Value Chain Analysis and Traditional Management Accounting

With the growth of global economic integration, modern businesses have to contend with pressures and threats not just from the domestic market as well as from international markets. Companies are faced with different economic environments which means that the accounting environment might also undergo significant changes(Pierce and

O’Dea,2003). The first is that the study and advancement of technology and science become an essential element of the foundation. The ability to gain the access of information as well as communication becomes the most important factor in the success. Thirdly, the human resource are the most important factor in a firm’s expansion and growth. The last one is a new development in services. A company should be aware of the global market. The contemporary concept of enterprise management is one of strategic, long-term and global in nature, which means that traditional management accounting might be difficult to adjust to this new context. Cost systems such as cost control systems, cost management systems, as well as performance-related systems used in traditional management accounting might not able to meet the demands of the modern manufacturing environment. The competitiveness among companies is not only based on the price of goods and services and their quality or cost, instead, it is reflected in the value chain between enterprises. In the 1980s of the last century, the work of Professor Michael Porter set the value chain theory, which has been extensively applied to the management of business and has grown to become the leading management concepts and strategies.

Based on this Based on this, this project will look into the ways in which value chain analysis can challenges and improves the management accounting system as it is currently used. The first step is to demonstrate the flaws of the traditional management accounting. It will continue to illustrate that the theory of value chains. The third part will examine the differences in the traditional accounting system and the value chain approach.

The limitations of the traditional management accounting

There are five main restrictions in conventional management accounting. The first is that traditional management accounting approach to the business as a single entity. It only provided information for a single enterprise management decision and control, ignoring the external environment and other relevant information also can reflect the firm’s position in the market(Williamson,1975). The traditional management accounting was confined to the gathering and analysis of internal financial data and the data is separated from the demands of strategic management in corporate organizations and diminished the importance that the management accounting(Granlund and Lukka 1998). Thirdly, the idea that is based on traditional accounting is to concentrates on solving relevant and specific internal problems. It is not able to create an effective management system that considers the long-term and market interests in mind, which means that the composition of the budget system will focus on the business’s internal operations and planning. The third is the standard management accounting system that relies on financial indicators , primarily cost and profit to evaluate and gauge the efficiency of corporate. However, the calculation of these indicators doesn’t include the capital cost and risk premiums, which means that the business performance reports produced through these indicators isn’t precise. Additionally, the assessment of business performance must include the non-monetary and monetary factors. But, the measurements of indicators using traditional management accounting is limited to financial indicators. The final indicator will be the one that affects investment decisions. This. It is an essential element of conventional management accounting. The economic analysis of investment ventures is primarily based on the cash flows and outflows throughout the operational and construction. This process primarily considers financial advantages, and focuses on the reduction of direct material and labor. But, in the context of the international market in order to enhance and improve the competitiveness of a business companies, it is not enough to just evaluate its financial performance however, it should also consider the non-financial aspects to be considered (Bhimani and Langfield-Smith. 2007).

Because of the limitations in traditional accounting for management, the emergence the concept of “Strategic Management Accounting” broadens the scope of Management Accounting (Roslender and Hart 2003). It clearly explains that the MA must be concerned with the entire purpose of the company. It serves in designing and managing the company’s strategies. In this regard the value chain analysis as a crucial technique in SMA is the most revolutionary. In the next chapter, I will concentrate on the theory of value chain.

Theory of the value chain

The idea of value chain was initially suggested in the work of Professor Michael Porter(1985) He demonstrated that when you look at the company as a whole, you will not discern the firm’s competitive advantage. The competitive advantage should stem from the many mutually distinct processes, including design manufacturing marketing, distribution, and the associated process. Each business is the culmination of these kinds of operations and all of them are able to be incorporated into an overall value chain. Following that, Shank as well as Gowindarajan(1993) consider that any corporate value chain must encompass all of the raw materials that come from the suppliers who started it all to the final products that will be distributed to consumers. Their most significant contribution is the combination of the method of analysis of value chains together with accounting data to enable the strategic management real. Through the advancement of technologies for information, Rayport and Sviolda(1995) suggested the concept of a “virtual value chain” and further enriched the theory of value chains.

