Companies conduct value chain analysis by looking at every production step required to create a product. The overall goal is to deliver maximum value for the least possible total cost.
There are many advantages of value chain analysis, which all result in a company's ability to understand and optimize the activities that lead to its competitive advantage and high profit levels. The disadvantage of value chain analysis is that it forces a company to break into segments, and there is the possibility of losing the big picture in the details.
Advantages of Value Chain Analysis
The primary goal and advantage of a value chain, and therefore value chain analysis, is to create or strengthen a competitive advantage. Through analyzing the five primary value chain activities, a company can ensure that the value it's creating exceeds the cost to create that value.
The five value chain activities are:
- Inbound logistics
- Outbound logistics
- Marketing and sales
If a company can create an advantage in any one of these activities through a value chain analysis, it captures a competitive advantage and increases its overall profit. To capture a competitive advantage, a company maps out its specific activities within the five generic value chain activities and looks for ways to create efficiencies.
Disadvantage of Value Chain Analysis
While there are many advantages of conducting a value chain analysis, the disadvantage of conducting this type of analysis is that sometimes a company's overall strategy and vision is lost when its operations are broken down into segments.
Creating efficiencies in each of a company's value chain activities is important, however, the value chain doesn't do a good job of linking each activity in the chain together. It's possible to lose sight of how the activities relate to each other.