3 Benefits Of Using Value Chain Analysis When Making Decisions

Before a product or service reaches the final consumer and soon after, a number of activities are involved.

For example, prior to hitting the shelves of a high street retailer, typical activities involved include, research & development, purchasing of raw materials, production and storage of the product, marketing and then sales of the product and lastly after sales service, after purchase by the consumer.

These activities have the potential to create long lasting customer value that will improve the competitive advantage of your organization.

Competitive advantage is not just about matching or surpassing what your competitors are doing, but finding out the expectations of your customers, profitably meeting those expectations and even going one step further of surpassing them.

Your organization’s overall competitive advantage derives from the difference between the value you offer your customers and the cost of creating that customer value.

Since customers place a “value” on the product or service that your business offer, it is essential that you understand the sequence of business activities by which, from the perspective of the end user, value is added to your products or services.

Value Chain Analysis is a continuous process of gathering, evaluating and communicating information for decision making and will help you to identify all the value-creating activities and processes within your organization.

Using VCA, you will be able to identify the primary activities and support activities by which your organization creates value.

The primary activities are directly related to production, sales, marketing, delivery and service. They take the form of inbound logistics, operations, outbound logistics, marketing and sales and after sales service.

However, these primary activities will not work on their own. They need a helping hand from the support activities to fully maximize customer value.

Examples of support activities include, procurement, technology development, human resource management and organizational infrastructure.

For example, for operations to convert the resource inputs into a final product, they need the support of procurement who will purchase the resource inputs from the suppliers.

Also, for operations to produce a product of the exact customer specification, they need the support of the Human Resource Management who will recruit, train and develop people capable of operating the IT to design the products and improve processes through automation.

However, you should know that activities that add value do not stop at your organization’s boundaries. As there are many players in the value chain, for example, suppliers, retailers/distributors, customers etc., this creates linkages within your organization’s value chain and theirs.

Linkages connect the activities of the value chain and activities in the value chain affect one another.

Understanding this interdependence between various members of the organization value chain is crucial for the ultimate satisfaction of the customer. There should be co-ordination for customer value to be maximized.

By undertaking Value Chain Analysis, your organization can benefit from:

Low Cost Advantage: Value Chain Analysis enables your organization to identify those profitable value-creating activities and those which are not. By assessing value-creating activities, it also allows your organization to establish the cost drivers of each process.

This then allows for cost improvement strategies to be implemented whilst at the same time not lowering customer value.

The organization will then be able to identify areas with lower cost of access to raw materials, distribution channels or innovative process technology.

Differentiation: Through VCA, your organization will able to compare its activities with those of its competitors.

Through the comparisons of your actions with those of your competitors, you are able to focus on the customer’s perceived value of the products and services, evaluate differentiation strategies, for example, product features, marketing channels, pricing, service support etc. for enhancing customer value.

This ultimately helps you identify innovative ways to perform value-creating activities, resulting in improved overall performance and competitive advantage

Identification of Core Competencies and Activities: Through VCA, an organization will be able to identify those value-generating activities and their cost drivers.

By reducing the cost of individual value chain activities or by reconfiguring the value chain, the organization will be able to create a cost advantage.

A big advantage is that the value chain is a very flexible strategy tool for looking at your business, your competitors and the respective places in the industry’s value system.

It helps you to understand the organization issues involved with the promise of making customer value commitments and promises because it focuses attention on the activities needed to deliver the value proposition.

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Fostering Outside-in Thinking in the Finance Function

The role of the CFO continues to expand. In addition to overseeing core finance and accounting functions, they’re also responsible for talent management, championing cybersecurity programs, identifying and evaluating digital investments, identifying new sources of competitive advantage, providing data-driven insights, and enabling innovation, among other functional areas.

To meet these changing demands and remain relevant, CFOs and their teams need to continuously embrace change and adopt new ways of thinking. This is a significant departure from the traditional finance role, which is very conservative, detail-oriented, rule-oriented, structured, and backward-looking.

