Value Networks and Value Streams
Connecting flow of value to flow of work
Value streams are made of people1.
Quantifying Value
In the software product development world, we approach some big questions in an ad hoc manner, among these:
What does our customer value?
Are we building a valuable product?
How does improving efficiency create value?
“Value” remains an abstract input into how we think about our product development systems.
While we use “value” and “impact” to characterize our system's effectiveness, few generally accepted definitions of these terms or ways of reasoning about what “creating value” or “having an impact” means exist.
We discuss the “flow of value” in almost all aspects of our process and system improvement efforts, but it has no formal or commonly accepted definition.
There is a lot of focus on efficiency, and we have many structured methodologies and tools to make the processes in our value streams more efficient. Yet, fewer ways exist to explain the relationship between efficiency and value.
As a result, anyone can claim to “create value” or “improve value” without having to prove it.
Almost every framework or methodology used in the software industry today—for process improvements, organizational design, or capability improvements—is deficient in this sense.
This post proposes a solution, mainly to bring greater focus to this sizeable grey area and help spur more discussion and conversations about the concept of “value” and the related concepts of “flow of value” and “value impact.”
Value Networks and Value Exchanges
This post is part of a series on Value Networks, a modeling technique developed by Verna Allee in the mid-nineties that provides a robust formal foundation for reasoning about value in a fundamentally novel way.
The Value Network is a straightforward concept built from three simple primitives: roles, transactions, and deliverables. Roles represent (groups of) people and the parts they play in a value-creating collaboration. Transactions represent interactions between two roles, where one role, the provider, delivers something to the other, the recipient. The deliverable may be tangible, or intangible.
The semantics of “value” in this transfer are subtle.
Assuming it costs the provider something to have a deliverable in their possession, we can only say the deliverable has value to the provider.
In this sense, every transaction leaves the provider with a value deficit2.
We cannot truly understand the value the recipient places on what they receive until the provider gets something back from the recipient.
So reciprocity is crucial in defining the “flow of value.”
A “value exchange” is a reciprocal interaction between provider and recipient in which each party exchanges something they value with the other3.
Most economic transactions are value exchanges, where goods and services are exchanged for money. Still, the concept generalizes well beyond that when considering intangible deliverables as part of the exchange.
My favorite example of value exchange is the scene from The Blues Brothers, where Jake wonders what happened to their Cadillac.
Jake traded the Cadillac to Ray and received a microphone in return, and each party was satisfied that they had gotten the better deal in the value exchange.When Elwood tells Jake he traded away the Bluesmobile for a microphone, it takes only a brief second for Jake to respond, “I can see that.”
Because neither party experienced a value deficit in the exchange, and indeed, both considered that they gained “value,” the value exchange benefitted both parties, and there was a natural “flow of value” in the exchange.
Value exchanges are the fundamental building blocks of a sustainable value creation system. Parties exchange things of value with each other, and as long as the perceived value of the thing each party receives is greater than the thing they traded away, each party finds “value” in the exchange.
As long as parties continue to transact, the network has a sustained flow of value.
Reciprocity is essential to sustaining the network.
It is the foundation of the market economy.
The Flow of Value in a Business Value Network
Let’s develop this concept further by formally defining the “flow of value” in a business value network.
In a business value network, the roles represent economic entities such as companies, their customers, suppliers, partners, etc. Our earlier post on Value Network Mapping discussed the business value network. Figure 2 reproduces it from that post.
To model the “flow of value,” let's assume we identify all the relevant value exchanges in the network. For example4,
The company provides the customer with access to the AssetManagerPro product, and the Customer pays subscription fees in return.
A large Distribution Partner provides its customers with access to the company, and the company pays a portion of the revenues from those deals back to the partner.
If we augment the value network with state and transaction history5, we may define the “flow of value” as the history of those value exchanges.
It is important to note that with these definitions, the “flow of value” is a concrete, measurable construct that we can extract from the transaction history of a business value network.
At this level of detail, we are not concerned with the internal details of the value exchanges; we are just concerned with their history, the roles involved in transactions, and the types of value exchanges.
In practice, network transactions can be instrumented and traced back to customers, suppliers, etc., with specific demographic or business profiles, contracts with concrete terms, prices, costs, etc.
Sales, signed contracts, cancellations, product churn, returns, etc., delineate the boundaries of typical value exchanges of interest and give us high-level insights into the flow of value and value-creation dynamics within the network.
Using value exchanges as the unit of value ensures that measurements and improvements in the "flow of value" focus on actual value being delivered between parties.
We can use this to define an associated definition of “value impact.”
A change in the value network will be defined as having a “value impact” if it produces an exceptional6 change in the flow of value in the network.
