Value Chain Analysis: Advantages and Disadvantages

Value Chain Analysis: Advantages and Disadvantages

A value chain is a business term describing the full range of iterative activities a company uses to create a product or a service. The purpose of value-chain analysis is to increase production efficiency so that a company can deliver maximum value for the least possible cost.

Key Takeaways

  • Companies use value chain analysis to deliver the most value for the least possible total cost.
  • If a company can create efficiencies by analyzing one or more of the five primary value chain activities, it can gain a competitive edge and boost profits.
  • A chief disadvantage of this type of analysis is that a company's overall vision and strategy may get lost or muddied when operations are broken down into fine segments.

Value Chain Analysis: An Overview

Companies conduct value chain analysis by scrutinizing every production step required to create a product, with the ultimate goal of delivering maximum value for the least possible total cost. There are many advantages of value chain analysis, all of which result in a company's ability to understand and optimize the activities that lead to its competitive advantage and higher profit levels.

Understanding the Top Value Chain Components

By thoroughly analyzing each one of following primary value chain activities, a company can ensure that the value it's creating exceeds the cost associated with creating that value.

  1. Inbound logistics. This includes functions like receiving, warehousing, and managing inventory.
  2. Operations. This entails procedures for converting raw materials into finished products.
  3. Outbound logistics. This describes activities directly involved with distributing the company's final products to consumers.
  4. Marketing and sales. This includes strategies aimed at enhancing visibility and targeting appropriate customers, such as advertising, promotion, and pricing campaigns.
  5. Service. This includes programs that enhance the consumer experience, such as customer service, maintenance, repair, refund, and exchange functions.

Support Activities

The following four support activities help make the aforementioned primary activities more efficient:

  1. Procurement. This concerns how a company obtains raw materials.
  2. Technological development. This is used at a firm's research and development stage, entailing practices like developing manufacturing techniques and automating processes.
  3. Human resources (HR) management. This involves hiring and retaining employees who carry out the firm's vision.
  4. Infrastructure. This includes the composition of a company's management team across its accounting, finance, and quality control silos.

Support activities are generally denoted as overhead costs on a company's income statement:

A Disadvantage of Value Chain Analysis

While there are many advantages to conducting a value chain analysis, there is one major potential drawback. Pointedly: by focusing too granularly on micro details, the broader strategic view can get lost. After all, the main purpose of value chain analysis is to evaluate company operations, segment by segment, to increase efficiency in each area. But chain analysis does a poor job of linking each activity in the chain together. Consequently, it's possible to lose sight of how the activities broadly interrelate.

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