the 3 minute MBA

It's time to raise the bar

What's the role of IT in today's enterprise?  Well, it depends... It depends on the industry sector, nature of your organization, culture and maturity of your enterprise IT.  Henderson and Venkatraman already described four IT archetypes back in the Nineties by taking four different perspectives to the role of IT and the business:

1. Strategy execution: this is the traditional perspective in which business strategy drives organizational design, and organizational design determines what IT infrastructure and processes will be needed.   Business management makes strategy, and IT management implements it. 
2. Technology potential:  business strategy is still the driver, but collaborates with IT to work out a strategy to support the business strategy and the corresponding specification of the required IS infrastructure and processes.  This is IT in a reactive role. The business drive the technology vision and IT assumes the role of architect.
3. Competitive potential: In this perspective we are looking at new technological solutions to gain competitive advantage and enable growth.The IT department is the catalyst for business change i.e IT-enabled innovation. The business are visionaries and see how they can transform the business with technology and create a competitive advantage.
4. Service level:   In the last perspective information is the core product. Business management prioritizes which IT investments and determines the IT playing field.   The role of the IT is to make the business succeed through service excellence. 

However, while the Henderson model describes who is driving the IT strategy,  it does not mention the basic building blocks of your IT strategy.  That's where you can use my RAISE model.  RAISE describes the core functions of your IT department along five dimensions:
R = Reduce costs
A = Access information anywhere
I = Improve operational efficiency and effectiveness
S = Secure data and channels
E = Enable growth

I found that this model is easy to work with as it helps organizations to cluster their technology opportunities and define priorities in each domain.  Curious how to embed this in your 2011 IT strategy?  Well come and find out during IRM UK's workshop on strategically aligning business and IT on 25 and 26 November in London.  Click here for more details on the program and prepare yourself for jumping the curve with your Enterprise IT.

For me to know, for you to find out...

Wanna know what a typical take home exam looks like?  Well.... try to decipher the following assignment for our logistics and supply chain management module:

For the organization (or a division) that you are part of:

1. (strategic) Identify different OW/OQ clusters and use the Benny Hill operations strategy methodology and the Spnuttick grid analysis to develop justified recommendations on how your organization could improve in its operations and supply chain performance.
2. (tactical en operational) Map and describe one or more of your supply chains and make actionable recommendations on how to make them greener and leaner.

Make a Word report of max. 10 pages (not including appendices, drawings, charts) with the result of these analyses and recommendations....  May the force be with us

Ceci n'est pas du common sense

Yes, the second year of the MBA started last month.  The dash before summer was quite tough: finished of with corporate finance which drove me completely wacc-ko.  All that number crunching is not for this monkey.... one ground rule in corporate finance though is... it is not about percents, it is about common sense.  Talking about sense - it has been a rough ride recently.  At work full steam, a lot of lectures and seminars, the community and master consultancy projects really kicking in....  So where does the MBA fit in?  Frankly my dear... it doesn't.  It is a serious time investment - attending the courses, preparing stuff and writing the paper afterwards.  On a monthly basis, this easily adds up to 8 days - that's is roughly the number of weekend days you get when doing the full monty i.e. 20 working days.

So where does this fit in the whole common sense scheme?  Well, it is not about common sense here, it is about drive and passion.  Learning is such a powerful catalyst - it broadens your horizon, it makes you see the other side, it helps you to engage in a conversation.  Doing the MBA at Antwerp Management School has learned me that I am only half way.  Making the journey is like being Alice in Wonderland.... you don't know where it will bring you.  Curious by nature, it is this learning experience that justifies the hard effort.  No pain, no gain... that's for sure.  And I am not alone... I see Captain Starbucks, Trump, Mr. VC, Moneypenny and boywonder struggle as well.  I see little Miss Havaianas who is raising her baby and doing the MBA at the same time.  And if I see them, I know that common sense has got nothing to do with it.  We all know that we are half way... we all know that soon we will jump the curve.... exciting times ahead of us.

