Managing Costs & Revenues

1. Managing Costs & Revenues Professor William F. O’Brien, MBA, CPA Spring 2007

2. Session 3 Value Chain Analysis Performance Based Measurement Review for Mid-term #1

3. Value Chain Analysis

4. A Changed Perspective • Results of Operations vs. operating information for results

5. Michael Porter’s 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.

6. Value Chain Analysis • Multiple Approaches • Porter’s approach…see next slide • MAG 41 approach • Ansari’s approach

7. Value Chain Modelfrom Michael E. Porter’s 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

8. 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 Value Chain Elements

9. Goal of Value Chain • Driven by customer perceptions • Increase margins • Focus on value processess • Distinctive capabilities • Cost advantages • Some examples • Southwest Airlines • Intel Corporation

10. Porter Focus • Value processes • Cost advantage • Core competencies

11. 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)

12. 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.

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. 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. 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. Performance Based Measurement

17. Performance Based Measurement • Measures the essential • Performance measurement elements • Performance measurement reporting

18. Performance Based Measurement Elements • Define Strategies • Identify Critical Success Factors (CSF’s) • Create Measures • Establish Standards through Benchmarking • Collect Data • Evaluate and Revise • Reward

19. 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

20. Critical Success Factors • Required for Strategic Objective Attainment • Select one CSF for each objective • Selection process can be difficult • Some CSF Examples

21. CSF Exercise • Use your own organization. • Take two or three of your strategic objectives and develop related CSF’s.

22. CSF Measurement Alternatives • Non-financial Measures • Operational Focus • Consider the Ease of Data Collection

23. 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

24. Measurement Examples • Continuing with the CSF’s you developed, define appropriate measures and potential standards of performance.

25. 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

26. Reward System Integration • Include CSF attainment in the reward system • Avoid sub-optimizing rewards

27. 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

28. Performance Measurement Reporting Measurement Identification Measurement Data Management’s Discussion and Analysis

29. Performance MeasurementTickler Strategic Objective Critical Success Factor(s) Measurement Identification Detailed Plan? Y or N Funded in $P? Y or N DateTargetActualVarianceComments