The outcome of the value chain is of course value as seen through the eyes of the customer or more broadly – stakeholders. The value chain as described by Michael Porter is responsible to create and deliver value but it cannot do this effectively on its own. Value creation needs the benefits from productivity and certainty programs to deliver total value.
Productivity affects Margins
To increase value, organizations establish productivity programs and systems to improve value chain efficiencies resulting in greater margins.
This is the domain of operational excellence where methodologies such as LEAN, Six-sigma, TQM, digital automation and others can be found.
While the measure of performance is efficiency, the measure of effectiveness is better margins.
Improved margins increase value not only financially but also in the form of protection against irreducible external and internal risk. Margins can be used to offset losses introduced by such things as market disruptions but also as a result of operational risk (i.e. not meeting goals and objectives).
However, the best way to contend with operational risk is with certainty and compliance programs and systems.
Certainty affects Compliance
To contend with operational risk, organizations establish programs and systems to ensure objectives are achieved. This is the traditional role of management for common variation and risk & compliance function for specialized threats and opportunities.
The measure of performance is the level of certainty on achieving objectives (you might call this assurance) and amelioration of risk.
The measure of effectiveness is compliance – the outcome of meeting obligations which is manifested as a measure of safety, quality, security, privacy, reputation, and other properties of value.
Contending with operational uncertainty help organizations operate between the lines which protects the value chain along with employees, assets, shareholders, customers, the environment, and communities where the organization operates.
Integrated Balanced Scorecard
Protecting the creation of value fundamentally is about contending with aleatory and epistemic uncertainty. Aleatory uncertainty is handled by applying margins to cover losses that cannot be avoided or reduced. Whereas, epistemic uncertainty is handled by means of compliance controls and measures to buy-down risk that is reducible.
Establishing adequate margin and compliance is therefore necessary to achieve effective value chain protection.
An integrated balanced scorecard can help improve visibility of strategic initiatives associated with value, margin, and compliance targets. This will also help to make appropriate trade-offs between opportunities to improve margin and measures to contend with threats.
When establishing an integrated balanced scorecard it is important to map strategic objectives and initiatives to appropriate categories. We have found that using categories used in Geoffrey Moores book "Zone to Win" along with functions in Michael Porter's Value Chain Analysis (VCA) helps better capture objectives with respect to time horizon, risk appetite and compliance priorities. A high-level example is shown at the top of this post.
Productivity and certainty activities will have their own objectives with respect to how they will positively affect the value chain. At the same time each may include initiatives to improve each other.
For example, productivity improvements can benefit certainty and compliance programs. In addition, productivity improvement initiatives will benefit from taking an objective risk-based approach.
More uncertainty and risk is expected in the incubation and startup activities. This may require different strategies focused more on the pursuit of opportunities rather than threat avoidance.