SEMINAR IN MANAGEMENT ACCOUNTING
MAF651
BACHELOR OF ACCOUNTANCY
(HONOURS)
SEMINAR 1
VALUE CHAIN ANALYSIS
PREPARED FOR : MADAM NORFIZAH OTHMAN
CLASS : JAC2208A
PREPARED BY :
NAME MATRIX NUMBER
FARAH NURSYAZANA BINTI AHMAD ZAHARI 2019728065
NUN ISNORFIQAH BINTI ISMAIL 2019583797
NURUL SHARMIN HAFIZA BINTI FAIZUDDIN 2019345933
TABLE OF CONTENT
NO. CONTENT PAGES
1. INTRODUCTION
1.1 Introduction to Value Chain Analysis 1
1.2 Development of Value Chain Analysis 1-2
2. TYPES OF VALUE CHAIN ANALYSIS
2.1 Primary Activities 2-3
2.2 Support Activities 3-4
3. COMPETITIVE ADVANTAGE
3.1 Overall Cost Leadership 4-6
3.2 Differentiation 6-8
4. BENEFITS AND DRAWBACKS OF VALUE CHAIN ANALYSIS
4.1 Benefits of Value Chain Analysis 8-9
4.2 Drawbacks of Value Chain Analysis 9
5. SUGGESTION FOR IMPROVEMENTS ON PORTER’S VALUE 9
CHAIN MODEL
6. CONCLUSION 10
7. REFERENCES 10
8. APPENDICES 11
ACKNOWLEDGEMENT
First and foremost, we are grateful to Allah S.W.T for giving us the courage and opportunity to guide us
throughout the preparation of this report. We are indebted to the many individuals who have provided their
knowledge towards us.
We would like to express our utmost gratitude to Madam Norfizah Othman who has guided us continuously
and keeps giving us support in completing this report. We also like to extend our gratitude to every single
member that participated and made this task complete.
We are grateful to our family members as well for having yet another challenge which decreases the
amount of time we can spend with them. Their love, support, endurance, patience, sacrifice and always
being there for us makes this report become more valuable and real for us.
Last but not least, we wish to thank the Dean of the Faculty of Accountancy, Universiti Teknologi MARA
Malaysia for assigning this report to be part of our assessment. This report gives us a better understanding
in the related topic and we also learn a lot from the syllabus.
1. INTRODUCTION
1.1 Introduction to Value Chain Analysis
The Value Chain Analysis (VCA) is a study of the activities that a firm engages in and how they
relate to its competitive position. It outlines actions within and around the company and links them to a
study of the organization's competitive strength. Michael Porter initially proposed the concept of a value
chain in his book in 1985. It examines how customer value builds up over time as a result of a series of
behaviors that lead to the creation of a product or service. VCA is defined as a process in which a company
discovers and analyses its main and support activities that add value to its final product in order to minimize
costs or boost differentiation. It denotes the internal operations that a company undertakes while converting
inputs into outputs. In other words, if a corporation manages its operations efficiently, the value obtained
should be greater than the expense of doing so.
If a company decides to employ value chain analysis, it might use one of two approaches: cost
advantage or differentiation advantage. Companies can improve sales and cut costs if this strategy is
implemented since it will provide them a significant edge over their competition. However, this value chain
analysis includes drawbacks and problems that businesses must overcome. A company who competes
through differentiation advantage will strive to execute its operations better than its rivals, and if it competes
on cost, it will aim to do internal activities at lower costs than its competitors. Profit is earned when a
corporation can create things at a cheaper cost than the market price or deliver better or superior products
than its competitors.
VCA's major goal is to find phases in the value chain where the company may add value to the
consumer or save money in some way. The value, value chain, and margin may all be used to further
describe the goal. The difference between this total amount or value and the total cost of performing all of
the firm's activities is the margin. Value is the total amount that buyers are willing to pay for a product, and
the difference between this total amount or value and the total cost of performing all of the firm's activities is
the margin. Margin denotes that an organization's capacity to manage links between all activities in the
value chain determines its profit margin. In other words, the company can provide a product or service for
which the consumer is ready to pay more than the total cost of all value chain operations. A value chain
focuses on the actions that occur from the acquisition of raw materials to the conversion of those materials
into finished goods or services.
