8E Value Chain Analysis Report PDF

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FACULTY OF ACCOUNTANCYSEMINAR 1MAFSEMESTER OCTOBER 2020 - FEBRUARY 2021PORTER’S VALUE CHAIN ANALYSISOF TESLA MOTORSGROUPAC2208EGROUP MEMBERS:PREPARED FOR: MADAM MARSHITA BINTI HASHIMNAME MATRICS NO.ATHIRAH SHASHA BINTI AZEMAN 2017313515KHALIESAH NUR ARINA ABU BAKAR 2017199083NURUL SYAFIQA BINTI AZMA...

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FACULTY OF ACCOUNTANCY SEMINAR 1 MAF651

SEMESTER OCTOBER 2020 - FEBRUARY 2021 PORTER’S VALUE CHAIN ANALYSIS OF TESLA MOTORS

GROUP AC2208E

GROUP MEMBERS:

NAME

MATRICS NO.

ATHIRAH SHASHA BINTI AZEMAN

2017313515

KHALIESAH NUR ARINA ABU BAKAR

2017199083

NURUL SYAFIQA BINTI AZMAN

2017538371

SITI SUFIAH NUR BINTI AB RAHMAN

2017147983

UMY NAZIHA BINTI ASMADY

2017347825

PREPARED FOR: MADAM MARSHITA BINTI HASHIM

TABLE OF CONTENT

PORTER’S VALUE CHAIN ANALYSIS Definition of the management accounting technique

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2. Purpose/objective of the technique 1 3. History/development of the technique 2 4. Reasons why such technique is popularly adopted by corporation 3 5. Usefulness of value chain analysis (VCA) 3 Cost advantage 4 Differentiation advantage 5 5.1 Limitation of the technique 5 6. Process/steps involved in order to implement the technique 6 7. Cite a company or organization that practices the management accounting technique, how it has gained improvement/benefit (internal & external) through the implementation of such management accounting technique. 9 8. Suggestion/ improvement on the technique used 9 9. Any other contents which are related and appropriate. 11 References 13 Appendices 15

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ACKNOWLEDGEMENT Firstly, we are grateful to Allah because He gives us opportunities to complete this report. The accomplishment of this Seminar 1 Report on Value chain Analysis thanks to guidance, comments and help from Madam Marshita binti Hashim, our MAF651’s lecturer. We were given ample time to do research and complete this assignment. This assignment cannot be completed without sincere effort and cooperation from our team members and fellow classmates. Lastly, thank you and may Allah bless you all.

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PORTER’S VALUE CHAIN ANALYSIS 1.

Definition of the management accounting technique

Value chain analysis can be defined from the management accounting perspective. Management accounting can be defined by using two different types of perspective which are by looking at: a) Within a company, they state that management accounting covers a variety of value-added stages comprising purchasing materials to distributing, selling and servicing the final product. b) The value-added stages from raw material to end-user as a product is All of the stages will portray a different type of industry. Another alternative way in defining value chain analysis is by looking at the internal and external value chains. a) From the internal value chain analysis, it is stated as a key idea in the field of strategic management that has been carefully discussed. b) External value chain however includes all the main upstream or supply and also the downstream or also known as the distribution process. (Crain & Abraham, 2008)  2. Purpose/objective of the technique The general objective of value chain analysis is to recognize areas and activities that will make the most of change in order to enhance productivity. (Roberts, n.d.) In other words, the purpose of the value-chain model is to help companies to assess and select the ideal set of activities and strategies of performing them to form the most value for the firm. The added-value chain proposes including an extended set of exercises to the initial value chain concept. Hence, it consolidates the qualities of Porter’s value chain with current thinking on business strategy to help solve the present challenges and current realities facing the firm. By seeing the bigger picture of the value adding activities spectrum, the added-value chain may help strategists and managers to create and communicate activities that will result in the firm to remain constantly successful in the current business environment. (McPhee & Wheeler, 2006)

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3. History/development of the technique The value chain, which is a tool that organization can use to formulate strategies was first proposed in 1985, by a Harvard professor, Michael Porter. Value chain was described by Porter as a model for ‘‘systematically examining all the activities a firm performs and how they interact’’. The overview of value chain analysis is primarily inwardly focused. It will analyze the core activities of organizations where they usually derive value from in the past. (McPhee & Wheeler, 2006) With the advancement of time, it is no wonder that business and its activities have immensely changed in the last 20 years. In today’s trends there are more things that drive the market valuations of firms where it is not necessarily a physical, tangible thing. For example, intangible assets in which its benefits can only be enjoyed by the firm and nobody else. In the 1990s, Gereffi and others developed the global commodity chain (GCC), originally derived from Wallerstein’s commodity chain. From his paper, there are four core elements points to be highlighted which are, the input-output structure, territorial (international) structure, institutional framework and governance structure.The primary focus of business is to set an equilibrium in the inherent strength of the coordination of globally fragmented but interlinked production system. From this, Gereffi inferred that most of the chains are indicated by some dominant actors. They are the ones who will dictate the overall character of the chain. These actors are in charge of upgrading possibilities, knowledge transfer, and interaction coordination within the value chain. In reference to Gereffi’s GCC, Messner (2002) developed the world economic triangle. Messner’s concept is based on the hypothesis that actors, governance and regulation systems are the factors for the field for action in the global commodity chains. This approach focuses on upgrading entire regions or clusters through their integration into chains. Hence, the horizontal (cluster development) and vertical approaches (value chain) are linked (Kaplinsky / Morris 2002). (Faße et al., 2009)

