Agile Management | NOOP.NL

Value Creation over Value Extraction

When you see an organization as a social value network (as I do) then you inevitably come to the conclusion that all stakeholders participate in this network in order to derive value from it. Customers, shareholders, employees, suppliers, banks, communities, business partners, governments, and everyone who is economically involved, try to get some value out of the organization. Or else they would not contribute to that collaborative project that we call a business.

But new value can only be created when that which is already valuable remains intact. When you delight customers while screwing suppliers, you’re not creating value, you’re just moving it from one stakeholder to the other. When you increase productivity while cutting corners in quality, you’re also not creating value, you’re just stealing it from the future. And when you think you create shareholder value by depleting natural resources, you’re again not creating value. You’re just transforming part of an ecosystem into an economy.

True value creation happens when you respect the things that are already valuable to some stakeholders. This means taking into account the values of people, at all levels of the hierarchy, and in all corners of the network.

Rather than viewing organizational processes as ways of extracting more economic value, great companies create frameworks that use societal value and human values as decision-making criteria.

- Rosabeth Moss Kanter,
“How Great Companies Think Differently”

“But”, I hear you think, “What is valuable to stakeholders? Which values should we respect and uphold? Because I want to be a true value creator!” Well, it seems you’re showing signs of curiosity, enthusiasm, and determination. Great! That means you’re already on your way to know the answer.

This text is part of Value Story, a Management 3.0 Workout article. Read more here.

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Why Not Delight the Supplier?

Yesterday I noticed that an invoice for the Moving Motivator cards from my printer had been hanging around in my “to-pay” folder for over a month. I was shocked and I quickly checked my bank account. Fortunately, I had already paid the bill weeks ago. I had simply forgotten to remove it from the folder. *phew!*

Today I received the invoice for my Chinese visa from my visa handler. I immediately paid the invoice. I felt that I owed them, because last time I did forget about the payment for more than a month, and I felt embarrassed about my lack of discipline.

Why am I so keen on paying suppliers?

Because there are people working there too.

Contrast this with the message that I got today from one of my customers. In order to receive the money they owe me, for a job I already did for them, they require that I fill out a form. And I have to send back the signed form, together with my invoice, together with a purchase order number. And they require that I send the invoice by email and snail mail. And they also informed me they will pay after 60 days, counting from the last day of the month of receiving all the paperwork…

It seems they forgot that I’m a person too.

I delighted my customer. At least, that’s what they told me. They want me to come back for another visit. And who am I to complain about that? But… shouldn’t healthy organizations do their best to return the favor? Shouldn’t they be trying to delight their suppliers too?

I do.

The more people focus on delighting the customer, the less they will be concerned about the other stakeholders. It is a fallacy to think that focus on one automatically benefits the others. I know, from first-hand experience.

p.s. I striked out the 60 days payment term, and I refused to send a paper invoice. (I will explain how the Print button works, if needed.) And if they haven’t paid within 30 days, there will be no return visit from me, or else a payment upfront. With business constraints such as these I primarily delight myself.

 

Stakeholders for Organizational Change

I used my first edition of Roving Coffee (in Stockholm, Sweden) to get feedback on my latest concept for stakeholders of organizational change.

Some weeks ago I described the first version, which emerged from the discussions at the Stoos Gathering in Switzerland. Since then people have suggested a number of changes and additions. Broadly speaking, the suggestions came in two forms.

Relationships to the Organization

My latest version lists no less than 25 groups of stakeholders, ranging from boards to unions, from customers to governments, and from coaches to families. All of these were suggested by readers and members of the Stoos network.

We can regard these groups as people with different kinds of relationships to the organization. They are all impacted by organizational transformation, and therefore they have a stake in changes of management thinking.

Mindsets of the People

Other people suggested that I should distinguish stakeholders along the lines of those “who get it” and those “who don’t”. Some said I should separate “leaders” from “followers”. And some said we should not forget the change agents themselves.

This made me realize that the innovation adoption curve might be a perfect model to address these concerns. It gives us another dimension for categorizing stakeholders, and it is a well accepted model for organizational change. It describes people with different mindsets and their interest in change.

The Stakeholder Grid

When I use both categorizations, the result is a stakeholder grid. Vertically, it lists stakeholders according to their relationships to the organization. Horizontally, it distinguishes people with different mindsets. I think this grid could be useful as a common language for change agents.

