This paper aims to discuss such topic as quality and performance management, and particularly its relevance to the concept of value chain.
Furthermore, it is necessary to explain how the increasing customer focus and business process perspective influence these fields of management and how the tasks of quality and performance managers have changed over recent years. We also need to show this theoretical knowledge can avail modern organizations in developing new business strategies. This topic has been selected for the discussion because it manifests itself practically in every element of the value chain that consists of inbound logistics, operations, outbound logistics, marketing, and sales (Porter, 1998, p 86).
Moreover, the idea of value chain is applicable to various kinds of businesses, either manufacturers of goods or providers of services. Overall, the findings of this report can better explain the problems, faced by present-day companies, for example, the inability to understand the customers’ perceptions of the product and his/her requirements. Finally, this paper will demonstrate that Porter’s model of value chain must not be taken as some step-by-step instructions; more likely, it is a generic description of the businesses process within and outside the company. In many cases, the mechanism of value creation has to be designed specifically for the needs of a certain company.
The importance of performance and quality management for value chain.
In this section of the paper, we should first define the notion of value chain, as it is crucial for our understanding of various organizational processes. It was introduced by Michal Porter, who viewed it a series of activities through which the company adds extra value to their products and services (1998, p 36). Value chain shapes the pricing policies of the company. Thing is that the majority of modern businesses, estimate the price of the goods not only on the basis of production or labor costs. As a rule, they try to take into account the perceived value of the product, in other words, the amount of money, which the customer is ready to pay for it. The critical issue is that in many cases there is a great difference between the actual cost of production (procurement of raw materials, employees’ wages, transportation and so forth) and the perceived value (Graph, 2001, p 204).
It should be pointed out that the idea of value chain value is applicable to both goods and services (Graph, 2001, p 204). In other words, those organizations that render financial, educational, or healthcare services to the customers should also consider the idea of value chain. In this case, the value chain will comprise such elements as the design of service, knowledge management (identification of customer needs and expectations), the actual delivery of services, and competition (Gabriel, n.d.
p 11). Thus, it will not resemble the model, which was introduced by Michael Porter, and in point of fact, it is not supposed to do it. While estimating the price for the product, the management tries to take into account those properties of the product that are of the greatest importance for the customer, for instance, the serviceable life of the product, its design, its reliability, functionality and so forth. While discussion service sector, we may point out such value-adding elements as politeness of the employees, their willingness to pay attention to the customers’ needs, their expertise, their timing and so forth (Brotherton, 2003, p 19).
On the whole, these examples indicate that quality and performance management are indispensible components for the functioning of value chain. The next section of the paper will show how these elements interact with one another. Another issue, which we need to clarify in this section, is the difference between quality management and performance management. To some extent, they can be regarded as the part and the whole. For a very long time, the term performance has been used to refer to some numerical characteristics such as the sales rates, the volume of output, revenues, operational costs, etc. Such interpretation has been rejected several decades ago, because it became evident to both scholars and management that performance also encompasses qualitative information.
More importantly, performance management has become more customer-oriented. In particular, while assessing the company’s performance, modern managers focus not only on revenues and costs, they also include such data as the number of acquired and lost customers, and the reasons why clients customers decide to use the company’s goods and service (Singh, 2004, p 25). Therefore, it is quite possible to argue that customer retention is one of those measurements, according to which the performance of an enterprise is assessed nowadays. In addition, performance evaluation includes such a parameter as the level of customer satisfaction (Singh, 2004, p 25). Thus, the duty of performance managers is not only to increase the profitability of the enterprise, but also to make internal operations within the firm more convenient or appealing to the customer.
Namely, they focus on such issues as speed or confidentiality as they are very important value-adding elements. This is why leading corporations regularly conduct customer polls in order to find out which properties of the products and services require improvement. It should also be mentioned that both performance and quality measurement have been strongly affected by the business process perspective; this means that while evaluating the quantitative and qualitative aspects of performance, modern managers usually single out very specific tasks or activities such as procurement, transportation, manufacturing, marketing, sales, and so forth.
