from annual reports:
Table 1 Benchmarking Analysis
There were insignificant differences in price per barrel as A/B was the industry price leader and the other competitors closely followed A/B’s pricing decisions. A/B had this pricing power because its domestic market share of 44% was twice that of Miller and four times that of Coors.
The major motivation for the CIL supply chain project came from the deficiencies in the supply chain performance. The CIL project had become fully operational by the end of 1997, but more time was needed to realize the full benefits of such a project. There was still a significant amount of volatility in the production process that contributed to the Colorado redistribution center’s being the largest bottleneck in the supply chain. For example, Coors often could not meet its goal to load beer product directly off the production line into waiting railroad cars.
Thus, Ken’s project team had already added three new nonmonetary performance measures and created challenging performance targets for these measures to track anticipated additional efficiencies from the CIL project. Also, top management had created financial goals for key monetary performance measures in an attempt to become more competitive. These key performance measures are shown in Table 2.
The gaps in current performance at the end of 1997 indicated problems with Coors’s traditional, cost-based performance measures. For example, direct labor variances were becoming less important due to the highly automated nature of the beer production lines. Also, current performance measures were fragmented and inconsistent between plants, unclear, not linking the separate business processes to the organization goals, not balanced to prevent overemphasis in one area at the expense of another, not able to be acted on at all levels, and used to punish rather than reward continuous improvement.
Balanced Scorecard and Change Management Issues
Ken was thinking that he could develop a crisis motivation for his balanced scorecard project, similar to the strategy used by Matt for his CIL project. Ken knew that Coors’s traditional, cost-based performance measures were not driving desired results, as indicated by the various performance gaps. From the vision statement and business strategy analysis, he thought that long-term sustainability and improvement in performance could be achieved by linking the balanced scorecard to the annual strategic planning process. He also thought that continuous improvement required clearly defined, aligned business process and activity measures that support a balanced scorecard.
Ken had already had preliminary meetings about this BSC project with employees who were involved in supply chain management. He had developed a list of frequently asked questions (FAQs).
He thought that these FAQs might help guide him in implementing a balanced scorecard for Coors.
These key FAQs are listed as follows:
1. Will the balanced scorecard be linked to any incentive plans?
2. What if a measure does not drive the correct behavior after implementation? What process will be used to evolve the scorecard? How will my input be heard?
3. Won’t the measures reduce our ability to be flexible with our distributors and make last-minute changes for them?
4. Why is the window on the load schedule performance measure so tight? What difference does it make if we get a load out within plus/minus two hours? If we get it out the day it is scheduled, won’t the load arrive at the distributor as planned?
5. We already have plant measures that are working. Why would we want to change them?
Table 2 Key Performance Measures
6. The production stability measure does not give the production lines incentive to run ahead.
Doesn’t it make sense to allow us to run ahead on major brands as a cushion for those times when we have problems? So what should we do when we are more than an hour ahead, shut the line down?
7. Why would you base production stability, load schedule performance, and load item accuracy on the initial weekly schedule? The schedule changes constantly. Why measure me against a weekly schedule that has changed as a result of something I had no control over?
8. Will the balanced scorecard be used to compare the performance of the three U.S. plants?
Since each plant is different, how can we be expected to use the same scorecard?
9. Product mix can adversely affect the cost per barrel. Will this be taken into consideration in this measure?
10. Some important measures may be excluded from the scorecard. If so, will they eventually be added to the scorecard?
11. Will there be a throughput measure on the scorecard? I cannot affect the number of barrels coming through my plant. That is determined by sales and scheduling that shifts production between plants.
12. How can you hold me responsible for a measure when I am not the only one who can affect it?
13. How often will the scorecard be updated?
14. Will the scorecard be used as a club?
15. Who will put together this scorecard?
Balanced Scorecard Project: Additional Thoughts
Ken was wondering whether he should do an EVA analysis to demonstrate its potential for a BSC financial performance measure. Coors’s net operating profit before income taxes had increased from $75 million in 1996 to $105 million in 1997. According to both the CEO’s shareholder letter and a value line analysis, the major reason for this increase was the productivity improvement from the supply chain management project, which cost $20 million. This $30 million improvement in net operating profit before income taxes was also predicted to become a permanent improvement for both 1998 and 1999 operations.
Ken’s project team had compiled the following five annual adjustments (all increases) and other financial information just in case Ken decided to do an EVA analysis.
