Accounting Systems and Assurance - Value Chain of Rio Tinto Group - Example

Name: Surname: Student ID: Tutorial times: Name of the tutor: Executive Summary Value chain refers to internal activities that a firm performs engages in to transform its inputs into desirable products and services for the market. Firms use value chain to analyze their internal activities in order to determine most important activities and activities that they need to improve on (Cunnigham et. al., 2011). Value chain comprises of primary activities that directly or indirectly add value to the final product. A value chain of a firm comprises of nine interrelated activities (Gray, 2014). Value chain is a business management concept that was first coined by Michael Porter. Michael porter explained value chain as a representation of value adding activities in a firm. Porter’s value chain is based on cost structure and pricing strategy of firm to create and sustain superior performance in an industry (Gray, 2014). According to Porter, the activities include five primary activities and four support activities. The five primary activities comprises of activities performed to create product and services, market and deliver goods and services to respective customers. Primary activities also entail providing customers with after-sale services (Gray, 2014). The primary activities include inbound logistics, operations, outbound logistics, marketing and service. Support activities helps in effective and efficient performance of primary activities. They include infrastructure, technology, human resource and purchasing (Gray, 2014). Introduction Value chain is a business management concept that was first coined by Michael Porter. Michael porter explained value chain as a representation of value adding activities in a firm (Gray, 2014). Porter’s value chain is based on cost structure and pricing strategy of firm to create and sustain superior performance in an industry (Gray, 2014). According to Porter, the activities include five primary activities and four support activities (Gray, 2014). The five primary activities comprises of activities performed to create product and services, market and deliver goods and services to respective customers (Tronova, 2007). Primary activities also entail providing customers with after-sale services. The primary activities include inbound logistics, operations, outbound logistics, marketing and service. Support activities helps in effective and efficient performance of primary activities. They include infrastructure, technology, human resource and purchasing (Cunnigham et. al., 2011). Conceptualization of Value Chain Value chain is a business management concept that was first coined by Michael Porter. Michael porter explained value chain as a representation of value adding activities in a firm. Porter’s value chain is based on cost structure and pricing strategy of firm to create and sustain superior performance in an industry (Amani, &, Fadlalla, 2017). Other scholars such as Gray (2014) have also explained value chain as activities that transform a product or service from conception to production to delivery to customer and to the disposal. According to Porter, value chain comprises of primary activities that directly or indirectly add value to the final product. A value chain of a firm comprises of nine interrelated activities. The activities include five primary activities and four support activities (Tronova, 2007). The five primary activities are comprises of activities performed to create product and services, market and deliver goods and services to respective customers. Primary activities also entail providing customers with after-sale services (Tronova, 2007). The primary activities include inbound logistics, operations, outbound logistics, marketing and service. (Tronova,2007) Support activities helps in effective and efficient performance of primary activities. They include infrastructure, technology, human resource and purchasing. Inbound logistics entails relationship between a firm and its suppliers and comprises of activities such as receiving, storing and dissemination of inputs. Operations in a firm comprises of activities that transform inputs into outputs (Efendi et. al., 2006). On the other hand, outbound logistics comprises of activities that involve collecting, storing and distribution of firm’s output. Marketing and sales are firm’s activities that inform potential customers of the existence of the outputs, convince customers to purchase and facilitate the process of purchase. Service entails activities that ensure the customer effectively use a product after its purchase (Gray, 2014). Procurement or purchasing is a value chain activity that involves resources or input acquisition for the firm. Infrastructure comprises of the department that help in the process of transformation of inputs, for instance quality assurance, finance, accounting, government relations, legal, planning and general management. Human resource management is firm’s activities that involve recruitment, hiring, training, development and compensation of firm’s staff (Gray, 2014. Technology comprises of software, equipment, procedures, hardware and know how used in transforming firms inputs into output (Gray, 2014). Importance of Value Chain Manufacturing companies such as Rio Tinto Group and service industries such as Central Queensland University are facing changes in the dynamic environment that has become very competitive. This has made it difficult to survive and continue operating in such environment. To ensure quality service and goods delivery these firms should focus on their value chain since value chain offers solutions to such problems (Amani, & Fadlalla, 2017). Some of the importance of value chain includes creation of a competitive edge, identification of primary and support activities in a firm, determination of importance of each activity in the value chain, identification of cost drivers of each activity, product differentiation, identification of activities that create value to customers and determination of links between different activities in an organization. Competitive Advantage Firms use value chain to analyze their internal activities in order to determine most important activities and activities that they need to improve to provide competitive advantage (Gray, 2014). Cunnigham et. al (2014) also stipulated that Analyzing the internal activities enables a firm to determine where it possesses competitive advantage and where it may experience competitive disadvantage. A firm that competes through product differentiation will usually perform at its level best as compared to its compared