Michael Porters Value Chain n Developed in 1985

Michael Porter’s Value. Chain n Developed in 1985 by Michael E. Porter in Competitive Advantage Highlights cost advantages and distinctive capabilities--the value capabilities processes But note that there is no one template STRATEGIC COST MANAGEMENT - BA 122 B - Fall 2006 1

Value Chain and the QCT Triangle n n n 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 - BA 122 B - Fall 2006 2

Value Chain Benefits n Identifies value processes n Identifies areas for cost improvement STRATEGIC COST MANAGEMENT - BA 122 B - Fall 2006 3

Value Chain Model from Michael E. Porter’s Competitive Advantage om st Firm Infrastructure (General Management) Cu er Human Resource Management Service and Support lue Sales & Marketing ar gin Outbound Logistics Cu st om er M Ops. lue n gi ar Procurement Inbound Logistics Va M Technology Development Va SUPPORT ACTIVITIES PRIMARY ACTIVITIES STRATEGIC COST MANAGEMENT - BA 122 B - Fall 2006 4

Value Chain Elements n n n Customer value added Margin orientation Primary activities n n n Inbound logistics Operations Outbound logistics Sales and marketing Service and support STRATEGIC COST MANAGEMENT - BA 122 B - Fall 2006 n Support Activities n n n Human resources (general and admin. ) Tech. development Procurement 5

Goal of Value Chain n Driven by customer perceptions Increase margins Focus on value processess n n n Distinctive capabilities Cost advantages Some examples n n Southwest Airlines Intel Corporation STRATEGIC COST MANAGEMENT - BA 122 B - Fall 2006 6

Value Chain Analysis n n Document the activities Understand the cost and margins at each step. n n Map the value chain to the industry value chain n n Use Activity Based Costing Look for core competencies Map the cost structure n Note that external values drive cost advantages STRATEGIC COST MANAGEMENT - BA 122 B - Fall 2006 7

Discovering Your Own Value Processes n Distribute a summary of the value chain model. n Create functional process lists n Transfer lists to color-coded labels n “Pin the process” on a large VC diagram. n Identify appropriate processes as: n n $ (cost advantage) CC (core competency) STRATEGIC COST MANAGEMENT - BA 122 B - Fall 2006 8

Using the Value Chain n n 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 n n outsourcing off-shoring co-location with customers or suppliers redesign for efficiency Involves chain partners: customers & suppliers STRATEGIC COST MANAGEMENT - BA 122 B - Fall 2006 9

Value Chain and the TBC Triangle n Technical: n n n Behavioral: n n n Increases knowledge of no profit zones Increases knowledge of forward and/or backward integration opportunities Identifies value processes Identifies win-win alliance opportunities Focus shifts to “the customer” Focus shifts from conflict to partnering with customers & suppliers Cultural n n Creates externally focused mindset Generates information sharing environment with respect for confidentiality STRATEGIC COST MANAGEMENT - BA 122 B - Fall 2006 10