COVID-19 has shined a light on the benefits of embracing fundamentally new ways of thinking and the dangers of getting comfortable with how things are. Change is inevitable and when it happens it’s usually quick and when we least expect it. Hence the importance of outside-in thinking and agility.

Companies that had the first crack at new technologies to enable new ways of working and simplify processes pre-COVID found it much easier to embrace remote working. Further, leaders who took an objective hard look at their business models were able to swiftly identify and pivot new sources of value.

Part of the reason why the office of the CFO is failing to deliver expected results for its business partners is that the finance operating model and its supporting processes are designed primarily with a finance-centric lens. In other words, built around an inside-out mindset.

For example, performance reports are based on what finance is accustomed to producing rather than on new requests to help decision-makers answer key performance questions.

Also, CFOs are often too caught up in their function’s highly specific challenges to understand the broader challenges of the business and how they can help it succeed.

Embracing an outside-in perspective focuses on creatively delivering something of value to leaders and other stakeholders instead of finance recurrently producing the same historical reports that lack forward-looking insights and recommendations to enable effective decision-making.

The conversation has to move beyond mere value preservation to also understand how finance can serve as a true enterprise-focused business partner and help influence the future direction of the company.

Why is it so important for finance to take an outside-in approach?

  • It helps finance understand sector-specific trends driving market disruption or emerging focus areas and consider innovation investments to drive growth.
  • Embracing an inside-out perspective often creates stand-alone “silos” with an endemic capacity to halt growth by creating blind spots to new opportunities.
  • Instead of providing reactive answers to unforeseen problems, it empowers finance to help business units scan for change signals, model different scenarios, and nimbly respond to changing market conditions.
  • It helps CFOs align finance and operational objectives with company strategy, determine the most critical measures to monitor strategy execution, and manage processes end to end rather than in a silo.

Making the transition from inside-out thinking to a broader, forward-looking model requires a lot of innovative thinking. Take traditional budgeting and forecasting as an example.

  • The annual process is inherently flawed, time-consuming, static, and political.
  • Capital and operational funding decisions are based on past performance without consideration of broader external market factors.
  • Legacy initiatives are first in line to receive funding, building on last year’s plan versus new investments considered risky or unproven.

To enable innovation and more agile responses to shifting signals in the markets, CFOs and their teams need to transform financial planning into a dynamic funding process that transcends the generally narrow view of the business.

When an opportunity presents itself, the company should be able to immediately mobilize a team, shift investment priorities, and allocate the necessary funding instead of informing a business unit to wait for the next planning cycle because the initiative was not built in the current plan.

By embracing an outside-in perspective and looking forward, finance will be able to influence strategic decisions through developing investment assessment criteria grounded not only in the economics of the business but also in other critical factors such as market attractiveness, urgency, competitiveness, feasibility, and strategic fit versus utilizing a historical approach.

Finance transformation is a never-ending journey. However, to begin fostering outside-in thinking:

  • Embrace the need to keep learning and confidently challenge the status quo. Recognize that what was useful yesterday may not be useful tomorrow.
  • Don’t optimize finance in isolation. Rather, break down traditional functional boundaries and collaborate with other functions to explore the art of the possible.
  • Look at issues from a different perspective. Let go of the old mindset that says “this is how it has always been done” and embrace fresh thinking that says “this is how it could be done.”
  • See beyond the problems of the past and recognize possible futures. Think through what might happen, what should happen, and consider alternative strategies.
  • Constantly anticipate the possible changes in your industry not only with current trading partners but also with other players across the market.
  • Create an environment of safe failure that encourages experimentation with ideas, emerging technologies, and business models. Failing forward is part of innovation.
  • Become performance-centric. Beyond reporting performance, understand the strategic direction of the business, what key performance questions to ask, and how to answer them with insights and analysis.

As the role of the CFO continues to evolve from record-keeping to delivering reliable insights and effective decision support, having an outside-in perspective is not a nice-to-have for the finance leader.

Being too slow to adapt will lead to irrelevance.

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CFOs as Masters of Change

The role of the CFO is continuously evolving and so are the demands placed on finance leaders. This is according to results shared by McKinsey from their recent survey.