		CA	IN	EA	EM	LM	LA
1	CEO's, top management
2	Boards, board members
3	Shareholders, business owners
4	Market analysts, investors
5	Pension funds
6	Startups, entrepreneurs	X	X	X
7	Middle management	X	X	X
8	Support, HR, Legal, Operations
9	Employees, knowledge workers	X	X	X
10	Unions, employee representatives
11	Spouses, families
12	Customers, end users
13	Suppliers, business partners
14	Accounting firms, accountants
15	Management institutes & networks
16	Professional associations, certifiers
17	Business schools, teachers
18	Students, "new millennials"
19	Training firms, trainers	X	X	X
20	Coaches, consultants & writers	X	X	X
21	Governments, law makers
22	Local/regional communities
23	NGOs
24	Virtual communities, social networks
25	Media, journalists

CA = Change Agents; IN = Innovators; EA = Early Adopters;
EM = Early Majority; LM = Late Majority; LA = Laggards;
X = Management 3.0 target audience

For example, with my management 3.0 course I am (primarily) targeting middle management, employees, training firms, and coaches. And for each of these groups I’m now addressing the change agents, innovators and early adopters.

Personas?

During the roving coffee in Stockholm we discussed how nice it would be to have imaginative descriptions of personas for each of the stakeholders in the list, with names and pictures. However, I fear that this would lead to the development of at least 125 personas.

That would take an imagination of the size of George R.R. Martin. 8-/

What do you think? Is it useful to have such a grid of stakeholders, distinguishing relationships to the organization from people’s mindsets for change? Could this approach be helpful to develop a common language among change agents for organizational transformation? Do you have suggestions for condensing or expanding the idea?

If you want to chat with me about Stoos, ALE, Management 3.0, or anything else, check out my Roving Coffee calendar…

Delight Your Stakeholders

Imagine you organized a dinner party for all stakeholders of your business. Shareholders, customers, suppliers, employees… everyone who is affected by your company is invited. Even the government, your local community and representatives of on-line communities are welcome. I would invite my spouse too. And the hamster.

Now imagine someone will ask the question, “what’s for dinner?”

Who will decide?

Jack Welch might say, “The shareholders get to choose what’s for dinner, because the party is financed with their money.”

Stephen Denning might say, “The customers get to choose, because the purpose of our business is to delight customers.”

Gary Hamel might say, “The employees get to choose what we’ll eat, because they are organizing the party.”

And I’m sure other people are able to come up with various reasons for suppliers, governments, and local and on-line communities to be allowed the final say over the dinner menu. I would tell you about the needs of my hamster.

Of course, you know better.

A business is a social network of stakeholders participating in freedom for mutual benefit of everyone involved. Nobody is more important than the others.

But Stephen Denning says you cannot please everyone:

The mathematics of optimization shows that only one variable can be maximized. […] It is not possible to maximize both client delight and shareholder value. You have to choose one or the other. (Radical Management, Kindle location: 1386)

Huh?

I wonder if Stephen Denning has any children. Will he always put the needs of the eldest first, because he doesn’t know how to optimize the needs of all children in his Excel spreadsheet? And will he just ask one party guest to decide what’s for dinner, because the problem of optimizing the sum of all needs across all guests is mathematically too hard for a manager?

That’s silly.

A traditional manager 1.0 might simply ignore stakeholders and follow his own personal agenda when making business decisions. A manager 2.0 might do better when trying to apply somewhat simplistic management advice, such as “optimize shareholder value” or “delight the client”. But I think a manager 3.0 will outperform all others. Because she understands a business is a complex adaptive system of stakeholders. They can all give and take, in endless iterations of collaboration, to please themselves and others.

A business is a non-zero sum game. You can and should delight everyone.

Including the hamster.

p.s. I actually like Stephen Denning’s book, Radical Management. You should read it! Just remember not to take its first principle (delight customers) too far.

(Jurgen Appelo is author of Management 3.0, a best-selling management book for Agile developers. It has a picture of a monster in it.)

(picture: Muffet)

The Purpose of a Business is NOT Customer Value

I keep saying that the purpose of a business is NOT to satisfy the customer. And people keep asking me why.

Here’s why…

An organization is a multiminded system, a voluntary association of purposeful members who have come together to serve themselves by serving a need in the environment.

Michael C. Jackson – Systems Thinking

Every business is a complex adaptive system of stakeholders working together in order to create value for everyone involved.

Therefore…

The aim proposed here for any organization is for everybody to gain - stockholders, employees, suppliers, customers, community, the environment - over the long term.

W. Edwards Deming – New Economics

Unfortunately, again and again, management fads and hypes try to reduce this systemic view on organizations into a simplistic view, with dumb suggestions such as “maximize shareholder value” or “delight your customer”.