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4. Reasons why such technique is popularly adopted by corporation To begin with, Porter’s framework is popular amongst the corporation to adopt because it is a general model and not a rigid framework that creates boundaries between functions or having to put equal weight between tasks when bringing the products and services to the market. Different divisions can use value chain analysis such as human resources, marketing, sales, and operating divisions. Other than that, many industries such as manufacturing, technology, retail, enterprise as well as government agencies effectively use the value chain analysis concept and know that not all functions require an equal level of scrutiny. (Roberts, n.d.)

5. Usefulness of value chain analysis (VCA) Among importance of this method are: 1.

Gain competitive edge - Firms have advantage over its competitors. Low cost production and high quality products give firms more attention from customers. E.g: Tesla produces a unique product which comes with self-driving technology along with a best safety record among its rivals.

2.

Higher profitability - Lower cost of operation and systematic chain of management can reduce waste and time cost while increase in sales and margin. E.g: Tesla high end product quality comes with excellent capacity of batteries due to partnership with Panasonic which offer cheap price compared with other brands.

3.

Standardized process - VCA helps in creating a set of procedures for every activity in order to maintain quality and ensure the process runs smoothly. E.g: Tesla developed its own manufacturing systems software and managed to identify most strategic manufacturing locations to reduce cost of operating.

4.

Improves customer relationship - Low cost product with good quality gives more satisfaction to customers and shows that firm ready to fulfill customer demand. E.g: Tesla goes for sporty and modern looks which captivates customers to buy the products along with latest software updates and supercharging features.

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5.

Reduce cost and delivery time - Systematic and comprehensive business management chain (from supplier to customer) can minimize delivery and distribution cost. E.g: Tesla leased many manufacturing and storage in North America, China, Shanghai and others in order to fulfill the demands all around the world.

Benefits can be achieved by two approaches which are: Cost advantage This advantage can be seen when the organization wants to compete on costs while maintaining customer value. There are few steps to obtain the advantage 1.

Identify the customers’ value creating activities - Firms need to classify activities under the correct department which will show how the organization delivers the value to customers.

2.

Identify the segment of the total cost of the product attributable to each value creating process - Companies need to reevaluate the estimation of cost for each activity to determine its value in competitive advantage.

3.

Identify importance and cost drivers for each activity - Firm needs to fully understand its resources or cost for each activity so firms can prioritise its cost improvement initiatives.

4.

Identify links for each activity - the movement from one activity to another might incur cost that firm might overlooked, which resulted in inaccurate costing information.

5.

Identify opportunities to reduce the cost - companies should actively study its cost from time to time by building good relationships with suppliers, business opportunities from other countries and maintain skilled employees.

Tesla obtained their cost advantage when they secured a business arrangement with Panasonic to supply them with batteries at low price and considering developing their own battery.

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Differentiation advantage This advantage can be used when the firm intends to create superior products from its rival. Steps taken are: 1.

Identify customers value creating activities - focus more on activities that contributes the most to customer value creating

2.

Evaluate differentiation strategies for improving customer value - enhancement strategies in terms of product features, marketing, after sales service, brand and price.

3.

Identify the best sustainable value - Create the most unique resources mix that differentiate firms with competitors which can add to customer value.

As for differentiation advantage, while the automotive industries are still conquered by non electric vehicles suppliers, Tesla offers innovative products with unique features such as self driving technology and batteries based vehicles. 5.1 Limitation of the technique This method has drawbacks which are: 1.

Intensive gathering data activities - There is much information required in order to establish a systematic chain management thus requiring a load of workforce and cost. E.g: Tesla founders need to do more research and study about the newest technology they intend to introduce such as the cost of production, reliable supplier and advantage of the product compared with fuel based vehicles.

2.

Resistance from employee - Employee did not want to study or change the current system which required training and time to understand the chain. E.g: Tesla keeps on improving the updates and software of the products which need cooperation and understanding from staff and other founders. Disagreement often occurs when to decide whether to get high profit or to introduce innovation to the market.

3.

Distracted decision making - Focus too much on details or link between activities might distract managers from organization goals and objectives. E.g: With rising 5

competitors in the electric vehicles industry, Tesla might be too focused on lowering the production cost such as batteries, software and start ignoring the organization objectives to provide innovative products. 4.

Difficulty to identify revenues, cost and assets - There will be many experiments done since it is difficult to identify revenues and cost for each activity. E.g: Since Tesla keeps on improving its products features, the process identifying the cost of product from supplier and in house development might be difficult. Besides, the cost and revenues might differ from certain periods of time due to uncertainty of economic changes.