Here are the key points from Mastering change: The new CFO mandate:

  • CFOs are increasingly playing a pivotal role determining how their businesses adapt to myriad changes and transform the way work gets done.
  • Across the entire finance function, digital adoption is on the rise – especially the use of robotics and AI tools, advanced analytics, and real-time dashboards for key measures of business performance.
  • Almost 60% of respondents reported either a positive or very positive ROI from IT and digital investments made in the past year.
  • Increasing technology adoption in finance could have lasting effects on a company’s overall resilience.
  • Despite digital technology’s promise, high up-front costs, a lack of skills or capabilities needed to build and implement the technologies, and cultural and organizational resistance to changing existing processes are the most common obstacles to adopting new technologies.
  • CFOs have a meaningful role to play in their companies’ ESG programs—especially now, as investor interest in these issues has increased dramatically during the pandemic.
  • CFOs are uniquely qualified to drive changes in how their companies experiment with new technologies, evaluate ESG risks and opportunities, and execute transformations.

While the survey results confirm the ever-changing demands on finance, I have a somewhat different view. Mastering change is not the new CFO mandate. For years, finance leaders have significantly been involved in driving organizational change and transformation.

The COVID-19 pandemic is not the only turbulent change CFOs have had to deal with. In the past, they have played an integral role leading their companies navigate through financial crises, economic recessions, and business restructuring.

Additionally, CFOs are heavily involved in the adoption of new financial reporting and regulatory standards (for example IFRS and SOX compliance) besides new systems implementation and integration.

It is a fact there is increased scrutiny on environmental, social and governance (ESG) metrics from investors, regulators, and the public hence ESG is gaining rigor. Should CFOs take the back seat on these issues? No.

Finance leaders are already the owners of company performance reporting therefore are uniquely positioned to embed new reporting metrics across the company that demonstrate their business practices are more sustainable, more socially responsible, and ethical.

It’s encouraging to see that investments in IT and digital technologies are not going down the drain. For those CFOs still deciding where to start, McKinsey recommends looking at those activities where increased use of digital technologies would add the most value. For example, cashflow forecasting and scenario analysis.

Additionally, I suggest looking beyond narrow adoption and taking a holistic and integrated approach to ensure seamless integration with the greater potential of unlocking value.

With the future of work leaning more towards a hybrid model, the right technology investments will help tackle any product and service delivery challenges for your business and become a source of innovation, competitive advantage, growth, and resilience.

Overall, I highly recommend reading the survey report.

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Finance Transformation is More Than One-Shot Improvement Efforts

It is eighteen months since Max Brown was appointed Head of Finance Transformation of CG Logistics to lead the redesign of the company’s finance function, optimization of finance end-to-end processes, and ultimately drive finance effectiveness company wide.

Prior to being promoted to this newly created role, Max was the Senior Finance Manager – Automobile Division overseeing all aspects of the division’s financial administration, revenue analysis and cost management, budgeting and forecasting, and the preparation of quarterly and annual financial statements.

Given his solid finance experience, significant successes in the past, familiarity with the organization’s structure and culture, and their productive working relationship for the past five years, Debbie Skins, CFO of CG Logistics, was easily convinced that Max was the right candidate to lead the company’s finance transformation agenda.

For Max, this was a big opportunity to bring about the required transformational changes, add value to the business, cement his credibility, and rise in the organization. Unfortunately, since his appointment, not much has changed within the finance function other than the addition of a new cloud-based FP&A system.

Team members are still spending more time on transactional processes versus analytical work and business support. Finance processes are still heavily manual. The function is still replete with non-standard and ad hoc reporting. Management reporting, which most of the time is delivered late, is mainly focused on what happened versus why it happened, how, and what could happen in the future.

Even though Debbie and Max meet regularly to discuss expectations and progress, she is concerned that despite repeated promises from him to course-correct plus her offering him plenty opportunities to redeem himself by form of results, the gap between actual versus desired results continues to widen.

