Concept: Value Analysis |
Value analysis is used to determine the value of components before including them in the portfolio.
Relationships
Related Elements | Balance and Authorize Portfolio Consolidate Demand Define and Prioritize Portfolio
Main Description
A key task of portfolio management is to determine the value of the components before including them in the portfolio. In terms of economics, a company creates value when it makes a profit. Thus, it is critical to a company to maximize value from a given investment. The concept of value is strongly related to corporate strategy. As stated in [COL98], "corporate strategy is the way a company creates value through the configuration and coordination of its multimarket activities." It is essential to understand the relationship between product portfolio decisions and the corporate strategy that drives the value creation. Two different generic value chain analysis methods have been proposed to conceptualize how value is created in companies [GRA91]. One was first suggested by the consulting firm McKinsey & Co., and one was later suggested by Porter [POR85]. The model first proposed by McKinsey (see [GLU80] and [BAL00], for example) involves six distinct activities: technology development, product design, manufacturing, marketing, distribution, and service. The concepts introduced by McKinsey later inspired the development of Porter's value chain model. [POR85] proposes the concept of value system, which includes not only the firm's value chain but also supplier value chains, as well as the channel value chain and the buyer's value chain. It is very important to understand what role your firm's product plays in your buyer's value chain when you are trying to understand your customer's needs and trying, ultimately, to gain and sustain a competitive advantage. Market segmentation is a prerequisite for value analysis. Because not all potential customers have the same need, it is crucial to identify the needs of these segments. The value analysis then identifies the importance of these needs and expectations. The value analysis is of great importance to portfolio management, because it helps steer the firm's limited resources to those products and investments that will generate the most value to the firm and its customers. The value analysis is conducted from two perspectives: the customer and the firm itself. The customer value analysis will increase the firm's understanding of which needs are most important to the different customers. This gives important input to the release planning to maximize the value of each release to the different customers. The analysis from the firm's perspective means that you evaluate the customer needs but from the perspective of firm. Important criteria are cost, risk, and market acceptance, among others. Firm-related criteria are also important to take into consideration in the release planning, because you need to optimize the value for each release in relation to cost, risk, and other factors. The customer value (or perceived customer value) of the components must be balanced with the firm's priorities (firm value, risk tolerance, strategic fit, and so forth). The purpose of the value analysis is to ensure a maximization of the product performance and, hence the portfolio performance, by ensuring that that the product meets the criteria that drives value. Herein lies a difficulty when designing the value-analysis framework: What are the value drivers or the criteria that affects product performance? Given that the drivers for product performance may differ from market to market, and the drivers themselves may be correlated and affect each other, the challenge to the firm is to identify the criteria that make the most sense to the firm and its chosen markets and segments. There are various characteristics to consider when evaluating a component. There characteristics can be grouped into several categories that are influenced by [COO01] and [HEN01]: Financial characteristics evaluation net present value (NPV) return on investment (ROI) RONA (Return on Net Asset) internal rate of return (IRR) Payback period Product characteristics evaluation Product matches customer needs Product advantage (the products advantage relative to other similar products on the market) Technological sophistication and alignment with strategic technology roadmap Strategic characteristics evaluation Strategic fit Dedicated human resources Dedicated Research and Development resources Process characteristics Pre-development task proficiency (for example, idea management) Marketing task proficiency Technological proficiency Launch proficiency Marketplace characteristics Market potential If you are considering the product lifecycle, more criteria are added to the evaluation process later in the product lifecycle as more information is known. In the beginning of the lifecycle, qualitative evaluation methods are usually used, such as checklists or scoring models [COO01].
© Copyright IBM Corp. 1987, 2009. All Rights Reserved.