Managing Costs & Revenues Professor William F. O’Brien, MBA, CPA Spring 2011

Session 3 n Value Chain Analysis n Performance Based Measurement

Value Chain Analysis

A Changed Perspective n Results of Operations vs. operating information for results

Michael Porter’s Value- Chain n Developed in 1985 by Michael E. Porter in Competitive Advantage cost advantages distinctive capabilities n Highlights cost advantages and distinctive capabilities--the value processes no one template n But note that there is no one template.

Value Chain Analysis n Multiple Approaches n Porter’s approach…see next slide n MAG 41 approach n Ansari’s approach

Value Chain Model from Michael E. Porter’s Competitive Advantage Firm Infrastructure (General Management) Human Resource Management Technology Development Procurement Inbound Logistics Ops. Outbound Logistics Sales & Marketing Service and Support PRIMARY ACTIVITIES SUPPORT ACTIVITIES Customer Value Margin

Value Chain Elements n Customer Value Added n Margin Orientation n Primary Activities n Inbound Logistics n Operations n Outbound Logistics n Sales and Marketing n Service and Support n Support Activities n Firm Infrastructure n Human Resources n Tech. Development n Procurement

Goal of Value Chain n Driven by customer perceptions n Increase margins n Focus on value processes n Distinctive capabilities n Cost advantages n Some examples n Southwest Airlines n Intel Corporation

Porter Focus n Value processes n Cost advantage n Core competencies

Discovering Your Own Value Processes summary n Distribute a summary of the value chain model. process lists n Create functional process lists. labels n Transfer lists to color-coded labels. n “Pin the process” n “Pin the process” on a large VC diagram. n Identify n Identify appropriate processes as: n $ (cost advantage) n CC (core competency)

Value Chain and the QCT Triangle quality n VC allows alignment of processes with customers. This generates a quality advantage. cost n VC focuses cost management efforts. timeliness n VC provides for efficient processes which improves the timeliness of operations.

Value Chain and the TBC Triangle n Technical: n Increases knowledge of no profit zones n Increases knowledge of forward and/or backward integration opportunities n Identifies value processes n Identifies win-win alliance opportunities n Behavioral: n Focus shifts to “the customer” n Focus shifts from conflict to partnering with customers & suppliers n Cultural n Creates externally focused mindset n Generates information sharing environment with respect for confidentiality

Using the Value Chain n Helps you to stay out of the “No Profit Zone” n Presents opportunities for integration n Aligns spending with value processes n Provides for reconfiguration of the value chain n outsourcing n off-shoring n co-location with customers or suppliers n redesign for efficiency n Involves chain partners: customers & suppliers

Value Chain Analysis n Document the activities n Understand the cost and margins at each step. n Use Activity Based Costing n Map the value chain to the industry value chain n Look for core competencies n Map the cost structure n Note that external values drive cost advantages

Performance Based Measurement

n Measures the essential n Performance measurement elements n Performance measurement reporting

Strategy-Performance- Management Key Issues Strategic Objectives CSF Measures Critical Success Factors Long-term FocusShort-term Focus BALANCED SCORECARD PERFORMANCE MANAGEMENT.STRATEGIC PLANNING

Performance Based Measurement Elements n Define Strategies n Identify Critical Success Factors (CSF’s) n Create Measures n Establish Standards through Benchmarking n Collect Data n Evaluate and Revise n Reward

Performance Measurement… Why Needed? n Creates Focus n Causal vs. Effect n “Not everything that counts can be counted and not everything that can be counted counts.”--Albert Einstein

Critical Success Factors n Required for Strategic Objective Attainment n Select one CSF for each objective n Selection process can be difficult n Some CSF Examples

CSF Exercise n Use your own organization. n Take two or three of your strategic objectives and develop related CSF’s.

CSF Measurement Alternatives n Non-financial Measures n Operational Focus n Consider the Ease of Data Collection

Benchmarking n Formal “benchmarking” involves the activities of “world-class” companies n “World-class” standards can frustrate “normal” organizations n Settle for a stretch rather than an impossible dream

Measurement Examples n Continuing with the CSF’s you developed, define appropriate measures and potential standards of performance.

Monitoring and Adjustment n Remember the ease of collection n Use meaningful measures n Monitor at least weekly…even daily n Make real-time adjustments n Invite participation in the solution process

Reward System Integration n Include CSF attainment in the reward system n Avoid sub-optimizing rewards

Implementation Keys n Begin with the Finance Department n Follow the management of change process n Use what data is available n Be prepared for resistance n Automation is NOT required n Create opportunities for celebration n Publicize on-going success

Performance Measurement Reporting Measurement Identification Measurement Data Management’s Discussion and Analysis

Strategy-Performance- Management Key Issues Strategic Objectives CSF Measures Critical Success Factors Long-term FocusShort-term Focus BALANCED SCORECARD PERFORMANCE MANAGEMENT.STRATEGIC PLANNING