How to conduct value chain analysis?

Aiming at the imperfections in the knowledge and practice of cost management in most enterprises at present, this article applies the new theory on resource analysis in MBA courses, value chain analysis, to cost management, so as to analyze the structural influencing factors of cost behaviors and rebuild the value chain by controlling them, and to reduce the costs from a strategic height, and the article also analyzes how to gain the persistence of cost advantages. The article also analyzes how companies can gain the durability of cost advantage. \x0d\\\x0d\ Keywords Cost Management Value Chain Analysis Reconstructing the Value Chain \x0d\\x0d\ Most enterprises are prone to fall into all kinds of misunderstandings in cost management, such as managers pay more attention to the control of production costs and neglect the control of marketing costs, service costs and logistic costs; pay more attention to the analysis of the cost of each individual activity that constitutes the operation process of the enterprise, and neglect to grasp the linkage between the various activities to look at the high level of the enterprise. activities to the height of the link between the examination of enterprise costs; 3, the method of cost analysis is overly dependent on accounting methods and systems, while the lack of analysis of cost behavior not included in the scope of accounting and so on. \x0d\\\x0d\\\ The MBA program of Harvard Business School in the United States put forward a new theory on enterprise resource analysis - the value chain analysis method, that is, the use of a systematic approach to examine the various activities of the enterprise and the interrelationships, so as to find the resources with competitive advantage. In the author's opinion, the essential goal of enterprise cost management should be to obtain a lower cumulative cost than that of its competitors through enterprise behavior and win the cost advantage. Therefore, I would like to examine enterprise cost from the perspective of enterprise behavior rather than accounting methods with the help of value chain theory. This paper intends to describe the following aspects: 1, identify the enterprise's own value chain, and use it to aggregate costs and apportion assets; 2, analyze the structural influencing factors of the enterprise's cost behavior from the perspective of the value chain; 3, reduce the enterprise's costs from a strategic height by controlling various influencing cost factors or reconstructing the enterprise's value chain; 4, maintain and consolidate the enterprise's cost advantage over a long period of time to gain the durability of the cost advantage. The cost advantage will be sustained over a long period of time, and the durability of the cost advantage will be achieved. \x0d\\\x0d\ I. Using value chain analysis to identify value activities related to cost management The value activities of an enterprise can be divided into five main activities and four auxiliary activities. The five primary activities include (1) input activities, such as those related to receiving, storing, and allocating goods; (2) production operations, i.e., activities related to transforming inputs into final products; (3) output activities, such as transportation, storage, customer contact, and order processing of finished goods; (4) sales activities, designed to make customers aware of and purchase goods, such as advertising, promotions, and costs of the sales organization; and (5) service activities, including training, repair, maintenance, parts renewal, etc., aimed at increasing the added value of the product. \x0d\\\x0d\\ The four auxiliary activities include (1) Purchasing activities, which refer to the purchase of activities used for all inputs to the firm's value chain, such as the purchase of raw materials and supplies, and the purchase and construction of fixed assets, etc.; (2) Technological development activities, where all value activities involve a technological component, such as the development of new products, technological innovation, trademarks, patents, know-how, and software development, etc.; and (3) Human resource management activities, which include employee recruitment, training, development, motivation, etc.; (4) corporate infrastructure, which refers to both hardware, such as plant facilities, machinery and equipment, and a large amount of software, such as general management, planning, finance, legal, quality management, and public **** relations. \x0d\\\x0d\\ There are other classifications of value activities of an enterprise, such as three kinds of activities based on the relationship of the products produced: (1) direct activities, which refer to those activities that directly create value for the buyer, such as supplying, producing, and selling; (2) indirect activities, which refer to those that ensure that the continuation of the direct activities becomes possible, and which are wide-ranging, varied in content, and easy to ignore; (3) quality assurance activities, which refer to those activities that ensure the quality of the enterprise's various value activities, such as trademark registration, hiring legal counsel, mergers and acquisitions, and other asset reorganization activities. This classification has practical significance for cost management. It is worth noting that the costs of indirect activities and quality assurance activities have not yet been properly recognized and sufficiently emphasized in the cost management of enterprises, as will be highlighted in this paper. \x0d\\\x0d\\ Second, the enterprise value chain to the centralization and apportionment of costs from the cost management point of view, the enterprise's value activities that is the cost behavior. Managers are able to capture the major components of a firm's costs, whereas those value activities that currently account for a smaller proportion but are growing and can