Eleonora Escalante, MBA - MEng Strategic Corporate Advisory Services Creating Corporate Integral Value (CIV)

Transcription

1 Eleonora Escalante, MBA - MEng Strategic Corporate Advisory Services Creating Corporate Integral Value (CIV) Leg 6. Analysis 13 Feb 2018 Cartoon Source: Rethinking the.

2 OUTLINE Leg 6. Analysis 01 Key Concepts Analysis 03 Who Uses Value Chain Analysis? 04 Advantages and Disadvantages 05 Innovating through Value Chain Analysis 06 Summary and Conclusions 13 Feb2018 2

3 OUTLINE Leg 6. Analysis 01 Key Concepts Analysis 03 Who Uses Value Chain Analysis? 04 Advantages and Disadvantages 05 Innovating through Value Chain Analysis 06 Summary and Conclusions 13 Feb2018 3

4 Primary Activities Support Activities Leg 4. From Melbourne to Hong Kong. Let s start to understand when can we use and how to do a Analysis INBOUND LOGISTICS Purchasing, Inventory, Materials handling FIRM INFRASTRUCTURE HUMAN TALENT DEVELOPMENT AND MANAGEMENT OPERATIONS TECHNOLOGY DEVELOPMENT PROCUREMENT OUTBOUND LOGISTICS Warehousing and Distribution Sales and Marketing Generic. Dealer Support and Customer Service The VALUE CHAIN disaggregates a firm into its strategically relevant activities in order to understand the behavior of costs and the existing and potential sources of differentiation. 13-Feb

5 The whole idea of Analysis is to fragment in pieces all the primary production activities and functional support tasks in order to maximize the VALUE for the clients, and Maximize the PROFIT for the company. Competitive Advantages of a company can t be understood if you look at a firm as a whole. Competitive Advantages can be detected only if we disaggregate the firm in several activities: Designing, producing, marketing, delivering and supporting its product. We need to identify and separate each activity to understand the nature of the competitive advantage for that activity and each of the set of sub-activities under it: Is the activity a cost advantage? Or is it a Differentiation advantage? A Cost Advantage may stem from different sources as - Low cost physical distribution system - Highly efficient assembly process - Superior Sales Force Utilization - A quick team of procurement - Etc A Differentiation Advantage can stem from diverse factors, such as - Procurement of high quality of raw materials - A responsive order entry system - A superior product design. - Etc. 13 Feb2018 5

6 Maximize Profit Maximize Value Leg 6. From Hong Kong to Auckland. The whole idea of Analysis is to fragment in pieces all the primary production activities and functional support activities. Value chain analysis can be used as an analytical tool in two (2) general situations. Common Uses PROFIT = Price - Cost Analysis as a tool for Competitive Advantage VALUE = Utility - Price For the Firm, we focus on cost drivers 1. Cost Analysis and Performance Improvement 2. Competitive Differentiation Analysis For the Customer, we focus in utility drivers 13 Feb2018 6

7 1. First Use of Analysis: From the Point of View of the Firm: Cost Analysis. The VALUE CHAIN Analysis can be used to understand the cost structure of it. The VALUE CHAIN ANALYSIS is a framework or a systematic way of examining all the activities a firm performs and how they interact is necessary for analyzing the sources of competitive advantage. Successively finer disaggregations of activities are made to expose differences important to understand each of the costs of our beautiful business. 13 Feb2018 7

8 1. First Use of Analysis: From the Point of View of the Firm: Cost Analysis. The VALUE CHAIN Analysis can be used to understand the cost structure of it. 1. Cost Analysis and Performance Improvement Analysis as a tool for Competitive Advantage 2. Competitive Differentiation Analysis For the firm PROFIT = Price - Cost If we wish to maximize PROFIT for the Firm Either we Maximize PRICE or Reduce our COSTS We focus on Cost Drivers 13 Feb2018 8

