Value Networks = networks of relationships centered around the exchange of intangible value.
Concept proposed by Verna Allee at http://www.vernaallee.com/value_networks/Understanding_Value_Networks.html
"Value networks trade in two primary types of currencies or mediums of exchange. When we look at business relationships both internally in an organization and with external business partners we can see a variety of currency exchanges taking place.
1. Tangible value exchanges - involve all exchanges of goods, services or revenue, including all transactions involving contracts and invoices, return receipt of orders, request for proposals, confirmations or payment. Knowledge products or services that generate revenue or are expected as part of service (such as reports or package inserts) are part of the tangible value flow of goods, services and revenue.
2. Intangible value exchanges - include two primary subcategories: Knowledge and Benefits.
Intangible knowledge exchanges include strategic information, planning knowledge, process knowledge, technical know-how, collaborative design, policy development, etc., which flow around and support the core product and service value chain.
Intangible benefits are advantages or favors that can be offered from one person to another. Examples might be offering to provide political support to someone. Or a research organization might ask someone to volunteer their time and expertise to a project in exchange for an intangible benefit of prestige by affiliation. These are intangible “products" that can be exchanged, as indeed people can and do “trade favors" to build relationships.
It’s all about relationships: The goal of a value network is to generate economic success or other value (benefits) for its participants. People participate in a value network by converting their expertise and knowledge into tangible and intangible deliverables that have value for other members of the network. In a successful value network every actor or participant contributes and receives value in ways that sustain both their own success and the success of the value network as a whole. Where this is not true participants withdraw or are expelled, or the whole system becomes unstable and may collapse or reconfigure.
Traditionally we have only focused on the tangible business transactions when we look at an enterprise. Today we are appreciating that intangibles such as knowledge and benefits are real deliverables that help build healthy and prosperous business relationships." (http://www.vernaallee.com/value_networks/Understanding_Value_Networks.html)
Extract from PDF : http://www.vernaallee.com/WhatIsVNA-Overview.pdf
Every business relationship includes contractual or mandated activities between participants — and also informal exchanges of knowledge, favors, and benefits.
A ValueNet Works analysis begins with a HoloMapping diagram that first shows the essential contractual, tangible revenue- or funding-related business transactions and exchanges.
Along with the more traditional business transaction the critical intangible, although informal, knowledge exchanges and benefits that build relationships and keep things running smoothly. These informal exchanges are actually the key to creating trust and opening pathways for innovation and new ideas.
Traditional business practices ignore these important intangible exchanges, but they are made visible with a ValueNet Works Analysis.
A Value Network Approach
Extracts from PDF :
A Value Network Approach for Modeling and Measuring Intangibles
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The methodology is grounded in principles of living systems, and represents a decided shift away from mechanistic models. It expands current thinking about intangibles in three important ways.
1. It goes beyond the asset view of intangibles to also consider intangibles as negotiables and as deliverables.
2. It proposes a way to model organizations and business relationships as living networks of tangible and intangible value exchanges.
3. It provides a way to link scorecards and indexes to specific business activities, allowing people to more fully understand the impact of their decisions and actions in both tangible and intangible terms.
Enterprise as a Living System
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The key business question is, “How is value created?” - also see [Value Creation Analysis] -
The traditional answer to that question is – “through the value chain.”
The value chain model, however, is a linear, mechanistic view of business that is based on the industrial age production line. This type of limited process perspective is woefully inadequate to understand the complexities of value in the knowledge economy. Further, most approaches to analyzing business relationships have not taken into account the role of knowledge and intangible value exchange as the real foundation for value creation.
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What makes something a truly living system?
There are two additional criteria that must be met:
1. The pattern of organization in a living system is consistent with that of an autopoietic network. An autopoietic network is one that continually produces itself, so that the being and doing are inseparable. That continual process of producing is cognitive in nature. So living systems exhibit intelligence.
2. Living systems are also dissipative structures that are open to the flow of energy and matter. They exist on the edge of chaos. With too much openness, they disintegrate; with too little they become rigid and closed and can no longer exchange energy and matter.
So, modeling business and enterprise from a living systems perspective requires being able to
a) Identify its pattern of organization as an organization
b) Describe its structure
c) Discover its most critical processes or exchanges from both a cognitive perspective and the flow of energy and matter.
