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VALUE CHAIN ANALYSIS

AND ACCOUNTING
INTRO: WHY NEED VCA

• Long Term CompetitivenessProviding high quality products/ servicesGive a


competitive price to the customers
• Competitive Price provide by decreasing operational costanalyse company cost
structureManaging Cost
• Value Chain Analysisfocusing company into strategically important activitiesanalyse
those impact on cost behaviour & differentiationStrategic cost reduction
VALUE CHAIN CONCEPT

• Is a linked set of value-creating functions that are required to bring a product or services to
the customers
• The lingkage: raw material from the suppliersa series value aded activity in a production &
marketing processdistributed the final product/ services to the ultimate customers
(through distibutor, reseler, agent)
• The Function of VCA: help business analyse their cost structure & identify competitive
strategies (Porter).
• Basic concept of VCAcost occur not only in the manufacturing activity, but also during
upstream segments (supplying & manufacturing activities) and downstream segments of value
chain (marketing & distribution)
VALUE CHAIN ANALYSIS AND VALUE ADDED
ANALYSIS
• VCA emphasis on understanding the total value of all operations across the business &
industryto minimizing cost (for cost leadership strategy) & indentify areas where
customers value can be enhanced (product differentiation strategy) with value-added
activity analysis value for money to the customers
PORTER’S VALUE-CHAIN FRAMEWORK

• Porter proposes that a firm’s value chain is composed of nine categories of interrelated activities that
consist:
• Primary activities
• Inbound Logistics (managing inbound items, ex: raw material handling & warehousing)
• Operations (transformation of inbound items into products suitable for sale, ex: research & development, product
design, manufacturing)
• Outbound Logistics (carrying the product from the point of manufacturing to the buyer, ex: warehousing &
distribution)
• Marketing & Sales (informing buyers about products and services with a reason to purchase, ex: distribution
strategy, promotional activities)
• Service (all activity required to keep the product/ service working effectively for the customers, ex: installation,
repair, after-sales service, waranty claims, answering customers inquiries)
PORTER’S VALUE-CHAIN FRAMEWORK

• Support activities
• Procurement (purchasing). This function is responsible for all purchasing of goods, services and materials.
The aim is to secure the lowest possible price for purchases of the highest possible quality
• Human resource Management (HRM). Employees are an expensive and vital resource. An organization
would manage recruitment and selection, training and development, and rewards and remuneration
• Technology Development (R & D). Technology is an important source of competitive advantage.
Companies need to innovate to reduce costs and to protect and sustain competitive advantage. This could
include production technology, Internet marketing activities, lean manufacturing, Customer Relationship
Management (CRM), and many other technological developments
• The firms infrastructure (accounting, finance, strategic planning). This activity includes and is driven
by corporate or strategic planning. It includes the Management Information System (MIS), and other
mechanisms for planning and control such as the accounting department.
• By applying VCA & value added analysis, firms gain competitive advantages by performing
these activities (nine categories of interrelated activities ) more cheaply or better than
its competitors. An organization able to provide, for the same price, a product of higher
quality than a competitor’s product is serving customers better.
PORTER’S GENERIC VALUE CHAIN

Infrastructure
Human Resource Management
Technology Development
Procurement
Inbound Operations Outbound Marketing Service
Logistics Logistics & Sales

Elapsed Time - Value added time cost


POTENTIAL IS CONTRIBUTIONS

Infrastructure - Planning Models


Support
Activities Human Resource - Skills & Experience Databases
Technology - Computer-Aided Design
Procurement - On-line parts ordering
Automated Automated Point of Remote
Primary Warehouse Check Sale E-Commerce Equipment
Activities Clearing Scanners Servicing

Inbound Operations Outbound Marketing Service


Logistics Logistics & Sales

Elapsed Time - Value added time cost


CORPORATE VALUE CHAIN (WIDER THAN
INDIVIDUAL PRODUCT VALUE CHAIN)
• The following steps in a corporate value-chain analysis:
• Examine each product line’s value chain (strengths and weaknesses)
• Examine the “linkage” within each product line’s value chain (value added activity & cost)
• Examine the potential synergies among the value chains of different product lines or business
units, ex: sharing resources by two separate products in the corporate value chain to get the
economy of scale in which activities are conducted at the lowest possible cost per unit
output.
MANAGEMENT ACCOUNTING SYSTEMS IN THE
VALUE-CHAIN FRAMEWORK
MANAGEMENT ACCOUNTING SYSTEMS IN THE
VALUE-CHAIN FRAMEWORK
• A Value chain cost management methodology (Porter):
• Identify the value chainassign cost, revenues & assets to the value activities
• Diagnose the cost drivers for each value activities
• Develop sustainable competitive advantage controlling cost drivers better than competitors & reconfiguring the value
chain (activity analysis through activity replacement & rearrangement)

• The relationship between cost structure with the economic structure that linkage with 5 strategic choices
about economic structure (structural cost drivers):
• Scale (of investment)
• Scope (vertical integration)
• Experience
• Technology
• Complexity
• To determine the firm’s cost position, should be included (executional cost drivers):
• Workforce involvement
• Total quality management
• Capacity unitilisation
• Plant layout efficiency
• Product configuration
• Linkage wit suppliers and customers
• Through value chain, firms can make a good relationship with suppliers as well as
customers and investigate how costs can be reduced for both the firm and its suppliers
& customers (ex: through Work closely with suppliers, ordering, freight, quality)