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Managing performance through famine and feast - Value chain framework - EY - Global

Managing performance through famine and feast

The value chain framework

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By applying an adapted version of this well-known framework to their company, CFOs can quickly understand where they need to be able to deliver insight to the business.

Porter’s Value Chain is a universally accepted framework for understanding the linked activities that take place within a business.

We have taken this framework and used it as the basis for demonstrating how performance management data could be improved; we have also broadened it to include important decision points across the full spectrum of organizational activity.

Porter divided the value chain into two categories of activity:

  1. The “primary activities” of operations, inbound and outbound logistics, sales and marketing, and service provision
  2. The “support activities” of procurement, technology, human resource management and organizational infrastructure

By applying an adapted version of this well-known framework to their company, CFOs can quickly understand where they need to be able to deliver insight to the business, and how that insight can drive shareholder returns and manage organizational performance.

The framework can be broken down into four broad sections:

  1. Providing strategic direction – corporate strategy
  2. Generating customer demand – sales, marketing and customer service
  3. Fulfilling customer demand – supply chain, manufacturing, production
  4. Providing support services – Finance, HR, legal and compliance

In constructing the framework in this way, we have added a strategic standpoint to ensure that overall corporate objectives and focus are covered as part of the performance management landscape.

We have also split Porter’s primary activities, so that we can easily differentiate between the supply and demand activities; this is because these two areas are usually organized and executed by discrete business units, even where make-to-order and demand-pull business models are deployed.

Performance management simplified

The resulting simplified view of performance management will enable you to identify your organization’s pressure points, allowing Finance more time to focus effectively on providing the data and informational requirements needed to inform management decision-making.

Critical questions that Finance should address, within a value chain-based performance management framework

1. Provide strategic direction: insight and analysis of strategic fundamentals

Broad consensus amongst CFOs and commentators indicates that the CFO’s role (and therefore the Finance function’s remit) has gradually extended. It now includes an element of responsibility for ensuring that resources are in place to deliver the financial targets determined by the corporate strategy; also that the entire organization understands that strategy and has access to sufficient information to enable them to execute against it.

Key questions for Finance to be able to provide performance management data on are:

  • What are our core competencies?
  • What are our markets?
  • How do we compete?
  • How do we fund our strategy?
  • What is the financial return we seek?

Case study: weak financial results for European steel producer

Client situation
Our client, a large European steel producer, was experiencing weak financial results: their performance issues were pronounced in comparison with their main competitors, and a significant gap was beginning to emerge. The company has traditionally operated on a product-centric basis, with individual business units owning responsibility for revenue generation; however, understanding of their products’ end user was limited, which led to a poor and fragmented customer experience..

Our approach
EY supported the client in developing sector-based strategies for their nine industry sectors, using profitability analysis to provide an end-to-end view of the net margin performance within business units to support the planning process. Customer satisfaction surveys were created to enable the organization to accurately assess what customers wanted and opportunity areas for focus. The joint project team worked to establish an account plan process that delivered distinct propositions for each account, and introduced a set of metrics and dashboards to help enable the executive community and business unit leads to be able to assess their sector performance on a monthly basis.

The outcome
The project provided supported strategic decision making through fact-based, analytical insights into the drivers of customer and business value. The tools and capabilities developed during the project form part of the client’s new performance management framework, underpinning changes made to the business operating model. Visions and strategies for each industry sector were articulated, together a set of focused initiatives were identified that have the potential to deliver a £3.5b revenue improvement. The project was short listed for an MCA award.

Case study: weak financial results for European steel producerClick here to expand

2. Generate customer demand: insight and analysis on profit and revenue drivers

There is a tendency for Finance to place most of their focus on operational expenses and to steer clear of the “front office”, leaving this to sales and marketing teams. However, this approach ignores the considerable impact that sales volume and pricing decisions have, or how costing methods can drive huge differences in marginal contribution, or how sales and service order commitments drive different cost profiles in delivery and fulfillment.

Key questions for Finance to be able to provide the right performance management data in this area are:

  • Do we understand our optimal products and services mix?
  • Do we understand how our sales and marketing efforts influence revenue?
  • Do we have a realistic demand forecast?
  • Do we optimize our cost to acquire/serve our customers?
  • Do we manage our customer working capital effectively?
  • Do our pricing models properly reflect costs to serve?

