144 Understanding the Numbers
Denise concluded: “So, it looks like the keys to success for ETN/ W are
threefold. First, study your customer captureand customer loadingprocesses
and make them more efficient. Second, figure out a way to minimize your peak
periods such that you run your transaction processing systems at capacity most
of the time. And last, focus your business model on large-volume e-commerce
retailers such that you recoup your front-end investment sooner. If you can ad-
dress these three issues, your investors should grant your third-round request.
Of course, we could not have come to these action steps until we achieved
transparency of your cost systems through ABC analysis. Good luck.
A REVIEW OF THE ABC METHODOLOGY
There are a number of lessons to be taken from the ETN/ W example.
ABC is a strategic model. The strategy literature states in various ways
that a company will achieve a strategic advantage over rivals if it can de-
liver (1) additional value to customers at a cost comparable to rivals or (2)
comparable value at a cost lower than rivals. This advantage is sustainable
if and only if the company does this in a manner different than its rivals.
The myth that all companies have a strategic cost model that provides the
necessary information unfortunately, in today’s world, does not hold true.
Most cost systems mainly provide aggregated cost information for esti-
mating inventory valuation and cost of goods sold—they focus on external
financial reporting. ABC, if done correctly, can provide the necessary
strategic information.
The earlier ABC is done in the strategic planning process, the
more value it creates.In the mid-1980s, when ABC analysis was being
touted as the key tool in making the United States more competitive on a
global basis, some researchers focused their studies on Japanese com-
panies. Their hypothesis was that, since the Japanese have dominated
many key industries over the last two decades, they must have some type
of ABC methodologies. These researchers found exactly the opposite;
costing systems for Japanese companies had even more arbitrary cost allo-
cations than their U.S. rivals. Further research, however, unveiled a key
competitive advantage.^5 Japanese product development was very cost
based. They employed a technique, called target costing, in which prices
were first set for new products through extensive market research, then
profitability targets based upon investor capital requirements for the
new product were estimated, yielding cost targets which were set at the
design stage. Techniques such as value engineering and experience-
curve analysis were employed to ensure that when the production began,
the product would meet its target cost. The Japanese understood that
this type of activity-cost analysis was best done very early in the product
development stage. An interesting additional insight was that these