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.
- 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:
- Inbound logistics
- Outbound logistics
- Marketing and sales
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.