Michael Porter’s Value-Chain

1. 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. STRATEGIC COST MANAGEMENT - BA122B - Fall 2006

2. 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. STRATEGIC COST MANAGEMENT - BA122B - Fall 2006

3. Value Chain Benefits • Identifies value processes • Identifies areas for cost improvement STRATEGIC COST MANAGEMENT - BA122B - Fall 2006

4. 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 STRATEGIC COST MANAGEMENT - BA122B - Fall 2006

5. Customer value added Margin orientation Primary activities Inbound logistics Operations Outbound logistics Sales and marketing Service and support Support Activities Human resources (general and admin.) Tech. development Procurement Value Chain Elements STRATEGIC COST MANAGEMENT - BA122B - Fall 2006

6. Goal of Value Chain • Driven by customer perceptions • Increase margins • Focus on value processess • Distinctive capabilities • Cost advantages • Some examples • Southwest Airlines • Intel Corporation STRATEGIC COST MANAGEMENT - BA122B - Fall 2006

7. 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 STRATEGIC COST MANAGEMENT - BA122B - Fall 2006

8. 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) STRATEGIC COST MANAGEMENT - BA122B - Fall 2006

9. 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 STRATEGIC COST MANAGEMENT - BA122B - Fall 2006

10. 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 STRATEGIC COST MANAGEMENT - BA122B - Fall 2006