Activity-Based Accounting: Why Walmart Killed Kmart and Why Best Buy Beat Circuit City

The Wizard of Ads Monday Morning Memo featured a great article this morning on activity-based accounting entitled “How Wal-Mart Killed K-Mart and Best Buy Beat Circuit City“.

In the article, Roy H. Williams recalls a recent speech to a small auditorium full of business school grad students at the University of Texas in which he explains what activity-based accounting is and how Walmart and Best Buy are using the practice (and underlying business intelligence/inventory management software applications) to gain a significant competitive advantage in retail.

Here’s an excerpt of the article:

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.

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.

No related posts.