to its competitors (Gray, 2014). Furthermore, a firm that derives its competitive advantage from cost advantage will only incorporate low cost activities in its value chain. Cunnigham et al., (2011) also stated that value chain plays an important role in understanding the scope and need for systematic competitiveness. Identification of Primary Activities and Support Activities in a Firm Value chain enables a firm to determine its primary and supporting activities undertaken to produces goods and services for its customers (Efendi et al., 2006). Identification of such activities helps the firm to control its costs and deliver products of high value to its customers. Determination of importance of each activity in Value Chain Having a value chain helps a firm to determine most important activities in the process of product or service production. Knowing the importance of each activity in the value chain enables a firm to assign cost to such activities (Tronova, 2007). Furthermore, it helps a firm to determine the total costs of producing a product or service. Identification of each Activity’s Cost Drivers Different activities in a firm have different cost drivers. Understanding the value chain enables management to determine factors driving costs of each activity in a value chain and how they can be improved (Gray, 2014). For example, work speed, work hours and wage are some of cost drivers of different activities in a value chain (Gray, 2014). Identification of Activities that Create Values to Customers Value chain enables a firm to determine customer’s value creation activities. This helps a firm to know activities to focus on in order to enhance customer satisfaction (Cunnigham et. al., 2011). Management can use the value chain to evaluate its differentiation strategies to improve customer value for instance addition of more features in a product, increase customization and focusing on customer responsiveness and customer service. This also helps in creating competitive advantage through product or service differentiation (Gray, 2014). Determination of Link between Activities Determination of links between activities in a firm helps in better understanding of cost of each activity in a value chain. Value chain therefore enables a firm to know effect of cost reduction on various activities on the value chain (Gray, 2014). Value Chain of Rio Tinto Group Rio Tinto Group is a multinational company that mines and processes various raw materials. The activities of the company have economic, social and environmental impact on the environment which they conduct their activities. The value chain of Rio Tinto Group is concerned with environmental, safety, health and socio economic effects of the company’s operations, including the materials purchased and manufactured across the life cycles. The company’s objective is to have a favorable supplier, ensure their production is socially and environmentally responsible and ensure their products are safe for use by consumers. The value chain of Rio Tinto group comprises of activities such as mining, sourcing, production, distribution and end-of-life. The following diagram shows the value chain of Rio Tinto Group. Value Chain of Central Queensland University Central Queensland University is a service institution where value chain plays an important role in understanding the scope and need for systematic competitiveness. It helps the university to identify is key competencies. A value chain exists in the university when all the stakeholders in the chain work to generate value along the chain. The service chain is a configured Porter’s value chain. Primary activities and supporting activities in the value chain of Central Queensland University concentrates on the delivery of services. Activities in value chain of the university is well integrated with all functions that ensure appropriate delivery of service to the customers. The universty’s value chain is also configured to ensure the organization gains cost advantage as it delivers its services. Central Queensland University value chain, service value chain is cross-functional, bidirectional strategy that ensures maximum capital utilization and cost efficiency. The value chain also ensures the university improve their brand image, increase profitability and accomplish greater value from the after sale services offered. The diagram below shows the value chain of Central Queensland University. Comparison of Value Chain of Central Queensland University and Value Chain of Rio Tinto Group Value chain of Rio Tinto Group is a manufacturing model while value chain of Central Queensland University is a service model. Primary and supporting activities in Central Queensland University value chain highlights the steps in delivery of service. The universty’s value chain is configured to ensure the organization gains cost advantage as it delivers its services. Central Queensland University value chain, service value chain is cross-functional, bidirectional strategy that ensures maximum capital utilization and cost efficiency. The value chain also ensures the university improve their brand image, increase profitability and accomplish greater value from the after sale services offered. On the other hand, the value chain of Rio Tinto Group is concerned with environmental, safety, health and socio economic effects of the company’s operations, including the materials purchased and manufactured across the life cycles. The company’s objective is to have a favorable supplier, ensure their production is socially and environmentally responsible and ensure their products are safe for use by consumers. Both the value chain of Central Queensland University and Rio Tinto Group where value chain plays an important role in understanding the scope and need for systematic competitiveness. Conclusion Manufacturing companies such as Rio Tinto Group and service industries such as Central Queensland University are facing changes in the dynamic environment that has become very competitive. This has made it difficult to survive and continue operating in such environment. To ensure quality service and goods delivery these firms should focus on their value chain. Companies should be able to identify gaps or bottlenecks that exist in their value chain to ensure service and products delivery is of high quality. Organizations should ensure they implement appropriate value chain models that suits their activities and enhances quality service delivery. Central Queensland University and Rio Tinto Group should also ensure they analyze gaps that exist in their value chains and ensure they are improved. 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