Summary by Maria Du
Master of Accountancy Program
University of South Florida, Summer 2002
In this article, Clinton and Graves introduce product value analysis as a unique tool for managers to achieve product and organizational effectiveness in strategic product performance measurement. Product value analysis integrates the following concepts and techniques:
Product life cycle analysis,
Value chain analysis,
Competitive advantage analysis,
Cost driver analysis and
The balanced scorecard approach.
The authors explain these five techniques and show how they connect for product planning and evaluation while maintaining a balanced perspective.
Product life cycle analysis involves a cost analysis of a product over its entire life cycle and is directly related to the product. Product life cycle analysis outlines four stages over the life of a product: introduction, growth, maturity and decline stages. Various factors, i.e., customer needs, innovations and financial needs and rewards, influence the length and shape of the product life cycle in different ways and at different times.
Value chain analysis is an examining activity in the perspective of the value chain phases that take place every day in the life of an organization. Value chain analysis shows the progression of a product through successive functional areas and activities which typically include research and development, design, production, distribution and services.
Porter’s competitive advantage analysis defines key activities based on current value chain emphasis and specific product strategies such as: cost leadership, differentiation, or quick response. Analyzing competitive strategic issues will help management to maintain their focus as they establish priorities and make trade-offs in day-to-day activity management.
Cost driver analysis defines key metrics for product strategy performance evaluation. In general, it matches at least one short-term driver-type metric with every key value chain activity, then the short term metrics can be linked to broader, long-term metrics.
The balanced scorecard examines performance in the key broad performance areas of financial, customer, internal business process, and innovation & learning. It provides for a balanced perspective over a product’s life while highlighting critical category emphasis in specific product life cycle stages.
Product Value Analysis
The table below illustrates how all five tools can operate together to provide a comprehensive product value analysis for a product under differentiation strategy.
|Product Differentiation Strategy Linkages|
|Product Life Cycle Stage||Value Chain Emphasis||Key Value Chain Activities||Key Performance Metrics||Critical Balanced Scoreboard Category|
|Continue R&D to support product. Refine/enhance product features. Identify product market direction.||Product ranking with benchmark. # of unique product features. QFD score (features vs needs/wants).||Innovation & learning
|Identify important proprietary features.
Aggressively promote product. Refine/enhance product features.
| Distinctive product strengths per customer survey.
Promotion cost as a % of sales.
QFD score (features vs needs/wants).
| Innovation & learning
Internal business processes
|Maintain promotion efforts. Maximize net revenue per unit. Emphasize product quality in service||Return on advertising investment. Net revenue per unit. Relative service rating as compared to competition|| Internal business processes
|Manage, reduce, & control costs. Divest/spin-off operations. Reduce capacity||Distribution & service cost per unit. Operating leverage. Square feet as a % of peak square feet|| Customer
Any given product goes through each product life cycle stage only once, however, units of production might go through the phases of the value chain repeatedly. The combination of product life cycle and value chain analysis lays a foundation for product value analysis. The primary value chain phase emphasis differs as the product moves sequentially through the product life cycle. For example, R&D and design will be most critical in the introduction stage; while in the decline stage, service activities will be emphasized.
The strategic approach provides a consistent emphasis through out the product life cycle. For example, if a cost leadership strategy is used, cost management activities will be more important across the product life cycle than otherwise; similarly, with the quick response strategy, emphasis will consistently be placed on responding to customers in an exceptional way. Cost driver analysis is used to choose short-term key performance metrics to link to the performance evaluation system.
The Balanced Scoreboard encourages a balanced approach to performance evaluation.1 This evaluation system represents key metrics from each of the four areas that can help managers to pinpoint areas with problems. For example, a company may find that internal business processes are being executed without properly considering customer or financial results; alternatively, internal business processes may be executed flawlessly, but if they don’t meet customer needs, the company will eventually flounder. In product life cycle, a greater emphasis will naturally be placed on innovation and learning in the introduction stage; while in the decline stage, minimal operational losses are emphasized and new product investment will be the major concern.
Remember, success in all categories is important, but not all categories receive equal emphasis over the life of the product. All the tools mentioned above are useful and well accepted, but isolated. Product value analysis ties them together to help a company understand value creation while evaluating multiple strategic approaches with specific products.
1 Note: According to Kaplan & Norton, successful balance scorecard adopters use the scorecard as an interactive system that focuses on communicating and implementing the organization's strategy. Some balanced scorecard implementations have failed because companies used the scorecard as only a diagnostic system that theoretically provides information indicating when a system is in control or out of control. For more on how the balanced scorecard should be used see Simon's Levers of Control in Relation to the Balanced Scorecard and the links at the end of that note.
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