ABSTRACT: Competitive advantage for a company means not just matching or surpassing what competitors can do, but discovering what customers want and then profitably satisfying, and even exceeding, their expectations. As barriers to interregional and international trade have diminished and as access to goods and services has grown, customers can locate and acquire the best of what they want, at an acceptable price, wherever it is in the world. Under growing competition and, hence, rising customer expectations, a company’s penalty for complacency becomes even greater.
A strategic tool to measure the importance of the customer’s perceived value is value chain analysis. By enabling companies to determine the strategic advantages and disadvantages of their activities and value-creating processes in the marketplace, value chain analysis becomes essential for assessing competitive advantage.
This guideline is addressed to managers, and more specifically to management accountants, who may lead efforts to implement value chain analysis in their organizations.
The concepts, tools and techniques presented apply to all organizations that produce and sell a
product or provide a service.
This guideline will help readers to:
- link value chain analysis to organizational goals, strategies and objectives;
- broaden management awareness about value chain analysis;
- understand the value chain approach for assessing competitive advantage;
- comprehend useful strategic frameworks for value chain analysis; and
- appreciate the organizational and managerial accounting challenges.
THE VALUE CHAIN DEFINED
The idea of a value chain was first suggested by Michael Porter (1985) to depict how customer value accumulates along a chain of activities that lead to an end product or service.
Porter describes the value chain as the internal processes or activities a company performs “to design, produce, market, deliver and support its product.” He further states that “a firm’s value chain and the way it performs individual activities are a reflection of its history, its strategy, its approach to implementing its strategy, and the
underlying economics of the activities themselves.”
Porter describes two major categories of business activities: primary activities and support activities. Primary activities are directly involved in transforming inputs into outputs and in delivery and after-sales support. These are generally also the line activities of the organization.
- inbound logistics—material handling and warehousing.
- operations—transforming inputs into the final product;
- outbound logistics—order processing and distribution;
- marketing and sales—communication, pricing and channel management; and
- service—installation, repair and parts.