Executive Summary
This report is intended to give a critical overview of the strategic position of Essar Energy by making an analysis of the current position of the company by the use the balanced score card. An analysis is made on the three non financial aspects; the customer perspectives, the internal process perspectives and the learning and growth perspectives in relation to the financial performance and position of the company to draw a conclusion on the strategic direction that the company ought to make so as to successfully achieve its stated strategic vision. Essar Energy’s financial performance in the financial period ending 31st March 2012 indicates a loss, and this report seeks to develop, through the use of the balanced scorecard, a method of steering the company back into profitability and achievement of long term financial success in all the divisions of the company and thus ultimately creating value for the shareholders of the company.
Introduction
Essar energy is a subsidiary of the Essar group of India. The company was formed in 1998 targeting the energy market in India, and later diversified to other countries. The company focuses on power generation and transmission and oil and gas exploration, drilling and production. It has substantial investment in the power production in India, owning the second largest power production plant in the country. The company has also obtained drilling rights in both onshore and offshore oil and gas blocks in India, and has invested in the oil industry in other countries such as Australia, Indonesia, Nigeria, Mauritius and Kenya. The company owns fifty percent of the Kenya Petroleum Refineries with the Kenyan government owning the other half.
Vision and Strategy
Essar Energy’s strategy is clearly stated on its website and on its 2011 financial year report as “to create a world-class, low cost integrated energy company, positioned to capitalise on India’s rapidly growing energy demand.” This strategy is further espoused into four strategic positions; to optimise the performance of all existing assets, deliver growth through a variety of power and oil and gas projects, leverage skills and Indian asset base to identify growth opportunities and to be a good corporate citizen (Essar Energy Financial report, 2011).
The company’s strategy is heavily anchored on the economic performance of the countries that the company operates in, especially India and China. In the company’s 2012 Annual report, an emphasis is made on the role that the performance of India’s economy will affect the performance of the company financially and otherwise in the next ten years. This indicates that the company’s vision is closely related on the development goals of the countries the company operates in/.
Balanced scorecard
The balanced scorecard is a framework for measuring the performance of the activities geared towards the achievement of stated objectives of stated objectives of a business entity. It involves the measurement of financial and non financial indicators. In designing the balanced scorecard for Essar energy, the company’s strategic objectives have to be translated into realistic and achievable operational goals, making proper and effective communication of the objectives to all those concerned in the actual implementation of the objectives and link the achievement of those objectives to individual performance of all those involved, carrying out business planning by setting up the actual business performance indices that need to be achieved and finally developing a an effective feedback mechanism to ensure that the performance of the strategy is well studied and feedback given with the appropriate corrective measures to the strategy taken.
Financial perspectives
Essar Energy reported an operating loss of 764.3 million dollars for the fifteen months ended 31st March 2012. The company’s financial statements however indicate that for the financial period ended 31st December 2010, the company had reported a profit of 365.5 million dollars. This is a very adverse shift in the profitability of the company, and aligning such a performance financially with the strategy of the company of creating a low cost world class energy company would seem an uphill task.
A strategic objective in the financial perspective of the company would be to improve the company’s financial performance from loss making to profitability.
Customer Perspectives
The company’s strategic objective in regards to customer service is the delivery of low cost energy to customers. Such an objective requires substantial investment in the delivery of quality products and services in a timely manner to the customers. The customer base of the company is diverse, and spread over great geographical distances. This means that quality considerations by the company will have to be in the highest standards possible if an achievement of the strategic objective of provision of low cost power is to be achieved. This objective is also in the backdrop of difficulties in the financial markets and poor economic performance by the economies of many countries that the company operates in.
Exploration, drilling and production of oil also forms a substantial part of the company’s business, and as such the requirements of customers in such business need to have their requirements met and provision of quality service made a norm. As the company’s strategic goal is provision of low cost energy, the company ought to have ways of ensuring that among its competitors, it provides the cheapest yet quality service.
Internal Perspectives
The operations of the Essar Energy are headquartered in Mauritius, although the company’s core business is located in India. In the current business environment, locations of offices may not play a key role in the determination of the course of operation that a business takes.