Dynamically the analysis of value chains is actually a process that is based on the value added, and continues to optimize and coordinate this value chain. The value chain as a key management tool should first be an information system that is able to provide assists its users management of business. It must provide relevant information that can be used to optimize business processes, thereby enabling the value-added process , and be utilized to aid in decision-making. The value chain analysis integrates all business operations in the value chain, and then forecast, determine to analyze, control, and assess any increase or decreased value is reflected in the value chain. As opposed to the traditional management accounting analysis, the value chain broadens the scope of accounting and expands the business beyond its inside to include the complete value chain. When examining the business as a whole, the company could be difficult to discern what is the most valuable value-added component. However, an analysis of the value chain could dissect the business’s activities by studying each one and their connection to other components within the value chain in order to identify the value added by the company. The value chain concept clearly described the organic linkages of the company’s value-creation actions, however the firm’s value chain isn’t only a single component, it is a cross-value chain network(Collins and Belcher 1999; Hinterhuber 2002). So, the management for the control of value chains must be apposed to being dispersed and must depend on high-speed assessment and multi-dimensional assessment of the complete spectrum of control.

The difference in value-chain accounting and conventional management accounting

There could be three major differences from traditional accounting and value chain analyses. The first is that the common characteristic in traditional managerial accounting. It. This is its inward-focused services, which are that are subordinate and support the business’s internal management and organization. The traditional management accounting utilizes the company as the primary objective, they only focus on the company itself and ignoring external influences, meaning the corporate objectives could be ineffective long-term. Contrary to this an analysis of value chains can lead to extrovertism, mostly due to the fact that enterprises’ strategies have an external in nature. Enterprise development strategies must be based on the uncertainty of the external operating conditions as a basis that it should pay careful attention to the changing conditions of the external environment in order to ensure that the company can endure and grow in this uncertain conditions. The scope of study of value chain research is a breakthrough for the business itself, which involves both downstream and upstream companies as well as competition. The goal is to keep the competitive edge at the start that is based on optimization of the system and long-term competitiveness.

The other is the management accounting approach that is based on the development of the business’s short-term goals and is only concerned with the manufacturing process, while studying the costs associated with three phases of a project: production, supply and marketing, without any in-depth examination of the operational management. The value chain management provides direct an analysis of the operating level. It comprises five fundamental operations as well as four auxiliary ones. The five main activities are the inbound logistics, operations outsidebound logistics, market, sales and service. In addition, procurement and technological development, human resource management, and enterprise infrastructure as four supporting functions. Based on this the analysis of the value chain is divided into three levels. One is designed to manage the operating management of the core operations and the support operations. The third is the corporate value chain administration. The third is the value chain management. The three levels will work with one another and help the management more independent. In actual fact when the competitiveness of businesses becomes the overall strategic competition, and the goal of achieving long-term goals as well as market share is now an essential business goal. Thus Value chain analyses follows the long-term as well as the overall interest and maximize profit is the primary goal.

The third is the traditional management accounting that is based on the business itself, and solely focusing on the firm as a whole or internal units as objects which is narrow. However, the value chain analysis does doesn’t just take the company itself into consideration as well as the competitors suppliers, sales channels, and even whole industries. the analysis of the subjects can be quite varied.


To conclude, due to solely focusing on internal management and the short-term effects management accounting has identified its weaknesses and did not meet the demands of the business. But, the strategic management accounting is better able to adapt to the ever-changing marketplace and competitive environment and is both concerned with the long-term goals and integration of resources within the internal as well as the external factors. The essay focuses on the ways in which the value chain analysis performs better than traditional management accounting. It also describes the major differences of value chain analysis and management accounting as a whole. Value chain theory is a significant development in recent times and offers a fresh perspective on business management.

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