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Eleonora Escalante, MBA - MEngStrategic Corporate Advisory Services
Creating Corporate Integral Value (CIV)
Leg 6. Value Chain Analysis
Value Chain Methodology Approach
13 Feb 2018
Cartoon Source: Rethinking the Value Chain. http://www.futurevaluenetwork.com/cartoons/
OUTLINE Leg 6. Value Chain Analysis
Leg 6. From Hong Kong to Auckland.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved
01Key Concepts
Value Chain
Analysis
06Summary and
Conclusions
02Value Chain
Methodology
Approach
13 Feb2018
03Who Uses Value
Chain Analysis?
04Advantages and
Disadvantages
Value Chain
05Innovating
through Value
Chain Analysis
2
OUTLINE Leg 6. Value Chain Analysis
Leg 6. From Hong Kong to Auckland.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved
01Key Concepts
Value Chain
Analysis
06Summary and
Conclusions
13 Feb2018
03Who Uses Value
Chain Analysis?
04Advantages and
Disadvantages
Value Chain
05
Innovating
through Value
Chain Analysis
We are here!
3
02Value Chain
Methodology
Approach
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved
Leg 4. From Melbourne to Hong Kong.
Value Chain Methodology Approach
4
FIRM INFRASTRUCTURE
HUMAN TALENT DEVELOPMENT AND MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND
LOGISTICS
Purchasing,
Inventory,
Materials
handling
OPERATIONS
OUTBOUND
LOGISTICS
Warehousing
and
Distribution
Sales and
Marketing
Dealer
Support
and
Customer
Service
Pri
mary
Act
ivit
ies
Su
pp
ort
Act
ivit
ies
13-Feb-2018
We are
here!
Let´s start to understand when can we use and how to do a Value Chain Analysis 02Value Chain
Methodology
Approach
Generic Value Chain.
• 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.
Leg 6. From Hong Kong to Auckland.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved 13 Feb2018
We are
here!
The whole idea of Value Chain 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.
5
Value Chain Methodology Approach
02Value Chain
Methodology
Approach
• 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.
Value Chain
Analysis as a
tool for
Competitive
Advantage
1. Cost Analysis
and
Performance
Improvement
2. Competitive
Differentiation
Analysis
Leg 6. From Hong Kong to Auckland.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved 13 Feb2018
We are
here!
The whole idea of Value Chain 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.
6
Value Chain Methodology Approach
02Value Chain
Methodology
ApproachCommon Uses
PROFIT = Price - Cost VALUE = Utility - Price
For the Firm,
we focus on
cost drivers
For the Customer,
we focus in utility
drivers
Maxi
miz
e
Pro
fit
Maxi
miz
e
Valu
e
Leg 6. From Hong Kong to Auckland.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved 13 Feb2018
We are
here!
The VALUE CHAIN Analysis can be used to understand the cost structure of it.
7
Value Chain Methodology Approach
02Value Chain
Methodology
Approach• 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.
1. First Use of Value Chain Analysis: From the Point of View of the Firm: Cost Analysis.
Leg 6. From Hong Kong to Auckland.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved 13 Feb2018
We are
here!
The VALUE CHAIN Analysis can be used to understand the cost structure of it.
8
Value Chain Methodology Approach
02Value Chain
Methodology
Approach
PROFIT = Price - Cost
For the firm
• If we wish to maximize
PROFIT for the Firm
• Either we Maximize PRICE or
Reduce our COSTS
• We focus on Cost Drivers
Value Chain
Analysis as a
tool for
Competitive
Advantage
1. Cost Analysis
and
Performance
Improvement
2. Competitive
Differentiation
Analysis
1. First Use of Value Chain Analysis: From the Point of View of the Firm: Cost Analysis.
Leg 6. From Hong Kong to Auckland.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved 13 Feb2018
We are
here!
By understanding our costs, the value chain helps us to identify each of the elements of
the cost structure for our beautiful business.