Case study: inability to understand return on investment for promotional activities

Client situation
Our client was engaging in a wide variety of promotional activity on their brands, in order to increase sales in their target markets. However, a lack of transparency on the return on investment (ROI) of their promotional activity meant that there was no clear understanding of how the promotional activity impacted the bottom-line profitability, as well as the top-line revenue.

Our approach
EY collated sales data by promotional activity and incentives (percentage discounts, buy one get one free, etc.) across a number of markets, in order to determine the ROI delivered by each of the promotions. Tactical interventions were identified to stop promotional deals that did not meet ROI hurdles, which immediately improved bottom-line profitability. Promotion guidelines were then created, to help structure future activity.

The outcome
The company has seen a significant increase in the financial returns from their promotional activity and has implemented a rigorous process to ensure compliance across the organization. Benefits of the consistent application of the promotional guidelines were £20m of incremental contribution.

Case study: inability to understand return on investment for promotional activitiesClick here to expand

3. Fulfill customer demand: insight and analysis on the direct cost of supply

A clear differentiator between organizations that successfully navigated the credit crunch and those that floundered was the flexibility and agility of the company’s cost base and its ability to react swiftly to changes in demand. From an economic perspective, this is the ability to move the supply curve in reaction to rapid changes in the demand curve.

Key questions for Finance to be able to provide the right performance management data in this area are:

  • Do we understand how our cost of supply varies with changes in volume?
  • Do we understand when to make investments in new assets as opposed to the maintenance of existing ones?
  • Do we have a realistic production forecast?
  • Do we understand how to allocate our costs to our products and services?
  • Do we manage our supply chain working capital effectively?

Case study: flat growth compounded by high input costs and commodity inflation

Our client was suffering from a flat top-line growth in their UK business which, compounded by high input cost and commodity inflation, was driving an acute need to review their supply chain and deliver improved cost-efficiencies. However, the lack of transparency across multiple profit-and-loss accounts within the company resulted in a limited overall understanding of the end-to-end impact of cost improvement opportunities.

Our approach
In an accelerated period of seven weeks, EY built a model for the US$1bn market in the UK to identify our client’s total delivered cost (TDC) profitability; looking at it from all levels – customer, channel, brand and product. The transparency gained through the TDC profit model enabled us to identify a number of improvement opportunities, which were subsequently prioritized and underpinned by detailed implementation plans.

The outcome
By adopting the TDC approach, the company identified multi-million dollar cost-saving opportunities in the UK division alone: these savings are now being delivered with an increase of 0.5% to their forecasted bottom line. The TDC model has now been scaled across the rest of the European region.

Case study: flat growth compounded by high input costs and commodity inflationClick here to expand

4. Provide support services: making efficient use of scarce resources

The CFO should lead the organization’s efforts to understand and make efficient use of scarce resources. From an economic viewpoint, Finance must challenge decision-makers to think in terms of allocating indirect resources in a way that is data driven and will maximize the return for the company.

Key questions for Finance to answer are:

  • Do we understand and measure our performance against our targets?
  • Do we have the skills we need to provide insight analysis to the business?
  • Do we incentivize our people to deliver our organizational targets?
  • Do our operations optimize our balance sheet?
  • Do we communicate our performance to external parties effectively?

Case study: cutting costs while continuing essential local services

Our client, a local authority, anticipated a 20% cut in funding over five years and a forecast rise in costs of 19%. Their focus on cost reduction needed to be balanced carefully with the continued provision of essential local services.

Our approach
We established a deep understanding of the drivers of current and forecast costs, using analysis tools and techniques which the Finance and service teams could use on a repeatable basis. This analysis provided transparency of the areas with savings potential for the local authority. We then facilitated a process through which the client’s corporate management team confirmed and validated priority outcomes and services which enabled them to undertake decisions on services to be reduced, retracted or transformed. The process required collaborative working between directors, Finance and service delivery teams, to identify opportunities to address the gaps in funding for priority areas.

The outcome
The council’s corporate management decision-making process was informed by fact-based analysis, and that enabled the council leaders to make a series of fundamental decisions regarding the future allocation of rate payers’ money to ensure appropriate focus on priority services while identifying £127m of run-rate, enabling the local authority to develop a delivery plan that will help ensure they meet future budget constraints in five years’ time.

Case study: cutting costs while continuing essential local servicesClick here to expand

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