Brenda Hogan 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 uthors firmly believe an attempt to estimate the value chain will be an invaluable exercise that will force managers to scrutinize all activities that add value to the chain of customers who use the product or service. A case study was presented within the article from field research. The fictional name of the company was Northam Packaging Company which produced coated paperboard. The cost structure was analyzed step by step from the mill to the supermarkets along with strategic options that were available and a comparison of the conventional analysis of strategy and the value chain perspective.
The point was made by the authors that the value chain analysis presented new insights than the conventional analysis. In conclusion, the article demonstrates through the case study that once the value chain has been fully analyzed at each step or link, critical strategic business decisions are clearly illuminated and are different and better decisions than would have been made without the thorough value chain analysis. Porter, M. (1985). Competitive Advantage. The Free Press .