1.2 Development of Value Chain Analysis
The value chain system was initially defined in the 18th century by French economist Francois
Quesnay in his book Tableau Economique. Many specialists have utilized and expanded these materials
since then. This includes Robert M. Grant (modern strategy analysis) and Wassily Leontief's (the input-
output model) and Porter’s massively influential model. However, Michael's VCA, which he pioneered and
presented, remains an essential approach. Michael Porter created the value chain model, often known as
Porter's Value Chain Model (refer Exhibit 2.2). In 1985, Michael Porter published Competitive Advantage:
Creating and Sustaining Superior Performance, which developed the generic value chain model.
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Exhibit 2.2. The Porter’s Value Chain Model
It is a method for breaking down a business's sequence or chain of functions into strategically
important actions that create value to the company. The value chain reflects all of a company's internal
operations that go into producing goods and services. It adds value, which leads to a competitive edge and,
eventually, increased profitability for a company. The value chain adds value to the organization by
performing main operations that add value directly and supporting activities that contribute value indirectly.
Primary activities, while directly adding value to the company, are not always more vital than support
activities. Nowadays, technological innovation is the primary source of competitive advantage.
2. TYPES OF VALUE CHAIN ANALYSIS
2.1 Primary Activities
Primary activities are the actual development of the product or service, its sales, transfer to the
buyer, and after-sale servicing are all aided by primary activities. Consists of five primary activities that are
involved in the real product's creation and sale. Inbound logistics, operations, outbound logistics, marketing
and sales, and service are the primary activities in Michael Porter's value chain. The purpose of the five
sets of activities is to generate value that is greater than the cost of doing so, resulting in a bigger profit.
Elements Definition Factors that need to be Example
considered
Inbound ● Receiving, storing, and distributing product ● Location of ● Material handling
logistic inputs are all part of inbound logistics distribution facilities ● Warehousing
● The relationship with suppliers is essential ● Warehouse layout ● Inventory control
to the creation of value in this matter ● Return to supplier
Operations ● All activities connected with transforming ● Efficient plant ● Machining
inputs into the intended product are included operations and layout ● Packaging
in operations ● Incorporation of ● Printing
● These activities helps to transform input to appropriate process ● Assembly
product technology ● Facility operation
Outbound ● Outbound logistics entails gathering, storing, ● Effective shipping ● Finished goods
logistic and distributing a product or service to process ● Warehousing
customers ● Minimizing shipping ● Order processing
● The goods may be transported immediately cost ● Material handling
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or must first be stored
Marketing ● End-user purchases of products and ● Innovative ● Advertising
and Sales services are the focus of marketing and approaches to ● Promotion
sales efforts promotion and ● Channel relations
● Make sure the potential customers are advertising ● Channel
aware of the product or service because the ● Proper identification selection
main objective is to promote company of customer segments ● Pricing and price
products and needs quoting
Service ● After-sales service is by providing service to ● Quick response to ● Installation
enhance or maintain the value of a product customer needs service
after it has been sold or delivered to the ● Quality of service ● Product
customer personnel or ongoing adjustment
● It is critical to have the correct customer training. ● Warranty
service practices in place in your company.
2.2 Support activities.
Support activities might be linked to certain primary activities or they can be used to help the entire
value chain. Support activities are believed to be “overhead”, yet some organizations effectively have
turned them into a competitive advantage. Each of the main support activities entails cost, and also adds
value to the product or services provided by the business.
2.2.1 Procurement
The function of purchasing inputs utilized in the value chain of a company is referred to as
procurement. Procurement is the act of obtaining goods or services, typically for business purposes. This is
how the organization obtains the resources it requires to function, such as locating vendors and negotiating
the cheapest pricing.