9
Value Chain Methodology Approach
02Value Chain
Methodology
Approach
• 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 Value Chain 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.
1. First Use of Value Chain Analysis: From the Point of View of the Firm: Cost Analysis.
Leg 6. From Hong Kong to Auckland.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved 13 Feb2018
We are
here!
The Cost Analysis using the Value Chain can be simplified in the next 6 main
steps:
10
Value Chain Methodology Approach
02Value Chain
Methodology
Approach
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.
FIRM INFRASTRUCTURE
HUMAN TALENT DEVELOPMENT AND MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND
LOGISTICS
Purchasing,
Inventory,
Materials
handling
OPERATIONS
OUTBOUND
LOGISTICS Warehousing
and
Distribution
Sales and Marketing
Dealer
Support
and
Customer
Service
Pri
mary
Act
ivit
ies
Su
pp
ort
Act
ivit
ies
1. First Use of Value Chain Analysis: From the Point of View of the Firm: Cost Analysis.
Leg 6. From Hong Kong to Auckland.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved 12 Feb2018
We are
here!
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.
11
Value Chain Methodology Approach
02Value Chain
Methodology
Approach
1. What are the activities of
OUR value chain ?• 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
FIRM INFRASTRUCTURE
HUMAN TALENT DEVELOPMENT AND MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND
LOGISTICS
Purchasing,
Inventory,
Materials
handling
OPERATIONS
OUTBOUND
LOGISTICS Warehousing
and
Distribution
Sales
and Marketin
g
Dealer
Support
and
Custome
r Service
Pri
mary
Act
ivit
ies
Su
pp
ort
Act
ivit
ies
Source: Value Chain, Bain Virtual University. Tom Macina. March 1998
This is a generic Value Chain which can be
modified and adjusted depending on our firm
and industry.
1. First Use of Value Chain Analysis: From the Point of View of the Firm: Cost Analysis.
Leg 6. From Hong Kong to Auckland.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved 12 Feb2018
We are
here!
12
Value Chain Methodology Approach
02Value Chain
Methodology
Approach
Step 1. Identify the appropriate value chain by defining the activities (sub activities) and
assign costs and assets to it.
Distribu-
tion/
Outbound
Logistics
ServiceMy Firm
Value
Chain:
Major Sub-
Activities for
that activity
of the Value
Chain:
Purchas-
ing/
Inbound
Logistics
Manu-
facturing/
Operations
Marketing
&
Sales
Material
PreparationConversion
Final
Assembly
Quality
AssurancePackaging
Technology R&D
Firm Infrastructure
1. First Use of Value Chain Analysis: From the Point of View of the Firm: Cost Analysis.
Source: Value Chain, Bain Virtual University. Tom Macina. March 1998
Leg 6. From Hong Kong to Auckland.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved 12 Feb2018
We are
here!
13
Value Chain Methodology Approach
02Value Chain
Methodology
Approach
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?.Market-
ing &
Sales
Distri-
bution/
Outbound
Logistics
Service
35% 30% 10% 10%
5%
What are cost drivers?
Percent of total cost:
•Allocate costs to each major activity
•Determine which activities account for the greatest
percentage portion of total cost
1. First Use of Value Chain Analysis: From the Point of View of the Firm: Cost Analysis.
Technology R&D
Firm Infrastructure
Manu-
facturing/
Opera-
tions
Purch-
asing/
Inbound
Logistics
5%
2%3%
Source: Value Chain, Bain Virtual University. Tom Macina. March 1998
Leg 6. From Hong Kong to Auckland.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved 12 Feb2018
We are
here!
14
Value Chain Methodology Approach
02Value Chain
Methodology
Approach
1. First Use of Value Chain 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.
Leg 6. From Hong Kong to Auckland.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved 12 Feb2018
We are
here!
