Brian Beers is a digital editor, writer, Emmy-nominated producer, and content expert with 15+ years of experience writing about corporate finance & accounting, fundamental analysis, and investing.
Somer G. Anderson is CPA, doctor of accounting, and an accounting and finance professor who has been working in the accounting and finance industries for more than 20 years. Her expertise covers a wide range of accounting, corporate finance, taxes, lending, and personal finance areas.
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.
Inbound logistics. Thisincludes functions like receiving, warehousing, and managing inventory.
Operations. This entailsprocedures for converting raw materials into finished products.
Outbound logistics. This describes activities directly involved with distributing the company's final products to consumers.
Marketing and sales. This includes strategies aimed at enhancing visibility and targeting appropriate customers, such as advertising, promotion, and pricing campaigns.
Service. Thisincludes 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:
Procurement. This concerns how a company obtains raw materials.
Technological development. This is used at a firm's research and development stage, entailing practices like developing manufacturing techniques and automating processes.
Human resources (HR) management.This involves hiring and retaining employees who carry out the firm's vision.
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'sincome statement:
A Disadvantageof 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.
It provides insight into the ways certain business activities add value for the company and the end consumer. Value chain analysis can help maximize production efficiency, reduce costs and improve a company's bottom line, but if company leaders rely on that approach, they may overlook important information.
May require changes to existing processes and procedures, which can be disruptive and difficult to implement. May not be suitable for all types of products or services, and may not be effective in all situations.
Some of the difficulties involve gathering data (which can be labor and time-intensive), identifying the tasks or functions that can add perceived or real value, and developing and deploying the plan.
The advantages are that it's an extremely systematic and comprehensive way of simplifying the process of gaining an advantage relative to your competitors. Value chain analysis considers every relevant activity a company performs in order to market its products and services. So in a sense, it leaves no stone unturned.
One benefit of a great value chain management system is that it can increase a company's revenue and profit margins. Value chain management focuses on identifying areas in which a company can streamline processes or improve a product, meaning the company can reduce spending as well.
Challenges within the global value chain could be lack of visibility within companies, chaos, inaccurate research or forecast, human mistakes, mother nature, political situation and so forth. The global value chain is a complex model with simultaneous flow of information and products .
Here are some of the most common disadvantages: Complexity: Global supply chains are complex and involve many different stakeholders. This can result in increased costs and delays. Regulatory risks: Global supply chains must comply with numerous regulations and laws in different countries.
Value chains help increase a business's efficiency so the business can deliver the most value for the least possible cost. The end goal of a value chain is to create a competitive advantage for a company by increasing productivity while keeping costs reasonable.
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.
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