Managing Costs

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Managing Costs Revenues

• Professor William F. OBrien, MBA, CPA

Spring 2007
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Session 3

• Value Chain Analysis
• Performance Based Measurement
• Review for Mid-term 1

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Value Chain Analysis
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A Changed Perspective

• Results of Operations vs.
• operating information for results

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Michael Porters Value-Chain

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

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Value Chain Analysis

• Multiple Approaches
• Porters approachsee next slide
• MAG 41 approach
• Ansaris approach

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

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Goal of Value Chain

• Driven by customer perceptions
• Increase margins
• Focus on value processess
• Distinctive capabilities
• Cost advantages
• Some examples
• Southwest Airlines
• Intel Corporation

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Porter Focus

• Value processes
• Cost advantage
• Core competencies

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Discovering Your Own Value Processes

• Distribute a summary of the value chain model.
• Create functional process lists.
• Transfer lists to color-coded labels.
• Pin the process on a large VC diagram.
• Identify appropriate processes as
• (cost advantage)
• CC (core competency)

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Value Chain and the QCT Triangle

• VC allows alignment of processes with customers.
  This generates a quality advantage.
• VC focuses cost management efforts.
• VC provides for efficient processes which
  improves the timeliness of operations.

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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

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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

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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

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Performance Based Measurement
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Performance Based Measurement

• Measures the essential
• Performance measurement elements
• Performance measurement reporting

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Performance Based Measurement Elements

• Define Strategies
• Identify Critical Success Factors (CSFs)
• Create Measures
• Establish Standards through Benchmarking
• Collect Data
• Evaluate and Revise
• Reward

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Performance MeasurementWhy Needed?

• Creates Focus
• Causal vs. Effect
• Not everything that counts can be counted and
  not everything that can be counted
  counts.--Albert Einstein

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Critical Success Factors

• Required for Strategic Objective Attainment
• Select one CSF for each objective
• Selection process can be difficult
• Some CSF Examples

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CSF Exercise

• Use your own organization.
• Take two or three of your strategic objectives
  and develop related CSFs.

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CSF Measurement Alternatives

• Non-financial Measures
• Operational Focus
• Consider the Ease of Data Collection

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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

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Measurement Examples

• Continuing with the CSFs you developed,
• define appropriate measures and potential
  standards of performance.

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Monitoring and Adjustment

• Remember the ease of collection
• Use meaningful measures
• Monitor at least weeklyeven daily
• Make real-time adjustments
• Invite participation in the solution process

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Reward System Integration

• Include CSF attainment in the reward system
• Avoid sub-optimizing rewards

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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

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Performance Measurement Reporting
Measurement Identification
Measurement Data
Managements Discussion and Analysis
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Performance MeasurementTickler
Strategic Objective
Critical Success Factor(s)
Measurement Identification
Detailed Plan? Y or N
Funded in P? Y or N
Date Target Actual
Variance Comments