Viewing value from a Lean-oriented perspective

Value streams are a Lean production concept that describes the series of product life cycle activities required to guide product deliveries from ideation through creation, deployment, support, retirement, and sustainment. As the name value stream implies, the whole point is to ensure all product delivery activities add value. From the perspective of Lean, adding customer-centric value means going beyond the provisioning of features and functions to also eliminate all forms of waste that customers don't want to have added to their costs.

VSM is an approach to methodically eliminate waste and improve productivity and efficiency while lowering costs. More precisely, you will learn that VSM encompasses Lean-oriented methods to improve work and information flow across value streams. Modern VSM tools support the VSM methods initially developed by Toyota as an approach to map material and information flows, and then later introduced to the rest of the world in the early 2000s (Jones, Womack, 2003).

When we get to the sections on Lean-Agile views and VSM, you will also find there are two forms of value streams: operations and development. Let's take a quick look at the differences between these two types of value streams.

Differentiating development from operations

Operations-oriented value streams deliver products and services to an organization's external customers, while development value streams create things used or delivered by the organization's operations-oriented value streams.

Let's put this another way, as follows:

• Operations value streams include the work and information flow that define how your company—or its product lines or lines of business (LOBs)—conducts business, earns revenue, and delivers services to its customers.
• Development value streams include work and information flows to build and support the products, services, and other artifacts used by the operations-oriented value streams to deliver value.

Operations-oriented value streams enhance customer experiences by providing products, information, and services, either online or through personal contacts. In contrast, development-oriented value streams create products and services for either internal or external customers. In other words, development value streams build stuff, while operations value streams need to sell, deliver, and support the organization's customers.

Both functions are necessary and value-adding. However, making a distinction between development and operations is important in terms of purpose, planning horizons, and who controls and funds the activities. For example, LOB executives and product owners have accountability over investment priorities in their operations-oriented value stream activities. In contrast, portfolio management team controls investment priorities over development-oriented stream activities.

Another way to look at this distinction is the operations-oriented processes of selling, delivering, and supporting products. These are tactical activities that provide value to our customers, usually over relatively short planning horizons. Development value stream investments tend to be larger, are critical to the organization's long-term survival, and require longer planning and implementation horizons. In contrast, development-oriented value streams help ensure the organization has the infrastructure, products, and services to meet its strategic objectives.

At first glance, this distinction between development and operations seems to support the traditional IT organizational model. Development teams create software products for both internal and external customers or users, and operations teams exist to keep systems running, secure, and available, while also resolving customer and user issues via helpdesk services.

Later in this book, you will learn that an IT organization implementing Lean-Agile practices should consider moving traditional IT development and operations functions within dedicated product teams. But that is getting ahead of ourselves. We'll come back to that subject later in Chapter 4, Defining Value Stream Management.

For now, let's take a look at some examples of how an IT development-oriented value stream can develop and support software applications for use by other organizational value streams, such as a customer order entry or product fulfillment.

Developing applications to support organizational value streams

The following diagram displays three organizational value streams: order entry, fulfillment, and software development. Order entry and fulfillment are operations-oriented value streams, while the software development activity is a development-oriented value stream:

Figure 1.1 – Value stream examples

Each activity block identifies the activity's name, process time (PT), lead time (LT), and percent complete and accuracy (%C/A) metrics. You learn how to use these metrics later in Chapter 8, Identifying Lean Metrics(VSM Step 5). The main point to understand is that IT is a critical development value stream that improves other operational value streams' delivery capabilities and efficiencies.

This book purposely opened with a discussion on operations- and development-oriented value streams. The current trend is to speak of VSM as a tools-based approach to improve DevOps pipeline work and information flows. DevOps pipeline flow improvements are a great application of VSM. However, your organization is missing the point if its VSM strategy is limited to DevOps. The discussion surrounding the value stream examples depicted in Figure 1.1 clearly shows how IT-based development value streams help improve operational value streams.

This book provides instruction on integrating Agile, Lean, VSM, and DevOps practices to enable business agility on an enterprise scale. These are the methods and tools that allow organizations to provide the right set of products and services customers want rapidly, efficiently, and at the lowest cost. Those organizations that do this successfully, and enterprise-wide, have a leg up when competing in our increasingly digitized economy.

We discuss all these concepts later in this chapter and throughout this book. Before we do, it's essential that you first have a clear understanding of what it means to compete in a digital economy and IT role.

Competing in a digital economy

Don Tapscott introduced the term digital economy in his book The Digital Economy: Promise and Peril in the Age of Networked Intelligence (1997). The book's key focus is on how digital technology changes the way individuals and societies interact.

Later, in 2001, Thomas L. Mesenbourg, then Associate Director for Economic Programs at the United States (US) Census Bureau, delivered a paper titled Measuring the Digital Economy. The paper describes an effort initiated by the US Census Bureau to measure the economic impact of electronic devices as the basis of our then-emerging digital economy.