eventually change the cost structure of the firm are easily overlooked, which may be overcome by applying the value chain analysis approach to cost management. \x0d\\\x0d\\ The cost of each value activity of an enterprise includes:\x0d\\x0d\ 1, Outsourced operating input costs: raw materials, reserve materials, and low-value consumables invested for production; 2, Human resource costs: expenditures incurred by an enterprise to acquire or replace human resources, such as the cost of human resource acquisition (recruiting, hiring, placement, etc.), human resource development costs (on-the-job education , job training, off-the-job training, further training, etc.), human resources maintenance costs (wages, bonuses, benefits, health care, housing, social insurance, etc.), human resources separation costs (retiree wages and benefits, job vacancy loss, loss of efficiency before and after job alternation); 3, capitalized costs: refers to expenditures that benefit from more than one year or more than one year of a business cycle. Such as fixed assets (buildings, machinery and equipment, labor tools, means of transportation, etc.), intangible assets (patents, trademarks, etc.), and deferred assets (upfront costs such as business start-up registration fees, decoration costs, and improvement expenditures on leased equipment, etc.). \x0d\\\\x0d\\ In cost management, a company must apportion the above costs to the value activities in the value chain. The purpose of apportionment is to produce a value chain that reflects the distribution of costs, to compare the distribution of costs across the value activities, and to identify breakthroughs that can be made to improve costs. \x0d\\\x0d\ How are costs apportioned? The general principle is that the costs of purchased operating inputs and human resource costs should be apportioned to the activities in which they are incurred; capitalized costs are apportioned to the activities that use them, control them, or have a significant impact on their use. Three methods of apportionment are usually used: 1, when the causal relationship between costs and enterprise value activities can be identified directly, they can be apportioned directly, such as production costs; 2, when a direct relationship cannot be identified, but it can be recognized that it will generate future benefits, they can be apportioned according to the characteristics of the assets, such as depreciation of fixed assets according to the period of benefit, and amortization amounts of intangibles, etc.; and 3, when there is neither a causal relationship, nor an expectation of its benefits, the Costs are immediately recognized as expenses in the current period, such as interest, business entertainment expenses, litigation costs, etc. are immediately calculated as current expenses. \x0d\\\\x0d\\\ The above cost sharing should be based on a certain accounting or operating year as the period boundary, it is different from the accounting bookkeeping sharing, this cost sharing data is mainly for strategic decision-making reference, so the accuracy requirements can be adjusted in accordance with the principle of cost-benefit, appropriate. \x0d\\\x0d\\ Through cost aggregation and apportionment, it can be found that the sum of the cost of indirect activities and the cost of quality assurance activities, which were not emphasized in the past, account for a far greater proportion of total costs than the original estimate of the managers, and with the challenge of knowledge-based economy faced by the modern enterprises, the investment in information technology will be increased, and the establishment of the network system, automation system and decision support system makes the non-direct cost There is a tendency for an increasing share of total costs. \x0d\\\x0d\3, structural factors affecting the cost of enterprises Enterprises are products of their environment, and many factors in the external and internal environment of the enterprise are having an impact on the value behavior of the enterprise, and consequently, the cost of the enterprise. The interaction between these factors determines the value behavior of the enterprise; but should also see that there is no one factor can be the only factor in the level of enterprise cost, that is, the enterprise cost is a multi-function. Analyzing the factors influencing the value activities of the enterprise will help the enterprise to determine its cost behavior from the source and to have a deep understanding of how to change its cost behavior. \x0d\\\x0d\\ Combining the basic theories of Management, Financial Management, Production Management, Marketing and other disciplines, as well as the cost management practices of many enterprises, the following structural factors affecting costs can be found: \x0d\\x0d\ Firstly, the choice of enterprise scale. Expansion of scale leads to specialization and collaboration, technical management level and other factors of production to achieve a new configuration ratio balance, stimulate new productivity, significantly reduce costs. However, when the scale exceeds a certain degree, will lead to the complexity of coordination and management efficiency, the natural conditions of production tend to deteriorate, that is, economies of scale beyond the critical point, transformed into diseconomies of scale. Enterprises have to adjust their scale to the right level in order to obtain the lowest possible cost. \x0d\\\x0d\ Secondly, the cascading land rent effect. Geographic location is clearly an independent factor affecting the cost of a firm. Geographic location leads to differences in labor, management, energy, infrastructure, raw materials, consumer demand for products, modes of transportation, communications, wage levels, and tax burdens. A geographically well-located firm has the potential to achieve excess profits over the average profits of society. There are external reasons for a firm's