They view the functioning of the enterprise not as a whole, but as a set of related activities. The major advantage of this approach is that it enables the managers to identify those elements or processes, which should be optimized, redesigned or eliminated in order to reduce operational costs or to increase the level of customer satisfaction (Doumeingts & Brown, 1997). In the majority of cases, performance management only supports value chain, because the customer is not directly affected by the company’s internal policies since he/she is primarily concerned with the quality of the product. However, the role of performance management becomes conspicuous, when we are referring to the service industry.
III. Quality management and Performance Management
Quality management consists of the series of activities, which include the monitoring, assessment, and improvement of the quality of products or services (Miltenburg, 2005).
It can be traced practically at every element of the value chain chain. At first, we need to analyze inbound logistics, which can be interpreted as procurement of raw materials or components. This issue is of great importance to the representatives of food industry and pharmaceutical companies (Schnoll, 2008, p 64).
These companies pay special attention to the selection of suppliers; more importantly, they continuously ensure that their suppliers always meet the highest quality standards, set by the industry. In part, such attitude can be explained by the willingness to create a perceived value for the customers, yet, one should not forget that these enterprises may also face a legal action if they begin to procure raw materials from law quality suppliers. This argument is particularly relevant when we are speaking about pharmaceutical companies (Schnoll, 2008). Similar situation can be observed in automotive industry, for instance, Ford Motor Company prefers to merge with its suppliers in order to better control quality (Shah, 2009, p 6).
These examples indicate that inbound logistics can become an element of value chain only the company establishes certain quality standards, which has to be met, and ensures their suppliers are actually willing to do it. We can also refer to such elements of value chain as operations and outbound logistics, in other words, the manufacturing process and delivery to the customer. At this stage, quality management plays the most crucial role for every company, irrespective of its specialization.
When speaking about manufacturing process and quality management, we can refer to the representatives of various industries, which create the perceived value for their products precisely at this stage, for example IT industry (Hewlett Packard, Apple, Adobe, etc), automotive industry (Toyota, General Motors, Ford), textile and fashion industry like Kelvin Klein. Among numerous quality management techniques, it is possible to single out the so-called quality circles (Dahlgaard, Kristensen & Kanji, 2005). The main advantage of this method is the wide range of its applicability.
The essence of this technique lies in the following: the company organizes groups of volunteers, whose task is to detect, analyze and avert the problems, connected with manufacturing process. These groups of volunteers usually consist of the company’s employees, working for the company for a long time and know every peculiarity of the manufacturing process (Dahlgaard, Kristensen & Kanji, 2005, p 74). Usually, every department or business unit has such quality circle, and by sharing information with one another, the representatives of these quality circles are able to improve the business processes within the company and raise the quality of the product. The most important thing, which must not be overlooked is that both value chain and quality management have been strongly affected by customer perspective. This means that the companies try to view their products from clients’ point of view in order to find out which properties are of the greatest value for the consumer; it may be the user-friendliness, functionality, design, and so forth.
One of the most widespread methods is the so-called Kansei engineering. Its major objective is to identify the customer’ expectations and translate them into certain technical features (Nagamachi & Lokman, 2010). On the basis of this analysis, they set quality standards and develop the strategies of quality management. Furthermore, one should not overlook the importance of post-sales services as the final element of value chain. As a matter of fact, a great number of customers view it as the most important component. They evaluate the quality and scope of post-sales services prior to making any purchasing decision. Therefore, the management of modern companies pays attention to the qualitative characteristics of any service, namely, timing, competence, responsiveness, and politeness (Parasuraman, Zeithaml and Berry, 1985 p 48). These are the key characteristics to which both managers and scholars attach importance.
One of the most difficult challenges, faced by the providers of goods and services is the identification of those qualitative elements that add real and perceived value to the product. In order to do it, the company has to carry out a great number of customer surveys. This approach enables them to better describe the clients’ expectation and their decision-making. In this section, we have examined the qualitative aspects of value chain. Yet, one should not underestimate the importance of performance management. Performance management is based on the idea that value chain can be decomposed into a set of distinct processes, namely, sales, procurement, production, distribution, etc (Ijioui, Emmerich, Ceyp, 2007, p 119). Thus, the managers can develop strategies that would enable them to reduce the number of operations needed for the creation of value chain.
Furthermore, they are able to eliminate costs, associated the value chain creation. Currently, a great number of enterprises have adopted this approach; perhaps, the most eloquent example is chemistry industry (Ijioui, Emmerich, Ceyp, 2007, p 128). The majority of these companies use ERP (Enterprise Resource Planning) systems in effort to monitor the key business processes, inventory, costs, customer orders, production processes.
