Question

ZZ Tire Company started as retail installer of tires on cars 10 years ago. They now have 400 retail stores, installing about 10,000 tires per store per year and selling a total of 4 million tires. 5 years ago, they decided to start manufacturing their own tires to sell in their retail locations.

They now have 4 manufacturing plants, making 2 million tires a year. They made a profit of $170 million dollars. On average, they make $50 a tire on the tires they manufacture and $35 on the tires from other manufacturers. Their current growth rate is 12% a year, and they are only located in the 10 southeastern states. Their current customer satisfaction rating is 85%. They are also starting to do research on making a tire that increases gas mileage in cars. Currently, they are using the same type of machines in the factory since the beginning and still use the same type of machines in their installation locations.

Do a basic balanced scorecard evaluation where you go through the four areas (learning and growth, internal business process, customer, and financial perspectives) and provide management some ideas for improvement. You are allowed to estimate and make assumptions about the company.

Answer 1

Learning and Growth:

The company is in the tyre market for 10 years and has a current sales volume of 4 million tyres. Out of these 4 million tyres the company manufactures 2 million tyres and it has started its own manufacturing 5 years ago. Both as a manufacturer and as a retailer, the learning curve effect should well set for the company especially in the manufacturing of tyres. The company losses $15 per unit of tyre which it purchases from other companies. With its wide experience in manufacturing and with a group of expert labourers at its disposal, it should strive to increase its productivity. The learning curve effect will help the company to reduce the manufacturing cost considerably and it can earn a much higher volume of profit, if all the tyres, as per the demand of the market, are manufactured by its own units. The market of the company is only limited to the 10 south-eastern states. This suggests that the company has a considerable growth opportunity in the market of the other states and it should immediately venture in the other markets to either hold onto its present growth rate or to increase it. Leaving its state orientation, the company should strive to develop the market throughout the nations, if it wants to project itself as one of the significant growth leaders within the tyre industry of the entire nation.

Internal Business Process:

The company within 10 years of its incorporation has registered a significant growth rate and has reached to 400 retail stores with several manufacturing units, thereby selling 4 million tyres per year. The internal management process and control has been proved to be productive and efficient for the company. But there are places to improve. The customer satisfaction is at present 85% reflecting the fact that at least 15% of the total customers are dissatisfied, either by the quality of the product, or by the service of the company. The company management has contained itself only within 10 south-eastern states, even when there is considerable growth potential in the other markets throughout the nations. This is probably because of the lack of capacity to produce the tyres to satisfy the demand of the new markets. Moreover as the company is making good profit and as it is getting the half of the required tyres from the other company till date, it seems the company has not yet thought about the expansion of production capacity or the market and is continuously sustaining a loss of $30 million per year because of resourcing of its 50% tyre requirement. The management should take more visionary and long-term approach regarding these points, which may have significant negative impact on the growth as well as on the customer loyalty of the company. However the management has well thought about the investment in research and development, to develop new generation tyre which will reduce the fuel cost of the customers. If successful, then the company will be able to increase its market share significantly and at the same time, can increase its profitability by charging premium price for its product.

Customer:

With a growth rate of 12% per year, the company has reached a total sale volume of 4 million tyres in just 10 years. This impressive growth rate and a customer satisfaction percentage of 85% suggest that the company is enjoying considerable reputation and has been successful in building commendable brand equity in the tyre market. Though the customer satisfaction index exhibits that the company has earned enough customer loyalty to find the market for its continuously increasing supply of tyres, the index of 85% should be improved as much as possible. Customer loyalty is the key driver of any business and the company should employ a better customer feedback system and a better after sales service system to address the issues and grievances of the rest 15% of the customers. If it is assumed that the customer satisfaction index is proportional to the sales volume (in number of units) of the company, then an increase of the index by another 10% has a potential of increasing the sales of the company by another 400,000 tyres per year (10% of 4000000). Moreover winning the new customers is as important as retaining the old customers. The strategic management should concentrate on increasing the customer satisfaction to serve both purposes.

Financial Perspective:

The company is using the same machinery for the last 10 years in its retail outlets and for the last 5 years in its manufacturing units. It seems, that even after enjoying a steep growth trajectory; it is unwilling to invest in the state of the art machinery for its production departments, because of the huge capital commitments. The company should go for some project consultancy to judge the long term profitability of introducing the state of the art technology and modern machineries within the company. Moreover, the company should take immediate drive to increase its production capacity, as due to lack of this capacity it is already losing a whooping $30 million, because of its purchase of 2 million tyres from other companies. Another important factor is that, these limitations, in its production capacity, are simply acting as a hindrance for the company to extend its market beyond the present territory. There is another factor that the company should consider for the long term. As the company is dependent on the other companies for 50% of its requirement, the other companies will have a significant impact on the pricing policies of the company, as well as, they are in a position to cast significant pressure on the company by setting adverse tyre prices. The company must think about introducing the state of the art (if available) equipments to boost the production capability of its present manufacturing units. At the same time it should immediately take steps to increase its overall production capacity by setting new manufacturing units to reduce the dependency on the external manufacturers as well as to extend its market share beyond the 10 south-eastern states.