On the Connections Among Activity Based Costing, Strategic Optimization Models for Decision Support, and the Resource-Based View of the Firm (Classic Reprint)

Excerpt from On the Connections Among Activity Based Costing, Strategic Optimization Models for Decision Support, and the Resource-Based View of the Firm

The starting point for the developments presented in this paper are experiences on several projects in different firms in which optimization models were created and used to study strategic resource planning questions. In some instances, the models drew on activity based costing (abc) relationships that the firms had implemented independently of the modeling exercises. In other instances, the model builders developed ad hoc ABC relationships to use as inputs to the models. Over time, the generality and importance of the connections between ABC and optimization modeling became much clearer.

Descriptions of resource availabilities, their costs, and their consumption by value adding activities were central constructs in effecting the linkages between ABC and optimization models. In most cases, the models initially sought to identify strategies for minimizing the total cost of meeting forecasted demand, mainly using existing resources. Invariably, though, issues arose about how to identify a comprehensive set of potential new strategic resources, and how these resources could be acquired and deployed to vary product mix so as to maximize net revenues. Resolving such issues in the construction and optimization of strategic planning models with greater scope was difficult. As we shall see, the emerging literature on the resource-based view of the firm (rbv) provides important insights for interpreting and expanding optimization models to address broader strategic questions.

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