SMA CH. 2 (P.45-98)

Continuous Analysis of Value Chains

• Value chains are dynamic and need ongoing analysis for optimization.

• Importance of understanding all stakeholders' value propositions.

  • Example: Tax preparation doesn't directly provide value to customers but supports governmental infrastructure benefiting the business indirectly.

Competitive Advantage through Value Chain Organization

• Porter (1985) emphasized that competitive advantage originates from how an organization organizes its activities.

• Value analysis focuses on the interrelatedness of activities within the value chain.

• Key strategies to enhance competitive advantage:

  • Identify non-value-adding activities to minimize or eliminate them.

  • Use substitute inputs that are less costly.

  • Innovate new processes or technologies for conducting activities.

  • Improve linkages between activities more effectively than competitors.

Non-Value-Adding Activities

• Defined as activities that customers don't compensate for, such as inventory storage.

• Reducing non-value-adding activities can decrease value chain costs and improve efficiency in bringing products to market.

Industry Value Chains

• Every role in the industry adds value (e.g., farmers to chefs).

• Organizations should analyze their role in the value chain to assess profitability.

  • Outsourcing or divesting less profitable operations can be a strategy.

  • Effective management of linkages with suppliers and customers can provide competitive advantages.

Vertical Integration

• Organizations may pursue forward or backward integration to control more of the value chain.

• External dynamics should be evaluated before making performance improvements, as shifting costs may drive customers to competitors.

Brand and Reputation

• An organization’s ability to portray its value-adding capabilities can enhance its competitive advantage.

• Unique brand reputation strengthens reliance from other parties in the value chain.

Example of Sustainable Competitive Advantage: Microsoft

• Microsoft's Windows operating system dominance provides long-standing competitive advantages, leading to anti-monopoly lawsuits.

Importance of Understanding Value Chains

• Management accountants must understand both organizational and industry value chains to analyze strategic positions.

• Lack of awareness about how value is created risks ineffective strategic development.

Value Analysis Example: Just-in-Time (JIT) System

• JIT systems minimize inventory stockpiling by synchronizing supplier delivery with production needs.

• Requires tight cooperation across the entire supply chain to be effective.

SWOT Analysis in Strategic Management

• SWOT Overview

  • Strengths and Weaknesses (Internal)

  • Opportunities and Threats (External)

• Strategies should leverage strengths to exploit opportunities while managing weaknesses and threats.

• Key supporting tools for SWOT analysis:

  1. Product life cycle analysis

  2. BCG matrix

  3. Porter’s five forces model

  4. PEST analysis

Product Life Cycle Phases

1. Introduction - High prices, low demand, risky investment.

2. Growth - Rapid market acceptance, increased competition, declining prices.

3. Maturity - Sales growth slows, new investment decreases, competition intensifies.

4. Decline - Sales decline, market saturation, and competition leads to exit.

BCG Matrix Characteristics

• Stars: High market share, high growth; requires investment.

• Cash Cows: High market share, low growth; generates surplus cash.

• Question Marks: Low market share, high growth; needs investment decisions.

• Dogs: Low market share, low growth; often candidates for elimination.

Industry Analysis and External Forces

• Organizations need to be agile in understanding their competitive landscape.

• Recognizing the five forces shaping the industry helps in strategizing:

  1. Threat of new entrants

  2. Presence of substitutes

  3. Bargaining power of customers

  4. Bargaining power of suppliers

  5. Intensity of rivalry among existing competitors.

PEST Analysis Components

• PEST stands for Political, Economic, Social, and Technological factors affecting the environment in which organizations operate.

Corporate Social Responsibility (CSR)

• CSR importance is growing for competitive positioning.

• Management accountants should align CSR with business strategy for sustainable growth.

Business Cycle Phases

1. Boom - Economic activity increases.

2. Recession - Decline in economic activity.

3. Depression - Prolonged low economic activity.

4. Recovery - Recovery back towards growth.

Role of Management Accountants in Strategic Management

• Management accountants serve as strategic partners, providing timely and relevant information to support decision-making.

• They need to embrace new technologies and data analysis to drive competitive advantage.