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Methodology

Find the Hidden Profit Cost Management Mindset Revenue and Value Focus
Staff Driven Improvement Value Chain Financial Indicators Process Mapping

Value Chain Analysis

Value chain analysis is a tool introduced by Michael Porter for strategic planning based on maximising value creation while minimizing costs.

Value chain analysis is used by Cost Management Specialists to think beyond the discrete elements of a process to the chain of events from customer order to delivery. Staff often have a role in elements of the chain but unless all links and interrelationships are clear and understood by them, what happens at one link may undermine the benefit or prior or future links. This is a risk which can be managed.

“A chain is only as strong as its weakest link.”
Vladimir Lenin

In a value chain, products pass through all activities of the chain in order. At each activity, the product gains some value. The chain of activities gives the products more added value than the sum of added values of all activities.

In a value chain, generic value-adding activities of an organization are categorised as:

  • "Primary activities" including inbound logistics, operations (production), outbound logistics, marketing and sales, and services (maintenance).
  • "Support activities" include: administrative infrastructure management, human resource management, R&D, and procurement.

Costs and value drivers are identified for each value activity.

A Value Chain Reference Model (VRM) extends the supply chain processes of

Acquire Build Fulfill Support

to include

Market Research Develop Brand Sell & Support

The three centers of excellence in a Value Chain are:

  • product excellence,
  • operations excellence, and
  • customer excellence.
Wikipedia defines excellence as:
  1. The quality of being excellent; state of possessing good qualities in an eminent degree; exalted merit; superiority in virtue.
  2. Something in which one excels.
  3. An excellent or valuable quality; that by which any one excels; a virtue.

Excellence is considered to be a value by many organizations and a goal to be pursued. Others regard it as a source of competitive advantage.

“Financial managers, relying exclusively on periodic financial statements...,
become isolated from the real value-creating operations of the organization.”

Johnson, H. Thomas, and Robert S. Kaplan. 1987.
Relevance Lost: The Rise and Fall of Management Accounting, Boston: Harvard Business School Press, 3.
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Page updated: 25th January 2016
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