Advantages & Disadvantages Of Value Chain Analysis

by Paul Simister on August 18, 2011

Value Chain Analysis is the big idea in Michael Porter’s classic strategy book Competitive Advantage.

Value ChainImage Rights for diagram

The Advantages Of Value Chain Analysis

  1. A big advantage is that the value chain is a very flexible strategy tool for looking at your business, your competitors and the respective places in the industry’s value system.
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  2. The value chain can be used to diagnose and create competitive advantages on both cost and differentiation. I’ve written about this in Using The Value Chain To Create Competitive Advantage.
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  3. It helps you to understand the organisation issues involved with the promise of making customer value commitments and promises because it focuses attention on the activities needed to deliver the value proposition.
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  4. Comparing your business model with your competitors using the value chain can give you a much deeper understanding of your strengths and weaknesses to be included in your SWOT analysis.
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  5. The value chain is well known and has been a mainstay of strategy teaching in business schools for the last 20 to 25 years. The book, Competitive Advantage was published in 1985.
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  6. It can be adapted for any type of business – manufacturing, retail or service, big or small.
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  7. The value chain has developed into an extra model, the industry value chain or value system which lets you get a better understanding of the much broader competitive arena. If you’re interested in this aspect of the value chain, watch the Value Chain Videos for an easy to understand introduction.

The Disadvantages Of Value Chain Analysis

  1. It’s very strengths of flexibility mean that it has to be adapted to a particular business situation and that can be a disadvantage since, to get the best from the value chain, it’s not “plug and play”.
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  2. The format of the value chain laid out in Porter’s book Competitive Advantage, is heavily oriented to a manufacturing business and the language can be off-putting for other types of business.
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  3. The scale and scope of a value chain analysis can be intimidating. It can take a lot of work to finish a full value chain analysis for your company and for your main competitors so that you can identify and understand the key differences and strategy drivers.
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  4. Many people are familiar with the value chain but few are experts in its use.
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  5. Michael Porter’s book is excellent but it is a tough read. It’s also dated in its examples which can make some of the ideas more difficult to relate to and understand how things fit together in the Internet age.
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  6. The value chain idea has been adopted by supply chain and operations experts and therefore its strategic impact for understanding, analysing and creating competitive advantage has been reduced.
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  7. Business information systems are often not structured in a way to make it easy to get information for value chain analysis.

A Partial Analysis Of The Value Chain

A full value chain analysis can make the strategy process long, time-consuming and complex.

I don’t believe it’s necessary in many cases.

Strategy is about finding insight to create competitive advantage and then taking the actions necessary to put the ideas into action.

It can be very effective to identify the business processes and the individual roles they can play – positive and negative – for implementing a particular strategy.

Using the Value Chain To Find Value Destroying Activities

Sometimes stopping a value destroying activity is more important than strengthen a value creating process. These happen because the use of individual goals, targets and incentives can lead to actions that harm the bigger business goals.

A great example is the buyer in a steel company who is targeted with getting the lowest cost when the business has an overall differentiation strategy of fast lead times and reliable due date supply to customers. Something has to give – it may be the service promise or  inventory levels are forced to rise and may create as many costs as the buyer hopes to save.

Using the Value Chain For Focused Improvement Of Processes

The most critical processes can then be broken down into value activities for more detailed analysis of what the business is trying to achieve and how it is currently operating. That opens the opportunity for focused process improvement on the areas of constraint which offer most leverage.

Yes the belt and braces approach of doing the full value chain analysis can be comforting because you know everything has been looked at, analysed and considered.

But often, resources and time aren’t available.

My view is that some value chain analysis is better than none. Focus on the important stuff that really matters.

The Value Chain And The Six Step Profit Formula

I use a Six Step Profit Formula to help keep strategic management grounded in what can help you to increase profits in the short and long term.

The value chain is useful in a number of steps. In particular it has a role to play in helping you to develop your irresistible promise and making sure that you deliver it consistently. It also helps you to think through how you continue to get revenue and profit from the relationship.

What Do You Think Are the Advantages & Disadvantages of Value Chain Analysis?

I’d welcome comments based on your own experience or knowledge of the value chain.

What advantages or disadvantages do you think I have missed?

What should be emphasised more?

I encourage you to contribute to the debate on the value chain as a way to develop your own understanding on it and to help others.

Paul Simister is a business strategy coach who helps business owners to differentiate their businesses and develop winning strategies. Get your free copy of the ebook The Six Steps Profit Formula.

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