October 23, 2012
Article Summary: Strategic Cost Management: The Value Chain Perspective
Authors of this article do not believe the concept of “value chain” has been written about enough or clearly enough and therefore attempt to state the importance of the value chain on strategy from a managerial accounting perspective. Michael Porter first wrote about this in 1985. [ (Porter, 1985) ] They believe that any organization must understand the entire value chain for the entire industry in order to sustain competitive advantage.
A firm or organization should quantify the economic value created at each stage of the chain by identifying costs, revenue and assets for each activity along the chain within the industry, not just the parts of the chain that the organization participates in. Looking more closely at cost at each stage will identify drivers of cost that explain variation and will provide a source of competitive advantage. Looking more closely at profit at each stage will highlight the power of buyers. Competitive Advantage and the power of buyers are concepts are also identified by Porter as two of the five forces.
There is discussion that differentiates” value chain” and “value-added” concepts. The authors argue that “value chain” is better for investigation of strategic issues. They state that “value-added” begins too late because it misses the opportunity with suppliers and ends too soon due to the fact that opportunities with customers are missed. Additionally, an explanation is provided about the fact that a true value chain analysis shows that individual value activities are interdependent.
An initial attempt at identifying value chain segments would be to identify every point in the value chain where an external market exists. One would then have to ensure that any given stage in the value chain can be decoupled before proceeding. There may be difficulties with calculations but the authors firmly...