Harvard Case - Case of the Colored Post-It Notes
"Case of the Colored Post-It Notes" Harvard business case study is written by Carliss Y. Baldwin, Michael C. Jensen, Karen H. Wruck. It deals with the challenges in the field of Accounting. The case study is 3 page(s) long and it was first published on : Dec 6, 1996
At Fern Fort University, we recommend the implementation of a comprehensive activity-based costing (ABC) system to accurately track and allocate costs across departments, including the production of colored Post-it notes. This will allow for a more informed decision-making process regarding resource allocation, pricing strategies, and ultimately, profitability.
2. Background
The case study revolves around Fern Fort University, a prestigious institution facing financial challenges. The university's decision to manufacture and sell colored Post-it notes as a fundraising initiative has resulted in unexpected cost overruns and a lack of profitability. The primary protagonists are the university president, the vice president of finance, and the head of the production department, who are all grappling with the financial implications of this venture.
3. Analysis of the Case Study
The case study highlights several key issues:
- Inadequate Cost Accounting: The university relies on a traditional cost accounting system that fails to accurately capture the true cost of producing the Post-it notes. This leads to a distorted view of profitability and hinders effective decision-making.
- Misallocation of Resources: Without a clear understanding of the costs associated with each activity, resources are potentially misallocated, resulting in inefficiencies and higher costs.
- Lack of Performance Measurement: The absence of robust performance indicators makes it difficult to assess the effectiveness of the Post-it note production process and identify areas for improvement.
- Limited Financial Analysis: The university's financial reporting system lacks the sophistication to analyze the financial performance of the Post-it note venture, making it difficult to identify the root causes of the financial challenges.
Framework: To analyze the situation, we can utilize the Porter's Five Forces framework to understand the competitive landscape and the Value Chain Analysis to identify key activities and potential cost drivers within the Post-it note production process.
Porter's Five Forces:
- Threat of New Entrants: The market for Post-it notes is highly competitive, with established players like 3M holding a significant market share. This poses a threat to Fern Fort University's ability to compete effectively.
- Bargaining Power of Buyers: Buyers have a high degree of bargaining power due to the availability of numerous substitutes and the relatively low switching costs.
- Bargaining Power of Suppliers: The bargaining power of suppliers is moderate, as the raw materials used in Post-it note production are readily available.
- Threat of Substitutes: The threat of substitutes is high, as there are numerous alternatives to Post-it notes, such as digital note-taking apps and other sticky note products.
- Competitive Rivalry: The competitive rivalry within the Post-it note market is intense, with numerous players vying for market share.
Value Chain Analysis:
- Inbound Logistics: The university needs to procure raw materials, including paper, adhesive, and packaging, at competitive prices.
- Operations: The production process involves cutting, printing, and packaging the Post-it notes.
- Outbound Logistics: The university needs to distribute the Post-it notes to retailers and customers.
- Marketing and Sales: The university needs to effectively market and sell the Post-it notes to generate revenue.
- Service: The university needs to provide customer service and handle any returns or complaints.
4. Recommendations
- Implement an Activity-Based Costing (ABC) System: This system will allocate costs based on the actual activities involved in producing the Post-it notes, providing a more accurate picture of the true cost of production.
- Conduct a Comprehensive Cost Analysis: The university should conduct a detailed cost analysis using the ABC system to identify the key cost drivers and areas for potential cost reduction.
- Develop Performance Indicators: The university should establish clear performance indicators to measure the efficiency and effectiveness of the Post-it note production process. These indicators should include metrics such as production yield, cost per unit, and customer satisfaction.
- Revise Pricing Strategy: Based on the cost analysis and market research, the university should revise its pricing strategy to ensure profitability.
- Improve Financial Reporting: The university should enhance its financial reporting system to include detailed financial statements for the Post-it note venture. This will allow for better monitoring and analysis of financial performance.
- Explore Alternative Fundraising Strategies: The university should consider alternative fundraising strategies that are more sustainable and less resource-intensive.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The university's core competency lies in education and research. Producing Post-it notes does not align with this core competency and may divert resources from its primary mission.
- External Customers and Internal Clients: The university's primary customers are its students, faculty, and staff. The Post-it note venture does not directly benefit these stakeholders.
- Competitors: The university faces stiff competition from established players in the Post-it note market, making it difficult to achieve profitability.
- Attractiveness: The financial attractiveness of the Post-it note venture is questionable, given the high costs and low margins.
Assumptions:
- The university is committed to improving its financial performance.
- The university is willing to invest in a new cost accounting system.
- The university is open to exploring alternative fundraising strategies.
6. Conclusion
Fern Fort University's foray into the Post-it note market has been a costly venture, highlighting the importance of accurate cost accounting and informed decision-making. By implementing an ABC system, conducting a comprehensive cost analysis, and revising its pricing strategy, the university can improve its financial performance and ensure the sustainability of its fundraising efforts.
7. Discussion
Alternatives not selected:
- Discontinuing the Post-it note production: This option would eliminate the financial losses associated with the venture, but it would also impact the university's fundraising efforts.
- Outsourcing the Post-it note production: This option could potentially reduce costs, but it would also require the university to relinquish control over the production process.
Risks and Key Assumptions:
- Implementation of the ABC system: The implementation of the ABC system may require significant time and resources.
- Cost reduction: The university may not be able to achieve significant cost reductions through process improvements.
- Market acceptance: The university may not be able to achieve market acceptance for its Post-it notes, even with a revised pricing strategy.
8. Next Steps
- Phase 1 (Immediate): Conduct a pilot implementation of the ABC system for the Post-it note production process.
- Phase 2 (3 months): Complete the full implementation of the ABC system and conduct a comprehensive cost analysis.
- Phase 3 (6 months): Revise the pricing strategy based on the cost analysis and market research.
- Phase 4 (12 months): Evaluate the effectiveness of the ABC system and the revised pricing strategy.
By taking these steps, Fern Fort University can improve its financial performance and ensure the sustainability of its fundraising efforts.
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Case Description
An example of how policies about budgeting and resource decisions are commonly misallocated is presented.
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