geographic location in terms of its history, industry size, national policies, etc., but this is not the same as saying that a firm can do nothing in this regard. Enterprises can redesign the locations where they carry out their value activities, or even relocate infrastructure, revitalize and replace real estate, and other methods to reduce costs. \x0d\\\x0d\ Third, the learning knowledge effect. Enterprises enter a certain industry, over time, the enterprise will be in the production of decision-making and planning, organization and scheduling, improve labor efficiency, improve the operational process, the efficiency of asset utilization, etc., to discover and learn to numerous cost reduction mechanisms and experience, the direct result of this learning activity is the enterprise product unit cost reduction. This is the learning knowledge effect, or knowledge spillover effect. This effect allows firms to both gain experience in cost reduction through learning and at the same time lose the durability of their cost advantage due to the spillover of their own knowledge throughout the industry. \x0d\\\x0d\ Fourth, the extent of utilization of productive capacity The extent of utilization of a firm's productive capacity depends not only on environmental conditions and the investment behavior of its competitors, but can also be placed under the firm's own control through the choice of its production and marketing strategies. The utilization of the production capacity of an enterprise at different stages of each production cycle is more subject to seasonal, cyclical and other factors that lead to fluctuations in demand, and the level of regulation of changes in such utilization determines the extent to which the enterprise's costs can reasonably be cut or increased. \x0d\\\\x0d\ Fifth, integration and linkages. \x0d\\\x0d\\ Integration concerns the firm's attitude to external collaboration, i.e., whether it is a strategy of self-manufacturing or outsourcing. Too much self-manufacturing will make the direction of the enterprise's business to develop in depth, but it will result in the dispersal of enterprise resources, the operation of the increasingly condensed, slow response to the market; and too much outsourcing will make the enterprise overly dependent on the outside world, the development of their own specialization. Both situations are not conducive to enterprise cost reduction. Proper use of consolidation can avoid utilizing market costs that are higher than captive costs, enable enterprises to avoid suppliers with strong bargaining power, and bring about the economics of joint operations. Firms sometimes have to de-consolidate, at which point they should consider whether the move is detrimental to the firm's strategy, in addition to whether it facilitates cost reduction. The linkage problem is comprised of internal linkages within the firm's value chain and vertical linkages within the marketing channel. Activities in the value chain are interlinked, and changing the way one of them is implemented can sometimes produce unintended cost reduction results. \x0d\\\x0d\ Four, the strategic way to seek cost advantage There are two ways for enterprises to gain cost advantage: first, for the structural factors affecting costs proposed above, according to the principle of importance, select the value activities that account for a large proportion of total costs, control or change the structural factors affecting them to gain cost advantage; second, to re-engineer the original value chain and adopt a more efficient way of designing, produce and sell products. \x0d\\\x0d\\ (a) Controlling structural factors affecting costs 1, Choice of size. A graphical representation can be used to illustrate the achievement of cost reduction through choice of scale. Figure 1 illustrates the cost structure of three different sizes, A, B and C represent the average cost curves of small, medium and large scale firms, respectively, and the choice of size is based on market demand. If the demand for Q1, the size of the selection of A, because at this time the average cost of A1 is lower; similarly, when the demand is no Q3, choose the size of B, the average cost of A2 is lower. And C represents the size, only when the demand is quite large is desirable. For example, Shanghai Hualian Supermarket's chain of stores below 35 is a loss, when the development of 35 to 70 is a slight profit, has developed to 165, cost margin of 12% . 2, control location factors. This factor in the organization of the enterprise production space, raw materials and product transportation distribution on the cost impact. Selection of geographic location should consider: proximity to the origin of raw materials; adequate supply of energy; guaranteed water supply; suitable weather; relatively low transportation costs; distribution of human resources; proximity to the consumer market; the influence of social and cultural practices; the distribution of teaching and research institutions and so on. \x0d\\\x0d\3, learning knowledge management. The learning curve effect makes it necessary for enterprises to strengthen learning management. Enterprises should formulate learning strategy objectives in conjunction with competitive strategy, assess strategic knowledge to determine the knowledge and technology replacement cycle, determine the organizational structure to support the learning strategy, incorporate learning into the evaluation contract and as a basis for personnel evaluation, validate the efficiency and quality of the internal training program and learning network, and determine the entry point to catch up with the competitors and the benchmark point. For knowledge overflow to maintain the necessary vigilance and preventive measures, the use of legal means to protect intellectual property rights. Enterprises should make full use of the international Internet INTERNET, familiar with the world's financial market, capital