January 27, 2012

Value Chain Analysis - IMA Guideline

A summary of IMA guideline

I. Need

     Value chain analysis is a strategic tool to measure the customer's perceived value. The analysis enables companies to determine the strategic advantages and disadvantages of their value creating processes and activities.

II. Value Chain - Definition

Customer value accumulates along the  chain of activities that a firm performs and delivers an end product or service to customers.
Activities and processes are performed by the firm to understand market, design, produce, sell (market), deliver and support its product.
A firm's value chain structure and the way the individual activities in the  value chain are  performed are a reflection of the firm's history, its current strategy, its approach to implementing its strategy and the underlying economics of the activities.
The activities in a value chain are categorised as primary and support activities.

III. Competing in the Market, Customer Value and Competitive Advantage

In order to compete in a market as a supplier of a product or service a firm must supply what customers want to buy. It has to create customer value so that customer pays a price for the offering. In any market there are competitors. The firm has to be provide some unique benefits to a certain section of persons in the target market to survive the competition.
The competitive advantage of a firm derives from the difference between the value it offers to customers and its cost of creating that customer value.
Thus the competitive advantage is obtained from two sources:
1. Differentiation advantage. Customer perceives more value from the firm's products.
2. Low cost advantage. The firm is able to provide the service or product at a cost lower than the market average.

IV. The Role of Management Accountant

Champion the use of value chain analysis.

V. Value Chain Analysis - Procedure

Internal cost analysis
Internal differentiation analysis
Vertical linkage analysis

VI. Strategic Frameworks for Value Chain Analysis

From the strategy theory the following concepts or frameworks are relevant for value chain analysis
Industry structure analysis
Core competencies
Segmentation analysisi

VII. Limitations of Value Chain Analysis

It is not an exact science. It is not easy. Finding costs, revenues and assets for each activity sometimes presents serious difficulties.
Despite such difficulties, experience indicates that value chain analysis yields firm swith invaluable information on their competitive situation, cost structure, and linkages with suppliers and customers.

VIII. Organizational and Managerial Accounting Challenges

Value chain analysis offers an opportunity to integrate strategic planning and management accounting. Management accounting department has to champion this to maintain its critical role as the information profession.

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Originally posted in Knol

Post updated 24.9.2012

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