Activity Based Accounting

How Wal Mart Killed K Mart and Best Buy Beat Circuit City

I spoke to a small auditorium full of business school grad students at the University of Texas last month.

They were fascinated by my case study of Transactional vs. Relational customers. I saw their eyes widen and their heads move up and down slowly as I explained how the Relational shopping mode is the foundation of all branding. But then they all dropped their heads and started taking notes like crazy when I began to talk about Activity Based Accounting.

I was startled by their reaction. I paused, then said, “You guys have heard about this, right?” They shook their heads no. These young men and women will receive their MBAs in May.

I stared at them in disbelief.

A man from India spoke up, “For a moment I thought you were talking about activity-based costing but then you took it a whole different direction.”

I was incredulous. “You’ve never heard of Activity-Based Accounting?” Again they shook their heads no. Then it hit me. Joe Romano invented this and taught it to his students 20 years ago without ever mentioning that it was his own invention.

I smiled. Joe has always been like that.

As the years have passed, I’ve seen countless real-life examples of Activity-Based Accounting in action. I just always assumed it was common knowledge and that everyone else was seeing what Joe taught me to see.

In a nutshell, Activity-Based Accounting is highly sensitive to trends in customer behavior. It sees the people behind the numbers.

Traditional cost-based accounting reduces customers and their behaviors to an “average” or a “percentage.”

If a hole is 12 inches deep, how deep is half a hole? Cost-based accounting will answer “6 inches.” Activity-Based Accounting will answer, “There’s no such thing as half a hole.”

Have you ever met the family with 2.3 children?

Analysts who study Wal-Mart will tell you that the secret to their success is inventory management. Dig a little deeper and you’ll find that Wal-Mart’s inventory management is highly responsive to the activities of the customer.

Wal-Mart has a men’s clothing department. So does K-Mart. Let’s assume they sell exactly the same clothing. K-Mart can tell you that the month started strong, then slowed down, so they pulled out their little stainless steel cart and the store manager got on the intercom and announced “a flashing blue light special.”

Wal-Mart, on the other hand, knows it sold 5 Dave Hogan sport shirts within the first 8 hours they were on display and that all of them were blue. The red ones aren’t selling. The next day they sell 4 more blue ones and only 2 red. Wal-Mart’s sales aren’t going to slow down like K-Mart’s, because Wal-Mart is going to make sure they don’t run out of blue, Dave Hogan sport shirts.

K-Mart went bankrupt. Wal-Mart became the most successful retailer in the history of the world. That’s the power of Activity-Based Accounting.

Likewise, Best Buy CEO Brad Anderson implemented a decision-making technique back in 2004 that I immediately recognized as Activity-Based Accounting. One year later the success of his endeavor was trumpeted in the Wall Street Journal. Four years after that, rival Circuit City was driven into liquidation because they never quite caught on to what Best Buy was doing.

Would you like to talk more about it?

Activity-Based Accounting dovetails nicely into the principles taught by women’s marketing expert Michele Miller, so I’ve asked her to give me a couple of hours during her upcoming Wonder Branding class April 15-16 at Wizard Academy. You don’t mind a little extra class time, do you?

Rooms are still available at no charge in Engelbrecht House. I’d snag one right now if I was you. A couple of days in Austin will make 2009 turn out a whole lot better for you. Just look at Wal-Mart and Best Buy. (Best Buy retained Michele Miller. Those guys aren’t stupid.)

“Education costs money, but then so does ignorance.”

– Sir Claus Moser

The Wizard Academy campus is beautiful this time of year. Come.

Roy H. Williams