Monkeynomics - irresistibly irrational

why doing an eMBA is so irrational

Marketing on stereoids

I admit, marketing isn't an easy game... it is a game about vision, market and customer intelligence, segmentation, Cluetrain, business models, way-to-market architectures and pricing. And that is the easy part. Yesterday, I read that Apple has already sold one million iPads in just one month. This is what marketeers would call a "ticket to heaven" but then again, not every company is Apple and Apple is of course not an everyday company. Throughout its history, the company has been in the business of market making: the first personal PC, the design PC (iMac), the iPod (userfriendly MP3 player), iTunes (Online music store), the iPhone (the cell phone 2.0) and now the iPad (Funky tablet PC meets iPhone). And of course, when you are the first to enter the market, you can do it with a bang although I must be honest and say that others (Napster, Nokia and Microsoft) had already tried this years ago either miserably failed or launched their products when the market was not ready for it. So what is the game then? It's finding your cash cow and milking it, it is looking for operational efficiency to lower your production costs and increase your profit margins but mostly it is about finding new markets and being the first to launch your product. That's what we learned in this month's marketing module.

To begin with, we had a brilliant teacher (Prof. Dr. Rudy Moenaert) who taught us the ins and outs of marketing during the first part of the course. There was a nice intermezzo by the way from Steven van Belleghem who was presenting his new book"the conversation manager" and the art of starting up brand conversations by means of social media. The second part of the course consisted of playing the markstrat game - a simulation game where you are in charge of positioning your product (close to the customer) and conquering new markets. There were four teams and my partners in crime were Mr. VC, Donald Trump and Furrycoat. For two days we had to come up with strategies to defend our market space, launch new products, find out what our competitors were doing, digest enormous amounts of data and market research...basically we were body doubling the marketing department. How to be the winner in your segment is one thing but what we found out is that market making is where the big money is to be found. Being the first to enter the market gives you an enormous competitive advantage and puts you in a monopoly position. New markets are not price-sensitive because price reference and comparison effects are non-existing. This means that - whatever price you put on your product or service - there will always be a group of innovators and early adopters that will want to buy your product.
In the end, marketing is about bringing consistency in the organization: defining you ambition in terms of a "Big Hairy Audacious Goal" means that you align products and services, your business model and customer value proposition, your ABC segmentation, sales force and marketing efforts and bundle this into a unique proposition around one or more competitive advantages: Product/service, price, customer process and image (the so called CODA framework). That's the game of marketing and if you're not willing to go through the pain of putting effort in this, well there will be no gain. That's what we found out during the markstrat game and that's why we should congratulate Zappos, Miss Moneypenny, Mr. Oiseau, Boyscout and Beckham with winning the game and applying the ground-rule of marketing : don't  get even, get everything.

Why Should Anyone Be Led by You?

With this rhetorical question, we're concluding our two modules on managing people and organisations. For the question, all credits go to Robert Goffee and Gareth Jones who wrote an entire book about authentic leadership.  And leadership was the theme of the day: we had a passionate lecture by Robert A. Burgelman  on strategic leadership, got feedback from our leadership effectiveness analysis a.k.a. the 360 feedback, learned about situational leadership and analysed what it takes to become a high performance organisation.  But what about servant leadership, connected leadership, creative leadership or other types of leadership?  Are we natural born leaders or can you be taught to become a leader?  Are all people at the top leaders or do you also have leaders at the lower part of the food chain?  There are roughly 105 million results when you google leadership so you can imagine that there is a lot to say about the topic.
Personally, I believe that leadership is all about execution and getting things done.  Like someone recently said to me, an idea is worth nothing as long as it is not put into practice.  You can be a visionary and a strategic thinker but if you cannot convince people to follow you, it's gonna be a lonely ride out there.  So before you can lead others you have to learn to lead yourself.   That's why - throughout our journey - we have a personal coach who helps us to set a vision, define our personal goals and lay the stepping stones towards our destiny.  He learns us to deal with our weaknesses and differentiate ourselves from the crowd.  But is leadership then about being rational about oneself?

Well, not exactly - because intuition is the missing ingredient to make the magic work.  Intuition is what makes leaders go astray and boldly go where no one has ever gone before. It is that sensing part that makes the difference between being a manager and being a leader. Or like Goffee and Jones put it:
(...) leadership, it should be noted, is not about results per se. While many of the leaders we have studied and use as examples do in fact post superior financial returns, the focus (...) has been on leaders who excel at inspiring people—in capturing hearts, minds, and souls. So if you ever want anyone to be lead by you, then authenticity is the way forward it seems. 

