Harvard Case - Manufacturers Hanover Corp.: Customer Profitability Report
"Manufacturers Hanover Corp.: Customer Profitability Report" Harvard business case study is written by Robert S. Kaplan. It deals with the challenges in the field of Accounting. The case study is 16 page(s) long and it was first published on : Oct 9, 1990
At Fern Fort University, we recommend Manufacturers Hanover Corp. implement a comprehensive customer profitability analysis (CPA) program using activity-based costing (ABC) methodology. This program will enable the bank to identify and understand the true profitability of its customer segments, allowing for targeted strategies to enhance overall profitability and drive sustainable growth.
2. Background
Manufacturers Hanover Corp. (MHC) is a large commercial bank facing increasing competition and pressure to improve profitability. The bank's current cost allocation system, based on traditional accounting methods, fails to accurately capture the true cost of serving different customer segments. This leads to a distorted view of profitability, hindering effective decision-making and resource allocation.
The case study focuses on MHC's efforts to develop a customer profitability report using a more sophisticated cost accounting system. The bank's management team recognizes the need for a more accurate understanding of customer profitability to make informed decisions about pricing, product development, and customer relationship management.
3. Analysis of the Case Study
To analyze MHC's situation, we can apply the following frameworks:
Strategic Framework:
- Porter's Five Forces: The banking industry is characterized by intense competition, high bargaining power of customers, and the threat of new entrants. MHC needs to differentiate itself and develop a competitive advantage to thrive.
- Value Chain Analysis: MHC needs to understand the cost drivers and value-added activities across its value chain to identify opportunities for cost reduction and service enhancement.
Financial Framework:
- Financial Statement Analysis: MHC's financial statements reveal trends in revenue growth, profitability, and asset management efficiency. Analyzing key ratios like return on equity (ROE), net interest margin (NIM), and efficiency ratios can highlight areas for improvement.
- Cost Accounting Framework: MHC's current cost allocation system is inadequate. Implementing ABC will provide a more accurate view of cost drivers and profitability by allocating costs based on activities performed for each customer segment.
Operational Framework:
- Process Mapping: Mapping MHC's key processes, such as loan origination, account management, and customer service, can identify inefficiencies and opportunities for streamlining operations.
- Performance Measurement: MHC needs to develop key performance indicators (KPIs) to track the effectiveness of its customer profitability program and measure its impact on overall financial performance.
4. Recommendations
MHC should implement the following recommendations to develop a comprehensive customer profitability program:
- Adopt Activity-Based Costing (ABC): ABC is a cost accounting methodology that allocates costs based on activities performed for each customer segment. This provides a more accurate view of cost drivers and profitability compared to traditional cost allocation methods.
- Develop a Customer Segmentation Strategy: MHC should identify distinct customer segments based on factors like revenue, transaction volume, product mix, and service needs. This segmentation will allow for tailored cost allocation and profitability analysis.
- Identify and Track Key Activities: MHC should identify all activities performed for each customer segment, including loan processing, account maintenance, customer service, and marketing. These activities should be tracked and allocated to specific customer segments.
- Develop a Cost Driver Database: MHC should create a database that tracks the cost drivers for each activity, such as labor hours, materials, and overhead costs. This database will be used to allocate costs to specific customer segments.
- Implement a Customer Profitability Reporting System: MHC should develop a reporting system that provides a comprehensive view of customer profitability, including revenue, costs, and margins for each segment. This system should be integrated with existing financial systems for efficient data flow.
- Develop Targeted Strategies: Based on the customer profitability analysis, MHC should develop targeted strategies to enhance profitability for each segment. This may include pricing adjustments, product development, and customer relationship management initiatives.
- Monitor and Evaluate Performance: MHC should continuously monitor the effectiveness of its customer profitability program and make adjustments as needed. This includes tracking KPIs, conducting variance analysis, and evaluating the impact of strategic initiatives.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: Implementing a customer profitability program aligns with MHC's mission of providing value to its customers and driving sustainable growth. This program will enhance MHC's ability to understand and serve its customers effectively.
- External Customers and Internal Clients: The program will benefit both external customers and internal clients. External customers will benefit from tailored products and services, while internal clients will have access to more accurate information for decision-making.
- Competitors: MHC's competitors are increasingly adopting customer profitability analysis to gain a competitive advantage. Implementing a similar program will help MHC remain competitive in the market.
- Attractiveness ' Quantitative Measures: The program is expected to generate a positive return on investment (ROI) by improving profitability, reducing costs, and driving revenue growth.
6. Conclusion
By implementing a comprehensive customer profitability analysis program using activity-based costing, Manufacturers Hanover Corp. can gain a deeper understanding of its customer segments, identify opportunities for improvement, and drive sustainable growth. This program will enable MHC to make informed decisions about pricing, product development, and customer relationship management, ultimately leading to enhanced profitability and a stronger competitive position.
7. Discussion
Alternatives:
- Continuing with the current cost allocation system: This would result in a continued lack of accurate customer profitability information, hindering effective decision-making.
- Implementing a simplified customer profitability analysis without ABC: This might provide some insights but would not be as comprehensive or accurate as a full-fledged ABC-based program.
Risks:
- Implementation challenges: The implementation of ABC can be complex and require significant resources and time.
- Resistance to change: Some employees may resist the adoption of a new cost accounting system.
- Data quality issues: The accuracy of the customer profitability analysis depends on the quality of data collected.
Key Assumptions:
- MHC has the resources and commitment to implement the program effectively.
- MHC's employees are willing to embrace the new cost accounting system.
- MHC has access to reliable data for accurate cost allocation.
8. Next Steps
- Develop a project plan: Define project scope, resources, and timeline for implementing the customer profitability program.
- Select a consultant: Engage a consultant with expertise in ABC and customer profitability analysis to assist with implementation.
- Train employees: Provide training to employees on ABC methodology and the new customer profitability reporting system.
- Pilot test the program: Conduct a pilot test with a limited number of customer segments to refine the process before full-scale implementation.
- Monitor and evaluate performance: Continuously monitor the program's effectiveness and make adjustments as needed.
By following these steps, MHC can successfully implement a customer profitability program that will drive significant value for the bank and its stakeholders.
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Case Description
Banking company noting declining profitability from its traditional lending activities has started to measure the total profitability of its lending relationships. A loan pricing model estimates the profit and return-on-equity from commercial loans. Additional work was required to recognize the revenue from fee-for-service business for the same customer that is performed by other units in the bank. The case raises the problem of how revenues and expenses from diverse activities can be combined to produce an accurate picture of customer profitability.
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