Eleonora Escalante, MBA - MEng · Eleonora Escalante, MBA - MEng Strategic Corporate Advisory...

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/

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

https://support.office.com/es-ES/article/b89770f1-deb1-4a19-94ef-342aa15a4689

OUTLINE Leg 6. Value Chain Analysis




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




Leg 4. From Melbourne to Hong Kong.


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.




© 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


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




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


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





We are

here!

The VALUE CHAIN Analysis can be used to understand the cost structure of it.

7


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.





We are

here!

The VALUE CHAIN Analysis can be used to understand the cost structure of it.

8


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






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


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.






We are

here!

The Cost Analysis using the Value Chain can be simplified in the next 6 main

steps:

10


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



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






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


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



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.






We are

here!

12


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







We are

here!

13


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


Technology R&D

Firm Infrastructure

Manu-

facturing/

Opera-

tions

Purch-

asing/

Inbound

Logistics

5%

2%3%






We are

here!

14


02Value Chain

Methodology

Approach


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.





We are

here!

15


02Value Chain

Methodology

Approach

Step 3. Identify competitor value chains and determine the relative cost of competitors and

the sources o cost differences.


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





We are

here!

16


02Value Chain

Methodology

ApproachStep 4. Develop a strategy to lower relative cost position through controlling cost drivers or

reconfiguring the value chain.


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.





We are

here!

17


02Value Chain

Methodology

ApproachStep 5. Ensure that cost reduction efforts do not erode differentiation or make conscious

choice to do so.


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%





We are

here!

18


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.





© 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


Today Next Post

The Cost

Drivers will be

explained in a

separate set of

slides




© 2017 Eleonora Escalante-all rights reserved 13 Feb2018 20

Thank you!

We are

here!

02Value Chain

Methodology

Approach


When using the VCA for Cost Analysis be careful with the 7 deadly sins of innovation…


Eleonora Escalante, MBA - MEng · Eleonora Escalante, MBA - MEng Strategic Corporate Advisory...

Documents

Transcript of Eleonora Escalante, MBA - MEng · Eleonora Escalante, MBA - MEng Strategic Corporate Advisory...