WORKSHEET #28: Evaluate Economies of Scale in Each Cost Function

Step 1:
Develop a measure of one of the basic Building Block Costs to use in the calculation. This worksheet will assume that we are using full time equivalent (FTE) people as the measure of Inputs.

Step 2:
Count the full time equivalents (FTEs) in each functional cost department today.

Step 3:
Count the FTEs in the functional cost department at a point in time at least three years ago.

Step 4:
Develop a measure of the Company’s Outputs. This worksheet will assume that we are using customer orders as the measure of Output.

Step 5:
Count the number of annual customer orders today and at the same point in time at least three years ago as in Step 3.

Step 6:
Divide the number of FTEs in the functional cost department by the annual number of Outputs both today and three years ago. Do the same calculation for the entire Company.

Step 7:
Prepare an analysis showing the growth rate in FTEs over the period compared to the growth in units of Output over the same period. An example of this analysis appears on the exhibit on Basic Strategy Guide Step 28.

Step 8:
Where possible, do the same calculations for the subordinate organizational units of each functional cost department.

Step 9:
Determine the reasons for the changes in Productivity in each functional department over the last several years.

Step 10:
Set targets for Economies of Scale and Productivity improvement for each functional cost department over the planning period.

  • Determine the amount of profit shortfall the Company faces after it considers improvements made in the section Managing Costs: Quantifying Cost Reduction Objectives.

  • Determine the limits on the growth of average FTEs across the Company (i.e., the weighted average cost for the FTEs for the Company as a whole) to close the portion of the gap that the Input People must contribute.

  • Calculate the number of company-wide weighted average FTEs the Company may add in order to support the financial goals it has set.

  • Estimate the number of FTEs by type of employee that the Company may add in order to reach this goal.

  • Assign these targets for growth of FTEs to each of the Company’s functional cost organization units.

Step 11:
Rank each competitor in the industry on the basis of the competitors’ market share.

Step 12:
Rank each competitor in the industry on the basis of its Return on Investment.

Step 13:
Identify competitors whose rank according to Return on Investment is different than its ranking by market share.

Step 14:
Determine the reasons for companies falling out of similar rank orders for market share and Returns on Investment.

Step 15:
Determine the industry competitors who have acquired other competitors over the last few years.

Step 16:
For each acquiring competitor in Step 15, determine the Return on Sales and Return on Net Capital Employed for each year after the acquisition.

Step 17:
Compare each acquirer’s ROSs and RONCEs to those of the Company and a few of the better competitors in the market to identify the advantages of the acquisition.

  • Subtract the acquirer’s return (ROS or RONCE) from that of the Company and of a few competitors in the earlier period.

  • Do the same calculation for the current period.

  • Identify the acquirer who improved its returns compared to its competition due to an acquisition.

  • Determine reasons why the acquirer above was successful in its acquisition.

<<Basic Strategy Guide Users Return to Step 28