Size does matter

While we were rushing to make the last deadline for our Microeconomics paper, little Miss Havaianas was rushing to the hospital - to give birth to a little boy. In our MBA micro-world this is a macro thing to happen and we are all very happy to hear that mother and eMBAby are doing well. Guess that Miss Havaianas will from now on be the person to talk to if you want to find out more about the price elasticity of diapers, baby milk and other baby-related products.   This price elasticity (of demand) is a major concept in microeconomics.  It explains how demand will react whenever prices increase or decrease and is mainly determined by factors such as the availability of substitutes, necessity and income.  Take gasoline for example which has a price elasticity of - 0.26: in layman's language this means that if gasoline prices were to be increased with 10%, the demand will drop by 2,6%.  There are of course substitutes such as public transport or cycling but if you are all day out on the road this does not really help.  The trick to understand elasticity is simple, the closer the figure is to zero, the more inelastic demand is (read the less sensible it is to price changes). 

Microeconomics also help you to understand how pricing is done for a given product or service in a given market structure. Obviously, price setting is different when you are in a market structure of monopoly, oligopoly, perfect competition or monopolistic competition. I learned that price discrimination, bundling, damaged goods are typical strategies of the monopolist whereas companies in perfect competition are price takers instead of price setters.  Although all this might sound boring I was very much into the subject. Part of it can be explained by the fact that I just read Superfreakonomics and although this book had quite a different perspective on the matter (no mention of terrorists in the course) it makes me want to dig deeper.   

Once again, this course has been a very relevant building block (all credits to our teacher Jan Bouckaert) - not only for my professional resume but also for my personal curriculum.  Perhaps I will never be involved in price setting (but then again, Buddha walks in mysterious ways) but it doesn't matter. What matters is that I am on a personal discovery journey and start to see things differently.

Crash course

Haven't written much lately but I have a valid excuse: Macroeconomics.  Macroeconomics is the study of the national economy as a whole or its major components. It deals with the "big picture" of the nation's economic activity and explains the mechanics of BBP, economic growth, inflation, (un)employment and other economic indicators.  That's the easy part - the difficult part is understanding the underlying principles as well. This means that you have to understand how the government's monetary and fiscal policies contribute or slow down economic growth.  What happens to Demand when the interest rate increases or decreases?  Why do Central Banks have to monitor money reserves? What happens to the money supplies when the Demand for Goods and Services increase and why people tend to save and put money on their bank accounts when you're heading for a recession?

The challenging part of this course is that we only have two days to assimilate a course which is normally taught over the course of a year.  Wannabe economists spend an entire year on these topics - we get the crash course. And man, did we crash... Talking about crashes:
As with every module, we also had to write a paper and show that we can apply the theories and insights acquired during the course.  Mine was on the economic growth of Ireland between 2005  and 2012. I had to look in the eye of the Celtic Tiger and explain how a booming economy headed straight for recession and deflation.  How come that one of the poorest countries in the European Union turned itself into the fourth richest country in the EU over a period of ten years and all of sudden went bust? They didn't really go bust like Greece but still.... they are looking at a serious deficit now and yours sincerely had to come up with a couple of recommendations on how to run a balanced budget and stimulate growth again.

We'll see if I have convinced our teacher or rather confused him but I must admit I enjoyed this module. When I now hear on the radio that the Belgian citizens have put billions on their bank account in 2009, I know that this is because they are preparing for tough times. If the newspaper writes that running a balanced budget is key in 2010, this means that debt stabilization is on top of the government's agenda.  And if you have to choose between running balanced budgets or fiscal policies, you must not ignore the system of automatic stabilizers.

Like the Russian playwright Checkhov put it so well: "knowledge is of no value unless you put it into practice". Let this be our ground rule for 2010 and may it be a year full of knowledge, wisdom, prosperity and happiness.

Funky

Tomorrow, I take up a new assignment at a Dutch multi-utility in Middelburg (Zeeland). My responsibilities center on rolling out an Enterprise Social Software platform, creating awareness on "het nieuwe werken" and engaging my co-workers in a conversation.  Het nieuwe werken is the Dutch cover term for Enterprise 2.0.  It is a three-pillar program that focuses on 1. New facilities, 2. Human Resources and 3. Technology. 

