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The Customer Value Problem: Ditch the Value Stream!

25/10/2010

The value stream is a potentially harmful metaphor. I think we should replace value streams with value networks, and customer value with stakeholder value.

Value-streamAgain and again I hear people referring to “value streams.” The value stream is a metaphor suggesting that “value flows” through an organization (possibly with hand-offs across several teams) in the direction of the customer. The value stream metaphor is a somewhat less rigid version of the value chain metaphor, as popularized by management guru Michael Porter.

I believe the value stream metaphor is badly chosen.

I hope we will get rid of it.

Here’s why…

Economy: Value Creation, not Value Flow

Today I bought two bookcases from Ikea. This means Ikea and I participated in an economic transaction. We swapped bookcases for money. I did this because (to me) the bookcases are worth slightly more than the money. Ikea did this because to them my money was worth a little more than the bookcases. With the exchange of bookcases for money both Ikea and I have increased the (perceived) value of our possessions. An economic transaction is the exchange of things to generate value on both sides. The perceived value of my possessions has increased with the value of the bookcases, whereas it has decreased because I gave away my money. For Ikea it is the other way around. Both of us see a net gain of the value of our possessions, because the value we each attribute to the bookcases and the money is different. That’s why we agreed to swap them!

Note: The value we attribute to goods and services is neither objective nor static. Being a clumsy idiot I accidentally broke a leg on one of the two bookcases. It’s value to me was immediately reduced to zero. (Or maybe even a negative value, because now I have to carry the junk away to have it destroyed.) For Ikea, the value of the money I gave them is also not static. Inflation makes it lose value slowly over time. Or they might lose it, the same way I often lose the plugs and screws.

This is how the economy works. Value is created on both sides when people exchange goods, services, and money. Value doesn’t “flow” because this suggests that value only goes in one direction. Clearly, this is false. (If it were true then someone would have had to force Ikea or me to part with our possessions. Basically, that’s how taxes work, but not a normal free economy.)

Business: Value Networks, not Value Streams

A business is a social network of stakeholders who collaborate to produce value for everyone involved. Shareholders give money and advice because they hope to get a return on their investment some time later. Employees supply labor so that they get a salary and a fulfilling job. Suppliers bring in goods and services in exchange for a proper fee. Customers bring in cash so that they get goods or services they find valuable. And the local community supplies the business with a healthy and stable environment, so that the community benefits from employment and economic growth.

It is bad to portray a business as a factory around a value stream. There is no “stream of value” flowing through a business in one direction. The value stream metaphor is misleading. A business is a network of stakeholders all creating value with each other. All stakeholders (shareholders, employees, customers, suppliers, and communities) are trying to generate value for themselves from their collaboration with others.

Your business is not a value stream. It is a value network.

The Shareholder Value Fallacy

In the 80s we saw the birth of the concept of shareholder value. The shareholder value principle said that the only goal of a business was to enrich its shareholders. People reasoned as follows: if you want to create long-term value for your shareholders, then you must take good care of your customers, employees, suppliers, and local communities. Because if you don’t, then ultimately the shareholders will suffer.

But the recent economic crisis proved that the shareholder value principle was a bad idea, because it led to sub-optimization. People invented measurement systems to favor short-term wins over long-term losses. Many CEO’s and other executives paid themselves handsomely for their misguided efforts at creating value, and their shareholders were left empty handed.

The shareholder value idea was great in theory, but not in practice.

The Customer Value Fallacy

Nowadays we are increasingly faced with customer value. The customer value principle tells us that the primary goal of a business is to deliver value to its customers. And people reason as follows: if you optimize the delivery of value to your customers, then you must take good care of your employees as well. And when both employees and customers are happy, then inevitably the shareholders, suppliers, and communities will follow and, magically, all will be happy…

Unfortunately, the customer value idea is just as misguided as the shareholder value idea. Instead of sub-optimization in the direction of the shareholder, there is now sub-optimization in the direction of the customer. Customers don’t care when their products are made by 7-year old children in Chinese sweatshops. Customers don’t care that toxic waste is being dumped in Africa. Customers don’t care when suppliers are being squeezed to near bankruptcy. Customers don’t care when shareholders are left empty-handed.

Note: When you replace “don’t care” with “don’t know” you immediately see an incentive for managers focused on customer value to keep their customers ignorant. There are many customers out there who value not knowing things.