5.

Technology advancement - Managers and accountants need to always have skills and knowledge in technology since information technology is widely used for information gathering. E.g: From early years, Tesla had difficulties in maintaining its financial resources and went through a few financial scandals. Inaccurate information regarding its supplies of inventories and demand cause misstatements information issued to the public. (San Miguel & Holst, 1996)

6. Process/steps involved in order to implement the technique

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PRIMARY ACTIVITIES ELEMENT The primary activities are formed to add value to the final product directly and support activities that add value indirectly. It has an immediate effect on the production, maintenance, sales and support of the products/services to be supplied.

Elements

Meaning

Applications in Tesla Motors

Inbound Logistic

The relationship with the suppliers is Design and engineering essential to the creation value in this matter

Operations

These activities that convert input to semi-finished to finished product

Outbound logistic

These activities related to delivery

Purchasing materials components

and

Assembly

the product to customer

Marketing & Sales

These activities related to putting the

Testing and quality control

product in the market Services

Sales and marketing and and dealer value of the products or services to distribution support customers as soon as a relationship These activities that maintain the

has

developed

procurement

of

based

on

services

the and

products.

SUPPORT ACTIVITIES ELEMENT Support activities are all acts that are not directly involved in the creation of a product, but instead provide a primary operation with substantial underlying support. This element helps the

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primary activities in creating an advantage over competitors. For most manufacturers, there are four principal types of support operations. 1. Firm Infrastructure It is how executives manage and lead the organization. The results of this leadership and organizing may be substantial and concerned on activities within the organization that enable the organization to maintain its daily operations. 2. Human Resources Management This involves practices concerning employee recruitment, training and compensation. This focuses on activities in which the development of the workforce within the organizations. Study shows more than 12,000 organizations to demonstrate how a company's employees' level of experience, skills and abilities can serve as a strategic resource and strongly influence the success of the company. 3. Technology development These are related to the development of the product and services of the organization, both internally and externally. In order to support primary activities, the business use of mobile devices, computer systems, and telecommunications. 4. Procurement It is a method of negotiating for and obtaining raw materials. Those activities related to procurement are to provide a quality service to the customer from the organizations. (GRIGORESCU, 2015)

Each of the main and support operations entails some costs, but often adds value to the product or service generated in an enterprise. It is necessary to find ways to minimize costs for any company, but it should not lead to a decrease in the quality of the goods or services given. However, cost increases should also be welcomed, as they contribute to improved product quality or customer service. (Edwards & Ketchen, 2014)

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7. Cite a company or organization that practices the management accounting technique, how it has gained improvement/benefit (internal & external) through the implementation of such management accounting technique. Value Chain Analysis has improved Tesla’s financial performance by helping them identify which activities give them more value. Value in this case depends on the company having a competitive advantage in the automotive industry. Using this value chain analysis, Tesla has identified that by producing a unique, difficult to imitate product would give them the upper hand in the industry. Therefore, Tesla invests 1.46 billion USD in their supporting activities which is technology specifically in research and development. The result of these investments made Tesla a brand that is known best as a company that produces the best hybrid cars in the industry. To compensate for the higher investment in research and development , Tesla has reduced one of the activity's resources which is the marketing, sales and service activity. Tesla did not do many advertising campaigns other than the advertising campaigns in social media. To reduce the cost of marketing, sales and service company-owned stores and galleries. This has been achieved using the value chain analysis. Furthermore, using value chain analysis, Tesla has identified a few strategic locations that benefit them the most for their outbound logistic activities. Using value chain analysis, China has become an important market where the demand for Tesla products has grown. The company is optimizing its value chain for higher efficiency and to deliver higher satisfaction to its customers in China as well as the other parts of the world. In addition, Tesla has also considered how to effectively manage their inbound logistics by having warehouses in North America, Europe and Asian. This helps them fulfill the demands of their customer which largely comes from these three continents. (Pratap, 2019) 8. Suggestion/ improvement on the technique used From the articles that we have found, we have managed to identify that there are a few suggestions that have been informed and can be used to improve the value chain analysis. There are two techniques that have been recommended to be used in conjunction with this management accounting technique. The two types of traditional tools that can be used to enhance the application are using PEST and Porter’s five-forces framework. 9

a) Using PEST framework ● By using this framework, we will analyse four different areas namely political, economic, social and technological. Basically PEST analysis is a strategic business framework that is practiced by companies to discover, evaluate, organize and track macro-economic factors that can influence the performance of the company. It is also beneficial for businesses to implement this framework as it guides in using the SWOT analysis and risk analysis. For example, a company may use a PEST framework to analyse the economic factors that may influence them. Some of the factors that can be considered as the economic element are the inflation rate and economics growth. Thus, if PEST analysis is used, a business can see whether the current economic growth can affect the efficiency and effectiveness of the business. They can also use their findings by figuring out ways to gain competitive advantage in order to attract their consumers. ❏ Political factors : Tax policy, labour law, environmental law ❏ Economic factors: Exchange rate, suppl...