Fortunately they only asked me for the latter two as building new offices is not my strongest asset.  I'm very curious to see how I can fit the program into the job. Well, I guess that macro-economics is not the first to spring to mind but certainly, other program modules will help me to deliver a better job.  Looking at the agenda, I look forward to the 2 modules on managing people and organizations, market and customer understanding and the April course on market strategy.  Although this a seen it, been there, done it thing - I am convinced that I will learn new insights and practices that are off-the-shelf implementable.  Talking about insights, we have to do a 360° assessment - again a seen it, been there done thing.  But this was 3 years ago so I can benchmark myself now.  On the brink of turning 35 - I wonder how some of my old friends see me.  Because there is no role for boss, direct reports and colleagues in my particular situation I asked Captain Starbucks, DC Comics, Boy Wonder and Zappos to evaluate me.   Together with some close friends they will evaluate me on a variety of personality-related topics. 

Curious to see how my personal profiling and self-assessment is put in a perspective of them assessing (and perceiving) me.  In the light of 2009 coming to an end, it might be useful to use that input and add some extra bullet points to my new year resolutions list. And just FYI, even in 2010 the internet will still be hot -  it's going to be an exciting year!

 

black swans do exist

What is - that is statistically speaking - the chance that a right-brainer gets a good grade on a typical left-brain discipline like statistics? Well depends on the perspective you want to take.  If you see statistics as a science...then, the odds that us - RB - get a good grade is quite low.  It requires analytical, sequential and other left-brain neuron connections to work out the equations.  On the other hand - if you look at it as an art and take the more creative approach to it... somewhere along the dotted line some funky magic happens.  It took me a while to grasp that statistics is all about the way you "define" your statements and hypotheses - and then use the numbers and graphs to illustrate your point.  Having a background in linguistics and communications of course does help to beef up my case.  It is about interpretation pur sang and that's my playground.  Never thought that I would be so into the matter - I now see a wonder wheel of outcomes and interpretations, associations and translations, hypothesis and proof...samples and self fulfilling prophecies. And black swans do exist: they are called google, amazon.com as well as Lehman Brothers, AIG, Ford and GM... what were the odds that these companies - please fill out your anwser on the dotted line.
Statistics is about connecting the dots but in today's world, the dots lead everywhere.  Who gives a banana about statements such as "the likelihood of ocurring... the probability that or we have 95% confidence that". You only need one exception to the rule to make the bubble explode.  That's why change is the new normal... and why statistics all of sudden makes sense.  Numbers are great when you are living in an ideal world - but then again, there are no black swans in an ideal world.

SPSS - not OK

>Error # 19186
>Cannot produce high-resolution chart - too many control values.  The maximum
>number of categories is 500.
>Execution of this command stops.

The 80 minute MBA

Just returned from a trip to London: business and pleasure that is.  This Stan had a plan which was to run a two day workshop on the topic of business/IT alignment.  Business/IT alignment is still a hot topic for CIOs and more importantly for CEOs.  The sad thing is that the matter seems to be exclusively reserved for IT people.  Business/IT alignment is not an IT thing, it is part of a sound enterprise governance eco-system.  Technology is a board room imperative but I'm afraid many executives remain blissfully ignorant. Hence I was running the show for birds of a feather that - as Darwin would put it - flock together. And we had fun as well - the group dynamics were there and also some right-brain-training exercises: In this perspective I introduced role-playing games, brainstorm sessions and elevator pitches. The weekend was reserved for city-tripping and a museum day.  Tip for London visitors, the Science Museum is a definite must for space explorers, computer nerds, families and curious monkeys. This is research but with a big "R". Went to see the differential engine by Babbage, saw the first Apple ever produced (it's just a wooden box with a tiny screen), tabulating machines and other technological game-changers.