After being in denial for a while, she has finally accepted the fact that Max is not the right candidate to continue in this role. “If the desired results are to be achieved sooner rather than later, we have to take immediate action and replace Max with the right candidate experienced in delivering finance transformation,” she has raised her concerns to Andrew Wilsons, the CEO of CG Logistics who gives her the go ahead to deliver the damning news to Max.

Considering his outstanding record, intelligence, focus, and determination, being let go for not producing the expected results has become Max ‘s worst career nightmare. Never in his career lifetime has he ever been fired for underperformance. In fact, he was head hunted for his first role with CG Logistics.

Instead of wallowing in self pity, play the blame game, and allow this temporary setback to detour his career ambitions, he chooses to learn from this recent setback and not allow his past successes act as a learning stumbling block.

He recalls the wise words of Tim (his mentor), “At some point in your career, you’re definitely going to receive heavy blows and get knocked down but what matters most is how you respond and forge ahead. Don’t be scared or become a know-it-all person. Rather keep your integrity and professionalism in check at all times and embrace a continuous learning and improvement attitude.”

Feeling a bit overwhelmed, he calls Tim. “We need to urgently meet and talk” Max says very directly. “Is everything okay?” Tim asked with a concerned tone. “No, I have just been fired” Max says sternly. “Let’s meet tomorrow at our usual coffee shop, same time” Tim responds.

Always time conscious, Max arrives at the coffee shop fifteen minutes early ahead of the scheduled time, somewhat looking defeated, and sits down like a punctured tire. Only him can attest what was going through his mind at that point. Within a few minutes, Tim arrives sharply dressed in a sky-blue, slim-fit suit and straight-ironed white cotton shirt.

“As you are aware, I was promoted to lead the finance transformation agenda for my previous company. I implemented a new financial planning and analysis tool and even reduced headcount, but this wasn’t enough in the eyes of my bosses. Now they have let me go for underperformance.” Max narrated to Tim.

“I’m sorry Max, we will get to the bottom of this and help you get up and running again.”  First, did you understand what the company is trying to achieve and how your role fitted in?” Tim politely asked.

“Yes, Debbie explained to me what the transformation agenda was. We had periodic performance check-ins. Also, she regularly shared with me feedback from business partners or concerns raised during SMT meetings regarding finance function performance.” Max went on and shared more details.

Looking deep in thought, Tim asked another question “Apart from meeting with your boss including what you’ve already told me, what else did you do?” “You see Max, understanding current reality is very critical. You need to be involved. From the information you have shared so far, I gather you had limited understanding of what the role entails, and rarely met with your stakeholders to discuss and understand their challenges and opportunities.”

Max’s eyes and ears suddenly became intently focused on Tim. “This lack of understanding of the organization’s current reality, unfortunately, caused you to implement quick, superficial solutions that failed to deliver the transformation agenda.” “You are not the first one to fall into this trap.” Tim added. “Finance transformation is a way of thinking. It is a journey that is never-ending.”

“You mentioned you successfully implemented a new system and reduced headcount?” “Yes, I did.” Max responded with a faint voice. “Okay, now tell me what are some of the concerns that were raised by your stakeholders?” Tim further asked. “Well, some complained of untimely reporting while others complained of limited forward-looking insights but more of historical reporting.”

“So then, how did the new system and reduced headcount address these concerns?” Max didn’t answer but slowly nodded as though he had figured something out.

Tim took a deep breath, sipped his favorite iced coffee, and continued the conversation. “Before embarking on the finance transformation journey, as a leader you must be able to determine and tell where the organization is right now.” Max decided to ask a question of his own. “Why is this so important?” Tim sensed that something seemed to be sinking in Max now, so he responded politely.

“This is important for building a roadmap and ensuring appropriate amount of time and resources are devoted to the transformation. Taking time to know and understand current reality helps you assess whether transformation objectives are being met or not, learn from successes and failures, and focus on what matters. Remember, transformation has no end, there will always be a gap between where the finance function is (current state) and where it would like to be (ideal state). Therefore, there will always be opportunities to improve.”

