Common Information Gaps for Strategic and Competitive Analysis

Let’s think about the role of cost and revenue information in strategic management, competitive market analysis, and strategy formulation.  A major assumption is that an organization knows a great deal about its costs, revenues, internal resource capacities, and nature of its profits. In my experience, this is much more of a question mark.

A key step in strategic management is an internal assessment of the organization’s strengths to determine core operating or support capabilities to determine core competencies that can be leveraged for competitive advantage or differentiation in the market. The objective is to leverage core competencies across existing or new products or services the organization produces or could produce.

I have seen numerous manufacturing plants that incorrectly cost most of their products (often believing losers were profitable and vice versa) or inadvertently provide salespeople incentives to price identical products cheaper when they are produced on an older, fully depreciated production line (which has lower quality and higher costs other than equipment). Educational institutions and hospitals often encourage donors to give new buildings or wings when they underutilize and can barely maintain the space they have. The lack of high-quality, causal cost, capacity, and revenue information is an often overlooked strategic information shortfall.

In Michael Porter’s material on competitive advantage, Southwest Airlines is often cited as an example of a company which identified a market/customer niche and has created and maintained a sustainable competitive advantage because it creates a very tight “fit” of its activities around its strategy to serve its niche. The head of cost and performance analysis for Southwest Airlines was on the team I lead that drafted the Institute of Management Accountant’s Conceptual Framework for Managerial Costing. It was very clear that Southwest took exceptional and very sophisticated care to understand the nature and impact of cost, revenue, and non-financial/operational performance information (including capacities) to create its strategic performance objectives, in both financial and operational dimensions. However, in my experience, Southwest Airline’s sophisticated approach to costing and operational information is the exception rather than the rule.

It may be possible to create a great global or corporate strategy without good cost and capacity information; but as you move toward execution at the business unit and functional level, you will see deficiencies and achievement will suffer. Operational excellence is considered a basic requirement for achieving sustainable competitive advantage.

High quality costing and revenue information tied to operational information is a key enabler of operational excellence.  The PACE approach - with high quality, causal financial internal decision support information models - is the best and most comprehensive route to high quality costing and capacity information.