How Not to Solve This Problem

A focus on customer value (or on any other stakeholder for that matter) is a clear case of sub-optimization. When I talk about this, people usually give me two kinds of replies:

1) But… a focus on customer value requires “respect people”

This is the same kind of reasoning that the shareholder value movement used. And it didn’t work for them. Apparently, it is possible to optimize for shareholder value (in the short term) and to ignore respect for other stakeholders. Ultimately, this strategy will fail, because it is unsustainable. And by applying it you hurt a lot of people in the process. I don’t believe for one moment that this strategy is going to work for businesses that are purely focused on customer value.

2) But… stakeholders can organize themselves and improve a business

This is like saying it’s OK to ignore (and even abuse) other stakeholders, until they take the effort of organizing themselves and become powerful enough to convince you that it’s not OK to abuse them; That it’s OK to sub-optimize until someone else convinces you not to sub-optimize; That it’s OK to be unethical until someone else convinces you not to be unethical. To me this doesn’t sound like a smart strategy for businesses. Why improve later if you can improve now?

Value Networks, or Stakeholder Value

I believe an organization is a social network of people generating value for each other. A business is a value network. It will be sustainable only when all stakeholders are treated well. This will require compromises.

By all means, draw a value stream map to optimize value delivery for your customers. But you must do the same for shareholders (are they getting a return on their investment?); And the same for employees (are their jobs bringing them money and fulfillment?); And the same for suppliers (are they getting what they need?); And the same for local communities (are they happy with our business being here?)

Customer value is a great idea, if and only if it is properly balanced with shareholder value, employee value, supplier value, and community value. Your business generates value in all directions!

So…

Don’t call it customer value anymore. Call it stakeholder value instead.

Don’t talk about value streams. Talk about value networks instead.

BTW, does anyone in my social network consider a bookcase with 1 broken leg to be valuable?

Jurgen Appelo is an award-winning speaker, trainer, and author of Management 3.0, a management book for software development. You can hire him as a speaker or trainer, to add some spice to your workshops, seminars, or conferences. 

(image by marcn)

This article is written by on in Stakeholder Management. Jurgen Appelo is at Happy Melly. Connect with Jurgen Appelo on .

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  • http://www.innovel.net Robin Dymond

    Hi Jurgen,
    Value Stream Maps have a particular purpose in the Toyota Production System (TPS), where they came from. Value Stream Mapping brings visibility where often there are only vague ideas about what work is done in an IT organization. This visibility allows management that has been managing against project schedules and cost objectives to begin understanding, measuring, and improving the whole system. TPS starts with pillars in the house of TPS. The house of Lean also starts with pillars, and respect for people is one of them (see Vodde and Larman). The challenge you bring to VSM seems to largely be one of terminology? VSMs allow classification of work by Customer Value Add, Business Value Add, and Non Value Add. From these classifications we can calculate process cycle efficiency, CVA/total cycle time. This give us a measure to compare against other processes from our industry and others.
    I do agree that VSM has weaknesses. However I don’t understand how thinking of it as a value network helps us come to grips with the huge amount of waste in most business and IT processes.
    Recently I have been thinking about the contribution of Teams to innovation in product development. The standard notion that the requirements flow from customer to Product Owner to team is inaccurate for most product companies because it does not account for team innovation. Innovation that is usually created by the team working on solving the customer problem, and finding new strategies and ideas that the customer would never have thought about. The arrival of information in domain knowledge, technical expertise, and repeated exposure to the problem leads to these innovations. Clearly, as you mention in your post, it is not a one way street. However we still need to effectively differentiate effective from ineffective processes, and what makes the difference. TPS gives us one tool set, it is limited, however it is also the most proven and effective system we have so far.

  • http://profile.typepad.com/financialagile Financialagile

    What he said.
    I also think you are talking about a healthy organisation. Nothing too new there. I think Value Streams are tool for getting rid of waste, nothing more nothing less.
    A healthy organisation ‘comprises three systems: a tasks system or system of work roles designed to achieve the tasks an organisation is in business to perform; a sentient system, the system where the employees’ human needs for affiliation and identity are met; and an overarching management system that manages the relations between the two.’
    Pizer and Hartel, ‘For Better or For Worse: Organizational Culture and Emotions’ in Hartel et al., Emotions in Organisational Behaviour. Lawrence Erlbaum, 2009. p. 336

  • http://profile.typepad.com/jurgenappelo Jurgen Appelo

    Robin, thanks for your reply!
    Yes, I have a problem with terminology, not with practices. If people understand that the “value stream” depicts only value created for the customer, and they compensate with other practices for other stakeholders, then I’m perfectly happy.
    I think the terms “value streams” and “customer value” are over-represented in our literature, and the other stakeholders might draw the shortest straw.

