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Activity-Based Management
Activity-based management (ABM) is a cost accounting tool applying
cost analysis, target costing and management accounting
across the organization. Activity-based management (ABM) enables
managers to enhance profits through cost control and
tracking practices.
From
Cost Management : A Strategic
Emphasis, 4/e By
Edward J Blocher,
University of North
Carolina-Chapel Hill
David E Stout, Youngstown
State University
Gary Cokins,
SAS/Worldwide Strategy
Kung H Chen, University
of Nebraska
Globalization is the key issue in
determining the future of financial
accounting, says professor
Gregory S. Miller. And as
more countries consider adopting an
international accounting standard,
India is positioned to be a strong
leader.
V.G. Narayanan is a professor in the Accounting and Management unit at Harvard Business School.
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Gregory Miller is an
associate professor in the
Accounting and Management
unit at Harvard Business
School. |
Executive
Summary:
It is
well
documented
that
financial
analysts'
opinions
are
reflected
in stock
prices.
The
problem:
Analysts
often
operate
under
incentives
that are
inconsistent
with
telling
the
truth.
Retail
investors,
who tend
to be
less
sophisticated,
may fail
to make
proper
adjustments
for the
more
nuanced
of the
resulting
biases,
some of
which
might be
reflected
in
market
prices.
To study
the
scope of
market
efficiency,
Scherbina
studied
analysts'
incentives,
resulting
forecast
biases,
and
their
potential
impact
on
market
prices.
Key
concepts
include:
-
When
the
level
of
analyst
disagreement
about
future
earnings
is
high,
the
average
forecast
tends
to
be
overly
optimistic.
-
The
"marginal
investor,"
on
average,
fails
to
interpret
analysts'
earnings
forecasts
with
an
eye
to
inherent
biases.
-
Sophisticated
investors
have
a
beneficial
effect
on
market
efficiency.
Anna Scherbina is an assistant
professor in the Finance unit at
Harvard Business School.
The
average
billion-dollar
company
spends as
many as
25,000
person-days
per year
putting
together the
budget. If
this all
paid off in
shareholder
return, that
would be
fine. But
few
organizations
can make
that claim.
In fact,
many firms
now question
the ROI of
traditional
budgeting
altogether
and are
looking for
alternatives
that reduce
time and
better align
spending
with
strategy.
Look at your
own
company's
budget
process: Has
it really
helped you
do a better
job of belt
tightening
during the
current
slowdown?
Many
companies
have
reverted to
more
centralized
command-and-control
procedures
to keep a
tight rein
on costs—but
the dynamics
of the
budgeting
process
often
undermine
this effort.
William
Bruns is
the
Henry R.
Byers
Professor
of
Business
Administration,
Emeritus,
at
Harvard
Business
School.
Editor's Note: The Sarbanes-Oxley Act of 2002, signed into law last July, is the government's response to a series of financial reporting scandals that rocked investors. Among other measures the law offers up stiff criminal penalties for accounting fraud. But in this Harvard Business Review excerpt, the authors suggest most accounting errors aren't the result of fraud. Rather, it is unconscious bias that is to blame. Here is a look at those biases, and how they can escalate from a small error of judgment to a big financial nightmare.
Max Bazerman is the Jesse Isidor Straus Professor of Business Administration at Harvard Business School.
If companies and regulators are ever to learn from the collapse of Enron—and prevent similar corporate debacles in the future—they must look more closely at the relationship between auditors, managers and the company audit committee. The Enron scandal is not an isolated accounting failure. Over the past five decades, accountants have changed from watchdogs to advocates and salespersons. Auditing has become one of a number of services, including consulting and tax advice, in which accountants "sell" creative tax avoidance and financing structures. Accountants enable their clients to account for transactions under generally accepted accounting principles (GAAP) while reducing transparency and aggressively maximizing earnings and debt.
Jay Lorsch is the Louis Kirstein Professor of Human Relations at Harvard Business School.
Corporate budgeting is a joke, and everyone knows it. It consumes a huge amount of executives' time, forcing them into endless rounds of dull meetings and tense negotiations. It encourages managers to lie and cheat, lowballing targets and inflating results, and it penalizes them for telling the truth. It turns business decisions into elaborate exercises in gaming. It sets colleague against colleague, creating distrust and ill will. And it distorts incentives, motivating people to act in ways that run counter to the best interests of their companies.
Michael Jensen is the Jesse Isidor Straus Professor of Business Administration, Emeritus, at Harvard Business School.
Beginning with the influential work of Professor Emeritus Robert N. Anthony in the 1960s and 1970s, Harvard Business School has given a prominent place to research and course development focusing on the intersection of strategy and management control systems. For the past sixteen years, HBS professor Robert Simons has been adding to that body of knowledge and practice through an extensive research agenda that has resulted in numerous books, articles, and case studies. Working Knowledge editor Jim Aisner sat down recently with Professor Simons to talk about his latest work, Performance Measurement & Control Systems for Implementing Strategy, published by Prentice Hall.
Robert Simons is the Charles M. Williams Professor of Business Administration at Harvard Business School.