2.2.2 Human resources
Recruiting, employment, training and development, and remuneration of all types of staff are all part
of human resource management. Human resources encourages employees to perform at their best and to
create a positive organizational culture. Human resources do affect the competitive advantage in any firm.
2.2.3 Technology development
These operations pertain to information management and processing, as well as the safeguarding
of a company's knowledge base. Value is created through reducing information technology expenses,
remaining current with technological improvements, and retaining technical quality.
2.2.4 General Administration
Individual activities are usually not supported by general administration, but rather the complete
value chain. Activities under general administration should not be underestimated even though some firms
collectively indicate it as “overhead” costs. It is the starting point for all smaller decisions in the firm to
begin.
3. COMPETITIVE ADVANTAGE
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A competitive advantage is a feature that enables a company to outperform its rivals. Enterprises
can control their own strategic costs using the Porter value chain model, which caters to their competitive
environment. The firm can gain competitive advantage by delivering the same benefits as competitors but
at a lower cost (cost leadership), or deliver benefits that exceed those of competing products (differentiation
advantage).
3.1 Overall Cost Leadership
According to Michael Porter, cost leadership is when a company sets out to become the low-cost
producer in its industry. Cost leadership can come from a variety of sources, depending on the industry
structure. They may include the pursuit of economies of scale, proprietary technology, preferential access
to raw materials, and other factors.
Overall cost leadership necessitates a certain set of strategies, which include:
1. Aggressive construction of efficient scale facilities.
2. Vigorous pursuit of cost reduction from experience.
3. Tight cost and overhead control.
4. Avoidance of marginal customer accounts.
5. Cost minimization in all activities
3.1.1 Cost Leadership in Primary Activities
In order to achieve cost leadership, the management must constantly work on reducing cost at
every activity to remain competitive while still producing an acceptable quality of product or services. Below
are some examples of value chain analysis in overall cost leadership.
Primary Activities
Inbound logistics
● Effective handling of inventory to minimize damage and improve the quality of the final product
● Example: Buy in bulk from direct supplier
Operation
● Effective use of quality control inspectors to reduce rework
● Example: Identify the ideal size for activities like sales, staffing, and facilities
Outbound logistics
● Effective shipping process to provide quick delivery and minimize damage
● Example: Selection of low cost carriers and efficient order size to allow delivery in bulk.
Marketing and sales
● Extensive promotions and purchase of media in large blocks
● Example: Promote and advertise through social media
Service
● Thorough service repair guidelines to minimize repeat maintenance calls
● Examples: Effective product installation to reduce recalls and training for dealers and customers
3.1.2 Industry Application in Cost Leadership
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One of the examples of a company that is applying cost leadership is McDonald. McDonald is one
of the most well-known brands of fast-food restaurants worldwide, which is widely known for its tasty
hamburgers. Here is how McDonald runs its business using this strategy.
1. Inbound Logistics
McDonald has practiced a backward integration, which is a form of vertical integration. This
happens when a company buys another company that makes input products for the acquiring company.
This means that McDonald merges with its supplier to gain control over the raw materials and maintain the
material quality standard. By acquiring their suppliers, McDonald is able to reduce cost and increase their
profits. McDonald input products include flour, sugar, yeast, beef, fresh vegetables and many more.
Furthermore, McDonald's also has a centralized warehouse, which is the place to store all restaurants’
needs. The warehouse runs in separate areas for dry, refrigerated and frozen foods, where a specific
temperature is maintained so the products are not spoiled because of weather and climate changes.
McDonald has accurate demand forecasting, which involves regional planners analyzing historical
performance and planning future sales campaigns in order to estimate future demand. They utilize their
inventory management system's stock control charts to illustrate product sales history and provide
projections for each restaurant. This helps them to keep in track of what each restaurant has and should
have on hand to match the demand and assist in the supply decision.
2. Operation
To have an efficient operation, McDonald maximizes space utilization in their restaurants and
kiosks, rather than focusing on comfort and spaciousness so that many people can come to the restaurants
and kiosks at the same time. Other than that, McDonald also has its own designated specialized kitchen.
