companies’ welfare. To remedy the limitations that lack of understanding can impose, we frequently
But, to succeed, IR professionals must employ another important strategy, as well: full integration into business processes. The value chain – a series of analyses and practices that extend throughout a company’s processes – has become a vital business concept. Understanding how IR can contribute to improvements along your organization’s value chain will improve your ability to save money, eliminate costs or both.
Harvard Business School Professor Michael Porter developed the value chain model to analyze specific activities through which firms create value for customers and better position themselves in competitive markets. Porter defines two activities – primary and support activities – that are generally present in organizations. According to Porter’s value chain model, primary value chain activities include, in sequence:
1. Inbound logistics: accepting delivery of and then storing the materials necessary to produce your company’s products or services, and the efficient distribution of those materials to manufacturing.
2. Operations: the production or manufacturing processes necessary to transform raw materials into the finished products and services your customers demand.
3. Outbound logistics: the maintenance, storage and distribution of finished products and services.
4. Marketing and sales: the processes of identifying customers and their needs, and generating demand for goods or services in the target markets.
- The firm’s infrastructure: organizational structure and hierarchy, locations, transportation and communication, corporate culture, financial and operating control systems, and similar institutional circumstances and practices.
- Human resource management: the processes of recruiting, hiring, training, developing and compensating employees, and planning for future employee needs.
- Technology development: identifying and implementing solutions that support your company’s value enhancing activities internally and support marketing, sales and service externally.
- Procurement: purchasing the raw materials, supplies, and equipment necessary for production.
Armed with this knowledge, you can conduct a value chain analysis in three sequential steps to identify opportunities to contribute to your organization’s value chain:
- Activity analysis: identify the activities necessary for your organization to manufacture and deliver its products or services. Specifically, note which of these activities IR currently supports and determine if there is any reason IR is not supporting other necessary activities.
- Value analysis: for each necessary activity, determine what investment recovery action or actions will add the greatest value for your customers. For example, your company’s strategy of warehousing service parts may pre-date the emergence of easy and cheap overnight delivery. In that case, IR may consolidate warehouse locations near transportation hubs and sell or lease facilities the company no longer needs.
- Evaluation and planning: after establishing the greatest value-adding activities, evaluate whether the benefit of taking the action justifies its cost. If so, plan for its implementation. IR can have a major impact on this process by disposing of surplus assets and using the proceeds to offset the costs of new equipment or more expensive processes.
Investment recovery professionals can participate in the value chain analysis in two ways. First, as part of an organizationwide assessment of value-adding activities, investment recovery should determine if IR offers a value-adding role for each activity. Second, IR departments can use the same value chain analysis tools to assess the value of each element of its activities. In the value chain analysis, first assess each activity your company or your team undertakes as a part of regular business practices. While it’s easy to consider primary and support activities and daily, monthly, quarterly or annual activities, the analysis leader should work with a diverse group of colleagues to brainstorm all activities that contribute to internal and external customer experiences. Remember to include routine managerial and outsourced activities such as team building and motivation, reporting, training and development, and internal and external feedback loops, both formal and informal.
To ensure that all appropriate activities are included in the analysis, it may be useful to construct a visual workflow that individual contributors can review and mark up with their individual responsibilities. This visual representation of IR tasks then can become part of an organization-wide flowchart that will be important in the value analysis and evaluation and planning steps. The added benefit of conducting the activity analysis with a larger group is that you can secure the support and buy-in of people who will determine whether your changes will succeed.
Consider why activities that add value to your processes and customers are worthwhile. Do they generate revenue or move a costly asset off the books? Do they extend the life or functionality of an existing asset? For each answer, ask the next question: If this activity adds value, what change could we make to add even more value? Again, brainstorming with a diverse group of colleagues is likely to generate the most useful solutions. It is during this step that you ask your customers, both internal and external, what adds value to the investment recovery process.
The third step in a value chain analysis is to evaluate the suggested changes to determine whether the cost of making each change justifies the benefit you may derive from it. Some ideas simply will not survive an honest cost-benefit analysis. Some will be marginal, and this is another opportunity to include your customers in the analysis. For example, if a customer tells you a particular change would generate more business, that information may justify a change which, on paper, appears to deliver benefits roughly equal to costs.