9 13 Feb First Use of Analysis: From the Point of View of the Firm: Cost Analysis. By understanding our costs, the value chain helps us to identify each of the elements of the cost structure for our beautiful business. It is crucial to look for ways of lowering costs without lowering the VALUE for customers. Nowadays it is hard to compete just with cost advantage strategy. Today companies need both low costs and some source of differentiation advantage too. The provides the basic tool for cost analysis. In order to analyze the costs for each of the activities of our value chain, we use the concepts of COST DRIVERS. Cost Drivers are the structural determinants of the cost of an activity, and differ in the extent to which a firm controls them. Cost Drivers determine the behavior of costs within an activity, reflecting any linkages or interrelationships that affect it. A firm s cost performance in each of its major activities cumulates to establish its relative cost position. 9

10 Primary Activities Support Activities Leg 6. From Hong Kong to Auckland. 13 Feb First Use of Analysis: From the Point of View of the Firm: Cost Analysis. The Cost Analysis using the can be simplified in the next 6 main steps: INBOUND LOGISTICS Purchasing, Inventory, Materials handling FIRM INFRASTRUCTURE HUMAN TALENT DEVELOPMENT AND MANAGEMENT OPERATIONS TECHNOLOGY DEVELOPMENT PROCUREMENT OUTBOUND LOGISTICS Warehousing and Distribution Sales and Marketing Dealer Support and Customer Service 1. Identify the appropriate value chain and assign costs and assets to it 2. Diagnose the cost drivers of each value activity and how they interact 3. Identify competitor value chains and determine the relative cost of competitors and the sources o cost differences. 4. Develop a strategy to lower relative cost position through controlling cost drivers or reconfiguring the value chain 5. Ensure that cost reduction efforts do not erode differentiation or make a conscious choice to do so 6. Test the cost reduction strategy for sustainability. 10

11 Primary Activities Support Activities Leg 6. From Hong Kong to Auckland. 12 Feb First Use of Analysis: From the Point of View of the Firm: Cost Analysis. Step 1. Identify and determine the appropriate value chain by defining the activities (and sub activities of it) and assign each of the costs to it. Determine key steps in designing, producing, marketing, delivering and supporting a product or service Activities can be separated and grouped based on different economics processes using different people/equipment/technology high or growing percentage of total cost distinction in mind of customer Helpful methodology in mapping out activities: product flow order flow paper flow 1. What are the activities of OUR value chain? FIRM INFRASTRUCTURE HUMAN TALENT DEVELOPMENT AND MANAGEMENT INBOUND LOGISTICS Purchasing, Inventory, Materials handling OPERATIONS TECHNOLOGY DEVELOPMENT PROCUREMENT OUTBOUND LOGISTICS Warehousing and Distribution Sales and Marketin g Dealer Support and Custome r Service This is a generic which can be modified and adjusted depending on our firm and industry. Source:, Bain Virtual University. Tom Macina. March

12 1. First Use of Analysis: From the Point of View of the Firm: Cost Analysis. Step 1. Identify the appropriate value chain by defining the activities (sub activities) and assign costs and assets to it. My Firm Value Chain: Purchasing/ Inbound Manufacturing/ Operations Firm Infrastructure R&D Technology Marketing & Sales Distribution/ Outbound Service Major Sub- Activities for that activity of the Value Chain: Material Preparation Conversion Final Assembly Quality Assurance Packaging Source:, Bain Virtual University. Tom Macina. March Feb

13 1. First Use of Analysis: From the Point of View of the Firm: Cost Analysis. Step 2. Diagnose the cost drivers of each value activity and how they interact. Step two is determining which activities are most critical. Which activities are most critical? And What are the cost drivers for each?. What are cost drivers? Manufacturing/ Operations Purchasing/ Inbound Firm Infrastructure R&D Technology Marketing & Sales Distribution/ Outbound Service 5% 2% 3% Percent of total cost: 35% 30% 10% 10% 5% 12 Feb2018 Allocate costs to each major activity Determine which activities account for the greatest percentage portion of total cost Source:, Bain Virtual University. Tom Macina. March