In later posts, we will have more to say about defining and measuring value impacts.
A Value Network as a Complex Adaptive System
As defined above, a value network models a complex adaptive system.
The flow of value in a value network is an emergent phenomenon resulting from the independent decisions of individual network participants to seek each other out and engage in value exchanges. A value exchange succeeds only when a recipient seeking a a benefit transacts with a provider offering that benefit on mutually acceptable terms.
The emergent nature of the flow of value means that it cannot be managed or controlled by any single party in the network; it can only be influenced through strategic actions by network participants that offer incentives for parties to participate in value exchanges.
Reciprocity and Stability
In a value network, reciprocity in value exchanges is the fundamental stabilizing mechanism for the complex adaptive system.
These exchanges, representing the mutual transfer of benefits between participants, provide the structure and feedback needed to maintain balance within individual interactions and move the system closer to equilibrium.
Balance occurs when the value exchanged is perceived as fair and mutually beneficial by both parties—recipients feel their needs and desires are met. At the same time, providers receive adequate compensation or strategic benefits in return.
This alignment ensures ongoing participation and satisfaction for both sides.
When such balance is consistently achieved across value exchanges, it maintains equilibrium, stabilizing the overall flow of value and preserving the coherence of the collaboration.
By contrast, if the value delivered by one party is not reciprocated, it ceases to function as an exchange and disrupts the balance within the value network.
This imbalance can erode trust, as the provider may feel exploited or undervalued, while the recipient might view the provider as unsustainable or unreliable if the imbalance continues. The provider incurs opportunity costs, expending resources on unrewarded efforts that could have been directed toward more sustainable exchanges.
Over time, the lack of reciprocity can lead to the breakdown of relationships, discouraging further engagement and disrupting the flow of value.
Participants may withdraw, and the flow of value fragments.
The collaborations become unstable and lose coherence.
Value Propositions as Signals
What enables two parties in a network to recognize the potential for value exchange?
This is the role of the value proposition.
The traditional view of a value proposition defines it as the provider articulating the unique benefits and value their offering delivers to the recipient, emphasizing how it addresses the recipient’s needs and differentiates the offering from alternatives.
A compelling value proposition distills the provider's understanding of the value dynamics within the network. It is rooted in a deep comprehension of three components in a value exchange: value to the recipient, value to the provider, and value in exchange.
Value to Recipient: The recipient's benefit from the ownership, possession, or use of a good or service the provider offers. It expresses the provider’s ability to fulfill the recipient's desires, aspirations, needs, preferences, or goals. Value-to-recipient encompasses both tangible utility and intangible benefits, such as satisfaction or prestige of association with the products and services the provider offers.
Value to Provider: The benefit the provider derives from offering a good or service, typically measured in revenue, profit, market share, or strategic advantage. It expresses the provider's ability to capture sufficient value-in-exchange to cover costs, generate returns, and support long-term growth. This includes tangible outcomes, such as financial gains, and intangible benefits, such as brand equity, market positioning, or customer loyalty.
Value in Exchange: The agreed-upon worth of a good or service in a transaction, reflecting a balance between value-to-recipient and value-to-provider. While traditionally expressed as a monetary price, it may also incorporate intangibles such as brand perception, trust, reputation, and emotional or symbolic associations, which may significantly influence the recipient's motivation and terms for the exchange. Value-in-exchange captures the tangible and intangible drivers of value in a value exchange.
The value proposition distills the provider’s understanding of all three value components in an exchange to communicate the benefits offered to the recipient in language designed to incentivize the recipient to engage in a transaction.
Identifying and communicating value-to-recipient and leveraging it to guide the provider's strategic positioning in the network is crucial for a provider to create and sustain the flow of value in their value network.
In short, the value proposition catalyzes a value exchange. They should ultimately be understood as signaling mechanisms that help network participants maintain coherence within a value network.
Value propositions communicate the potential for mutually beneficial value exchanges between providers and recipients, signaling opportunities for meaningful interactions and fostering network coherence.
Clear and compelling value propositions reduce ambiguity and friction in value exchanges and support a consistent flow of value.
As network needs and conditions evolve, value propositions act as dynamic signals, adapting to demand, competition, or resource shifts. This adaptability aligns participants' actions with the emergent flow of value, maintaining coherence.
Value propositions capture feedback from past exchanges and incorporate it into their refinement, signaling updated expectations to participants. This continuous refinement helps stabilize and sustain coherence by ensuring that offerings remain relevant and aligned with the network’s needs.
In a complex adaptive system, coherence arises from shared patterns and purposes. Value propositions contribute by signaling the shared understanding of what value means for providers and recipients.