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Intangibles are at the heart of all human activity, especially socio-economic activity.
Further Research References for Intangibles
A number of intangible accounting approaches have been proposed to explain, measure, and manage intangible assets. Intangibles, like other assets, are increased and leveraged through deliberate actions.
Among these efforts, one finds the intellectual capital methods of Karl-Erik Sveiby ² , Leif Edvinsson ³ , Johan and Goran Roos 4 , Annie Brooking 5 , Pat Sullivan 6 .
Related work from the U.S. is the Balanced Scorecard approach of Norton and Kaplan 7 .
There are also a number of other experiments such as Kanavsky and Housel’s 8.
Virtually every accounting standards body in the U.S. and Canada has special task forces on accounting for intangibles, and the OECD in Europe has also held special hearings.10
Core Assumptions about Value Networks
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This method and approach is based on some basic understandings and assumptions:
1. Participants and stakeholders participate in a value network by converting what they know, both individually and collectively, into tangible and intangible value that they contribute to the network.
2. Participants accrue value from their participation by converting value inputs into positive increases of their tangible and intangible assets, in ways that will allow them to continue producing value outputs in the future.
3. In a successful value network, every participant contributes and receives value in ways that sustain both their own success and the success of the value network as a whole. When this is not true, participants either withdraw or are expelled, or the overall system becomes unstable and may collapse or reconfigure.
4. Successful value networks require trusting relationships and a high level of integrity and transparency on the part of all participants.
5. Insights can be gained into value networks by analyzing: 1) the patterns of exchange 2) the impact of value transactions, exchanges, and flows, 3) the dynamics of creating and leveraging value.
6. A single transaction is only meaningful in relation to the system as a whole.
Transparency and Self-Organization
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Complex living systems are self-regulating and self-managing. They cannot be designed or engineered from the outside; there are simply too many variables. For decades, we have tried to manage our organizations from the outside in – by designing structures, systems, rules, and formal reporting relationships. Now, many such efforts seem to get in the way more than they help. In a rapidly changing economic and business environment self-organization is the only way complex webs of business activities can respond quickly and effectively to change.
However, for self-organization to happen there must be autonomous agents, such as people, who have the information and whole system understanding they need to make good decisions and initiate effective action.
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People must also have the supporting mechanisms they need for both tangible and intangible exchanges, so they can negotiate their own activities with those they interact with. No one person or group of people can manage a complex system. However, as participants, people can self-organize their inputs and outputs and negotiate exchanges with others in the system as they need to. Modeling the business as a dynamic pattern of tangible and intangible exchanges helps people find themselves and their role in the system in a completely transparent way. They can then manage their activities in ways that assure success for themselves, their business, and the economic ecosystems they are part of.
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As the natural network patterns of business are better understood, people are increasingly seeking management tools and methods that help them manage their activities in ways that support the health and vitality of the economic and business systems they are part of.
The linear, mechanistic, engineered approaches of the past cannot meet this challenge. Approaches based on the principles of living systems are required to manage the complex interdependencies of the networked knowledge economy.
To be successful, people need to understand the patterns of value exchange, the value impact of the tangible and intangible inputs they receive, and the dynamics of creating and leveraging value.
The whole-system value network approach described in this paper is a powerful and robust tool for supporting the types of business analysis needed for transparent enterprise, yet is a simple method to master and understand. By incorporating new understandings about knowledge, intangibles, and living systems, it provides a foundation for much more effective management practices in the networked world of organizations.
The power of an intangibles perspective and the self-organizing potential of a truly transparent organization can then be fully realized.
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1 Fritjof Capra, The Web of Life, Anchor Books, 1996.
2 Karl Erik Sveiby, The New Organizational Wealth: Managing & Measuring Knowledge-Based Assets, San Francisco: Berrett-Koehler, 1997.
3 Leif Edvinsson and Michael S Malone, Intellectual Capital: Realizing Your Company’s True Value by Finding its Hidden Brainpower, New York: Harper Business, 1997.
4 Johan Roos, Goran Roos, Leif Edvinsson, and Nicola C. Dragonetti, Intellectual Capital: Navigating in the New Business Landscape, New York University Press, 1998.