More Working Knowledge from Robert Kaplan
Executive Summary:
Activity-based costing (ABC) has become
popular in business writing and management
circles. (An example of an activity would be
process customer complaints.) However,
calculating baselines for activities,
developing the model, and retesting the
model once it is implemented is
time-consuming and costly. Kaplan and
Anderson developed improvements in the
process through what they call time-driven
ABC. Time-driven ABC decreases the amount of
data needed, and only requires estimates of
two things: (1) the practical capacity of
committed resources and their cost, and (2)
unit times for performing transactional
activities. Key concepts include:
- Building an accurate time-based
algorithm in one facility will typically
serve as a template that can be easily
applied and customized to other plants,
or even other companies in an industry.
- Time-driven ABC requires less time
and resources to implement. At one
company cited, it took two people two
days per month to load, calculate,
validate, and report findings, compared
to the ten-person team spending over
three weeks to maintain the previous
(traditional ABC) model.
"Most organizations attempt to create
synergy, but in a fragmented,
uncoordinated way," say HBS professor
Robert S. Kaplan and
colleague David P. Norton.
Their new book excerpted here,
Alignment, tells how to see
alignment as a management process.
Many organizations suffer a
disconnect between strategy formulation
and its execution. The answer? HBS
professor Robert S. Kaplan
and colleague Andrew Pateman
argue for the creation of a new
corporate office.
Benchmarks have their virtues, but
professor Robert S. Kaplan
argues they should be saved for surveys
of commoditized processes or services.
From Balanced Scorecard Report.
Executive Summary:
Organizations often fail to execute their
strategy—failure rates may range as high as
60 to 90 percent. Successful companies align
their key management processes for effective
strategy execution. Creating a new
corporate-unit level, the Office of Strategy
Management (OSM), may help align management
processes to strategy. The authors explain,
among other topics, OSM core processes,
desirable OSM processes, integrative
processes, and positioning the OSM. Key
concepts include:
- Strategy management is an emerging
profession.
- Each organization must ask itself:
What are we doing to make strategy
management a core competency of our
organization?
- Create an Office of Strategy
Management, position it at the level of
other senior corporate staff offices,
and give it responsibility and authority
for the nine key strategy management
processes.
Executive Summary:
The authors review the key roles of
corporate boards and recommend a Balanced
Scorecard approach to help boards work
smarter, not harder. Kaplan and Nagel
recommend a three-part Balanced Scorecard
program: Part 1: An Enterprise Scorecard
that includes enterprise-wide strategic
objectives, performance measures, targets,
and initiatives; Part 2: A Board Scorecard
that defines and clarifies the strategic
contributions and requirements of the board,
and provides a tool to manage the board's
performance; Part 3: Executive Scorecards,
which define strategic contributions of top
management and are used to select, evaluate,
and reward senior executives. Key concepts
include:
- Reforms such as Sarbanes-Oxley have
increased the amount of work that boards
need to do. A Balanced Scorecard
approach can help boards use their
limited time effectively.
- An enterprise strategy map and
enterprise Balanced Scorecard should be
the primary documents distributed to the
board in advance of meetings.
Editor's Note: (One cure for stock option
abuse, say proponents, is to change
accounting rules so that option grants are
reflected in a company's principal financial
statements. High-tech start-ups blister at
that idea, saying it would harm their
ability to recruit and retain top-notch
employees. A recent Harvard Business
Review piece argued that options are
an expense, plain and simple, and should be
accounted for in that way. In this excerpt,
the authors address what they call a
fallacy: that expensing options will hurt
young businesses. —Ed.)
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Partnering and the Balanced
Scorecard
- Research & Ideas - December 23,
2002
Often
overlooked
in essays on
leadership
is the role
of the
organization's
measurement
and
management
system.
Effective
leaders,
however,
know that
measurement
and
management
systems play
a critical
role in
communication;
in
establishing
the culture
and values
of the
organization;
and in
aligning
diverse
units,
employees,
and
constituencies.
In this
chapter, we
describe how
effective
leaders
customize
their
organization's
measurement
and
management
system to
partner with
their
employees
for strategy
implementation.
We also
discuss how
the new
measurement
and
management
system goes
beyond
intra-organizational
partnerships,
facilitating
alignment
and
partnership
with
external
constituents:
customers,
suppliers,
and
communities.
-
Editor's Note: In The Strategy-Focused
Organization, HBS professor
Robert Kaplan and David Norton,
president of the Balanced Scorecard
Collaborative, share the results of ten
years of research into companies that have
implemented the Balanced Scorecard. Drawing
on more than 20 in-depth case studies, they
illustrate how major organizations have used
the Scorecard to create an entirely new
performance management framework that puts
strategy at the center of a company's key
management processes and systems.
We believe that competition is the
root of the problem with U.S. health care
performance. But this does not mean we advocate
a state-controlled system or a single-payer
system; those approaches would only make matters
worse. On the contrary, competition is also the
solution, but the nature of competition in
health care must change. Our research shows that
competition in the health care system occurs at
the wrong level, over the wrong things, in the
wrong geographic markets, and at the wrong time.
Competition has actually been all but eliminated
just where and when it is most important.
There is no villain here. Poor public-policy
choices have contributed to the problem, but so
have the bad choices made by health plans,
hospitals, and the employers who buy their
services. Decades of "reform" have failed, and
attempts to reform will continue to fail until
we finally get the right kind of competition
working.
Michael Porter is the Bishop William
Lawrence University Professor at Harvard
Business School.
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Why Budgeting Kills Your Company 
