Porter's Value Chain and the REA Analysis as an Accounting Information System

Table of Contents

1. Introduction

2. Value System Model
2.1. Theory of Porter’s Value Chain Model
2.2. Porter’s Value Chain applied on Branckowitz & Young

3. Business processes
3.1. Theory of Transaction Cycles
3.2. Transaction Cycles applied on Branckowitz & Young
3.2.1. The Revenue Cycle at Branckowitz & Young
3.2.2. The Expenditure Cycle at Branckowitz & Young
3.2.3. The Production/Service Cycle at Branckowitz & Young
3.2.4. The Payroll Cycle at Branckowitz & Young

4. The REA Analysis
4.1. Theory of the REA Analysis
4.2. The REA Analysis at Branckowitz & Young
4.3. Key Attributes
4.3.1. Key Attributes for the Revenue Cycle
4.3.2. Key Attributes for the Expenditure Cycle
4.3.3. Key Attributes for the Production/Service Cycle

5. References
5.1. Books

6. List of figures

7. Appendix
7.1. Explanation of terms used

1. Introduction

Rachel Branckowitz and Rick Young are two dentists who are merging their offices together. They are faced with finding a system that fulfils their requirements e.g. the extended number of clients. The merging and system implementation is due in six month.

Using Porter’s Value Chain, a REA Analysis will be derived according to the doctors needs.

2. Value System Model

According to Handfield (2002) a value system model can be defined as a connected stream of value. “Value systems integrate supply chain activities, from determination of customer needs through product/service development, production/operations and distribution.” (Handfield, 2002, p.11). Their aim is to position a company so that it will achieve high levels of customer satisfaction while utilizing the company’s competencies (Handfield, 2002).

2.1. Theory of Porter’s Value Chain Model

Porter’s Value Chain represents the business processes which comes along with a product, the design, production, delivery and the market (Porter, 1985). How this process is executed is a reflection of the company’s strategy, history and vision. Companies competing in the same market are likely to have similar value chains (Porter, 1985).

The aim of a value chain is to find sources for a company’s competitive advantage (Porter, 1985). By dividing the company in several activities it becomes clear which are “strategically relevant activities” (Porter, 1985, p.33). Furthermore analyses the value chain which segments contribute most to the company’s revenue (Sekhar, 2010)The value is measured by total revenue or profit (Sekhar, 2010)Thus the value chain offers to be a tool to detect profitable departments within a company and future prospects to gain market share.

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Figure 1, Porter's Value Chain (Porter, 1985)

As Figure 1 shows, can the activities performed by a company be divided into Primary activities and Support activities (Porter, 1985). Each activity includes purchased inputs, human resources and technological information (Porter, 1985). Primary activities are involved in the production process of a product, its sale and its maintenance post sales (Porter, 1985). These primary categories can be further divided into five categories as shown in Figure 1: Inbound logistics, operations, outbound logistics, marketing and sales and service (Katsioloudes, 2002).

Inbound logistics display the internal logistical efforts regarding products. This includes logistic scheduling, material handling, warehouse control and inventory (Porter, 1998).

Operations include activities taking components to become the finished product such as packaging, machining, assembly line maintenance, testing and facility operations (Portert, 1985).

Outbound logistics cover the physical logistical aspect. Such as warehouse handling, scheduling, order processing and distribution (Porter, 1985).

Marketing and Sales contribute to the initiation to buy a product, like advertising, promoting, monitoring the sales force, channel selection, channel relations and pricing (Porter, 1998).

Service activities are related to offer services to sustain or increase the value of a product by installing, repairing, training, components supply and product adjustment (Porter, 1985).

Support activities back up the Primary activities. Support activities can be divided into four categories: Procurement, Technology Development, Human Resource Management and Firm Infrastructure (Sekhar, 2010).

Procurement is the function of buying inputs, which are used in the value chains activities. This includes consumables like raw materials, and assets as machinery, fixtures and furnishing (Sekhar, 2010). This form of procurement can be executed by managers as well as the purchasing department (Porter, 1998). Procurement is a cost factor which affects departments throughout the company, even though it contributes a fairly small amount to the overall costs (Porter, 1985).

Technology Development is the part of a company where new products are invented and innovations are taken to the next step. It furthermore includes technological applications to support the Primary functions (Porter, 1998).

Human Resource Management supports primary as well as other support activities. Costs can significantly be changed by understanding the costs of high salaries versus training and recruiting (Porter, 1998).

A Firm Infrastructure supports the whole value chain instead of individual activities (Porter, 1985). General management, strategy, finance and accounting, legal matters and quality management are part of the Firm Infrastructure (Porter, 1985).

2.2. Porter’s Value Chain applied on Branckowitz & Young

As described in 2.1. the value chain is a tool to analyse competitive advantage. Nevertheless it can also help to create organizational structure (Porter, 1998). Activities which are similar can be grouped in one department and help to coordinate each segment. “Organizational structure balances the benefits of separation and integration.” (Porter, 1985, p.59).

Branckowitz & Young are searching for a system that will help them to custom fit their requirements. Both dentists expect the system to cover all work processes at the office, especially simplification of client handling is essential.

Complex functions like their handling of finances or patients must be divided into subactivities (Porter, 1985). Each revenue generating activity can be described as one separate activity. The suitable level of dispartment depends on the purpose of the value chain (Porter, 1998). Branckowitz & Young pursue the purpose to treat customers with the highest quality possible, at the lowest cost and the shortest amount of time. It seems reasonable to split activities with different economics, impact different aspects of the value chain or signify a considerable amount of total costs (Porter, 1985). Even though Porter’s originals Value Chain model implied the activities In- and Outbound Logistics it seems more reasonable to find a suitable adaption in regards to the service industry. The value is not created through the transformation of products, but through the offer and demand of services (Hollensen, 2007). The value creation process is not one were value is added through a linear, but a cyclical process (Hollensen, 2007). Therefore Inbound and Outbound logistics were concentrated in one activity as shown in figure 2. This is due to the fact that Branckowitz & Young are not producing output, they offer a service and their daily business does not consist of material handling. Respectively Finances was included into one of the primary activities, not limiting it to the firm infrastructure. Finances make up a large part in the offices business. Internal as well as external payments and money circulation needs to be considered, making finances a complex activity.

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Figure 2, Value Chain of Branckowitz & Young

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