“If only I had received this advice earlier on, I would still have my job today.” Max remarked.  Tim just smiled. “You are going to be fine.” “What else should I have done differently?” Max asked. “Look Max, I am going to be blunt with you on this one. Please don’t be offended. It’s the honest advice anyone is ever going to give you and I’d rather be that one guy in your boxing corner instead of misleading you.”

Seemingly confused with what he had just heard, Max shrugged and half-nodded.

“In your previous roles, you have done very well because of your strong technical skills and incredible attention to detail. These are great tools to have in your toolbox but as for the most recent role, these strengths alone are insufficient.” “Really?” Max seemed surprised. “Tell me about it.”

“Of course.” “Finance transformation is cross-functional requiring input from both internal and external stakeholders on the function’s performance and how it can improve. Thus, each transformation leader must be able to collaborate across the organization and create change instead of maintaining the status quo.”

Max interrupted. “Oh, I get it now. An effective leader changes things, moves them forward, and produces different results than those previously achieved. They don’t do it alone but surround themselves with capable team members. Now I understand why earlier on you mentioned functional expertise alone is not enough.

“Go ahead,” Tim encouraged him. “As I’m reflecting now, I’m starting to notice how I failed to make the leap from being a strong functional performer to taking on the cross-functional role. I focused more on technicalities and kept doing what I was accustomed to. By sticking with the past and not fully embracing my new role, I blew a big opportunity to shine. Surely, it’s time to add business knowledge, strong leadership, communication, collaboration, and influencing skills to my tools kit.”

All this time Max was talking, Tim couldn’t stop nodding in agreement. He shifted in his chair and leaned forward. “Listen Max, I’m glad our meeting has been fruitful, now you get it. I have no doubt in mind you are definitely going to bounce back stronger.” Max felt Tim’s approval and calmly responded. “Thank you Sir.” At this point he looked more relaxed and victorious than he was an hour or so ago when he arrived at the coffee shop.

“Sure, that brings us to the last point of our discussion.” “Finance Transformation is more than simply implementing new systems. Earlier on, you mentioned the various industry events you attended soon after your promotion. One that you spoke a bit more about is Finance Reimagined which you highlighted is one of the biggest annual conferences for Finance professionals bringing together thousands of peers, specialists, banks, technology suppliers, platforms,   CFOs, and thought leaders.”

Tim paused, took a deep breath, looked at his watch, and leaned back in his seat. “Just like you, I enjoy attending such events as they present an opportunity to learn more about best practices, new technologies, and emerging risks and opportunities. However, sometimes I get the sense that some of these events are more about tech companies promoting their new shiny tools and less about learning.”

As a result, leaders end up instantaneously making critical investment decisions from simply witnessing a demo.” Max nodded and asked his final question for the day. “So, if finance transformation is not about technology alone, what then are the other critical success factors?”

Tim smiled before responding. “After seeing countless demos of different FP&A tools at Finance Reimagined, suddenly, you were fully convinced that a specialized planning and BI tool was the key transformation ingredient missing at your company hence the quick deployment. Although technology is a key enabler of efficiencies, it is only one piece of the puzzle. People, processes, and the organization are equally important ingredients.”

Max thought about it for a few seconds, then allowed Tim to continue. “You need the right people with the right skills to use the new technology. If the process is broken and not fixed, no shiny piece of technology can fix that. If the organization or culture is not aligned to what the company is trying to achieve (understanding of purpose), technology alone will not bring about the desired results. Beliefs drive behaviors, behaviors drive actions, and actions produce results.”

Tim paused, but only for a moment to let Max digest the message.

“That’s it for today. Always remember finance transformation is about continuing on a never-ending path towards improvement and not a series of one-time improvement efforts or projects. Mistakes are bound to happen and when they do occur, reflect, learn, unlearn, and continue the journey.”

And so, the meeting ends. Max firmly shakes Tim’s hand and thanks him for his mentorship. As the two men part ways heading in different directions, Max’s confidence was rejuvenated, prepared to face the next challenge.

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