Table 3 EVA Adjustments
At the end of 1997, Coors had total stockholder equity of $730 million and total liabilities of $670 million. Total liabilities included $170 million of interest-bearing debt as well as current liabilities, deferred income taxes, and pension liabilities. Coors’s weighted average cost of capital was 10%.
Ken was curious about what gaps might exist between vision statements and current business strategies for both Coors and the O&T department. However, he did not want this gap analysis to wind up overloading the BSC with too many performance measures. He was also concerned about what performance targets and reporting frequencies to establish for various BSC performance measures.
Other challenges were how to link BSC performance measures and how to gain employee acceptance of the BSC.
Ken realized that he had some serious challenges ahead of him in order to create and implement a balanced scorecard for Coors. It was now January 1998 and top management was pressing for a quick installation of the balanced scorecard in order to use it for evaluating performance in 1998.
Questions:
Write a 750-900 word paper to addressing the following:
a. What were the company’s objectives in implementing the Balanced Score Card? What problems was the company trying to address?
b. Describe the implementation plan/process. How was implementation affected by the company characteristics -- e.g. culture, competitive environment, management style or capabilities, etc.? Identify at least three company characteristics that impact the plan.
References
Birchard, B. “Making It Go.” CFO, October 1995, pp. 42–51.
Kaplan, R., and D. Norton. “The Balanced Scorecard—Measures That Drive Performance.” Harvard
Business Review. January-February 1992, pp. 71–79.
Silk, S. “Automating the Balanced Scorecard.”
Balanced Scorecard
Hugh Grove, School of Accountancy
Daniels College of Business, University of Denver
Tom Cook, Department of Finance
Daniels College of Business, University of Denver
Ken Richter, Product Quality Control Manager
Coors Brewing Company
By the end of 1997, Coors had finished the implementation of a three-year computer-integrated logistics (CIL) project to improve its supply chain management. Coors defined its supply chain as every activity involved in moving production from the supplier’s supplier to the customer’s customer. (Since by federal law, Coors cannot sell directly to consumers, Coors customers are its distributors whose customers are retailers whose customers are consumers.) Coors’s supply chain included the following processes: purchasing, research and development, engineering, brewing, conditioning, fermenting, packaging, warehouse, logistics, and transportation.
This CIL project was a cross-functional initiative to reengineer the business processes by which
Coors’s logistics or supply chain was managed. This reengineering project improved supply chain processes and applied information technology to provide timely and accurate information to those involved in …show more content…
supply chain management. The project objective was to increase company profitability by reducing cycle times and operating costs and increasing customer (distributor) satisfaction.
The software vendor used for this project was the German company Systems Applications & Products (SAP), which provided the financial and materials planning software modules. The SAP planning software became Coors’s load configurator software, which takes distributor demand forecasts and the production schedule and creates a shipping schedule for the following week. The following major supply chain problems were corrected by this CIL project:
• meeting seasonal demand,
• meeting demand surges from sales promotions,
• supporting the introduction of more than three new brands each year,
• filling routine customer (distributor) orders,
• filling rush orders,
• moving beer from production through warehouse to distributors before the beer spoiled.
(The shelf lives for Coors products were 60 days for beer kegs and 112 days for all other beer packages.)
Matt Vail, head of Coors’s Customer Service Department, had been the CIL project leader since the inception of the project. He had developed such expertise with supply chain management that he had just been hired by a supply chain consulting firm. In early 1998, on his last day of work for Coors, he was talking with Ken Rider, head of Coors Quality Assurance Department. Ken had just been placed in charge of the new balanced scorecard (BSC) project at Coors. The initial motivation for this project was to assess whether the supply chain improvements were being maintained. However, the project was broadened to become a company-wide BSC. Accordingly, the project strategy was to implement a performance measurement process that: (1) focused on continuous improvement, (2) rewarded reasonable risk taking and learning to improve performance, and (3) enabled employees to understand the opportunity and reward for working productively.
Matt: The supply chain management project was really challenging and rewarding. I hate to leave Coors, but the consulting firm made me such an attractive offer that I could not refuse it. I hope you have such positive experiences with this follow-up balanced scorecard project.
Ken: This new project will be a real challenge. We need to build on all the improvements made by your supply chain project.