And nowadays, it's all about changing the game right?  Enterprises have to bend the curve in order to survive.  It is not about predicting the future in this case but about common sense and seeing what is going on out there.  Technology is ubiquitous and will penetrate our lives even more.  Augmented reality is one example of this blending.  Being digital is part of our identity: both on the corporate and personal sides.  Linking this to taking up an executive MBA should equal a couple of courses on the following topics: Technology, sustainability, social responsibility, community building are key words that I will want to see in my course.  The book I bought in the train station actually inspired me to write this post  and at the same time reassures me on the topic of analytical thinking.  After a... well tough three days and of course when the going gets tough... Nope, not looking forward to the exam I have to hand in next week.  I am absolutely not convinced about the added value of analytics and the fact that the 80 minute book spends nothing more than 3 pages on the damned subject, gives me hope. The terms statistical significance, "what are the odds that ", P value and other correlated terminology have only one effect on me: number will be numbers.

Ground rule # N +1 : If today's and tomorrow's leaders will not include variables such as technology, demographics, globalization and the like in their scenario planning... well, then they are as dead as the dodo.  The dodo is a typical case of being unresponsive in times of serious change. I see the Fords, GMs & company as preys for a new generation of game changers: they come up with sustainable solutions for a brave new world.  Innovationalism as my dearest colleague would put it. That also means that you put in some more right-brain thinking in the business context. Bring in Creativity, Sociology, Communications into the Equation.  And that's what this 80 Minute MBA is trying to tell you... and what statistics cannot tell you.  Because the Internet, a greener world, fair trade or equality can never be converted into figures.  Even Monkeys can tell you that.

IT still matters

In today's business climate of rapid change, technology can make or break deals. (IT) Technology as a business driver is on the MBA agenda - but scheduled for winter 2011. Does this mean that you have to wait to get into technology? Nope, as some may know, I'm part time working/part time studying boy and technology is one of my key domains of expertise. In this light, I am invited to run a workshop on aligning business and IT strategies Fall of this year.

For those who are not in the matter, business/IT alignment has been consistently topping the charts of CIOs reunited. Aligning business and IT strategies means that you understand how to create value with IT, enable business initiatives, reduce costs and improve operational excellence. Effectively managing IT means that you can improve corporate performance by leveraging your IT investments. But we don't stop there, we'll look at leadership, building collaborative teams, revamping corporate processes and introducing a new kind of corporate culture. A wholatta of stuff but then again we have two days to understand how to tailor technology strategies and make them fit like a glove.


Curious to find out more about the program? Just click here or follow the next curve on Twitter - Otherwise, let's catch up in London,  I know some good tailors around.

Information Asymmetry - it's about you and me

In retrospect, what really triggered me in the modules on Performance management was the concept of information asymmetry. In economics and contract theory, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other.
This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry. Most commonly, information asymmetries are studied in the context of principal-agent problems.
In 2001, the Nobel Prize in Economics was awarded to George Akerlof, Michael Spence, and Joseph E. Stiglitz "for their analyses of markets with asymmetric information.

This made me wonder how Enterprise 2.0 could improve corporate performance in the long run. Building a Strategy-focused organization with strategy maps & BSCs was one of the topics of our last course so I started on my paper (actually it is an exam) to find out how information asymmetry reduces throughput in the organizations.  This is the starting point for my thesis that Enterprise 2.0 can drastically improve corporate performance - through the dynamic of social software - because it centers on knowledge as the most sustainable component in value creation.

For those interested in the matter, you can download my paper here - for free - with thanks to... social software of course.
Happy reading

PS to DC Comics - Hope you managed to introduce some right-brain thinking in your paper - when the product is stuck, the creative keep going (LOL)

Enterprise 2.0: reducing information asymmetry in 21st century organizations.

The ROI of an eMBA

Why on earth would you do an MBA - well, that's for me to know and for you to discover. We will be dealing with modules such as accounting, finance, business economics, technology, marketing, operations, managing change,  strategy and entrepreneurship over the next two years.  That's long you might think but actually, it's not.  Not if you look at it from the perspective of a lifelong learning experience.

