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)