Matt: My project team was excited to see that our CEO discussed the supply chain project in his 1997 shareholder letter. He said that significant productivity gains in 1997 were due to our project, which streamlined purchasing, brewing, packaging, transportation, and administration of the supply chain.
Ken: Perhaps an economic value-added (EVA) analysis could be done to assess these supply chain productivity gains.
Matt: That’s an interesting idea, to analyze performance in the financial quadrant of the balanced scorecard with EVA.
Ken: Another challenge for my project is how to translate the Coors vision statement and related business strategies into operational performance measures.
Matt: You also need to identify any gaps between the vision statement, business strategies, and current performance.
Ken: Do you have any experiences from your project that I could use?
Matt: Well, we did obtain some benchmarking data to develop targets for some performance measures for our supply chain project. I can give you these measures, but they are limited due to confidentiality problems in obtaining such data. Maybe Coors should join one of the commercial benchmarking databases.
Ken: Thanks. I am also aware of certain employee resistance to developing a new set of performance measures for this balanced scorecard approach.
Matt: We had similar employee resistance to changes in the business processes of the supply chain. We were able to use the following crisis motivation. At that time, Coors could not support all the new beer brand introductions proposed by our marketing people, due to the antiquated 1970s software that was then being used for our supply chain management. The marketing people wanted to introduce three new brands each quarter, and we could support only three new brands each year! We also learned that we needed to get more employee involvement in the project.
Ken: That’s a good idea. In fact, I’ve already developed a list of the most frequently asked questions (FAQs) about the balanced scorecard from initial meetings with employees involved in the supply chain.
Matt: You have lots of challenges awaiting you. Good luck in your new project. Make sure that today’s improvements in supply chain performance don’t become tomorrow’s problems!
Balanced Scorecard Background
The balanced scorecard is a set of financial and nonfinancial measures relating to the company’s mission, strategies, and critical success factors. The balanced scorecard puts vision and strategy at the center of the management control system. Vision and strategy drive performance measures, as op19 posed to the traditional performance measurement systems that provided their own limited measures to management whether they were needed or not. The goal is to maintain an alignment of an organization’s vision, strategy, programs, measurements, and rewards.
An innovative aspect is that the components of the scorecard are designed in an integrative manner to reinforce each other as indicators of both current and future prospects for the company. The balanced scorecard enables management to measure key drivers of overall performance, rather than focusing on short-term financial results. It helps management stay focused on the entire business process and helps ensure that actual current operating performance is in line with long-term strategy. Kaplan and Norton (1992) are generally given credit for creating the balanced scorecard in the early 1990s.
A recent survey found that 80% of large American companies want to change their performance measurement systems (Birchard 1995). Another recent survey found that 60% of Fortune 1,000 companies have or are experimenting with a balanced scorecard (Silk 1998). Such changes have been driven by the evolving focus on a team-based, process-oriented management control system.
The balanced scorecard has four perspectives or quadrants that generate performance measures to assess the progress of a company’s vision and strategy, as follows:
• Customer perspective: how do customers see us?
• Internal business perspective: what must we excel at?
• Innovation and learning perspective: can we continue to improve and create value?
• Financial perspective: how do we look to shareholders?
The BSC is a set of discrete, linked measures that gives management a comprehensive and timely evaluation of performance. The BSC tries to minimize information overload by providing a limited number of measures that focus on key business processes by level of management. For example, top management needs summarized, comprehensive monetary measures while lower levels of management and employees may need both monetary and nonmonetary measures on a more frequent basis.
Also, such measures need to track progress concerning the gap between a company’s performance and benchmarked targets.
The BSC considers frequency of measurement, depending on the type of measure. Generally, nonmonetary measures are reported more frequently than monetary measures. For example, nonmonetary operating measures, such as machine downtime, percentage of capacity used, and deviations from schedule, may be measured daily. Other nonmonetary measures, such as manufacturing cycle time, delivery accuracy, customer complaints, and spoilage, may be measured weekly. Some nonmonetary and monetary measures, such as inventory days, accounts receivable days, product returns, and warranty costs, may be measured quarterly. Other nonmonetary and monetary measures, such as new products introduced, market share, total cost of poor quality, return on investment and employee training, may be measured annually.
Company Background
Coors had been a family-owned and operated business from its inception in 1873 until 1993 when the first non-family member became president and chief operating officer. However, Coors family members still held the positions of chairman of the board of directors and chief executive officer and also held all voting stock. Only nonvoting, Class B common stock was publicly traded.
