TABLE OF CONTENTS
1. Background 2. Market Analysis 3. Internal Assessment 4. Strategic Initiatives 5. Activity Based Costing Implementation KPIs 6. Activity Based Costing Best Practices 7. Activity Based Costing Deliverables 8. Implement Advanced Activity Based Costing Models 9. Digital Transformation in Manufacturing Processes 10. Sustainable Product Innovation 11. Additional Resources 12. Key Findings and Results
Consider this scenario: A mid-size building materials manufacturer in Europe, despite its robust market presence, struggles with maintaining profitability due to outdated activity based costing models.
The organization faces a 20% increase in production costs without a corresponding increase in sales prices, squeezing margins. Externally, there is an intense price competition from low-cost manufacturers and fluctuating raw material prices, which have eroded its market share by 8% over the past two years. Internally, the outdated costing models fail to accurately reflect production costs, leading to inefficient resource allocation and product pricing strategies. The primary strategic objective of the organization is to refine its operational efficiency and costing accuracy to restore profitability and competitive positioning in the European building materials market.
The organization, while maintaining a strong market presence, is experiencing profitability challenges attributed to its reliance on outdated activity based costing models. This has resulted in increased production costs without the ability to adjust sales prices accordingly, putting a significant strain on profit margins. Additionally, the competitive landscape is intensifying with the entry of low-cost manufacturers and the constant fluctuation of raw material prices. These factors collectively suggest that the core issues may be rooted in inefficient operational processes and a misalignment between costing models and market dynamics.
The building materials industry in Europe is currently facing a period of moderate growth, driven by the resurgence in construction activities post-pandemic. However, the industry is also navigating through challenges such as raw material price volatility and changing regulatory standards.
Understanding the competitive landscape requires an examination of the primary forces shaping the industry:
Emergent trends include a shift towards sustainable and eco-friendly building materials. This shift has led to:
The STEER analysis highlights that technological advancements and environmental regulations are key external factors influencing the industry, presenting both opportunities and challenges in maintaining competitiveness and compliance.
Learn more about Competitive Landscape Market Analysis
For a deeper analysis, take a look at these Market Analysis best practices:
The organization boasts a strong market position and a comprehensive product portfolio. However, it faces significant challenges in operational efficiency and cost management.
A MOST Analysis reveals misalignments between the organization's objectives and strategies, particularly in the adoption of modern costing methodologies and operational processes. This misalignment is a critical factor in its declining profitability.
The McKinsey 7-S Analysis indicates that while the organization has strong shared values and staff competencies, there are gaps in systems, particularly in cost management and operational processes, which hinder its ability to respond agilely to market changes.
A Core Competencies Analysis underscores the company's expertise in product innovation and market knowledge. However, it also reveals a crucial gap in operational efficiency and modern cost management practices, which are essential for maintaining competitiveness and profitability.
Learn more about Core Competencies Agile Cost Management
Learn more about Change Management Customer Segmentation Value Creation
KPIS are crucial throughout the implementation process. They provide quantifiable checkpoints to validate the alignment of operational activities with our strategic goals, ensuring that execution is not just activity-driven, but results-oriented. Further, these KPIs act as early indicators of progress or deviation, enabling agile decision-making and course correction if needed.
These KPIs offer insights into the strategic initiatives' impact on the company's profitability, operational efficiency, and market positioning. Tracking these metrics allows for timely adjustments to strategies to maximize their effectiveness.
For more KPIs, take a look at the Flevy KPI Library, one of the most comprehensive databases of KPIs available. Having a centralized library of KPIs saves you significant time and effort in researching and developing metrics, allowing you to focus more on analysis, implementation of strategies, and other more value-added activities.
Learn more about Flevy KPI Library KPI Management Performance Management Balanced Scorecard
To improve the effectiveness of implementation, we can leverage best practice documents in Activity Based Costing. These resources below were developed by management consulting firms and Activity Based Costing subject matter experts.
