VALUE CHAIN

The value chain sets out all the activities carried on by an organisation. These activities (and associated costs) in some way allow the organisation to make profits from customers ie to create value. The implications of the value chain for performance management are:

1 You have to understand what customers value, or treasure, about what the company does. It might be (in a general case) low costs per unit, or fantastic quality, or innovation, or quick responses to customer orders. The first lesson is that performance will be improved only if value adding activities are improved.

2 The company must understand linkages between activities. So it might improve performance by spending more on training (HRM) if this produced products of better quality. Similarly with procuring material of better quality but at the same cost (if possible). Similarly technology development might create a better web-site for customers (eg allowing them to track goods on their way) and some customers might value that.

In general there is not much point in changing a process which then either:

1 Costs more, but does not add value to the product or dervice (eg adding a feature to a product that customers don’t appreciate).

2 Costs less, but really hurts customers’ perception of value (eg changing a material to a cheaper on but which customers also perceive as being inferior).