Value Chain Analysis: Advantages and Disadvantages

Value Chain Analysis: Advantages and Disadvantages

Reviewed by Somer Anderson
Fact checked by Suzanne Kvilhaug

What Is Value Chain Analysis?

Value chain analysis is an investigation of a business’s value chain, the full range of activities a company conducts 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 determine the lowest-cost methods for delivering the most value.
• A company can gain a competitive edge and boost profits by analyzing the five primary and four supportive value chain activities and creating efficiencies in them.
• A primary disadvantage to this analysis is that a company’s overall vision and strategy may get lost or muddied when operations are broken down into fine segments.

Primary Value Chain Components

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.

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

• Inbound logistics: Functions such as receiving, warehousing, and managing inventory.
• Operations: Procedures for converting raw materials into finished products.
• Outbound logistics: Activities directly involved in distributing the company’s final products to consumers.
• Marketing and sales: Activities aimed at enhancing visibility and targeting appropriate customers, such as advertising, promotion, and pricing campaigns.
• Service: Programs that enhance the consumer experience, such as customer service, maintenance, repair, refund, and exchange functions.

Support Activity Components

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

• Procurement: How a company obtains raw materials.
• Technological development: Used at a firm’s research and development stage, entailing practices like developing manufacturing techniques and automating processes.
• Human resources (HR) management: Hiring and retaining employees who carry out the firm’s vision.
• Infrastructure: The composition of a company’s management team across its accounting, finance, and quality control silos.

Important

Support activities are generally denoted as overhead costs on a company’s income statement.

Steps to Value Chain Analysis

• Identify and classify all value chain activities
• Determine the activities’ cost and value drivers
• Learn about, review, and compare the competition’s value chains
• Identify the links between activities
• Determine competitive advantages and identify opportunities for reducing costs

Advantages of Value Chain Analysis

The primary benefit of conducting a value chain analysis is that it helps businesses increase customer value and profit margins. Additionally, the more often a value chain is analyzed, the more familiar management becomes, making it easier to identify improvement opportunities.

Disadvantage of Value Chain Analysis

There is one major potential drawback to value chain analysis: By focusing too granularly on micro details, the broader strategic view can get lost. After all, the primary purpose of value chain analysis is to evaluate company operations, segment by segment, to increase efficiency in each area.

However, value 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. If this view is lost, it’s possible that the components will be more efficient on their own, but when combined, they might not be. Therefore, it’s important to exercise caution and not lose sight of how each component contributes to overall efficiency and profitability.

What Are the Benefits of Value Chain Analysis?

Value chain analysis allows businesses to identify opportunities to make their activities more efficient, increase customer value, and increase profitability.

What Is the Importance of Value Chains?

Value chains help businesses organize their activities into primary and secondary activities. Managing these value chain activities is key to increasing customer value and reducing costs.

What Are the Main Goals of Value Chain Analysis?

The goal of value chain analysis is to identify opportunities to reduce costs and increase value, ultimately delivering more value at lower costs for customers.

The Bottom Line

A value chain analysis is an evaluation of a business’s primary and secondary activities. The analysis is conducted to find ways to improve activities within a value chain and reduce costs, which should lead to better customer value at lower costs.