‘Strategic Cost Management and the Value Chain’
Every business, whether it be a production or service entity has an underlying goal in maximizing revenue whilst keeping the costs of sales low, inevitably to increase profits from year to year. American Professor Michael Porter developed a concept called the value chain, hence creating value chain analysis. A value chain can be defined as, the linked set of value-creating activities beginning with basic raw material sources through to manufacturing or serving, and untimely through to the end-use product or service delivered to the consumers. The basic logic behind the value chain and value chain analysis is that it gives a greater insight into cost allocation over the value added approach from traditional management accounting methods. The value chain allows organizations to adopt an external focus in understanding and analyzing costs arising from both intra-organization and inter-organization processes. This requires the involvement of suppliers and customers in understanding and gaining a competitive advantage over other players in the industry. As such, the management of costs needs to take a broad focus that includes processes external to the organization. The value chain also allows firms to exactly which segments of the chain can be used to implement their competitive strategy, in order to achieve competitive advantage, an organization has to create value for its customers at a cost that is lower than the value created. The ability of an organization to attain competitive advantage can be achieved by having cost leadership or a differentiation focus. A cost leadership strategy is when firms achieve lower costs than their competitors through economies of scale, and a differentiation strategy can be achieved by producing innovative products and services that offer customers more in value than the cost of making the product or service. Not all activities add value in the same magnitude...
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