5 Annie Brooking, Intellectual Capital, 1996. London: International Thompson Business Press, 1996.
6 Patrick H. Sullivan, Profiting from Intellectual Capital, John Wiley & Sons, 1998.
7 Robert Kaplan and David Norton, The Balanced Scorecard: Translating Strategy into Action. Boston: Harvard Business School Press, 1996.
8 Tom Housel and Valery Kanavsky, “A New Methodology for Business Process Auditing,” Planning Review, v23n3, May/June, 1995.
9 UnSeen Wealth: Report of the Brookings Taskforce on Understanding Intangible Sources of Value. The Brookings Institution, 2000. Available through http://www.brook.edu. Baruch Lev, Intangibles: Management, Measurement and Reporting. Brookings Institution, 2001. Available through http://www.brook.edu.
10 Measuring Knowledge Assets, The Society of Management Accountants of Canada, 2000. Available through http://www.cma-canada.org.
11 Verna Allee, “The Value Evolution,” Journal of Intellectual Capital, May, 2000.
12 Deloitte and Touche Tohmatsu, Corporate Environmental Report Score Card, (Deloitte & Touche, 1997).
13 Tachi Kuichi, and Bill Shireman, What We Learned in the Rainforest: Business Lessons From Nature, Berrett-Koehler, 2002.
14 People, Planet and Profits: A Summary of the Shell Report 2000. Shell, 2000. Available at http://www.shell.com/shellreport.
15 Verna Allee, The Future of Knowledge: Increasing Prosperity through Value Networks, Butterworth-Heinemann, 2002.
16 Verna Allee, “Reconfiguring the Value Network,” Journal of Business Strategy, July-August 2000.
17 Verna Allee, “ValueNet Works Analysis,” White Paper, author 2001. Available through the Verna Allee Toolkit, http://www.alleetoolkit.com.
Value Creation Analysis
Excerpted from the Value Network Fieldbook, http://www.alleevaluenetworks.com ;
Value Creation Analysis looks at how each participant is adding value to the system. The roots of this analysis lie in the principles of [value-added accounting] and [value chain analysis]. The theory goes that at every point along the value chain you should be adding value to the product or service.
The value creation analysis is focused on the value creation and output of each participant — much like the [Impact Analysis] looks at how a participant gains or benefits from an input. Of course, if a participant can both gain value for oneself and also leverage that input for a greater value output, then that is really creating value!
Like the [impact analysis] the value creation analysis is basically an expanded Cost/Benefit analysis. So the key questions here are:
• How well are we using our assets to create this value output?
• What value features or enhancements do we provide with this output?
• What is the level of benefit to our business in providing this output?
• Does the effort to provide this really pay off in the way others perceive value?
How to use it
Value creation analysis helps to identify value creation opportunities and prioritize current activities. While the same approach could be taken to analyze the network as a whole, it is usually done by focusing on one participant at a time. After all, no one really administers or manages an entire network or system. What we really manage as participants in different networks are our inputs and outputs, so from a practical standpoint we find the focus on the individual participant is very useful. It helps people better understand their roles and identify high-leverage value-creating activities.
When to do it
The value creation analysis should be conducted after completion of the visual Value Network Map and after an initial “as-is” Exchange Analysis. It can be done either before or after an Impact Analysis, or any time you are ready to focus on the value being provided by a single role or participant, or by the network overall. If you do it before the impact analysis then you still need to be sure that you have some way to assess the transaction-level Perceived Value of the recipients —that us usually done as part of the impact analysis.
The value creation analysis requires that:
• All Participants and Roles have been identified.
• Transactions and Deliverables are indicated.
• Sequencing or other validation has been completed.
• Perceived Value has been completed for all transactions
• A participant group has been identified for the analysis.
How to do it
• Determine which participant(s) is going to be the focus of the analysis.
• Create a spreadsheet or table by listing the transactions on one axis and the key value creation questions on the other axis.
• The table can be customized for any financial and non-financial scorecard.
Example A below uses the IAM (Intangible Assets Monitor) of Karl-Erik Sveiby, which has the non-financial asset categories of Human Competence, Internal Structure, and External Structure. Example B shows additional questions that can be included in the analysis. The table can be expanded to include any factors around the output that people feel are important.
• It is also possible to consider negative costs or impact of the value output.