Value Chain Analysis

Value Chain Analysis"Accounting for Strategic Management Porter identified the 'value chain' as a means of analysing an organisation's strategically relevant activities in order to understand the behaviour of costs. Competitive advantage comes from carrying out those activities in a more cost-effective way than ones competitors.This essay describes the activities which are referred to as the value chain and discuss how cost analysis of the value chain can be achieved in order to facilitate cost-effectiveness.M. Porter (in Competitive advantage, 1985) breaks the value chain (VC) model into two distinctive types these being primary and support activities. (Bowman C., 1990, p63) The model suggests, that no matter how many operational units that are involved in the process of generating customer value; these primary activities can be conceptualised into five generic stages. The five primary stages are inbound logistics, operations, outbound logistics, marketing and sales, and service. These primary stages are supported by the firms infrastructure, human resource management, technology development, and purchasing and procurement. The stages within the VC should not be seen in isolation but looked at in a wider context and include the interactions between stages not just within the processes. The relationship between sales, operations and procurement for instance can determine how much stock is to be carried and therefore reflected in cost of inventory held.When analysing the VC of a given company/organisation the management accountant (MA) should firstly identify the activities of the firm to establish the framework of the chain.• o ". . . Porter suggests the detailed assignment of operating costs and assets to each value activity" (Grant R.M., 1995,p193) A company producing computers and a firm of accountants for instance would display very different components within the chain due to the differentiating activities (see below); this framework will allow us to establish the relevant importance of each unit of activity in regards to costs. As you can see the relevance of operations within the manufacturing company is higher than that of operations within accountancy. With over 60% of its costs being allocated to operations, it would seem that the manufacturing company should concentrate on this area to maximise savings, as this is the main cost driver. The accountancy firm however as two main cost drivers these being operations at 26% and marketing at 21% , suggesting almost equal saving potentials can will be offered. As MA’s we need to identify the cost drivers, in a similar manner as ABC costing.