1. Managing Costs and Revenues--MBA I--Spring 2010 1 Managing Costs & Revenues Professor William F. O’Brien, MBA, CPA Spring 2010

2. Managing Costs and Revenues--MBA I--Spring 2010 2 Session 3 Value Chain Analysis Performance Based Measurement

3. Managing Costs and Revenues--MBA I--Spring 2010 3 Value Chain Analysis

4. Managing Costs and Revenues--MBA I--Spring 2010 4 A Changed Perspective Results of Operations vs. operating information for results

5. Managing Costs and Revenues--MBA I--Spring 2010 5 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.

6. Managing Costs and Revenues--MBA I--Spring 2010 6 Value Chain Analysis Multiple Approaches Porter’s approach…see next slide MAG 41 approach Ansari’s approach

7. Managing Costs and Revenues--MBA I--Spring 2010 7 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

8. Managing Costs and Revenues--MBA I--Spring 2010 8 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

9. Managing Costs and Revenues--MBA I--Spring 2010 9 Goal of Value Chain Driven by customer perceptions Increase margins Focus on value processes Distinctive capabilities Cost advantages Some examples Southwest Airlines Intel Corporation

10. Managing Costs and Revenues--MBA I--Spring 2010 10 Porter Focus Value processes Cost advantage Core competencies

11. Managing Costs and Revenues--MBA I--Spring 2010 11 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)

12. Managing Costs and Revenues--MBA I--Spring 2010 12 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.

13. Managing Costs and Revenues--MBA I--Spring 2010 13 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

14. Managing Costs and Revenues--MBA I--Spring 2010 14 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

15. Managing Costs and Revenues--MBA I--Spring 2010 15 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

16. Managing Costs and Revenues--MBA I--Spring 2010 16 Performance Based Measurement

17. Managing Costs and Revenues--MBA I--Spring 2010 17 Performance Based Measurement Measures the essential Performance measurement elements Performance measurement reporting

18. Managing Costs and Revenues--MBA I--Spring 2010 18 Strategy-Performance- Management Key Issues Strategic Objectives CSF Measures Critical Success Factors Long-term FocusShort-term Focus BALANCED SCORECARD PERFORMANCE MANAGEMENT.STRATEGIC PLANNING

19. Managing Costs and Revenues--MBA I--Spring 2010 19 Performance Based Measurement Elements Define Strategies Identify Critical Success Factors (CSF’s) Create Measures Establish Standards through Benchmarking Collect Data Evaluate and Revise Reward

20. Managing Costs and Revenues--MBA I--Spring 2010 20 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

21. Managing Costs and Revenues--MBA I--Spring 2010 21 Critical Success Factors Required for Strategic Objective Attainment Select one CSF for each objective Selection process can be difficult Some CSF Examples

22. Managing Costs and Revenues--MBA I--Spring 2010 22 CSF Exercise Use your own organization. Take two or three of your strategic objectives and develop related CSF’s.

23. Managing Costs and Revenues--MBA I--Spring 2010 23 CSF Measurement Alternatives Non-financial Measures Operational Focus Consider the Ease of Data Collection

24. Managing Costs and Revenues--MBA I--Spring 2010 24 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

25. Managing Costs and Revenues--MBA I--Spring 2010 25 Measurement Examples Continuing with the CSF’s you developed, define appropriate measures and potential standards of performance.

26. Managing Costs and Revenues--MBA I--Spring 2010 26 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

27. Managing Costs and Revenues--MBA I--Spring 2010 27 Reward System Integration Include CSF attainment in the reward system Avoid sub-optimizing rewards

28. Managing Costs and Revenues--MBA I--Spring 2010 28 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

29. Managing Costs and Revenues--MBA I--Spring 2010 29 Performance Measurement Reporting Measurement Identification Measurement Data Management’s Discussion and Analysis

30. Managing Costs and Revenues--MBA I--Spring 2010 30 Strategy-Performance- Management Key Issues Strategic Objectives CSF Measures Critical Success Factors Long-term FocusShort-term Focus BALANCED SCORECARD PERFORMANCE MANAGEMENT.STRATEGIC PLANNING