Advanced Cost Management Professor William F. O’Brien, MBA, CPA Fall 2004

ADVANCED COST MANAGEMENT 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.

ADVANCED COST MANAGEMENT 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.

ADVANCED COST MANAGEMENT Value Chain Benefits n Identifies value processes n Identifies areas for cost improvement

ADVANCED COST MANAGEMENT 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

ADVANCED COST MANAGEMENT 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 Human resources (general and admin.) n Tech. development n Procurement

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

ADVANCED COST MANAGEMENT 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

ADVANCED COST MANAGEMENT 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)

ADVANCED COST MANAGEMENT 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

ADVANCED COST MANAGEMENT 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