Value Creation Through Integration

Michael Porter was right. You need capabilities to create value which he outlined in his Value Chain Analysis (VCA) from which competitive advantage can be determined.

So the question is, what capabilities does compliance have to create value for the organization, and how does this generate competitive advantage?

Integrated Balanced Scorecard

The value chain's ultimate outcome is value as perceived by customers and stakeholders. While Michael Porter's value chain framework creates and delivers value, it cannot do so effectively in isolation.

Total value creation requires integrating productivity and compliance programs.

Productivity Drives Margins

Organizations implement productivity programs to enhance value chain efficiencies and increase margins. This operational excellence domain encompasses methodologies such as Lean, Six Sigma, TQM, and digital automation.

Performance is measured by efficiency, while effectiveness is measured by improved margins. Better margins create value both financially and as protection against unavoidable external and internal risks. Margins can offset losses from market disruptions and operational risks—instances where organizations fail to meet goals and objectives.

However, operational risk is best managed through risk and compliance programs.

Compliance Drives Certainty

To address operational risk, organizations establish programs ensuring (to make certain) objectives are achieved. Management traditionally handles common variation, while risk and compliance functions address specialized threats and opportunities.

Performance is measured by the level of certainty (or confidence) in achieving objectives—what might be called assurance—and risk amelioration. Effectiveness is measured by compliance: meeting obligations manifested through safety, quality, security, privacy, reputation, and other value properties.

Managing operational uncertainty helps organizations stay within boundaries, protecting the value chain along with employees, assets, shareholders, customers, the environment, and communities.

Integrated Balanced Scorecard

Protecting value creation fundamentally means contending with two types of uncertainty. Aleatory uncertainty (irreducible randomness) is handled by applying margins to cover unavoidable losses. Epistemic uncertainty (reducible through knowledge) is managed through compliance controls and measures.

Adequate margin and certainty are both necessary for effective value chain creation.

An integrated balanced scorecard improves visibility of strategic initiatives related to value, margin, and compliance targets. It also facilitates appropriate trade-offs between opportunities to improve margins and measures to contend with threats.

When establishing an integrated balanced scorecard, map strategic objectives and initiatives to appropriate categories. Using categories from Geoffrey Moore's "Zone to Win" alongside functions from Michael Porter's Value Chain Analysis helps capture objectives according to time horizon, risk appetite, and compliance priorities.

Productivity and compliance activities each have objectives for positively affecting the value chain while including initiatives to improve one another. For example, productivity improvements can benefit compliance programs, and productivity initiatives benefit from objective risk-based approaches.

Greater uncertainty and risk characterize incubation and startup activities, which may require different strategies focused on pursuing opportunities rather than avoiding losses.

Compliance as Competitive Advantage

Organizations that excel at compliance create sustainable competitive advantages beyond mere risk mitigation. Strong compliance capabilities build trust with customers, regulators, and stakeholders, enhancing brand reputation and market position. They enable faster market entry by streamlining regulatory approvals and reducing time-to-market for new products and services. Robust compliance frameworks also attract premium customers and partners who prioritize working with reliable, trustworthy organizations.

Moreover, proactive compliance reduces the cost of crisis management, legal disputes, and remediation efforts that plague competitors with weaker systems. By embedding compliance into strategic planning rather than treating it as an afterthought, forward-thinking organizations transform regulatory requirements into differentiators that strengthen their competitive moat and create barriers to entry for less disciplined competitors.