  • http://profile.typepad.com/jurgenappelo Jurgen Appelo

    Where are the suppliers, shareholders and local communities in that “three-system” approach?

  • http://neoscrum.com Denis Miller

    As I understand please correct me. Value networks is a basement for bureaucracy and self-orientation. I should use another stakeholders to achieve and increase my own value. Sure, it’s a very tactical approach. But having network and making attraction around myself (using some political games) we can create group of people who has resources and “others”. Some small group of people can exploitation “others” to increase their value.
    I think “value stream” and “customer value” are good criterias for making decision. Because in this chain we have only one resource to support this chain – customer. It’s slightly moving (reframing) in our mind. It changes our making decision process from self-orientation (stakeholder value) to customer-oriented approach (customer value).
    But, I found this idea very useful as an implementation of “Individuals and iteration over process and tools” value. It’s a mindset in our collaboration with each other. And a good addition to customer-oriented approach (customer value). And I hope using two mindsets/metaphors can help us.

  • http://profile.typepad.com/jurgenappelo Jurgen Appelo

    Thanks Denis, but I think you misunderstood me.
    The customer _is_ one of the stakeholders. All stakeholders try to optimize their own value. This applies to customers as well as to shareholders and suppliers.

  • Scott F

    I am unclear how changing streams to networks will achieve the goal of greater corporate effectiveness. It may indeed head off some of the sub-optimization nightmares you mention but will do more than that?
    With Financialagile, I think corporate culture is the elephant in the room. You can bring in Agile, TPS, Value Streams, Kanban, Lean or Pink Faerie Dust (PFD). In the end, you have a large group of people with conflicting needs and goals. No one has found a way to bring it all together in the general case.
    Witness the decadal swing in pop management books and consulting. Everyone is flocking from one pseudo-solution to the next. Why? Because none of it works. Any successful management strategy works in a given place and time with a given group of managers and key stakeholders. No silver bullets, n’est-ce pas?
    The current crop of management schemes try to address this fact by preaching “agility” (in the ancient, 20th century sense). But pointing out the emperor’s birthmark doesn’t knit him a pair of boxers. Once the problems have been discussed ad nauseam , Agilistas, for instance, fill the void with something like Scrum which in effect rearranges the deck chairs. There is a level of complexity in running a corporation that can not be papered over with new terminology. All the things that the project manager was doing still have to be done even if by slightly different people with different titles. No one has convinced me that Scrum is less complex and prone to failure than anything else. Nor does it seem likely that any kanban or other tool is going to change the fundamental requirements of software production.
    I suppose it is good to warn against the perils of sub-optimization. Or rigid hierarchical management structures. Or process over people. However, even the methodologies that claim to put people first grossly over-simplify human nature. Do people really just need happiness and fulfillment? Are ego or a need to control such minor emotions that one can afford to leave them out of the analysis? What about the variations in individual personalities? What I am waiting for is an approach that takes on corporate culture, human nature and individual personalities in a realistic and insightful way.

  • Scott F

    Oh, and by the way, thanks for the blog!

  • http://neoscrum.com Denis Miller

    I got idea about stakeholder and sub-optimization for everyone. As I understand. There are two model/midset:
    “Customer’s value” (only one huge goal) – i will focus on customers needs and deliver something to him. In such case I aware about something else rather than me. And i will get from him some bonus for my attention to him.
    “Stakeholder’s value” (there are a lot of goals for everybody in the process) – i will focus on myself (me as stakeholder”. Ego-centric mindset. In short-term i will get something. Such approach doesn’t support organization goals. Because for more complex structure we need something out of system for sync-up system activities.
    I think the first approach is more team/system oriented. The second one is more about individual contribution.

  • http://profile.typepad.com/jurgenappelo Jurgen Appelo

    “i will focus on myself”
    Why? I don’t understand this.
    If you focus on one stakeholder (customer) you focus on him, not on yourself.
    If you focus on _multiple_ stakeholders (customers+suppliers+shareholders…) you focus on all of them at the same time, but _not_ on yourself.
    I don’t understand what stakeholder management has to do with an “ego-centric mindset”

  • http://profile.typepad.com/jurgenappelo Jurgen Appelo

    Scott, thanks for your awesome reply!
    “What I am waiting for is an approach that takes on corporate culture, human nature and individual personalities in a realistic and insightful way.”
    I think (hope) my new book has a few answers to that. :-)
    http://www.management30.com