Coors has been financed primarily by equity and has borrowed capital only twice in its corporate history. The first long-term debt, $220 million, 8.5% notes, was issued in 1991, and the final $40 million of principal was to be repaid by the end of 1999. The second long-term debt, $100 million, 7% unsecured notes, was issued in a 1995 private placement. Of this principal, $80 million is due in 2002 and the last $20 million is due in 2005.
In the mid-1970s Coors was a regional brewery with an 11-state market, selling one brand in a limited number of packages through approximately 200 distributors. Traditionally, Coors beer had been a non-pasteurized, premium beer. (However, with a recently developed sterilization process, its products now have the same shelf life as its competitors’ pasteurized products.) The Coors plant in Golden, Colorado, was its only production facility, and it had no other distribution centers. Over the next 25 years, Coors changed dramatically by expanding into all 50 states and various foreign markets. By the end of the 20th century, Coors had production facilities in Golden, Colorado, Memphis, Tennessee, Elkton, Virginia, and Zaragoza, Spain. It had expanded to using 21 “satellite redistribution centers” in the United States before the CIL project reduced this number to eight. Beer shipments were made by both truck and railroad cars. Coors had approximately 650 domestic beer distributors, although about 200 of them accounted for 80% of Coors’s total sales. Coors also had several joint ventures and international distributors in Canada, the Caribbean, Latin American, Europe, and the Pacific.
Coors had 16 beer brands, including a specialty line, Blue Moon, that competed with the domestic micro brewing industry. However, Coors continued to focus on its four key premium brands: Coors Light, Original Coors, Killian’s Irish Red, and Zima. Coors Light was the fourth largest selling beer in the United States. In packaging, Coors had to compete with the major competitors’ value packaging, such as 12-packs and 30-packs. In 1959, Coors introduced the nation’s first all-aluminum beverage can and in the late 1990s, it had introduced a baseball bat bottle and a football pigskin bottle.
There were also numerous state labeling laws to meet, such as returnable information, and packaging graphics to reinforce the Rocky Mountains image for Coors beer.
Competition in the beer industry was strong, especially in the United States. Anheuser-Busch
(A/B) was the market leader with approximately 44% of the U.S. market, 80 million barrels sold, $8 billion beer sales, and $1 billion net profit. Due to its size, A/B was the acknowledged price leader in the industry. A/B also had 13 domestic production plants, including one in Ft. Collins, Colorado, to achieve its customer service goal of having no major domestic distributor more than 500 miles away from one of its beer production plants.
Number two in this market was Miller, owned by Philip Morris, with approximately 22% market share, 40 million barrels sold, $4 billion beer sales, and $460 million net profit. Miller had seven domestic production plants. Coors was number three with an 11% market share, 20 million barrels sold, $2 billion beer sales, and $80 million net profit. Coors had three production plants in the United States. Its Colorado plant was the largest brewery in the world and served 70% of the U.S. market with its 10 can lines, six bottle lines, and two keg lines.
No other domestic brewers had market share in excess of 5%. In the late 1990s, there had been consolidation of the larger companies in the domestic beer industry. The most recent example was Stroh Brewing Company (SBC) with about 5% market share. SBC had signed agreements to sell its major brands to Miller and the remaining brands to Pabst Brewing Company. SBC would then exit the beer industry by 2000.
From 1983 through 1998, Coors was the only major U.S. brewer to increase its sales volume each year, although industry sales had grown only about 1% per year in the 1990s. Coors had outpaced the industry volume growth rate by one or two percentage points each year. Coors had accomplished this growth by building its key premium brands in key markets and strengthening its distributor network, recently with improved supply chain management.
Coors’s Vision Statement and Business Strategies
Coors’s vision statement was as follows:
Our company has a proud history of visionary leadership, quality products and dedicated people which has enabled us to succeed in a highly competitive and regulated industry. We must con21 tinue to build on this foundation and become even more effective by aligning and uniting the human, financial and physical aspects of our company to bring great tasting beer, great brands and superior service to our distributors, retailers and consumers and to be a valued neighbor in our communities. Our continued success will require teamwork and an even stronger dedication by every person in our organization to a common purpose, our Vision. Achieving our
Vision requires that we begin this journey immediately and with urgency for it will require significant change for us to thrive and win in our industry.