Instead of having a lot of equipment and stations for the preparation of a wide variety of foods, they
specialized the kitchen to have very large grills, so that they can cook a number of burgers at the same
time. The counters are also separated into two, which is for making payments and another counter for
taking the order. This tactic has increased the efficiency of the operations as it reduces the time for the
order to finish as each worker needs to focus on their respective counters only. While waiting for their
orders, the customers can take a seat instead of waiting in front of the counter, which is very convenient for
the customers as well, especially those who order in a large quantity.
3. Outbound Logistics
McDonald has an efficient system for processing customer orders. The customers can order using
McDonald's self-ordering kiosks or order online and pick-up later. This system is very helpful as it provides
flexibility to the customers, where they can make their order at the restaurants, home, or anywhere else.
This system helps in increasing the order fulfillment rate of McDonald's because their employees can focus
more on the preparation of foods instead of dealing with customers individually, hence reducing time to
complete the customer orders.
4. Marketing and Sales
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McDonald uses mass media promotion and advertising in both online and offline strategies, such as
in newspapers, billboard ads, television, radio, as well as McDonald's official social media in order to reach
wider customers. To retain customers, McDonald also uses its own mobile app and website, where
customers can claim special deals, find nearest restaurant locations and place orders anytime that they
want. In terms of pricing, McDonald uses bundle pricing strategy and psychological pricing strategy.
McDonald's uses the bundle pricing technique to provide reduced meals and other products as compared
to purchasing each item separately. Customers can, for example, order a Happy Meal or an Extra Value
Meal to save money and get a better deal. In psychological pricing, on the other hand, the corporation
utilizes prices that appear to be substantially more reasonable, such as RM .99, rather than rounding to the
closest dollar. This price approach encourages customers to buy the company's items since they are
believed to be affordable. As a result, this aspect of McDonald's marketing mix emphasizes the value of
package pricing and psychological pricing in encouraging customers to buy additional goods.
5. Service
McDonald's human resource methods include training for skills required on the restaurant kitchen
production line. This is because individual and organizational learning are very important to support
McDonald’s organizational culture and to deliver great services and maintain the food quality that they offer.
In addition, McDonald also provides a form on their websites for customers to complain or give suggestions
for further improvement to increase customer satisfaction.
3.2 Differentiation
Differentiation strategy consists of creating differences in the firm’s product or service offered by
creating something that is perceived as unique and valued by customers. A company that uses this
approach usually sets their products and services at a premium price as they are offering unique qualities
of products and services with distinctive features from its competitors.
3.2.1 Differentiation in Primary Activity
Primary Activities
Inbound logistics
● Superior material handling operations to minimize damage and raise the quality of finished products
● Example: Choose a quality material for the specialized product
Operation
● Consistently manufacture attractive and unique products
● Example: Using product design that is not offered by competitors
Outbound logistics
● Accurate and responsive order processing
● Effective product replenishment to reduce customer inventory
Marketing and sales
● Creative and innovative advertising programs
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● Example: Use creative elements that effectively highlight the unique features of the products
Service
● Rapid response to customer service requests
● Example: Offer services during pre-purchase, during and post-purchase
3.2.2 Industry Application in Differentiation
One of the companies that practices differentiation is Starbucks, which is the premier roaster and
retailer of specialty coffee in the world and famous for its wide range of premium coffee drinks.
1. Inbound Logistics
Starbucks is very careful with the selection of their coffee beans. They extensively search for the
best coffee bean farms in Latin America, Africa and Asia that provide top-notch quality and comply with
Starbucks quality standards. The firm also prefers to buy coffee from farmers certified under the Starbucks
Coffee and Farmer Equity (CAFÉ) program. Starbucks' green or unroasted beans are purchased straight
from farms by Starbucks purchasers and transported to the storage sites, after the beans are roasted and
packaged. Starbucks enhances value to the beans through its unique and exclusive roasting and
packaging, which helps to increase their selling values. The beans are then delivered to distribution
centers, some of which are owned by the corporation and others are run by third-party logistics
organizations. The company does not outsource its sourcing because they want to assure high-quality
standards from the beginning of the coffee bean picking process.