  • http://profile.typepad.com/dirklectisch Dirklectisch

    This is an interesting topic because it is at the foundation of any decision made within a business. I have been thinking about your value network metaphor. If I understand correctly your main point is that optimizing for any stakeholder is harmful because it might lead to neglecting other stakeholders.
    Now while I don’t think we should dismiss any stakeholder as unimportant, I do think there is an important distinction between the customer and other stakeholders. This distinction becomes apparent when you think about the purpose of business.
    As Peter Drucker says, business is an organ of society. I like that analogy because it so clearly communicates that we are dependent on businesses and that we have a purpose for them. I think that purpose is to provide services that have value to individuals within the society. A business that doesn’t provide those services has no reason to exist.
    To fulfill this purpose a business uses resources from society which stakeholders provide. The use of the resources are a cost to society. The stakeholders that provide these resources might have selfish reasons but because they are limited they are a cost to society as a whole. The only reason we allow business to use these resources is because we want them to fulfill their purpose.
    A specific institutions purpose is captured within it’s mission. It defines what kind of services the business aims to provide. I don’t think your mission should be to provide value for stakeholders other than the customer nor should it entail creating profit for the business itself. These might be lower level goals but they are not part of the business its purpose.
    It is important for a business to foster the relationship with all stakeholders. Not only does it need them to supply resources, but it also needs an healthy environment to function on the long term. Although all stakeholders deserve to be treated well this is only done to accomplish the mission in a sustainable way.
    To summarize: the customer is the only stakeholder that justifies business and is therefore different in a significant way. This is where the value stream/chain metaphor finds it origin and it’s use, it learns us to focus on our purpose/mission. No one would deny the existence of a value network though. Where the value stream metaphor might lead to neglecting certain stakeholders the value network metaphor might result in treading stakeholder as equally important, which is just not true.
    Anyway, this is getting quite long so i’ll stop here. It would be great if you could shoot some holes in my ramblings above. I do have a question that I would like to ask: How do you define success in a business context? It seems to me that we should optimize for that, right?

  • http://profile.typepad.com/dirklectisch Dirklectisch

    Oops, that was quite long, sorry :-)

  • http://profile.typepad.com/jurgenappelo Jurgen Appelo

    @Dirklectisch:
    I don’t see the difference between customers and shareholders that you are pointing out.
    In the 80′s we saw the rise of “Shareholder Value,” which said that the purpose of a business was to create value for shareholders. It failed. Because it led to sub-optimization.
    You say the purpose is to create value for customers instead of shareholders. What’s the difference? Why will customer value not fail, while shareholder value did?
    I don’t believe there’s a difference. Both will lead to sub-optimization if value to other stakeholders is not explicitly addressed.

  • http://profile.typepad.com/dirklectisch Dirklectisch

    Customers are different from other stakeholders because they are required for any business to function. I can imagine a sustainable company that doesn’t have shareholders, employees or suppliers but I can not imagine one without customers. Other stakeholders depend on transactions made with the customer for their own transactions to be valuable.
    This is not just a conceptual difference but significant to what you optimize for. Optimize for shareholder value more than customer value and soon your shareholders will not have a reason to be there at all. On the long-term your customers will go to the competitor who did optimize for customer value.
    So while value transactions in the network might be alike on an individual level, they are not equal on a business level.

  • http://profile.typepad.com/jurgenappelo Jurgen Appelo

    Let me give you some examples:
    A focus on (only) customers has led to toxic waste dumped in Africa. It has led to child labor in the far east. It has led to the mistreatment of animals, and the exploitation of natural resources.
    Most customers don’t care about these things.
    In each of these cases the value for customers is optimized. But other stakeholders suffered (environment, employees, communities, and ultimately shareholders).
    That’s why I think a focus on (only) customers leads to sub-optimization.
    But I think I’m again and again saying the same thing, and we’re not getting any further in this discussion. So maybe we’ll just disagree. :)

  • http://profile.typepad.com/dirklectisch Dirklectisch

    Actually I don’t we think we disagree much, if at all. Our differences are mostly in the way we define certain concepts not in what we would like people to do.
    Thanks for your time, I’m looking forward to reading your upcoming book!

  • http://www.scm-operations.com Ben Benjabutr

    I think Toyota approach is to break one big problem into smaller problems. Value Steam Mapping seems to focus on only operations issues. Anyway, they address the issues with other stakeholders through other practices. For example, they pay attention to customer using voice of customer or quality function deployment. For supplier side of the business, they establish long term value and relationship through supplier development.