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Alignment of Activities and Results |
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Alignment between activities and results can be visualized as "weak" when significant collateral costs and benefits distort the results of the business unit. In other words, some revenues or costs generated through our business unit activities appear in the results of other business units, or activities at other business units lead to revenues or costs appearing in our results.
There are a number of ways that business units might create collateral revenues. For example, the blood
testing division of a diagnostic lab may offer cheap blood tests as a loss-leader for a variety of other,
very profitable tests in a package deal. In such a case, the revenues from blood testing are not indicative
of the overall contribution that blood tests create for the whole company. Revenues from loss leaders, or
secondary products from a common production platform, or products or services whose value are enhanced by
other activities within the company, may make it impossible to objectively assign revenues to a particular
product or service that is more properly viewed as part of a package of products or services.
Collateral or shared costs are also prelavent in companies. An example would be an expensive die stamping
out products for use in several end products. It is impossible to objectively assign any part of that die's
cost to any particular product. Or when the legal department is defending patents that cover the firm's
basic technology, the cost of that defense cannot objectively be assigned to any specific product enabled
by that technology. In fact, any set of products or services that rely on a common set of sustaining
R&D, production platforms, or corporate services may be causing the company to incur costs in a way
that is not easily assignable--and may be impossible to objectively allocate--to specific business units.
When considering such intra-company exchanges, we should keep materiality in mind. If the collateral revenues
or shared costs are modest or--in the case of the latter--largely historical (i.e., sunk or non-recurring), their
existence would not rule out viability. It is only when one business unit's activities materially impacts
the revenues or costs of another business unit that we could find ourselves in a situation where one unit's
imperative to grow EP could compromise EP at another unit. A high degree of alignment means that decisions
taken within the EP center to grow its EP are very likely to result in an increase in the company's overall EP. |
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