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strategy and business
 / Summer 2004 / Issue 35(originally published by Booz & Company)


Recent Studies

In their paper, Professor Kaplan and Mr. Anderson cite one organization with 14 people working full-time on ABC data collection; another that requires 12 people and months of work to simply update its ABC model; and a third whose automated system requires three days to work through the costs generated by 40 departments, 150 activities, 10,000 orders, and 45,000 line items.

To address the time-intensive and resource-intensive nature of ABC, Professor Kaplan and Mr. Anderson propose what they call “time-driven activity-based costing.” This approach involves deriving the price of an operational activity from rough estimates of the time required to perform it, rather than attempting to specifically measure the precise cost of every activity, at every stage, as ABC would require. This is possible to do without making the cost analysis inaccurate, the authors argue, because certain business activities and process costs tend to be consistent within an industry, a company, or a function.

Illustrating the quick implementation advantage in this approach to ABC, the authors describe the time-driven ABC system installed at a wholesale parts and materials supplier of steel, aluminum, and fiberglass (Klein Steel, based in Rochester, N.Y.). In just two months, using an industry template instead of a mountain of internal data, Klein has been able to produce a model that identifies specific activity costs by product, customer, order size, and distribution site.

Through this process, Klein found, among other things, that 25 percent of the its customers and several distribution routes were unprofitable. On the basis of its new costing model, the company was able to set a target for annual earnings increases of more than $700,000 from specific process improvements, such as tying sales commissions to customer profitability benchmarks.

This example suggests the time-based approach could mark an important breakthrough for ABC as it evolves into a more powerful mainstream management tool.

A Matter of Trust
Daniel Yankelovich ([email protected]) and Steve Rosell ([email protected]), “Making Trust a Competitive Asset: Breaking Out of Narrow Frameworks,” report of the special meeting of senior executives on The Deeper Crisis of Trust, New York, May 15–17, 2003. Click here. For a copy of the report, e-mail [email protected]

Businesspeople may attribute recent corporate scandals to “a few bad apples,” but the public isn’t buying it. A 2002 Gallup Poll found that almost 80 percent of the public believes corruption is endemic in the corporate world and that executive greed and immorality are the top causes of current economic woes.

This is the third major crisis of confidence that corporate America has faced since the 1930s, say Daniel Yankelovich and Steve Rosell, principals of Viewpoint Learning, in a report that grew out of a May 2003 discussion on the loss of trust in the business world. The discussion was attended by executives from Hewlett-Packard, Coca-Cola, Royal Dutch/Shell, Monsanto, and Toyota, among other major corporations, and academics from the University of Warwick Business School.

The first two crises of confidence — the Great Depression of the 1930s and the “stagflation” of the late 1960s through 1980 — were marked by a weakening of confidence in the free-market economy and public disillusionment in big business, respectively. But this third crisis is different, the authors say, because senior executives, not just corporations, are viewed as being directly responsible for the scandals. Their over-the-top compensation; excessive management perks; and perceived willingness to trade jobs, environmental standards, and labor rights for profits squeezed out of globalization have fanned mistrust in the individuals who run companies and, secondarily, in the companies themselves. The impact so far has been new laws such as the Sarbanes-Oxley Act; demands that executives be punished; and the emergence of corporate integrity as an important competitive factor.

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