Value system
The value system extends the value chain beyond the boundaries of the business and recognises that a business is dependent on relationships with suppliers and buyers.
Competitors may have organised their value chain differently, for example they may have a lower degree of vertical integration, which could give them a cost advantage or make them more vulnerable.
Analysis of the value system may reveal that a source of competitive advantage for your business could be a better selection of suppliers, for example suppliers that have a labour cost advantage. Make or buy decisions are also affected by a downstream analysis of the value system, and the distribution strategy can be optimised by understanding the distribution value chain. For example, some manufacturers have their own retail outlets but also supply competing retailers. The question is whether or not such an arrangement produces competitive advantage.
tangible assets such as plant and equipment, a branch network, office buildings;
intangible assets such as brand names, rights, patents;
operational methods and systems, for example a just-in-time manufacturing system or a flexible manufacturing system.
The identification of resources and whether they are put to good use may reveal astonishing waste. For example, in recent years, businesses have looked critically at the land and buildings they own. Leaseback deals and sell-offs have freed up substantial amounts of capital, and in some cases additional uses have been found for land and buildings.
An important task is to identify all resources that are not listed as assets on the balance sheet. There may be unused patents or rights, which could be employed in the value chain, licensed or sold off. In May 2003, for example:
Scottish Radio Holdings announced a multi-million pound recording deal with Universal Music after a spring clean turned up 600 forgotten recordings from artists such as U2, Rod Stewart and Elvis Costello. The archive consists of concert
recordings broadcast by one of its stations, Radio Clyde, during the 1970s and early 1980s. The arrangement with Universal gave Scottish Radio Holdings royalties on CDs sold and provided a new income stream.5
Human resources
As businesses become more knowledge based and dependent, human resources are increasingly viewed as a strategic asset. Annual reports of larger companies include information on human resources in an increasingly formalised manner. For example, in 2003 the Chartered Institute of Personnel and Development in the UK published a reporting framework on the value of human resources.
All businesses depend on their staff to succeed. For example, well-trained and motivated employees can make the difference between losing and retaining customers, and the cost of replacing lost customers can be high. An increasing number of businesses depend for their success on attracting and retaining a pool of increasingly talented people. To take account of these people assets, a human resource audit should be part of an analysis of the firm.
Chart 6.8 provides a checklist of the information you should collect about staff and managers and the impact they have on the business. The checklist should be used in conjunction with other elements of the resource audit, such as critical success factors.
The analysis may help to identify false economies, such as not investing in the training and retention of customer-care staff. For example, some businesses view sales as a profit centre but customer care as a cost centre, when, in most cases, it is cheaper to retain an existing customer than to acquire a new one. The human resource audit together with a value add analysis will bring this to light and allow a correction of strategy, allocating more resources to customer retention than to customer acquisition.
Chart 6.8 Elements of human resource audit
Staff and managers Organisational impact
Recruitment Leadership
Staff size Know-how (core competencies)
Skill levels Productivity
Leaders Representation
Structures Dependency
Labour relations Culture
Salaries Generation of new ideas
Training Organisational change
Staff turnover
The core competencies (see page 44) of a business may be embedded in its management and staff; in other words, the business is more successful than others because of its human capital. Skills are acquired over time and enhanced with investment in training. Concepts such as the “learning organisation” are based on this observation and underline the importance of human resources as part of an overall resource analysis.
Organisational resources
Organisational resources comprise the departmental structures and reporting systems of a business. A clearly set out organisation chart is a prerequisite for a good business plan. It is not possible to build a business plan without an organisational plan, which includes staffing and management control assumptions. In many businesses, staff and associated costs constitute the single biggest operating expense.
The purpose of analysing an organisation is to ensure that it can carry out its function, and that it is fit for its purpose and geared towards delivering value. Ideally, it should be possible to overlay or link the organisational structure with the objectives and the value chain.
Chapter 4 deals with the setting of objectives by which success or failure can be measured.
Responsibilities have to be assigned to a person whose task it is to deliver the objectives.
Responsibility for delivering value must be made visible in the organisation chart. For example, if the value chain shows that 30% of value added arises from a particular activity but no manager has been allocated direct responsibility for it, this must be corrected.
Different organisational forms and related aspects of the operational plan are covered in more detail in Chapter 13.
Financial resources
Financial resources include all forms of funding: capital, debt, loans, vendor finance and creditors. Return on capital employed is perhaps the final arbiter of how successful a business is. Financial resources are crucial to the development and survival of a business.
Most strategic plans have some kind of growth objective. Any new business activity, even
Resource audit 51
within an existing business, requires funding. Growth, even organic growth, usually results in a need for funding, if only increased working capital.
The different sources of finance and the optimisation of financial structures are covered in detail in Chapter 19.
Resource utilisation
Gerry Johnson and Kevan Scholes (1989)6pointed out that the operations resource audit must measure how efficiently resources are used and whether they are optimally configured to deliver value. The latter point relates to the value chain and is concerned with the effectiveness of resources.
Efficient use of operational resources
There are a number of measures of efficient utilisation of resources, such as capacity utilisation, stock turnover, yield, damage, sales per outlet or per salesperson, labour productivity, span of control, and so on.
For many businesses, fixed assets are the most substantial part of the balance sheet.
Fixed assets imply fixed costs and profitability becomes a function of utilisation. In industries such as passenger and freight transport, capacity utilisation is the single biggest factor in determining profitability.
The efficiency of utilisation of inputs is important in certain types of industry.
Measures could include energy efficiency, yield from raw materials or damage during transit. Energy efficiency is also important because it is part of the environmental responsibility statement.
Labour productivity has a huge impact on producing competitive advantage. It is often cited as the single biggest factor in determining the competitiveness of countries. Measures can be specific to functions, for example turnover per
salesperson, calls answered per call-centre operator, or units produced per production worker. Span of control (how many subordinates one manager controls) is a measure of management efficiency.
Utilisation of overall financial resources is measured as return on capital employed (see Chapter 17). Measures of working capital utilisation include stock turnover, how many days it takes to collect sales revenue from debtors (debtor days), and how many days’ credit is taken from creditors (creditor days).
Once you have calculated the different measures of efficiency, you can set targets for improvement (setting targets is an important part of business planning) and, when the business is operating, track change. In doing this, you will want to know how efficient your business is relative to other businesses, which you can do by benchmarking (see Chapter 7).
Effective use of operational resources
When a resource is used effectively, it is much more valuable to the business. Some aspects you might investigate to determine how effectively resources are being used are as follows:
Are intangible assets such as patents, rights and brands being used to their best advantage?
Are any staff engaged in work below their level of capability or qualification (and consequently below their level of remuneration)? Redeployment could make effective use of their skills.
Are you being too efficient? For example, you may have an excellent logistics system that delivers goods to customers within 24 hours of the order being placed. But if market research shows that customers would be happy if it took three days, you might consider reducing delivery resources.
All aspects of the value chain must be working towards the same generic strategy (see Chapter 10). For example, if your business competes on the basis of cost
leadership, then those involved in r&dshould spend most of their time finding ways of making products cheaper rather than developing differentiated product features.