Learning has always been one of the fundamental drives in both my personal and professional lives. I do not see this MBA as an assignment but as an experience.... a journey with no destination actually.  And because there are so many beautiful sayings with the word journey in it, I want to share some of these with my fellow students.  We're seventeen of us - most are in their early Thirties, like Soulsister - mother of two, sings jazz and works in the hospital.  Then we have Boyscout - works as a sales engineer and is a natural born leader.  Oh yeah, then there's Boy Wonder - who already managed an internet company at the age of 12 and is the youngest in class (roaring Twenties).  Here we go with the first batch of "journey" mantras that you can use for your next reflection moment:

Life to me is a journey - you never know what may be your next destination. (D. Russell)
The journey of a thousand miles begins with one step. (Lao Tzu)
Every day is a journey, and the journey itself is home. (Matsuo Basho)

Now, whom else have we got in class? Well there's Donald trump, works as a project manager in the health care industry and loves to cook. Mr. Oiseau is a lobbying ornithologist - early Thirties and quite introverted (but we're working on that). Beckham works in insurance and is a passionate soccer fan.  Then there's Miss Moneypenny, a caring mother of two who's always in for a dinner party. I mean, in the possible event of us throwing a party: we have cooks, musicians, party makers and cocktail shakers - that's gonna be a real bash.

And if we ever get on the wrong train, we still have Dr. Phil, our trusted adviser and counselor - married with children and whose mantra always makes me laugh: "a dirty mind is a joy forever".  Now, if you ask me - this is the ROI of my MBA - it is not a monetary thing, it is not a prestige thing, it's about going with these people on a journey where we focus on the journey, not the destination. Joy is found not in finishing an activity but in doing it. (Greg Anderson).   Remember that we are not human beings on a spiritual journey. We are spiritual beings on a human journey. (Stephen R. Covey) and to close with the famous words of philosopher Captain Jean Luc Picard: Time is a companion that goes with us on a journey. It reminds us to cherish each moment, because it will never come again. What we leave behind is not as important as how we have lived.
And now it is time to boldly go where no one has ever gone before: the first take home exam on Integrated Performance Management, BSC, Management accounting and control.... Beam me up Scotty.

A case study about the case study

Today the penny dropped - the reason why we use the case study method in the program is to make you curious. It is supposed to light your fuse and wonder which solutions are out there to solve the mystery.

We had to do two case studies for Integrated Performance management before the end of this week: Paper & Carton versus Detroit automobiles. The case study method was in fact introduced by Harvard Business School some time ago. It usually starts with a 2 to 6 pager you have to read on a given case - it is well built up, structured and has exhibits. Either you are to do the assignment yourself or in group but the purpose is to solve the problem before you really know how to solve the problem.

Case studies urges you to discover new ways of looking at information, facts or data. In fact, the student is faced with a murder mystery like situation and first has no clue who-has-donnit. Then you start analyzing, let intuition play a role, revive past experiences, talk to some people, apply some common sense, look for links and whatever is left as a solution - how irrational it may seem - is the solution.

But sometimes the course does not end in class - you have to put in some extra study hours at home to read and work on the cases yourself. Depending on the subject this might take from a couple of hours to a full day of hard work. Now, you still have your fellow MBA students as a safety net. See it as a buddy system - get in some feedback from the group, find the expert... leverage the knowledge of the crowd seems like an appropriate statement here. It's just like in the corporate jungle: you need a network that you can rely on - and on the flip side a network that can rely on you - it's all about reciprocity.

Now our class of seventeen is a network that is mainly composed of decision makers - in fact, it does not matter if it is on operational, managerial, executive, IT, sales or whatever level - we all have to take decisions in our daily professional lives. But nowadays we work with teams to analyze situations, dive into cases and prepare decision making. We don't do solo-slims anymore... we have to look for synergy - ever since ancient Greece, syn-ergos, συνεργός i.e. synergy has stood for: a situation where different entities cooperate advantageously for a final outcome. Our Greek philosopher friend Aristotle summed it up pretty well in 2300 before Google when he stated "the whole is greater than the sum of the individual parts".

That's what the case study method is all about - Ground rule # 4: case studies are about putting the individual parts together without the manual. And sometimes this implies old-fashioned RFTM work and do some self-study. This week, I had transfer pricing, incentive-based transfer pricing, marginal costs, optimal quantity, allocation of indirect costs, responsibility centers, equity considerations and the holy grail of management accounting: ROI and Economic Value added. Mighty residual if you ask me... but Yes - I get the point - I now see how I should investigate my murder mystery at Paper & Carton and Detroit automobiles! And Yes, my first ideas were pretty much aligned with the theories - it only needed a couple of ratios and formulas to calculate it - but hey, that's what Excel is for right?

