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What is activity-based management (ABM)?

Activity-based management (ABM) is a managerial approach that focuses on improving an organization’s performance by analyzing and managing its activities. It involves identifying and understanding the various activities within a company’s processes, evaluating their costs and value, and making informed decisions to optimize resource allocation and improve overall efficiency.

ABM follows a two-step process. First, it involves activity-based costing (ABC), which assigns costs to specific activities rather than general cost pools. ABC provides a more accurate understanding of cost drivers and helps identify activities that consume resources. This enables managers to prioritize activities based on their importance and align them with the organization’s strategic goals.

The second step is using activity analysis to gain insights into how activities contribute to value creation and to identify opportunities for improvement. By analyzing activities and their relationships, managers can identify non-value-added activities or bottlenecks that hinder productivity and profitability. They can then develop strategies to eliminate or streamline such activities, reduce costs, and improve performance.

ABM encourages a proactive approach to managing activities by fostering continuous improvement, innovation, and value creation. It enables managers to focus on activities that drive the most value, allocate resources effectively, and make informed decisions regarding process improvements, product/service mix, pricing, and customer segmentation.

In summary, activity-based management aims to enhance an organization’s performance by understanding and optimizing its activities, improving efficiency, reducing costs, and increasing value creation.