VALUE PROPOSITION

Value Proposition

Value Proposition

The developments within the global economic environment require that finance professionals are not only adept at analysing internal operations but that they are also exposed to, and thus experienced in, generating information relating to operations outside their own organisations. This external focus is a reflection of the customer-centric approach required for survival in the global business environment. In terms of this approach, the value of a product/service is no longer internally determined but is now a function of the market needs. In addition, the external orientation has been brought about by the fact that processes on both the supply and demand sides of an organisation are increasingly influencing the costs of internal processes of the organisations. Value chain analysis has emerged (amongst other techniques such as competitor analysis and target costing) as one of the techniques that are useful in understanding and analysing both intra-organisation and inter-organisation processes in order to identify sources of competitive advantage. (Amir 2006)

A value chain is defined as "the linked set of value-creating activities all the way from basic raw material sources for component suppliers through to the ultimate end-use product delivered into the final consumers' hands". The basic logic behind value chain analysis is that organisations should adopt an external focus in understanding and analysing costs arising from both intra-organisation and inter-organisation processes. This requires the involvement of suppliers and customers in understanding and exploiting sources of competitive advantage embedded in their inter-organisation processes. As such, the management of costs needs to take a broad focus that includes processes external to the organisation, i.e. cost management should take a value chain perspective.

Value chain analysis involves the process of decomposing the processes from suppliers to final customers into strategically relevant activities as a way of managing costs. Since each strategically relevant activity involves investment in resources to be performed, it follows that each segment or link along the value chain is expected to add value. Once the distinct segments of the value chain or the strategically relevant activities have been identified, the role of finance professionals is to contribute to the assignment of costs to these activities. Assigning costs to the strategically relevant activities facilitates process value analysis, which involves comparing these costs against the value generated by the activities. The aim of process value analysis is to ensure that each segment of the chain is not only relevant, but that it is also generating value higher than the costs it consumes.

The value creating activities occur at two levels, i.e. within the industry in which an organisation operates and within the organisation itself. As such, there are two components of the value chain, namely the industry value chain and the organisation's internal value chain. The industry value chain is made up of all the value-creating activities within the industry, starting with the basic raw material and ending with the delivery of the final product into the hands of the consumer. The organisation's internal value chain consists of all the value-creating activities ...