A note on value chain: for advanced management accounting students

A note on value chain

 

Highlight 5 main ideas of the topic of Value Chain (of Michael Porter) in the context of advanced management accounting study.

 

Five main ideas

1.    A business is a system of value-creating activities.
Porter’s value chain breaks a firm into the activities used to design, produce, market, deliver, and support an offering. In advanced management accounting, this shifts analysis away from treating the organisation as a few broad departments and toward analysing the economics of individual activities.

2.    Separate primary from support activities.
Primary activities are inbound logistics, operations, outbound logistics, marketing and sales, and service. Support activities—procurement, technology development, human-resource management, and infrastructure—enable the primary activities to work effectively. Accountants should trace costs to both groups rather than assuming only production creates customer value.

3.    Margin comes from value exceeding total activity cost.
The central commercial question is whether customers are willing to pay more for the product or service than the combined cost of all relevant activities. Management accounting supports this by measuring activity costs, revenues, and profitability—not merely controlling expenditure.

4.    Identify cost drivers and eliminate non-value-adding cost.
Costs arise because activities consume resources; their drivers may include order frequency, product complexity, supplier reliability, batch size, delivery distance, or returns. Value-chain analysis therefore complements activity-based costing: identify the activity, measure its cost, find its driver, and improve, redesign, outsource, or remove wasteful work.

5.    Competitive advantage depends on linkages and strategic choice.
The aim is not simply to make every activity cheaper. A firm may pursue cost advantage through lower-cost activities or differentiation through activities that improve customer value, such as faster delivery, superior service, or product innovation. Importantly, advantage can arise from how activities fit together—for example, better supplier coordination may reduce inventory cost while also improving customer delivery performance.

For an advanced management accounting answer, try expressing the logic as: activities consume resources -> cost drivers explain costs -> activities create customer value -> managing activity linkages improves margin and competitive position.

A simple example: online retailer

Assume an online shop sells 1,000 reusable water bottles per month at HK$120 each. The value-chain model assigns costs to the activities that create and deliver value, rather than viewing “selling expenses” as one lump sum. Each business function incurs costs that must be reflected in the final price.

Value-chain activity	Example cost	Monthly cost (HK$)	Cost per bottle (HK$)
Procurement / inbound logistics	Buying and receiving bottles from supplier	45,000	45
Operations	Inspection, labelling, packaging	12,000	12
Outbound logistics	Pick-and-pack and courier delivery	18,000	18
Marketing and sales	Online advertisements and marketplace commission	15,000	15
Service	Handling customer enquiries and returns	5,000	5
Total value-chain cost		95,000	95

Accounting interpretation

First calculate the revenue:

Revenue= 1,000 × HK$120

Revenue= HK$120,000

Then calculate the value-chain margin:

Margin=  Revenue − Total value-chain cost 

Margin=  HK$120,000 − HK$95

Margin=  HK$25,000

The accounting insight is that outbound logistics plus marketing cost HK$33 per bottle—more than operations at HK$12. Management should therefore not focus only on reducing packaging or inspection costs; it may investigate courier contracts, minimum delivery thresholds, advertising efficiency, or customer acquisition cost. Value-chain analysis evaluates costs at every activity to find opportunities to lower cost or raise customer value.

What activity would you examine first if the retailer’s monthly margin fell from HK$25,000 to HK$10,000, and what cost driver would you investigate?

** reference:  a collection of management accounting notes