The company’s human resource capital is mainly sourced from India, and this can be partly explained by the fact that the company’s primary operations are in India. The human resource capacity, according to the company’s annual report 2012, indicates that the company has the best human resources available in the market by the virtue of its being one of the largest energy producers in the country. Its past success in the production of energy and the undertaking of massive infrastructure projects successfully is an indication that the company human resource capacity is well qualified and suited for the job.
Essar energy has invested heavily in the energy sector in various markets across the globe. This gives the company an edge in the provision of energy needs to customers since experience obtained from one market can be applied in new markets to register success in the new markets. The use of experienced labour in new markets is also strength since some of the hitches associated with entry into new markets are avoided.
Innovating and learning perspectives
The company’s investment in research and development should be increased as a way of developing the technological level of the company. More research into green energy and better methods of managerial and structural composition of the company is also needed to further strengthen the company’s operations by eliminating wastage both in production and the utilization of human resources available to the company.
Recommendations
With the evaluation of the company using the balanced scorecard, the following recommendations are made to the board of directors as means towards achieving long term financial success and develop a synergy in the company:
Investment in more efficient technologies in the production and transmission of power, exploration, drilling and production of oil and gas to improve the return on assets. This will enable the company move away from older and inefficient production processes which increase production costs.
Increase the presence of the company in the major oil producing countries especially in Africa and Asia so as to get a better grip on oil and gas exploration, drilling and production. The company will thus not have to depend on the few markets on which it already operates in and will record improved financial fortunes due to an increased customer base.
Increased entry into new markets through mergers and acquisitions so as to develop a better global presence and increase the company’s asset base and grow and diversify its customer base and grow revenues.
Increase the company’s investment in research and development so as to develop new technologies which are environment friendly and which are efficient. Increased efficiency in the company is bound to result in better performance in all its operations.
Improve the human resource capacity of the company by carrying out an analysis of human resource needs and recruitment. The company should also invest in the development of its employees so as to create a leadership culture within the ranks of its human resources.
Evaluation of the use of the balanced scorecard
Practical Usage
The use of the metric measurements in Finance for evaluation of business performance had been in use before the balanced scorecard was developed. The balanced scorecard was initially developed as a means of improving the measurement of business intangible assets and as such employ the results of such measurements to improve the performance of the business. With time, the model was improved and became a significant tool for the description, measurement and implementation of a company’s strategy (Kaplan, Norton 2007:4). It was bettered to help determine concise strategic objectives of a company and develop a means of realistically achieving the objectives through well planned and executed measures.
The use of the balanced scorecard is common in the United States, the United Kingdom, northern Europe and Japan (Advanced Performance institute 2000).
The model uses the rationale that improvements in learning and innovation automatically lead to improvements in internal business processes of the company, and as a result of these improvements made in internal business processes automatically led to improvements in customer satisfaction levels which in turn lead to improvements in the financial soundness of the company and thus by extension leading to increase in shareholder wealth (Proctor 2009:453). These non financial indicators were employed by Kaplan and Norton as a way of going beyond the use of financial information as the only measure of performance.
According to David Otley(1996), the use of the balanced scorecard can be employed in illuminating organizational vision, achievement of agreement in organizational strategy, the delivery of goals and education for the labour force of a company, establishment of goals and setting of targets and the establishment of performance indicators for a company.
Conclusion
A great limitation of the usage of the balanced scorecard approach is the cost involved in its implementation since there is a requirement for the massive employment of company resources. Not many business entities may have in their possession the resources necessary to implement the balanced scorecard effectively.
In a dynamic economic world, the definition of concise vision of a strategy by a firm may not be feasible. The determination of the objectives of a company, especially the long term ones may be limited by the changes in the economic conditions, and a company may be forced to change its objectives periodically to align itself to the prevailing economic conditions. This may limit the application of the balanced scorecard.
The model relies on an assumption that a business is stable. This is not always the case, and implementation of the balanced scorecard may not be feasible in the cases of financially unstable companies. The cause and effect relationships espoused in the model may not be always practical in the business world. Differing customer expectations and fluctuating economic cycles make the actual usage of the model unrealistic.
Advanced Performance institute (2000). Balanced Scorecard: How many companies use this tool?[online] available from
Cobbold, I and Lawrie, G (2002). "Classification of Balanced Scorecards based on their effectiveness as strategic control or management control tools". Performance Measurement Association 2002.
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