14 1. First Use of Analysis: From the Point of View of the Firm: Cost Analysis. Step 2. Diagnose the cost drivers of each value activity and how they interact. What Cost Drivers? We will define each of them in a separate set of slides. One by one. Main Cost Drivers (10) Economies of Scale Experience (Learning and Spillovers) Patterns of Capacity Utilization Linkages Interrelationships Integration Timing Location Institutional and Regulatory Factors Discretionary policies independent of other Drivers. 12 Feb

15 12 Feb First Use of Analysis: From the Point of View of the Firm: Cost Analysis. Step 3. Identify competitor value chains and determine the relative cost of competitors and the sources o cost differences. Purchasing/ Inbound Firm Infrastructure R&D Technology Manufacturing/ Operations This is the value chain of our company Marketing & Sales Distribution/ Outbound Service Compare it with the value chains of our competitors to determine the differences Purchasing/ Inbound Purchasing/ Inbound Purchasing/ Inbound Firm Infrastructure R&D Technology Manufacturing/ Operations Firm Infrastructure R&D Technology Manufacturing/ Operations Firm Infrastructure R&D Technology Manufacturing/ Operations Marketing & Sales Marketing & Sales Marketing & Sales Distribution/ Outbound Distribution/ Outbound Distribution/ Outbound Service Service Service Competitor A Competitor B Competitor C 15

16 12 Feb First Use of Analysis: From the Point of View of the Firm: Cost Analysis. Step 4. Develop a strategy to lower relative cost position through controlling cost drivers or reconfiguring the value chain. How can I reach superior position vis-à-vis the cost drivers of any activity in our value chain? Purchasing/ Inbound Firm Infrastructure R&D Technology Manufacturing/ Operations Marketing & Sales Distribution/ Outbound Service Activities that represent a significant or growing proportion of costs will offer the greatest potential for improving relative cost position. Determine where largest relative performance gap lies relative to competitors relative to internal comparables Determine which costs are most controllable (Controlling Cost Drivers) If our firm value chain is significantly different from its competitors and industry, try to reconfigure it to reach cost advantages. 16

17 1. First Use of Analysis: From the Point of View of the Firm: Cost Analysis. Step 5. Ensure that cost reduction efforts do not erode differentiation or make conscious choice to do so. Analyze how the cost reduction efforts will impact the differentiation in terms of VALUE for the customer Purchasing/ Inbound Firm Infrastructure R&D Technology Manufacturing/ Operations Marketing & Sales Distribution/ Outbound Service Shift from 35% to 25% For example if we will reduce the Inbound from 35% to 25% (by changing to a new raw material or a new supplier), we will have to ensure that the VALUE for the customer is the same or better. 12 Feb

18 1. First Use of Analysis: From the Point of View of the Firm: Cost Analysis. Step 6. Test the cost reduction strategy for sustainability over time. Cost Advantage will result in above-average performance only if the firm can sustain it over time Sustainability varies for different cost drivers and from one industry to another. Some drivers tend to be more sustainable than others Sustainability stems not only from one or two value activities but by accumulating cost advantages gained from numerous sources in the value chain that interact and reinforce each other. Some of the most sustainable cost leadership advantages come from scale and proprietary technology. Patents help to protect proprietary new products or process technologies. Once we have a reconfigured value chain, competitors almost have difficulties to match our own new reconfigured chain. 12 Feb

19 08 Feb Leg 6. From Hong Kong to Auckland. The Cost Drivers will be explained in a separate set of slides On my next post we will continue sailing in the, with the second use of the Analysis: Competitive Differentiation Analysis. 1. Cost Analysis and Performance Improvement Today Analysis as a tool for Competitive Advantage 2. Competitive Differentiation Analysis Next Post All the material shared today is from the book Competitive Advantage, Creating and sustaining Superior Performance, From Michael Porter. Thank you!

20 When using the VCA for Cost Analysis be careful with the 7 deadly sins of innovation Thank you! 13 Feb