Managing Costs and Revenues--MBA I--Spring Managing Costs & Revenues Professor William F. O’Brien, MBA, CPA Spring 2010

Managing Costs and Revenues--MBA I--Spring Session 3 Value Chain Analysis Performance Based Measurement

Managing Costs and Revenues--MBA I--Spring Value Chain Analysis

Managing Costs and Revenues--MBA I--Spring A Changed Perspective Results of Operations vs. operating information for results

Managing Costs and Revenues--MBA I--Spring Michael Porter’s Value- Chain Developed in 1985 by Michael E. Porter in Competitive Advantage cost advantages distinctive capabilitiesHighlights cost advantages and distinctive capabilities--the value processes no one templateBut note that there is no one template.

Managing Costs and Revenues--MBA I--Spring Value Chain Analysis Multiple Approaches Porter’s approach…see next slide MAG 41 approach Ansari’s approach

Managing Costs and Revenues--MBA I--Spring 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

Managing Costs and Revenues--MBA I--Spring Value Chain Elements Customer Value Added Margin Orientation Primary Activities Inbound Logistics Operations Outbound Logistics Sales and Marketing Service and Support Support Activities Firm Infrastructure Human Resources Tech. Development Procurement

Managing Costs and Revenues--MBA I--Spring Goal of Value Chain Driven by customer perceptions Increase margins Focus on value processes Distinctive capabilities Cost advantages Some examples Southwest Airlines Intel Corporation

Managing Costs and Revenues--MBA I--Spring Porter Focus Value processes Cost advantage Core competencies

Managing Costs and Revenues--MBA I--Spring Discovering Your Own Value Processes summaryDistribute a summary of the value chain model. process listsCreate functional process lists. labelsTransfer lists to color-coded labels. “Pin the process”“Pin the process” on a large VC diagram. IdentifyIdentify appropriate processes as: $ (cost advantage) CC (core competency)

Managing Costs and Revenues--MBA I--Spring Value Chain and the QCT Triangle qualityVC allows alignment of processes with customers. This generates a quality advantage. costVC focuses cost management efforts. timelinessVC provides for efficient processes which improves the timeliness of operations.

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

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

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

Managing Costs and Revenues--MBA I--Spring Performance Based Measurement

Managing Costs and Revenues--MBA I--Spring Performance Based Measurement Measures the essential Performance measurement elements Performance measurement reporting

Managing Costs and Revenues--MBA I--Spring Strategy-Performance- Management Key Issues Strategic Objectives CSF Measures Critical Success Factors Long-term FocusShort-term Focus BALANCED SCORECARD PERFORMANCE MANAGEMENT.STRATEGIC PLANNING

Managing Costs and Revenues--MBA I--Spring Performance Based Measurement Elements Define Strategies Identify Critical Success Factors (CSF’s) Create Measures Establish Standards through Benchmarking Collect Data Evaluate and Revise Reward

Managing Costs and Revenues--MBA I--Spring Performance Measurement… Why Needed? Creates Focus Causal vs. Effect “Not everything that counts can be counted and not everything that can be counted counts.”--Albert Einstein

Managing Costs and Revenues--MBA I--Spring Critical Success Factors Required for Strategic Objective Attainment Select one CSF for each objective Selection process can be difficult Some CSF Examples

Managing Costs and Revenues--MBA I--Spring CSF Exercise Use your own organization. Take two or three of your strategic objectives and develop related CSF’s.

Managing Costs and Revenues--MBA I--Spring CSF Measurement Alternatives Non-financial Measures Operational Focus Consider the Ease of Data Collection

Managing Costs and Revenues--MBA I--Spring Benchmarking Formal “benchmarking” involves the activities of “world-class” companies “World-class” standards can frustrate “normal” organizations Settle for a stretch rather than an impossible dream

Managing Costs and Revenues--MBA I--Spring Measurement Examples Continuing with the CSF’s you developed, define appropriate measures and potential standards of performance.

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

Managing Costs and Revenues--MBA I--Spring Reward System Integration Include CSF attainment in the reward system Avoid sub-optimizing rewards

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

Managing Costs and Revenues--MBA I--Spring Performance Measurement Reporting Measurement Identification Measurement Data Management’s Discussion and Analysis

Managing Costs and Revenues--MBA I--Spring Strategy-Performance- Management Key Issues Strategic Objectives CSF Measures Critical Success Factors Long-term FocusShort-term Focus BALANCED SCORECARD PERFORMANCE MANAGEMENT.STRATEGIC PLANNING