2. Operation
Starbucks' success is due in part to the efficiency of its processes and capacities. Starbucks offers a
highly efficient process, which can be seen in its cafes. The processes in the cafes are flexible, where the
personnel are able to adjust to sudden increases in demand during peak hours. The layout design of
Starbucks cafes also maximizes workflow efficiency. Though the design does not maximize space
utilization for tables and seats, Starbucks main priorities are on premium customer experience over space
utilization. Starbucks, on the other hand, does not operate under standard franchising rules, but it is
operated either as a direct company-owned store or as a licensed business, where 81 percent of its total
net sales in the first half of the 2020 is from the company-operated stores, while 11 percent are contributed
from the licensed stores. Teavana, Seattle's Best Coffee, and Evolution Fresh are also a few of the brands
it owns.
3. Outbound Logistics
For its many business activities, Starbucks employs both automated and human scheduling
methods. Flexible schedules are also used by the organization for managerial staff. This decision area of
operations management is relevant to Starbucks in terms of the company's goal of simplifying procedures
while allowing for some flexibility across managerial roles. Furthermore, there are few, if any, intermediaries
involved in the sale of Starbucks products. The bulk of the items are available for purchase in shops.
Storage and delivery to retail outlets, on the other hand, are critical.
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4. Marketing and Sales
Starbucks ensures that its goods and services reflect the firm’s high-end brand image by
emphasizing premium design for its goods and services, which offers attractive and pleasant looking brand
merchandise. This plays an important role in the promotion of the brand as well as customer retention and
satisfaction. Apart from that, Starbucks also does not advertise as what others in the food and beverage
industry do due to the reason that advertising and paid promotions are not their central focus. They do the
promotion, but not as heavily as other companies in the same industry. Instead, they employed an
unconventional technique of marketing, which is based on their brand image.
5. Service
Starbucks provides a premium quality of service through servant leadership and a warm friendly
culture to increase customer satisfaction. This organizational culture is shaped by the employees-first
attitude that cares for Starbucks workers. The organization employs barista work teams in the cafes.
Starbucks employs functional jobs, such as HRM and inventory management, in other sectors of the
company, with less focus on work teams. The focus in this decision area of operations management is on
ensuring that the Starbucks culture is infused into every work while still meeting the fundamentals of
technical task specifications. Other than that, Starbucks also provides adequate training for its personnel so
that they are able to maintain the quality of products and services.
4. BENEFITS AND DRAWBACKS OF VALUE CHAIN ANALYSIS
4.1 Benefits of Value Chain Analysis
1. Standardized processes
Since value chain analysis involves repetitive operations, it helps the company to understand the
organizational issues associated with making the customer value commitments and promises since it
focuses on activities required to achieve the value offered. Hence, customer expectation can be fulfilled by
continuously reviewing the operation.
2. Reduce cost of operation
By using value chain analysis, the company is able to identify the value-generating activities and its cost
drivers. As a result, the organization may get cost advantages by lowering the necessary costs of individual
value chain operations or redesigning the value chain to minimize inefficiency and resource waste for better
resource management and improved product and service quality.
3. Assists in the company’s SWOT analysis
The company can use value chain analysis to observe how their competitors manage their company. This
is because it gives a deeper understanding of the company’s strengths and weaknesses and what needs to
be included in its SWOT analysis for improvements.
4.2 Drawbacks of Value Chain Analysis
1. Too focus on micro detail
The company will lose its strategic view if too much attention is paid to micro details. This is because it
does a poor job in linking each activity in the chain together since it focuses on evaluation of the company
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by segment. Hence, it is possible for the company to lose sight of how the activities are broadly interrelated
with one another.
2. Labour and time intensive
The scale and scope of value chain analysis can be intimidating. It is difficult to gather data and it can take
a lot of work and time to finish a full value chain analysis for their own company and for their main
competitors. This is because they need to break down the activities by segments to understand the key
differences and the strategy drivers, and thus this can disrupt the business operation and deploy the plan
that is already made ahead.
