Value Chain Analysis

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VALUE CHAIN ANALYSIS Shank and govindrajan(1989)

* value chain - “the linked set of value-creating activities from basic raw material sources for component suppliers through the ultimate end-use product delivered into the final customers’ hands” * VCA is used to analyze, coordinate and optimize linkages between activities in the value chain, by focusing on the interdependence between these activities. * VCA – core analytical tool of strategic management accounting (SMA) * break up “the chain of activities that runs from basic raw materials to end-use customers into strategically relevant segments in order to understand the behaviour of costs and the sources of differentiation” * Managing linkages in the value chain, which is also the central idea of supply chain management, can be used to reduce costs and to enhance differentiation

* Little empirical evidence of its use in practice is available, which has been a reason for criticism on the relevance of the concept for practice. * although a VCA conceptually spans the entire value chain, crossing organizational boundaries, its role in interfirm relationships has received little attention. * Issues of joint VCA – collaborating firms may be concerned about the following three issues: 1. The exchange of sensitive information.

2. A fair division of cost and benefits.
3. The appropriation of investments to be made in specific assets. * First issue - When buyers and suppliers exchange cost and performance information, concerns may arise about their bargaining position and about information spill overs to competitors. Therefore, they will not exchange private information before they are confident that this information will not be used against them. * Second/ Third - With respect to the division of costs and benefits, collaborative decisions need to be taken based on two levels of analysis. First, the investment must earn an adequate rate of return for the risks associated with the project. In addition, when investments need to be made in specific assets, which have little value outside the relationship, the investing firm needs to be confident that this investment will not be appropriated by the other. Second, the partners need the prospect of receiving a fair share of the benefits, before they are willing to participate in the project. * Solution – trust built during previous interactions, if not contractual agreements on profit and cost sharing, ordering quantities and length of the relationship, confidentiality agreements for information exchange, and joint investments in equipment, creating a mutual hostage situation.


* based on the internally oriented concept of value added * problem of the value added concept is – by starting cost analysis at the point of purchase, possibilities to exploit linkages with suppliers are missed, and by stopping the cost analysis already at a completed sale, possibilities to exploit linkages with customers are missed. The value added perspective focuses on (maximizing) the difference between the firm’s purchasing costs and selling price. Thereby it ignores linkages in the wider value chain, such as the causes of this purchasing price, the costs of activities related to the product, and the consequences of the product for the buyer’s activities. * A VCA, in addition to the buyer’s costs, takes account of the activities and costs of other firms in the value chain (i.e. suppliers and buyers), and recognizes the interdependencies of these activities and costs.

* Cannot be used for VCA
* they do not focus on critical activities, but on responsibility centers. * they do not account for interdependence between subunits (such as activities), while cost and performance of one subunit often depend on the costs and performance of other subunits. * they do not accumulate data about the...
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