In order to be highly competitive in the market, an organisation must be able to forecast future changes in customer needs and market trends. Organisations normally predict possible future market changes by assessing past and current market flows. For this purpose, an organisation deploys a number of business evaluation tools. Activity based costing, value chain analysis, and customer profitability are the three major frameworks that assist an organisation to evaluate its business flow. This paper conducts a detailed research to identify the core concepts, objectives, pros and cons, and applicability of each of these business evaluation methodologies. The paper includes an extensive literature review section and an analysis section.
The major findings reflect that:
• Cost centre and cost driver are two core concepts of activity based costing
• Governance, innovation and upgradation, benchmarking, and product positioning are the key ideas of value chain analysis
• Cash flow, customer capital/equity, and customer as a real option constitute the core concepts of customer profitability
• The ABC approach greatly assists users to better identify their overheads with regard to activities and resources.
• The most advantageous feature value chain analysis is that this methodology assists its users to get a clear view of their core competencies
The concept of customer profitability aids an organisation to identify its profitable customer groups and secure them from competitors. II. Introduction Today, organisations are widely using business evaluation tools like ABC, value chain analysis, and customer profitability analysis to evaluate their (organisations’) business feasibility and secure future profitability. Application of these tools assists firms to identify their pitfalls in supply chain activities, their potential strengths and weaknesses, and most profitable customer segments. Although all these three techniques are complex and time consuming, they are the best available tools to accurately evaluate a business concern. The ABC approach is mainly concerned with allocation of cost to various supply chain activities along with the firm’s resources whereas the value chain analysis explores activities that create value for the organisation and those do not create. The former method specifically focuses on profitability of each activity and process while the latter tries to define the organisation’s core competencies over its rivals. In contrast, the concept of customer profitability aids a firm to identify profits generated by its individual customers. All the three approaches are based on some core accounting and management concepts. The following sessions critically analyse these three business evaluation tools in detail. III. Literature review 1. Activity based costing Activity based costing (ABC) can be simply referred to a special costing approach that clearly identifies and defines activities in an organisation and allocates costs of each activity among all products and services based on actual consumption by each activity. According to the Consortium for Advanced Manufacturing-International (CAM-I), activity based costing is a costing model “that assigns cost activities based on their use of resources, and assigns costs to cost objects, such as products or customers, based on their use of activities” (Lewis, 1995, p.114). The ABC is a valuable accounting tool as it provides an organisation with more clear view of the product and process costs. This concept can be effectively employed to improve management decision making process and thereby promote the firm’