Choosing How to succeed

The purpose of the value chain costs entity is to capture the different types of costs involved or expected to be involved in the delivery of value for a specific value chain and potentially for a specific Arena (geography, industry, industry segment). It is not an accounting tool to track those costs, but a strategic thinking tool to define and capture costs to identify, understand and optimise them.

Fixed costs do not change with increases/decreases in units of production volume, while variable costs fluctuate with the volume of units of production.

Different industries can have different demands for the degree of fixed costs required to enter the industry. Recall, from the Industry assessment and threat of New Entrants, that high fixed costs are a barrier to entry into an industry. Indeed, if technology or other changes (e.g. regulatory, supply arrangements) allow new entrants to convert fixed to variable costs, then, the threat of new entrants must be elevated.

Which costs when

Cloud services for technology infrastructure have anecdotally accelerated digital innovation. Previously, to establish a digital capability required up-front investment in fixed costs. Fixed costs included purchasing of I.T equipment and hosting it. With cloud infrastructure those fixed costs and delays associated with them have been replaced with variable and lower costs.

1. Variable costs

   Reduce upfront investment and can be valuable in reducing the cost impact of failed business experiments and economic slowdowns. For example: when expanding into a new geography. By keeping facilities and other costs variable, offers opportunity that if the expansion does not succeed, then costs have been kept low and capital is not tied up in an arena that is not paying its way.
   Alternatively, if there is an economic slow-down since the costs vary with sales, as sales reduce so do costs. Avoiding excessive capital being tied up in inventory is also obviously important.

2. Fixed costs

   Fixed costs elevate the base operating expense of the business. So in an economic downturn as sales decline, fixed costs remain the same. Contrarily, however, in the presence of economic growth, as sales and revenue increase the fixed costs remain the same. For example, having a reserved set of I.T infrastructure for your training your A.I algorithms signed up for a period of 3 years, is a fixed upfront cost. However, now if you run training all day every day or once a week, your costs do not change.

   Fixed costs make sense where the opportunity to reduce risk and cost of operations are present or fixed costs are unavoidable.

From the Strategic choices canvas or the related entities tab on any Entity but most particularly the Integrated value chain entity, you can add a Value chain costs profile. On the Value chain costs canvas you can link that to a particular arena.
So for example, if your business delivers its value proposition in two different geographic regions (Arenas). You could have the same cost profile for both or a separate one for each, even if they use the same Value delivery chain.
To identify the Arena the cost profile is related to you can add the Arena to the Value chain costs canvas - Related entities.

If the Value chain costs entity already exists then you can link to it using the link icon .
Otherwise, if the Value chain costs entity does not exist tap the add icon (far right). A dialog box will appear. Record the title, description and team that will own the Costs entity and submit. Once the Value chain costs is created then you can link to that Value chain costs using the link icon .

Once the Value chain costs entity is created and the value chain, it will be related to and Arena (see Linking the Value chain costs to an Arena below) is understood, you can build out the cost elements.

Fixed costs

At the top of the Value chain costs canvas is the Fixed costs. Here you can capture all the upfront and sunk costs that will not vary with sales or product/service volume. You can validate that investment in these costs is superior to any variable cost equivalents.

Costs for the phases of the value chain.

The remainder of the canvas is partitioned into the standard components of Michael Porters value chain. There are separate sections for:

1. Primary activities

   1. Input management

   2. Operations

   3. Distribution

   4. Marketing / sales

   5. After sales service

2. Secondary activities

   1. Procurement

   2. Technology management

   3. Human resources management

   4. Management and administration

   5. After sales service

You can rename any of the primary or secondary activities to align with your value chain.

Capture and manage value chain costs

For each activity

1. Record your known, expected and possible costs.

2. Record what is currently being done to ensure optimised cost within that activity.

3. Identify future options to augment or replace what is currently being done to ensure optimised cost within that activity.

Linking the Value chain costs to an Arena.

If an Integrated Value chain supports a single Arena, then you can link the Integrated value chain to the Arena and costs in the Integrated value chain view. This will be a common scenario.
Alternatively, if the same Integrated value chain is applied to multiple Arenas, then you can link the specific costs to the Arena by adding the Arena to the costs.

You may wish to include specific resources, capabilities or other entities into the scope of your costs, to clarify the scope of the costs.

To do so choose the Related entities tab above the Value chain costs canvas.
Then if a tab for the Resources or Capabilities is already present in the Related entities, you can add the Resource or Capability by selecting the tab then linking the Resource or Capability from the dialog that appears.
This is the same procedure you used to add a Value stream costs to an Integrated value chain or an Arena to a Value chain costs canvas.

If there is no tab present for Resources, Capabilities or any other category of entity you want to add to to Costs. You can add a tab for the category

Click the add icon above all the tabs, and then choose the category of entity you want to have in the list of available tabs. Select that and submit. Now the tab for that category is available. You can add entities into the scope using the procedure above.