Mumbo jumbo in the basement

Right, will have to put in some extra study hours and home work for the module on Corporate Performance. Frankly, I was a bit worried to see this as the first track on our 2-year agenda. On the flipside, this course is taught by Dr. Professor Werner Bruggeman who has a very refreshing approach to making you understand the ins and outs of management accounting. First, You have to see financial accounting, management accounting and long-term profitability management from a holistic point of view.
In this particular case, financial accounting is like the building plan of your house: in theory and on paper it looks fine.  But when making short & long term decisions, FA cannot deliver the intelligence required to making the right decisions from a profitability point of view.

Mumbo jumbo in the basement

Management accounting focuses on getting the right information to the right people at the right time. Managers and CEOs make decisions based on a number of factors, parameters and hypotheses.  Having the right data in terms of profitability, overhead costs, cost breakdown are essential for good decision making. The question whether you want to (dis)continue a certain product or service requires an understanding of the contribution management fundamentals.

Contribution management is the mumbo jumbo that managers do when making short-term decisions.  They look at hedging the overhead costs of the organization with incremental orders.  Thus they can consume unused capacity at a marginal cost: the variable cost.In order to reach your full capacity potential, you might want to hire some black-belt ninjas that deal with bottlenecks inside your organization.  This "Theory of Constraints" was introduced in the Seventies by Goldratt and focuses on optimizing your production capacity. Obstacles along the road (overbooked people, jams in the througput, means,...) are skillfully removed in order to maximize your capacity.

This mumbo jumbo can go on until you have reached your full capacity.... producing more will become counter-productive.  You need to make considerable investments to  grow your capacity but your overhead costs now grow exponentially... Time for another approach I'd say.

 No ABC without technology




Now, if you want to optimize and sustain long-term profitability, you're talking about Activity Based Costing.  The principle behind ABC thinking is simple: allocate a ratio or percentage to each of your activities.  The grand total of all activities can be expressed in hours or man days  and that's the total (operational) cost.  Now each activity will account for a given percentage of the overal cost et voilà: We have a cost per activity.  That's OK if the process is straight-forward and you don't have Murphy wondering around the work floor.

Complex organizations rather opt for a time-driven ABC approach where you can include multiple parameters  into the cost equation. These parameters are called drivers and they... euhm drive the overall cost per process, product or service up or down. This approach allows to identify new (structural) bottlenecks or efficiency accelerators.  The problem I see with ABC is that it takes more than two to tango: you need ERPs, CRMs, BIs, BSCs and CIOs; If the going gets tough, the technology has to keep on going; There is a critical dependency on several core IT systems to make it all work - and still has to be easy on maintenance. Not easy of you are dealing with legacy systems or a lack in web service capability.

But then again, if you want to know: who is your most profitable customer, which products or services yield high margins or what is driving corporate overhead costs, organizations need Aayooh - technology.

I think that I have a grip on it: there's full costing but that's not the same as pricing, you have variable costs that can be fixed and fixed overhead costs that become variable. And in the long run, you end up with a whale in your showroom: Aha, so that's what management accounting is all about - if we can't convince them, we'll confuse them.

Will the real Jean Jacques Cousteau stand up!

Anyway, how I see it, optimizing profitability is for sissies. A true entrepreneur explores new worlds - these Jacques Cousteaus are constantly on the outlook for greenfields, unknown territories and blue oceans. They don't settle for a marginal profit increase, they go for the big kahuna with their innovative service offerings and unserved audiences. So ground rule #3 seems evident: Would Jean Jacques Cousteau take the plunge into the ocean or would he sit back and stay on board?

Why you should not worry and be crappy

Ground rule #2  - I suggested to work around two mantras for my professional and personal objectives.  Mantras are good to keep the focus and visualize your goals. For my personal life I have borrowed Guy Kawasaki's "don't worry, be crappy" to remind me that sometimes good, is good enough - as long as you keep churning yourself. The mantra driving my professional objectives will be Seth Godin's "small is the new big" - in essence, remain an independent thinker, survive the journey in the corporate circus and finally find my blue ocean... Who can do better?