Customer Profitability

MBA Business Finance Management Dissertation Ideas, Economics Projects Topics Thesis Ideas and Abstracts in PDF, DOC, PPT

Customer Profitability

Postby Anup V » Tue Aug 07, 2012 11:08 pm

The aim of this paper is to examine how customer profitability is measured within a manufacturing company and analyze whether the measurement method is institutionalized or not. A case study has been conducted on a Swedish manufacturing company that has applied different measurement methods throughout the years. The paper presents a theoretical approach of customer profitability and management accounting change, and this approach is contrasted with the empirical study. The main finding of the study is that customer profitability is only partly being measured within Kanthal, even though the company has a well developed measurement tool kit. The reasons for this are that customer profitability has different meanings within the organization, old routines are preferred over new routines, and that the task of measuring and managing customer profitability has been assigned to the sales team. The demands on the sales team are too high and due to the lack of support from the rest of the organization, it becomes clear that the measurement of customer profitability is not fully institutionalized.

Customer profitability has been ranked as one of the most prominent features within current general management and has become increasingly important for companies today. To be successful, a company needs to formulate and implement a strategy that reveals the truth about its customers, i.e. highlight the activities that add value and those that do not. When that is done, value added activities can be maximized and non-value added activities minimized. However, most companies today fail to measure customer profitability and therefore they are not as competitive as they could be.

The reason behind the failure is that there is usually very little information about profitability of customers when the accounting management systems are designed in order to analyze product profitability. Today’s business is not only about executives managing a portfolio of products, there is a clear need for managing a portfolio of customers. When the management is able to identify revenues, costs and profit by individual customer or customer group, better decisions are to be made in the long term

Evolutionary Changes

Management accounting changes that are consistent with the existing routines and institutions are more likely to be completed than those that are not. The emerging routines will indirectly be influenced by the meanings and norms that are embedded in the existing routines and institutions. In addition, the powers of individuals will also play an important role as well as cost control and a concern for economic efficiency. Nelson (1995) describes the process of institutionalizing, i.e. the emerging routines become widely accepted in the organization and are a feature of the management control system. When this has occurred, the emerged routines represent definitions of behavior and relations between various groups within an organization.

A management accounting change like this, when the routines are influencing the activities within an organization, the change is characterized as evolutionary. This category of changes all involves movement over time, random elements, systematic mechanisms, and existing institutions. To sum up, to be able to change the existing management accounting system entails a deep understanding of the context of an organization, i.e. the existing routines and institutions. It is not only the formal systems that are important, habits of organizational members and taken-for-granted assumptions are also playing major roles
Anup V
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