Conducting a Value Chain Analysis (VCA)

VCA involves the following steps:

Identity activities: VCA requires a firm to divide its operations into primary and support activity categories. Within each category the firm may typically perform a number of discrete activities that may reflect its key strengths and weaknesses. At this stage managers should desegregate what actually goes into various activities in a detailed manner.

Allocate Cost: VCA requires managers to assign costs and assets to each activity which is totally different from what one finds in traditional Cost accounting methods.

As the above Table shows VCA would offer a more useful analysis of the procurement functions costs and consequent value added.

Identify activities that differentiate the firms: Here managers should try to identify several sources of differentiation advantages relative to competition.  Alex Miller has listed some of these advantages thus:

Examine the value chain: Once the value chain has been described managers should list the activities that are important to buyer satisfaction and market success. Keeping costs under strict vigil, offering value added services at each stage doing things better than rivals are all part of this strategy.

VCA is most effective when managers try to draw comparisons with key competitors and improve the internal processes with a view to offer value for money kind of services to customers.

Financial analysis:

Financial Analysis is an important method of analyzing the strengths and weaknesses of a firm within its industry. Managers investors, and creditors all employ some or both form of this analysis as the standing point for the financial decision making. Investors use financial analyses in making decisions about whether to buy or sell stock. Creditors use them in deciding whether or not to lend. Managers use financial analyses to find how the firm is doing currently in comparison with its past performance in past years (also as against its competitors) Of course on the negative side, financial analysis is based on past data and whatever picture emerges out of this should be taken to be representing future trends. Again, the analysis is only as good as the accounting procedures that have provided the information. (Remember Enron which was coming out with a rosy picture of its financial health even as it was moving fast towards bankruptcy – thanks to the dubious accounting practices followed and certified by the audit firm. Anderson Consulting). While drawing comparison between firms one should take note of the variability of accounting procedures from firm to firm (Pears and Robinson).

Ratios are among the best known and widely employed tools of financial analysis. Ratios permit us to draw intra firm and inter firm comparisons. A ratio expresses the mathematical relationship between one quantity and another. The ratio of 100 to 50 is expressed as 2:1 While the computation of ratio simply involves the division of one variable by another, the interpretation of a ratio is somewhat complicated as many factors influence variables involved in the ratio.

A ratio analysis is an important tool to evaluate the financial condition and the performance of the firm. Ratio analysis evaluates a set of financial ratios, looks at trends in those ratios and compares them to the average values for other companies in the industry. Management employs it to maintain efficient operational control but it is also helpful in analyzing a firm for possible debt or equity investments.

There are four basic groups of financial ratios: Liquidity, Leverage, Activity and Profitability.

Liquidity ratios:
Liquidity ratios measure the firm’s ability to meet its maturing short term obligations. The most common ratio is the current ratio

Current ratio = Current assets / Current liabilities.
Source: Strategic Management

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