Using this vision statement, top management had decided to focus on four fundamentals: improving quality, improving service, boosting profitability, and developing employee skills. In the 1997 Coors annual report, both the CEO and the president discussed the following general business strategies or “six planks” to drive these fundamentals in the future:
1. Baseline growth: we will profitably grow key brands and key markets.
2. Incremental growth: we will invest selectively to grow high potential markets, channels, demographics, and brands.
3. Product quality: we will continuously elevate consumer perceived quality by improving taste, freshness, package integrity, and package appearance at point of purchase.
4.
Distributor service: we will significantly enhance distributor service as measured by improved freshness, less damage, increased on-time arrivals, and accurate order fill at a lower cost to Coors.
5. Productivity gains: we will continuously lower total company costs per barrel so Coors can balance improved profitability, investments to grow volume, market share and revenues, and funding for the resources needed to drive long-term productivity and success.
6. People: we will continuously improve our business performance through engaging and developing our people.
The operations and technology (O&T) department of Coors was in charge of the supply chain management and had developed its own vision to elaborate the overall Coors vision statement as
follows:
We are partners with our internal business stakeholders, with our suppliers and with our communities. With our partners, we have developed an aligned and integrated supply chain that delivers our commitments and meets the requirements that delight our distributors, retailers, and consumers, establishing our company as the supplier of choice. The processes required to design, safely produce, and deliver great tasting beer at its freshest, with superior packaging integrity, competitive cost, are well-defined, understood, consistently followed, and continually improved by every person in our organization. The quality and innovation we employ in all we do encourage beer drinkers to seek out our brands and make Coors the envy of our competition. Our use of current, accurate information and appropriate technology enables all individuals in our organization to monitor and control their work, be flexible and move with speed. We value learning and exercise a tenacious approach to eliminate waste and reduce cost. We realize that in a competitive world, we must bring value to our brands and continually aspire to a higher level of performance to compete successfully.
The O&T department had also adopted and extended the following supply chain guiding principles from the work of the CIL supply chain project team to create its own business strategies:
• Simplify and stabilize the process.
• Eliminate non-value-added time and waste.
• Relentlessly pursue continuous improvement.
• Inventory is a liability, not an asset.
• People doing the work are critical to lasting improvement.
• Short cycle time + reliability = flexibility.
• Find and fix the root cause.
• Know your costs.
• Know your customers’ expectations.
• Make decisions where work is performed.
• Balance and optimize the overall process.
• What gets measured gets done.
Benchmarking and Performance Gaps
Only limited benchmarking information was available since Coors had not yet decided to join any of the commercial benchmarking databases. (The largest one in the United States, the Hackett Group Study, sponsored by the American Institute of CPAs, has about 700 participating companies.)
Performance gaps with Coors’s two major competitors were noted by the following financial information obtained from annual reports:
Table 1 Benchmarking Analysis
There were insignificant differences in price per barrel as A/B was the industry price leader and the other competitors closely followed A/B’s pricing decisions. A/B had this pricing power because its domestic market share of 44% was twice that of Miller and four times that of Coors.
The major motivation for the CIL supply chain project came from the deficiencies in the supply chain performance. The CIL project had become fully operational by the end of 1997, but more time was needed to realize the full benefits of such a project. There was still a significant amount of volatility in the production process that contributed to the Colorado redistribution center’s being the largest bottleneck in the supply chain. For example, Coors often could not meet its goal to load beer product directly off the production line into waiting railroad cars.
Thus, Ken’s project team had already added three new nonmonetary performance measures and created challenging performance targets for these measures to track anticipated additional efficiencies from the CIL project. Also, top management had created financial goals for key monetary performance measures in an attempt to become more competitive. These key performance measures are shown in Table 2.
The gaps in current performance at the end of 1997 indicated problems with Coors’s traditional, cost-based performance measures. For example, direct labor variances were becoming less important due to the highly automated nature of the beer production lines. Also, current performance measures were fragmented and inconsistent between plants, unclear, not linking the separate business processes to the organization goals, not balanced to prevent overemphasis in one area at the expense of another, not able to be acted on at all levels, and used to punish rather than reward continuous improvement.