market, talent market, the operation of the market, the development trend of the same industry, and have a certain degree of foresight on a variety of opportunities and crises. Shenzhen Huawei Hi-Tech Company suffered very little damage in the financial turmoil a few years ago because it was good at analyzing the changing situation of the world market and took certain precautions. \x0d\\\x0d\ 4, balancing production operations and regulating market demand fluctuations. \x0d\\\x0d\\ Enterprises can be controlled from both production and sales. The purpose of production process control is to prevent and stop the deviation of production from the target and to ensure the balance and stability of production. The balanced line method, the chart control method, and the production card method have all proved to be effective in saving costs. In sales, demand fluctuations are regulated to a certain extent through planning, such as expanding products into those that are not cyclical or seasonal, studying customers with stable demand, withdrawing in peak season to take away in off-season, and squeezing competitors into market segments where demand fluctuates. \x0d\\\x0d\ 5, identify the linkages and appropriate integration of cost factors within the value chain are often interlinked, enterprises can change the cost situation if they can accurately recognize this linkage and take advantage of it. Such as the enterprise quality cost is composed of preventive inspection costs and product loss costs of two parts, the former cost increase, product quality up, then the loss cost will be reduced, on the contrary, the former small latter will be large, only the sum of the two smallest, is the best quality cost. Similarly, the cost of inventory and the cost of holding cash can be controlled. Integration and dissolution, both have the potential to reduce costs, systematic, comprehensive and appropriate use of integration is very necessary. Lenovo Computer Corporation, which has opened more than 200 parts factories and more than 20 assembly and debugging centers in Dongguan, Guangdong Province, with obvious cost advantages, is a good example of proper understanding and handling of integration and linkage. \x0d\\\x0d\\ (ii) Reengineering the value chain Reconstructing the value chain can achieve a significant cost advantage, stemming from two mechanisms: one, reengineering is not the same as improvement, value chain reconstruction will fundamentally change the cost structure; and two, the enterprise after a period of twists and turns to reconfirm the significant factors affecting the cost, and thus to change the basis of its competition. Re-engineering value chain methods such as: adopting different processes; capitalizing on automation differences; changing from indirect to direct sales; adopting new distribution channels; and integrating forward (towards raw materials) or backward (towards products). \x0d\\\x0d\\ To cite two examples, first, Shiseido of Japan has been hoping to enter the product (cosmetics) into China through the headquarters of the distribution channel, but little progress has been made, and then in Shanghai Pudong to engage in joint ventures, direct production and marketing in China, this reconstruction of the value chain initiatives, significantly reduce tariffs, freight and labor costs. Second, the United States Southwest Airlines had a long shuttle in large airports, and many large companies head-to-head, poor profitability, and later opened up another way, between small and medium-sized cities to provide short-haul cheap service: downtime to take off again as long as 15 minutes to increase flight density, equivalent to the extension of the voyage; no first class on board, no designated seats, no meals, in order to cut down on fares; passengers can go to the gate vending machines to buy tickets, in order to save commissions; all invested in new Boeing airplanes to cut maintenance costs, thus re-engineering the value chain and gaining a clear cost advantage. \x0d\\\\x0d\\V, long-term maintenance and consolidation of cost advantage The strategic value of cost advantage depends on its durability: the durability of cost only exists if the source of the firm's cost advantage, for competitors, is difficult to copy and imitate. There are two basic ideas for maintaining cost advantage: first, to develop durable sources of cost advantage and expand their quantity; second, to construct barriers (like tariff barriers in international trade) to prevent experience from spreading and competitors from invading. Specific operations such as building alliances to obtain franchises, maintaining differential land rents, seeking government policy support, and seeking a monopoly position in the market can be sources of persistent cost advantage. \x0d\\\x0d\\ For example, Sichuan Changhong has been fighting a price war in recent years, competing for market share by virtue of low prices, and developing and expanding sources of persistent cost advantage by achieving a market size that competitors can only hope to achieve. For example, Microsoft relies on the creation of its proprietary and exclusive "Windows" Office software and the use of legal provisions protecting intellectual property rights and other barriers to consolidate its stunning cost advantage. 1998 Microsoft, compared to General Motors (the top of the Fortune 500), had 5% of the latter's sales and 44% of its profits, and its stock market value was 44% of its profits. 44% and a stock market value 2.4 times that of the latter, the cost advantage is evident. \x0d\\\x0d\\ In summary, the key to applying the value chain analysis methodology in corporate cost management lies in carefully analyzing and identifying the structural factors that affect costs, then seeking strategic ways to cost advantage against these factors and developing lasting sources of cost advantage in order to maintain and consolidate the cost advantage.