15
Value Chain Methodology Approach
02Value Chain
Methodology
Approach
Step 3. Identify competitor value chains and determine the relative cost of competitors and
the sources o cost differences.
1. First Use of Value Chain Analysis: From the Point of View of the Firm: Cost Analysis.
Technology R&D
Firm Infrastructure
Purch-
asing/
Inbound
Logistics
Market-
ing &
Sales
Distribu-
tion/
Outbound
Logistics
Manu-
facturing/
Operations
Service
Technology R&D
Firm Infrastructure
Purch-
asing/
Inbound
Logistics
Market-
ing &
Sales
Distribu-
tion/
Outbound
Logistics
Manu-
facturing/
Operations
Service
Technology R&D
Firm Infrastructure
Purch-
asing/
Inbound
Logistics
Market-
ing &
Sales
Distribu-
tion/
Outbound
Logistics
Manu-
facturing/
Operations
Service
Technology R&D
Firm Infrastructure
Purch-
asing/
Inbound
Logistics
Market-
ing &
Sales
Distribu-
tion/
Outbound
Logistics
Manu-
facturing/
OperationsService Competitor A
Competitor B
Competitor C
This is the value chain
of our company
Compare it with the value
chains of our competitors to
determine the differences
Leg 6. From Hong Kong to Auckland.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved 12 Feb2018
We are
here!
16
Value Chain Methodology Approach
02Value Chain
Methodology
ApproachStep 4. Develop a strategy to lower relative cost position through controlling cost drivers or
reconfiguring the value chain.
1. First Use of Value Chain Analysis: From the Point of View of the Firm: Cost Analysis.
Technology R&D
Firm Infrastructure
How can I reach superior position
vis-à-vis the cost drivers of any
activity in our value chain?
Purch-
asing/
Inbound
Logistics
Market-
ing &
Sales
Distribu-
tion/
Outbound
Logistics
Manu-
facturing/
Operations
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.
Leg 6. From Hong Kong to Auckland.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved 12 Feb2018
We are
here!
17
Value Chain Methodology Approach
02Value Chain
Methodology
ApproachStep 5. Ensure that cost reduction efforts do not erode differentiation or make conscious
choice to do so.
1. First Use of Value Chain Analysis: From the Point of View of the Firm: Cost Analysis.
Technology R&D
Firm InfrastructureAnalyze how the cost reduction
efforts will impact the
differentiation in terms of VALUE
for the customer
Purch-
asing/
Inbound
Logistics
Market-
ing &
Sales
Distribu-
tion/
Outbound
Logistics
Manu-
facturing/
Operations
Service
For example if we will reduce the Inbound Logistics 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.
Shift from 35% to 25%
Leg 6. From Hong Kong to Auckland.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved 12 Feb2018
We are
here!
18
Value Chain Methodology Approach
02Value Chain
Methodology
Approach
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.
1. First Use of Value Chain Analysis: From the Point of View of the Firm: Cost Analysis.
Leg 6. From Hong Kong to Auckland.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved 08 Feb2018 19
Thank you!
On my next post we will continue sailing in the Value Chain Methodology Approach, with
the second use of the Value Chain Analysis: Competitive Differentiation Analysis.
All the material
shared today is
from the book
“Competitive
Advantage,
Creating and
sustaining
Superior
Performance”,
From Michael
Porter.
We are
here!
02Value Chain
Methodology
Approach
Value Chain
Analysis as a
tool for
Competitive
Advantage
1. Cost Analysis
and
Performance
Improvement
2. Competitive
Differentiation
Analysis
Value Chain Methodology Approach
Today Next Post
The Cost
Drivers will be
explained in a
separate set of
slides
Leg 6. From Hong Kong to Auckland.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved 13 Feb2018 20
Thank you!
We are
here!
02Value Chain
Methodology
Approach
Value Chain Methodology Approach
When using the VCA for Cost Analysis be careful with the 7 deadly sins of innovation…