Nonsense!

A common deficiency is the failure of such panaceas not taking into account the social system of stakeholders.

Russell L. Ackoff – Re-Creating the Organization

Most fads and panaceas ignore that a business is a social complex system. It’s purpose is not to satisfy only shareholders, or only customers, or only employees, or only the local community.

A business must satisfy everyone!

We will have to redefine the purpose of the employing organization and of its management as both satisfying the legal owners, such as shareholders, and satisfying the owners of the human capital that gives the organization its wealth-producing power—that is, satisfying the knowledge workers.

– Peter F. Drucker - Management

Of course, managing multiple stakeholders is hard! It is difficult to satisfy customers and shareholders and employees and suppliers and the local community and the whole shebang. Indeed, nobody promised business life to be easy. Sorry! But because it’s so hard, dumb people tend to focus only on one kind of stakeholder, and they ignore all the others.

But you’re not dumb, are you?

Why would an intelligent group of people pursue a vision that  ignores the needs of customers, employees, or investors?

- John P. Kotter – Leading Change

As a reader of this blog, I assume you’re not dumb. You’re intelligent! You will follow the advice of leading systems thinkers and management gurus such as W.E. Deming, Russell L. Ackoff, Peter F. Drucker, John P. Kotter and Michael P. Jackson. I assume you will not make the same mistake as all those other people with their dogmatic and simplistic approach to “maximize customer value”.

Because if you do, you will fail…

A corporation that fails to see itself as an instrument of [all] its stakeholders will not survive.

Russell L. Ackoff – Re-Creating the Organization

The "Optimal" Fallacy

You cannot “optimize the whole”. The best you can do is sub-optimize, cooperate, and iterate.

Allow me to share with you the trouble of speaking at conferences and organizing courses. When conference organizers invite speakers, the optimal thing for them to do is to make speakers commit to their conference as early as possible, while the organizers themselves try to defer their own decisions for as long as possible. At the same time speakers who organize courses want to commit to conferences as late as possible, while trying to get participants for courses to commit as early as possible.

As a speaker and trainer my daily life is a neverending stream of decisions that all tend to be compromises between customers, partners, suppliers, and other stakeholders. People ask me for decisions about speaking engagements, while I’m waiting for courses to be finalized. I attempt to have partners commit to courses, while they defer decisions waiting for participants. We are all selfish bastards, optimizing for ourselves. And therefore we are all sub-optimizing.

There is no other way.

Optimize the Whole

There exists a Lean principle called “Optimize the Whole”, which is too often interpreted as an instruction to only optimize “the whole of the system” and to refrain from optimizing subsystems in an organization. Again and again I come across suggestions to “consider the whole value stream”, to “measure results end-to-end”, and to “focus on customer value”. The assumption is that the customer’s view on a business is one that includes the whole system and therefore a relentless focus on customer value delivery will “optimize the whole”.

This is not true.

A business is a complex system involving customers, employees, shareholders, suppliers, partners, local communities, and natural resources. (And a number of very confused managers.) They all try to optimize for themselves. No observer of a system can claim to have an objective view on the whole, wrote Jerry Weinberg in An Introduction to General Systems Thinking. And therefore, the customer’s view differs from the shareholder’ view. The shareholder’s view differs from the view of the local community, and so on, and so on. Movements like stakeholder management and sustainable development attempt to address the need for reconciliation of multiple views on businesses, from different perspectives.

The Optimizing Whole

We cannot “optimize the whole” by focusing only on the customer. The best we can do is sub-optimize, negotiate, cooperate, and re-optimize, in a neverending stream of compromises. All the parts try to optimize for themselves, and through interdependencies between the parts the whole system tends to evolve to an optimal situation, wrote Stuart Kauffman in At Home in the Universe. That’s how complex systems optimize a whole. Not as a principle to be followed, but as the outcome of interdependent parts, cooperation, and iteration.

The optimizing whole is emergent, not directed.

I call this kind of reasoning complexity thinking, which is slightly different from systems thinking. Some systems thinkers and Lean gurus seem to optimize their own consultancy firms instead of teaching people the nature of complex adaptive systems. But I get paid for helping people think, instead of selling solutions. Lean tools are nice, but counterproductive when applied without proper thinking, wrote John Seddon in Freedom from Command & Control.

Feel free to contact me and add an invitation to my very sub-optimal calendar.

The Customer Value Problem: Ditch the Value Stream!

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

Again 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)