Value chain analysis: What are the advantages and disadvantages?

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.

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:

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

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.

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.