5. SUGGESTION FOR IMPROVEMENTS ON PORTER’S VALUE CHAIN MODEL
The article “Research on Strategic Cost Management of Enterprises Based on Porter’s Value Chain
Analysis” written by Shuai Ruan (2020) analyzes the concept of Porter’s value chain model and the
strategic cost management based on value chain. The relevant concepts of Porter’s value chain model
used by the author comprises Porter's value chain model theory, Porter’s competitive model and Porter’s
value chain analysis.
The strategic cost management highlighted in the article are as follows:
1. Value chain cost calculation
Calculation of the value chain cost which includes input costs, customer service cost, operation
cost, human resource cost and other related costs from the data of profit or loss statement, cost
report or budget report.
2. Formation of value chain interaction model
After calculating the cost, enterprises need to determine the value of each activity and develop a
value chain interaction model while considering their importance index, which is determined from
the perspective of its contribution rate and relevance of production process activities.
Suggestion for improvements on Porter’s value chain model:
1. High executive skill in goal decomposition and goal confirmation to realize the organization’s goals.
2. Ensure sufficient human, material and financial resources to achieve strategic cost control of value
chain activities.
3. Continuously optimizing the activities of the enterprise value chain to improve cost control.
4. Established a strategic control system that is consistent with the corporate culture and strategy to
ensure effective implementation of the targeted plan.
6. CONCLUSION
It is common for all companies in this world to achieve desire goals in all aspect such as profit basis,
sales target, innovative product and more. They will make decisions that affect their competitive position
and profitability to help themselves against their competitors. As previously mentioned, value chain analysis
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is one of the company's strategies. It can be used to develop competitive strategies, understand the source
of competitive advantage, and identify or develop the linkages and interrelationships between primary and
support activities that add value to the end product.
The firm need a competitive advantage that can be exploited to withstand attacks from competitors
and industry changes. Therefore, we can highlight that by looking into internal activities, the analysis will
reveal where a firm’s competitive advantages or disadvantages. Value chain analysis is a useful technique
to employ in strategic planning since cost and differentiation advantages are generated from the way
resources are organized in the value chain. Value chain analysis is also a way of understanding how
activities collectively impact the business unit in order to deliver a valuable product.
7. REFERENCES
7.1 Books/Articles References:
1.Gregory Dess, Gerry McNamara, Alan Eisner and Seung-Hyun Lee (2021). Strategic Management:
Creating Competitive Advantage Tenth Edition. McGraw-Hill Education.
2.Obasi Akan, Richard S. Allen, Marilyn M. Helms and Samuel A. Spralls III (2006). “Critical Tactics For
Implementing Porter’s Generic Strategies” Journal of Business Strategy, 27 no.1 (2006): 43-53.
Emerald Group Publishing Limited.
3.Shuai Ruan (2020). “Research on Strategic Cost Management of Enterprises Based on Porter’s
Value Chain Model” Journal of Physics: Conference Series. IOP Publishing.
7.2 Website References:
1.Google. Prableen Bajpai. “Analyzing Starbucks’ Value Chain” Investopedia, last updated November
29, 2021, https://www.investopedia.com/articles/investing/103114/starbucks-example-value-chain-
model.asp
2.Google. Lawrence Gregory. “McDonald’s Generic Strategy & Intensive Growth Strategies” Panmore
Institute, last updated on February 5, 2017, McDonald’s Generic Strategy & Intensive Growth
Strategies - Panmore Institute
3.Google. Lawrence Gregory. “McDonald’s Operations Management, 10 Decisions, Productivity”
Panmore Institute, last updated on February 5, 2017, McDonald’s Operations Management, 10
Decisions, Productivity - Panmore Institute
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8. APPENDICES
Appendix 1: “Critical Tactics For Implementing Porter’s Generic Strategies” Journal of Business Strategy
Appendix 2: “Research on Strategic Cost Management of Enterprises Based on Porter’s Value Chain
Model” Journal of Physics: Conference Series
