The primary goal and advantage of a value chain is to create or strengthen a competitive advantage and companies use value chain analysis to help achieve this and boost profits. This method has several advantages and one major disadvantage.

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 overall profits.
  • A major disadvantage of this type of analysis is that a company's overall vision and strategy can get lost when operations are broken down into segments.

Value Chain Analysis: An Overview

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. Let's take a look in more detail at the pros and cons of this method.

Advantages of Value Chain Analysis

The primary benefits of value chain analysis include:

Ensure value created exceeds cost

There are five primary value chain activities. Through analyzing them, a company can ensure that the value it is creating exceeds the cost to create that value.

The five value chain activities are:

  1. Inbound logistics
  2. Operations
  3. Outbound logistics
  4. Marketing and sales
  5. Service

Gain competitive edge and boost profit

If a company can create an advantage in any one of these five 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.

Enhancements to a value chain can improve production capacity or reduce costs.

Disadvantage of Value Chain Analysis

While there are many advantages of conducting a value chain analysis, there is one major disadvantage. The chief drawback 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. Value chain analysis, however, 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.