Accounting for Managers: Interpreting accounting information for decision-making

122 ACCOUNTING FOR MANAGERS

Firm Infrastructure

Human Resource Management

Technology Development

Procurement

Inbound

Logistics

Operations Outbound

Logistics

Marketing

and Sales

Service

Support

activities

Margin

Primary

activities

Figure 9.1 Porter’s value chain
Reprinted from Porter, M. E. (1985).Competitive Advantage: Creatingand Sustaining Superior Performance.
New York, NY: Free Press.

performs individual activities are a reflection of its history, its strategy, its

approach to implementing its strategy, and the underlying economics of the

activities themselves. (Porter, 1985, p. 36)

Porter separated these activities into primary and secondary activities.
This approach has similarities to the business process re-engineering approach
of Hammer and Champy (1993, p. 32). Their emphasis on processes was on ‘a
collection of activities that takes one or more kinds of input and creates an output
that is of value to the customer’ (p. 35).
Porter argued that costs should be assigned to the value chain but that account-
ing systems can get in the way of analysing those costs. Accounting systems
categorize costs through line items (see Chapter 3) such as salaries and wages,
rental, electricity etc. rather than in terms of value activities that are technologi-
cally and strategically distinct. This ‘may obscure the underlying activities a firm
performs’ (Porter, 1985).
Porter developed the notion of cost drivers, which he defined as the structural
factors that influence the cost of an activity and are ‘more or less’ under the
control of the business. He proposed that the cost drivers of each value activity be
analysed to enable comparisons with competitor value chains. This would result
in the relative cost position of the business being improved by better control of the
cost drivers or by reconfiguring the value chain, while maintaining a differentiated
product. This is an approach that is supported by strategic management accounting
(see Chapter 4).
The value chain as a collection of inter-related business processes is a useful
concept to understand businesses that produce either goods or services.

Managing operations – manufacturing........................

A distinguishing feature between the sale of goods and services is the need for
inventory or stock in the sale of goods. Inventory enables the timing difference