Limiting Factor

by Thomas Sim, 8 April 2002

Studies of enzyme kinetics in biology talks about the rate limiting step in a series of enzymatic reactions. This concept also appears in management and is called 'limiting factor' analysis.

In management accounting, you would touch on the topic of cost drivers. These are the identifiable functions of business activities which contribute to costing of the operation. In more practical sense it is identification of different components of a business activity that businessmen, managers and staff understand the economic effects of an operation.

It is the combination of limiting factor analysis and cost driver identification that economic saving is achieved in a business operation. In short, resources are put into best use to yield maximum output per unit cost.

Every day, we encounter the rate-limiting factor phenomena. For example, the traffic lights, the ATM machines and even trying to get your wife pregnant.

How can traffic lights, ATM machines be rate limiting factors? God! My wife?

Think about it, any step in a series of activities that is limiting the outcome of the activities is a rate limiting factor. The traffic lights limits the traffic flow, the speed of ATM machine limits the length of queue. You wife limits the number of children you could possibly have.

In case we could change the frequency and duration of traffic light or the processing time of the ATM machine, we could change the traffic flow and the queue time. However, at times, it is impossible, e.g. can you change your wife?

Therefore, rate limiting analysis does not only serve to show the step involved in the rate flux, but the other factors that happen before or after the rate limiting step.

In many occasions, identifying rate-limiting factor is to understand our environment. For example, in a price elastic market, sales demand is the rate limiting factor. By this, it means the maximum sales is determined by the market which perceive the product at a price-quality range. Changing the price would alter the limiting factor (which is sales demand) to achieve more sales or more profitability.

Numerous angles of looking at the business, we frequently over emphasize the rate limiting factor and forgotten the other steps which could be of importance. This is a common failure of a business strategy where resources are put into waste.

Take another example, bosses always say that sampling programme is an excuse of imperfect marketing. Sampling reduces profitability, it halts immediate sales, it makes people perceive the product as 'cheap', hence given free. On the other hand, sampling can reduce other costs of marketing. It shortens time to gain market acceptability.

Why spend so much on other promotional activities e.g. third party endorsement (movie star/football star etc.) to gain acceptance when you could save the money to do sampling, which at the end, could cost less?

Why we have to wait for 2 years to gain acceptance by mouth-mouth referral when we could do it in 6 months by just good sampling? The 1½ year saving isn't money?

Cost of other promotional activities is still cost to running of business. The best course of action is to achieve business objective with the least cost of shareholders' fund. In this case, factors that shorten time taken to achieve customers' acceptance of the product.

If you have a limiting factor that you cannot control, don't spend too much time and energy trying to change it. Look at the other factors and modify them. At the end, there are other things in life which are more meaningful and challenging than just worrying over a simple rate-limiting factor.

To let go is an art of marketing.