Overview
Discussion - Unprofitable Customers
Tommy Bamford, director of UK-based interior fixtures manufacturer Egan & Sons, faces a dilemma: one of the company's largest and oldest customers, Westmid Builders, has become highly unprofitable according to an activity-based costing analysis. Despite the financial strain, regional sales manager Jane Oldenburg argues against dropping Westmid due to their long-standing loyalty, even as other customers turn to Chinese competitors.
Read the full case "When to Drop an Unprofitable Customer" in your coursepack. Using the information in the case and this week's resources and lesson, please answer the following questions:
- Based on the principles of activity-based costing, what factors might contribute to a product or customer being highly unprofitable?
- Conversely, what characteristics of a product or customer, as revealed through activity-based costing, would indicate high profitability?
- Drawing from your own experience, discuss a situation where you believed a customer or product should have been dropped or expanded by your company, and explain how activity-based costing insights could have informed this decision. (If you work in government or the non-profit sector, consider a process or service that might fit.)
Assignment - Strategy Simulation
The 30-minute Strategy Simulation: Value Champion (located in your coursepack) teaches us about value chain analysis and competitive advantage.
You will act as a manager at SmartShoe, a manufacturer of technology-enabled athletic footwear. To fulfill a special order from a large sports retailer, you will make strategic decisions about everything from the number of shoes to produce and the quality of raw materials to shipping and delivery options, manufacturing methods, staffing, procurement, and product features. Your decisions impact SmartShoe's costs and the buyer's willingness to pay.
In the debrief, you will learn about the value chain framework and how to apply it to your experience in the simulation; you will understand how to break down the various activities of the firm to help manage costs, increase differentiation, and create value.
For this assignment, run the simulation. Then please submit a 2 – 3 page paper that discusses:
- Your results.
- Your strategy choices. Why did you select those as opposed to others?
- What you think the causes of your results are.
- What you would do differently.