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

4. Value Chain Model from Michael E. Porter’s Competitive Advantage
SUPPORT ACTIVITIES
Firm Infrastructure (General Management)
Human Resource Management
Customer Value
Technology Development
Margin
Procurement
Inbound Logistics
Outbound Logistics
Sales & Marketing
Service and Support
Ops.
Margin
Customer Value
PRIMARY ACTIVITIES
STRATEGIC COST MANAGEMENT - BA122B - Fall 2006

5. STRATEGIC COST MANAGEMENT - BA122B - Fall 2006
Value Chain Elements
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
STRATEGIC COST MANAGEMENT - BA122B - Fall 2006

6. STRATEGIC COST MANAGEMENT - BA122B - Fall 2006
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. STRATEGIC COST MANAGEMENT - BA122B - Fall 2006
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. STRATEGIC COST MANAGEMENT - BA122B - Fall 2006
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