Balanced Scorecard and Change Management Issues
Ken was thinking that he could develop a crisis motivation for his balanced scorecard project, similar to the strategy used by Matt for his CIL project. Ken knew that Coors’s traditional, cost-based performance measures were not driving desired results, as indicated by the various performance gaps. From the vision statement and business strategy analysis, he thought that long-term sustainability and improvement in performance could be achieved by linking the balanced scorecard to the annual strategic planning process. He also thought that continuous improvement required clearly defined, aligned business process and activity measures that support a balanced scorecard.
Ken had already had preliminary meetings about this BSC project with employees who were involved in supply chain management. He had developed a list of frequently asked questions (FAQs).
He thought that these FAQs might help guide him in implementing a balanced scorecard for Coors.
These key FAQs are listed as follows:
1. Will the balanced scorecard be linked to any incentive plans?
2. What if a measure does not drive the correct behavior after implementation? What process will be used to evolve the scorecard? How will my input be heard?
3. Won’t the measures reduce our ability to be flexible with our distributors and make last-minute changes for them?
4. Why is the window on the load schedule performance measure so tight? What difference does it make if we get a load out within plus/minus two hours? If we get it out the day it is scheduled, won’t the load arrive at the distributor as planned?
5. We already have plant measures that are working. Why would we want to change them?
Table 2 Key Performance Measures
6. The production stability measure does not give the production lines incentive to run ahead.
Doesn’t it make sense to allow us to run ahead on major brands as a cushion for those times when we have problems? So what should we do when we are more than an hour ahead, shut the line down?
7. Why would you base production stability, load schedule performance, and load item accuracy on the initial weekly schedule? The schedule changes constantly. Why measure me against a weekly schedule that has changed as a result of something I had no control over?
8. Will the balanced scorecard be used to compare the performance of the three U.S. plants?
Since each plant is different, how can we be expected to use the same scorecard?
9. Product mix can adversely affect the cost per barrel. Will this be taken into consideration in this measure?
10. Some important measures may be excluded from the scorecard. If so, will they eventually be added to the scorecard?
11. Will there be a throughput measure on the scorecard? I cannot affect the number of barrels coming through my plant. That is determined by sales and scheduling that shifts production between plants.
12. How can you hold me responsible for a measure when I am not the only one who can affect it?
13. How often will the scorecard be updated?
14. Will the scorecard be used as a club?
15. Who will put together this scorecard?
Balanced Scorecard Project: Additional Thoughts
Ken was wondering whether he should do an EVA analysis to demonstrate its potential for a BSC financial performance measure. Coors’s net operating profit before income taxes had increased from $75 million in 1996 to $105 million in 1997. According to both the CEO’s shareholder letter and a value line analysis, the major reason for this increase was the productivity improvement from the supply chain management project, which cost $20 million. This $30 million improvement in net operating profit before income taxes was also predicted to become a permanent improvement for both 1998 and 1999 operations.
Ken’s project team had compiled the following five annual adjustments (all increases) and other financial information just in case Ken decided to do an EVA analysis.
Table 3 EVA Adjustments
At the end of 1997, Coors had total stockholder equity of $730 million and total liabilities of $670 million. Total liabilities included $170 million of interest-bearing debt as well as current liabilities, deferred income taxes, and pension liabilities. Coors’s weighted average cost of capital was 10%.
Ken was curious about what gaps might exist between vision statements and current business strategies for both Coors and the O&T department. However, he did not want this gap analysis to wind up overloading the BSC with too many performance measures. He was also concerned about what performance targets and reporting frequencies to establish for various BSC performance measures.
Other challenges were how to link BSC performance measures and how to gain employee acceptance of the BSC.
Ken realized that he had some serious challenges ahead of him in order to create and implement a balanced scorecard for Coors. It was now January 1998 and top management was pressing for a quick installation of the balanced scorecard in order to use it for evaluating performance in 1998.
Questions:
Write a 750-900 word paper to addressing the following:
a. What were the company’s objectives in implementing the Balanced Score Card? What problems was the company trying to address?
b. Describe the implementation plan/process. How was implementation affected by the company characteristics -- e.g. culture, competitive environment, management style or capabilities, etc.? Identify at least three company characteristics that impact the plan.
References
Birchard, B. “Making It Go.” CFO, October 1995, pp. 42–51.
Kaplan, R., and D. Norton. “The Balanced Scorecard—Measures That Drive Performance.” Harvard
Business Review. January-February 1992, pp. 71–79.
Silk, S. “Automating the Balanced Scorecard.”