Kolmog Hotels is a large, listed chain of branded hotels in Ostland. Its stated mission is: ?To become the No. 1 hotel chain in Ostland, building the strength of the Kolmog brand by consistently delighting customers, investing in employees, delivering innovative products/services and continuously improving performance.? The subsidiary aims of the company are to maximize shareholder value, create a culture of pride in the brand and strengthen the brand loyalty of all stakeholders.

The hotels in the Kolmog chain include a diverse range of buildings and locations serving different customer groups (large conference venues, city centre business hotels and country house hotels for holidays). For reporting purposes, the company has divided itself into the four geographical regions of Ostland as can be seen in a recent example of the strategic performance report for the company used by the board for their annual review (see Appendix 1). At the operational level, each hotel manager is given an individual budget for their hotel, prepared in the finance department, and is judged by performance against budgeted profit.

Kolmog is planning a strategic change to its current business model. The board has decided to sell many of the hotels in the chain and then rent them back. This is consistent with many other hotel companies who are focusing on the management of their hotels rather than managing a large, property portfolio of hotels.

In order to assist this strategic change, the chief executive officer (CEO) is considering introducing the balanced scorecard (BSC) across Kolmog. He has tasked you, as a management accountant in the head office, with reviewing the preliminary work done on the development of the scorecard in order to ensure that it is consistent with the goal of meeting the strategic objectives of the company by tying operational and strategic performance measurement into a ?coherent framework.

The CEO is worried that the BSC might be perceived within the organization as a management accounting technique that has been derived from the manufacturing sector. In order to assess its use at Kolmog, he has asked you to explain the characteristics that differentiate service businesses from manufacturing ones.

Senior executives at the head office of Kolmog have drawn up a preliminary list of perspectives and metrics as an outline of the balanced scorecard in Table 1:

Table 1

Key strategic perspective ....................MetricStrategic financial performance.......? Financial performance benchmarked to Kolmog?s main competitors (share price and return on capital employed)Customer satisfaction .......................? Customer satisfaction survey scoresHotel performance against budget .? Variance analysis for each hotelEmployee satisfaction .......................? Staff turnover

The history of rewards at Kolmog has not been good, with only 1 percent of staff receiving their maximum possible bonus in previous years and 75 percent of staff receiving no bonus. This has led to many complaints that targets set for the reward system are too challenging.

Under a new performance reward system, employee targets are to be derived from the above BSC strategic measures depending on the employee?s area of responsibility. The new system is for hotel managers to be given challenging targets based on their hotel?s performance against budgeted profit, industry-wide staff turnover and the company?s average customer satisfaction scores. The hotel managers will then get up to 30 percent of their basic salary as a bonus, based on their regional manager?s assessment of their performance against these targets. The CEO wants you to use Fitzgerald and Moon?s building block model to assess the new system. He is happy with the dimensions of performance but wants your comments on the standards and rewards being applied here.

Appendix 1

Strategic performance report for review Kolmog Hotels Year to 31 Mar 2017

Required:

Write a report to the CEO to:

(i) Explain the characteristics that differentiate service businesses from manufacturing ones, using Kolmog to illustrate your points;

(ii) Evaluate the current strategic performance report and the choice of performance metrics used (Appendix 1);

(iii) Evaluate the outline balanced scorecard (Table 1) at Kolmog, suggesting suitable improvements;

(iv) Describe the difficulties in implementing and using the balanced scorecard at Kolmog;

(v) Explain the purpose of setting targets which are challenging, and evaluate the standards and rewards for the hotel managers? performance reward system as requested by the CEO. Professional marks will be awarded for the format, style and structure of the discussion of your answer.

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East West North South Total As % of Region Region Region Region Total 2016 revenue $m $m $m $m $m $m for 2017 235 244 313 193 985 926 Revenue Cost of sales 28 37 21 110 11.78% 116 Gross profit 207 214 276 172 869 816 Staff costs 61 65 78 54 26.19% 258 245 Other operating costs 68 70 97 289 270 29.34% hotels 54 head office 158 150 16.04% Operating profit 78 79 101 64 164 151 16.60% Financing costs 73 7.92% 78 Profit before tax 86 78 8.73% Growth Year on Year Capital employed $1132m $1065m 6.29% EPS $1.36 $1.27 7.09% Share price $12.34 $11.76 4.93% ROCE 14.49% 14.18%