BUSINESSES operating in difficult markets must constantly search for ways to increase their ability to compete. When working with clients to improve competitiveness and help a business function more efficiently, it is important to ask the following key questions very early on:
1. How effectively are they managing the costs of our resources?
2. What are activities costing and where is the waste?
3. Do we really know which products and customers create value and which destroy value?
In many cases, the right information to make business-critical decisions and to identify a robust way of exploring the profit impact of alternatives is not available.
Successful businesses typically have three things in common:
A profitable product (or service) and customer portfolio.
An efficient cost base and
A low cost of acquiring and serving customers and bringing products to market.
Traditional profitability analysis based on top down assumptions, allocations and averages via aggregated data can fail to reveal the true drivers of cost and profit. Measuring profitability at a detailed level allows better management decisions and customer relationships by providing insights into how, when and where businesses are failing to manage costs and profitability.
Leading businesses are strategically managing costs with an approach that uses the concepts of activity-based costing and establishes cause-effect relationships to better understand costs.
The idea behind the concept is to help business leaders identify strategic and operational scope for performance improvement, including:
Customer and product profitability.
Costs incurred in acquiring and serving customers.
Costs incurred in bringing products to the market and
Areas where value is destroyed.
Aligning true costs with activities enables business to understand costs and make sensible decisions based on the strategic importance and true profitability of a product.
For instance, knowingly producing lower profitability products may be acceptable provided they are of high strategic importance but low profitability and low strategic importance and services could, at best, be getting in the way of the more business beneficial outputs, and at worst could actually be destroying value.