The key task of the manager is to increase the speed of operations, and to reduce the production costs, while retaining the quality of the product.
B. Service industry and value chain
Many scholars and managers have long debated the applicability of Porter’s value chain to the service industry. The thing is that this model was designed for the needs of those enterprises that manufactured some tangible goods: cars, clothing, medication, computers and so forth but not services like healthcare, finance, hospitality industry and so forth. Thus, one of the most difficult questions was how it could be adopted by the representatives of service industry such as airline companies, banking institutions, hotels, restaurants, and so forth. The problem was that such activities as inbound logistics or post-sale services, which are the basic elements of Porter’s value chain, do not correspond to the activities of these service businesses (Hollenson, 2007, p 27). In this paper, we can refer to the model, proposed by Professor Elisante Gabriel (n.
d). According to him, the value chain of service industry has to comprise the following components: 1) The design of service: at this stage, the management identifies the needs of the customer, develops the strategies of addressing the needs and sets the pricing policies; 2) Knowledge management: it has to perform two functions, namely to increase the company’s knowledge about the customers and two raise the clients’ awareness about the company; 3) Delivery management, which aims to make the service both affordable and accessible to the customer; 4) Moment of truth: the actual point, when the service is being delivered to the customer. 5) Service competition (Gabriel, n. d.
, p 20). We have discussed this model because it can better explain for us the tasks of quality and performance management. This framework is by no means universal, but it can act as the stepping-stone for those managers, who work in the service industry. First, one has to know which elements of the value chain have to be monitored and what the qualitative and quantitative aspects are, and, more importantly, how they should be measured. In the previous section of this report, we have pointed out those qualitative characteristics, which add value to the service: competence, credibility, reliability, responsiveness, security, privacy, accessibility, courtesy etc (Parasuraman, Zeithaml and Berry, 1985 p 48).
Under the circumstances, the main responsibility of a quality manager is to make sure the services meet the standards, set by customers. It should be borne in mind that many providers of services spend much effort to examining customer perceptions of their services. Overall, customer survey is considered to be the reliable or valid tool for the evaluation of services. In contrast, performance managers, specializing in service industry, tend to focus on slightly different parameters.
They attempt to simplify the functioning of the company so that to make it more convenient for the client, for example, they may introduce information technologies in order to eliminate certain operations (Doumeingts & Brown, 1997). One of the most common examples is the development of websites through which clients can purchase airline tickets or reserve rooms in the hotel. On the one hand, this change aims to reduce operational costs, while on the other, it strives to make the service more accessible to the customer and ultimately increase its real and perceived value. Thus, in the case of service industry, the role of performance management is greater importance to the customer, and it directly affects his/her perception of the company. This feature distinguishes service companies from the manufacturers of products.
One should take it into consideration that there is no universal value chain model that could be used by each representative of the service industry. More likely, this model has to be designed on an individual basis. The framework, proposed in this paper should be regarded only as the starting point for the managers.
These findings indicate that the majority of modern organizations have become customer-driven and that many business processes within the firms are now oriented toward the creation of the products’ real and perceived value. The model of value chain, proposed by Michael Porter should not be regarded as the ultimate guideline for top-managers, because in many cases, it can be of little use, especially if we are speaking about the service sector. Still, it gives a good idea of how the customers view the products and services and how the construct value.
The work of quality and performance managers is based on the analysis of these perceptions, because in this way they can establish the standards of quality and assess the performance of the employees. One of the examples, which we have discussed in the previous section, is Kansei engineering which relies on the premise customer perceptions and expectations can be translated into technical specifications. Thus, we can argue that one of the greatest difficulties, encountered by modern enterprises is the inability to understand customers’ perceptions of the product or service. The thing is that in order to map out quality management policies, one should primarily define and list those qualitative characteristics of the product or service, which are of the highest value to the customer. Furthermore, one should not forget that value chain is a set of distinct operations, which can be either accelerated or optimized, while others can be eliminated at all.
This is the domain of performance managers, who have to analyze these operations, simplify them, and make them more cost-efficient and attractive to the client. Only in this case, the concept of value chain can avail the company.
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