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

2. ADVANCED COST MANAGEMENT-2004 3-2 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.

3. ADVANCED COST MANAGEMENT-2004 3-3 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.

4. ADVANCED COST MANAGEMENT-2004 3-4 Value Chain Benefits n Identifies value processes n Identifies areas for cost improvement

5. ADVANCED COST MANAGEMENT-2004 3-5 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

6. ADVANCED COST MANAGEMENT-2004 3-6 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

7. ADVANCED COST MANAGEMENT-2004 3-7 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

8. ADVANCED COST MANAGEMENT-2004 3-8 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

9. ADVANCED COST MANAGEMENT-2004 3-9 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)

10. ADVANCED COST MANAGEMENT-2004 3-10 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

11. ADVANCED COST MANAGEMENT-2004 3-11 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