The document discusses Michael Porter's value chain model, which identifies a firm's primary and support activities that create value. It describes how the value chain allows companies to align processes with customers, focus cost management efforts, and improve efficiency. Applying value chain analysis involves documenting activities, understanding costs and margins, and looking for core competencies to gain cost advantages. The goal is to increase margins by focusing on value-creating processes and developing distinctive capabilities.

1. STRATEGIC COST MANAGEMENT - BA122B - Fall 2006 4-1
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.

2. STRATEGIC COST MANAGEMENT - BA122B - Fall 2006 4-2
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.

3. STRATEGIC COST MANAGEMENT - BA122B - Fall 2006 4-3
Value Chain Benefits
 Identifies value processes
 Identifies areas for cost improvement

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

5. STRATEGIC COST MANAGEMENT - BA122B - Fall 2006 4-5
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

6. STRATEGIC COST MANAGEMENT - BA122B - Fall 2006 4-6
Goal of Value Chain
 Driven by customer perceptions
 Increase margins
 Focus on value processess
 Distinctive capabilities
 Cost advantages
 Some examples
 Southwest Airlines
 Intel Corporation

7. STRATEGIC COST MANAGEMENT - BA122B - Fall 2006 4-7
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

8. STRATEGIC COST MANAGEMENT - BA122B - Fall 2006 4-8
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)

9. STRATEGIC COST MANAGEMENT - BA122B - Fall 2006 4-9
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

10. STRATEGIC COST MANAGEMENT - BA122B - Fall 2006 4-10
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