Value Streams
Effective value propositions attract network participants to providers who can consistently fulfill them, creating coherent and sustained flows of value within the network—flows we call value streams.
Value streams emerge as the confluence of the three components of value in an exchange—value to the recipient, value to the provider, and value within the exchange.
Value stream management is the continuous process of comprehending value propositions, nurturing value streams, and sustaining them by creating and adapting the organizational capabilities required to harness the flow of value in those streams efficiently.
It requires a constant focus on aligning value propositions and internal operations that fulfill those value propositions to facilitate efficient value exchanges and maximize the flow of value.
Finally, it requires the capacity to detect weak signals in value stream flow and adapt value propositions and operations to grow these streams over time. Value exchanges with short feedback loops are essential for this.
Understanding and optimizing value to the provider while balancing it with value to the recipient is a central concern in a provider’s business strategy and operational efficiency and the main focus of value stream management.
Our definition and treatment of value streams as emergent flows of value within a value network might seem relatively unfamiliar compared to the much more familiar definitions of value streams. But, as we will discuss in our next post, these are simply two different ways to look at the same underlying reality.
Value Stream Models
A value stream model is an analytical construct that describes the relationship between the value propositions offered to the network and the provider's internal resources, capabilities, and processes needed to fulfill them.
The value stream model connects the flow of value in the value network to the flow of work within the provider organization needed to fulfill it.
The unifying construct across all these representations is the value proposition, which centers on the customer—the ultimate beneficiary of all the work undertaken.
The model connects the value proposition to the three core value components inherent in each value exchange, which must align to fulfill the value proposition.
In an industrial or repetitive service value stream, the value proposition is typically known beforehand and remains static throughout the value stream's life.
Consequently, the models and representations needed to maintain alignment with the value proposition are simple.
For software products, it is more the norm, rather than the exception, that the value proposition, and by extension the value stream, adapt and change to the flow of value in the value network. The system of processes, people, and capabilities fulfilling the value proposition is a complex adaptive system requiring richer representations.
The value stream model is this generalization. It contains all the representations a provider needs to reason about the relationships between the flow of value in the value stream and the internal systems within the provider organization that sustain it.
It consists of many different perspectives on the flow of work and value, including a model for the value proposition, value stream maps, value network maps, code promotion flow maps, etc. In our last post, we showed, for example, how a value stream map and a value network map represent two views of the same underlying set of activities supporting a sales transaction.
Many such synergies emerge from a value network model.
In the next episode “Value Exchanges and Collaboration Protocols,” we will look at a simple example of a value network and the various value streams that emerge from the value exchanges that occur within the network.
Summary
Here are the main takeaways from this post.
Value streams are made of interactions between people.
Reciprocal value exchanges between roles are essential building blocks for modeling and measuring sustainable value creation in a value network.
A value network is a complex adaptive system model in which effective value propositions attract coherent, sustainable flows of value.
Value streams emerge as the confluence of the three components of value to people involved in an exchange—value to the recipient, value to the provider, and value within the exchange.
A value stream model contains all the representations a provider needs to support value stream management, which involves reasoning about the relationships between the flow of value in the value stream and the internal systems within the provider organization that sustain it.
Adopting value exchanges as the unit of measurement for the “flow of value” ensures that value stream management stays focused on increasing value creation within the network.
Marc Charron and John Siegrist gave valuable feedback on drafts of this post, improving it significantly. Many thanks to both of you!
Liz Keogh, who explored the topic in this post nearly a decade ago, deserves original credit for this phrase.
The extent of this deficit may vary quite a bit depending on the exchange and, in a sense, reflect the value the provider places on the deliverable. As John Siegrist pointed out in reviewing this article, the marginal costs of acquiring and trading information are often minimal in the information and knowledge economy, and the dynamics of value exchanges can be much more subtle. However, the critical thing to remember here is that the principle of reciprocity is the more important characteristic of the value exchange, not the “magnitude” of the value being exchanged.
In general, a value exchange may be a cycle of transactions in the value network in which every provider eventually receives something of value in return as part of the exchange.
These are just examples. Identifying the value exchanges that contribute to the flow of value is the most important modeling decision, and it is an ongoing exercise done at varying levels of detail by refining the business value network as needed.
Both history and state are necessary concepts before we can reason about flow. The details of the state model, etc., are network-specific and not critical at this stage.
Defining routine vs. exceptional change in the flow of value in the value network requires a bit more machinery than we are prepared to discuss in this post, but for those familiar with Don Wheeler’s writing, “exceptional” is used in that sense. The key things to note here are that with these definitions, we have a robust way of measuring the impact of a value exchange's outcome or some other structural change in the value network on the flow of value in the network.