Question

Problem V: (10%) Talk about the Value Chain Analysis and how it is important with respect to management decision making and cost accounting?

Answer 1

Value Chain Analysis :

In 1985 , Micheal Porter introduced 'Value Chain Analysis' concept. The value chain analysis help entity to identify the internal activities which add value and which does not. It is the activity that identifies primary and support activities that could add value to final product and then analysis of these activities to reduce costs or increase product differentiation.The buyers of product are generally attracted towards product when they see value in the product. Unnecessary design, feature, process could hike the cost but does not add up any value.Thus it is often considered to analyze the complete process of product from getting raw-materials to delivering product to identify non-value added activities to remove them.

Value Chain model has 2 activities

1. Primary Activities :

a. Inbound Logistics

b. Operations

c. Outbound Logistics

d. Marketing & Sales

e. Service

2. Support Activities

a. Firm Infrastructure

b. Human Resource Management

c. Procurement

d. Technology

The Importance of Value added activity in decision making:

It is very important to identify the value added and non value added activities of company in order to run the comp-any in highly competetive environment.

The importance are

1. Stratergic decision making : Value chain analysis is flexible stratergic tool which look into the internal activities to run business in effective way. The fast growing competetive business environment always require quick decision. Value chain analysis work as tool because of its flexibility

2. Cutting Cost and Differentiation : Value chain analysis brings more focus on cost leadership and product differentiation which could ultimately lead to promising future. The value chain analysis gives a insight to the company to apply appropriate decisions.

3. Increases Customer Satisfaction : The customer is God in any business. When customer is happy, business become success. Preliminary value chain factors like inbound logistics, operations and outbound logistics increase their response times and reduce costs for customer.

4. Increased profit and business valuation : The significance of Value chain analysis is to cut the cost without compromising quality which ultimately increases profit. A good combination of important activities in the value chain add more value to the product and generate more revenue to the company.