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The strategic initiative to implement advanced Activity Based Costing (ABC) models was underpinned by the Value Chain Analysis framework. This framework, developed by Michael Porter, is instrumental in understanding how activities within an organization contribute to value creation and cost. It proved especially valuable in identifying where traditional costing methods fell short in accurately assigning costs to products. The team embarked on this process by:
Another framework that played a crucial role was the Economic Value Added (EVA) model. EVA is a measure of a company's financial performance based on the residual wealth calculated by deducting cost of capital from its operating profit. This model helped in quantifying the financial benefits of implementing the ABC models. The organization:
The results from implementing these frameworks were transformative. The organization witnessed a marked improvement in margin accuracy and a reduction in cross-subsidization between products. This not only led to more strategic pricing decisions but also highlighted areas within the value chain where operational efficiencies could be improved, ultimately enhancing the company's financial performance as evidenced by a significant increase in EVA.
Learn more about Value Chain Analysis Value Chain Activity Based Costing
For the strategic initiative focusing on digital transformation in manufacturing processes, the Lean Manufacturing framework was pivotal. Lean Manufacturing, which focuses on minimizing waste within manufacturing systems while simultaneously maximizing productivity, was instrumental in identifying inefficiencies and areas for improvement. The organization successfully implemented this framework by:
The Capability Maturity Model Integration (CMMI) was another framework that guided the digital transformation initiative. CMMI is a process level improvement training and appraisal program. It helped the organization in benchmarking its digital processes against best practices and identifying areas for improvement. The steps taken included:
The implementation of these frameworks led to a significant reduction in waste and production costs, while also improving product quality. The digital transformation initiative, guided by Lean Manufacturing and CMMI frameworks, enabled the organization to achieve operational excellence, resulting in increased competitiveness in the market.
Learn more about Digital Transformation Operational Excellence Maturity Model
The strategic initiative to develop a new line of eco-friendly building materials was supported by the Design Thinking framework. Design Thinking is a human-centered approach to innovation that integrates the needs of people, the possibilities of technology, and the requirements for business success. It was crucial in ensuring the new product line met market needs and sustainability goals. The organization proceeded by:
Conjoint Analysis was the second framework utilized to gauge market acceptance and optimal product features for the sustainable product line. This statistical technique is used in market research to determine how people value different attributes that make up an individual product or service. The organization:
The outcomes of employing Design Thinking and Conjoint Analysis were profound. The organization successfully launched a highly anticipated line of eco-friendly building materials that not only met environmental standards but also resonated well with customers, leading to a positive reception in the market and a promising start in terms of sales and brand differentiation.
Learn more about Design Thinking Market Research Product Development
Here are additional best practices relevant to Activity Based Costing from the Flevy Marketplace.
Here is a summary of the key results of this case study:
Evaluating the results of the strategic initiatives reveals a mixed picture of success and areas for improvement. The implementation of advanced ABC models and the digital transformation in manufacturing processes have been notably successful, as evidenced by significant improvements in margin accuracy, reduction in production costs, and an increase in EVA. These outcomes directly address the core issues of cost management and operational efficiency that were previously identified. The launch of the eco-friendly product line also represents a strategic win, tapping into market demand for sustainable products and contributing to revenue growth. However, the results were not uniformly positive. The modest 5% reduction in cross-subsidization between products suggests that there may still be inefficiencies in cost allocation and pricing strategies that were not fully addressed by the ABC implementation. Additionally, while the new product line has been successful, the 10% revenue increase may not be sufficient to offset the R&D and compliance costs in the long term, indicating a potential underestimation of market penetration challenges.
Given these findings, the next steps should focus on further refining cost management and pricing strategies to address remaining inefficiencies. This could involve a deeper analysis of the value chain to identify hidden costs and opportunities for additional operational improvements. Additionally, a more aggressive marketing and sales strategy for the eco-friendly product line could enhance market penetration and revenue growth. Finally, exploring partnerships or collaborations could provide new avenues for innovation and cost-sharing, particularly in the area of sustainable product development.
Source: Operational Efficiency Strategy for a Building Materials Manufacturer in Europe, Flevy Management Insights, 2024
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