In his paper, Mesenbourg describes the digital economy as having three primary components, listed as follows:

• E-business infrastructure: This includes all participating computing, network, communication, security, and software systems.
• Electronic business processes that support the digital economy.
• Electronic commerce transactions that support the selling of goods and services online.

Building products for the digital economy

The term digital economy implies something much more significant than Mesenbourg's original e-commerce-centric views in a modern context. For example, digitally enhanced technologies now allow organizations to conduct business on the internet and mobile technologies while providing near-real-time and global access to information and knowledge-based services.

Moreover, digital technologies enhance physical products with new features not possible through simple modifications in materials or mechanical components. Broadly classified as the Internet of Things (IoT), product features and capabilities can be updated, even after delivery to customers.

The key differentiator of an IoT capability is the ability to transfer data over a network without requiring human-to-human or human-to-computer interaction. At a conceptual level, IoT is a system of interrelated computing devices with unique identifiers (UIDs) that make them visible to other computing systems and digital devices via the internet and mobile connections.

IoT devices include mechanical and digitally enhanced machines and embedded objects within manufactured goods, people, or animals. As modern examples, your automobile gets factory updates to its computing and navigation systems via mobile connections. Telehealth-based IoT solutions enable real-time monitoring of patient health at long distances via external and embedded monitoring systems. As a final example, embedded biochips with transponders help identify animals and monitor their health and location in the wild and within farms, and can even identify your pets.

Connecting in the digital economy

Our modern digital economy is also more than the scope of e-commerce and digitally enhanced products. The internet has opened up extraordinary communication avenues, information sharing, and collaboration via social media tools and platforms.

Web-based social media tools enable people to interact and share information and experiences across multiple media formats (for example, audio, video, text, photos, images, and so on). Social media is all about leveraging content to drive human-to-human and business-to-human engagements.

Holly Gibbons, President of Gibbons Business Solutions, LLC., lists six categories of social media content that drive engagements (https://gibbons-business-solutions.com/6-types-of-social-media-content-that-drive-engagement/), outlined as follows:

• Promotion: Informing on products and services
• Education: Establishing expertise and enabling self-help
• Connection: Delivering an "insider" view of your business
• Conversation: Specifically targeted to engage customers
• Inspiration: "Feel-good" messages with quotes, facts, and personal stories of success that reflect the vision and values of the person or entity
• Entertainment: Connecting with audiences through sharing holiday wishes, jokes, comics, funny but informative videos, contests, and giveaways

Social media is a transformative capability that helps drive our modern digital economy. The following subsection lists other digitally enhanced business transformations.

Delivering value in a digital economy

Other names for the digital economy include the internet economy, new economy, or web economy. The evolution of the digital economy has forced traditional brick-and-mortar companies to rethink their business strategies or face being driven out of business by fierce competitive disruptors such as Amazon.com (retail), Airbnb (travel accommodations), Google (information searches), Netflix (home entertainment), Lyft and Uber (transportation services), Tesla (automobiles and aerospace), and YouTube (video-based information and entertainment content sharing).

Given their legacy investments in brick-and-mortar-based infrastructures, companies need to rapidly find creative approaches to leverage their traditional economies of scale to compete in the digital economy. In some cases, this means finding different ways of engaging with our customers. In other cases, a blended approach to integrating traditional and digital infrastructures may provide the most competitive advantage.

In any case, companies must define and execute their competitive value propositions. They must evaluate all their investments and activities to ensure maximal contributions to adding customer-centric value. Ultimately, this book introduces many interrelated concepts that help an organization deliver value in a digital economy, but before we get to those sections, we need a shared understanding of what value means. That is the topic of the following subsection.

Diving into the many concepts of value

Semantics is essential in computer science—so important that an entire IT discipline called ontology is devoted to the subject. If you look up the word ontology, you will find that the term's origins come from a branch of metaphysics that deals with the nature of being or what exists. Ontology is a compound word that combines onto (Greek ὄν) and "being; that which is" (gen. ὄντος, ontos). In other words, it's a discipline that seeks to discover what is real.

In the field of information science, Ontology deals with semantic meanings. The problem is that humans have this annoying habit of using the same terms but having very different views on what those words actually mean. Our life experiences, education, and intellectual capabilities greatly influence our understanding of the words we use. This is a primary reason why we humans so often get our communications wrong.

In contrast, traditional information systems must have a precise contextual understanding of the terms and values they employ; otherwise, they cannot correctly exchange information. The same issue applies to human-computer interactions. The words we want to use may not fit the computer's understanding of the term. This dichotomy is what drives much of the research in artificial intelligence (AI). In other words, part of AI research seeks to help computers understand the contextual meaning of words in specific types of human-to-computer interactions.

The word value has many business meanings that support various business practices or desirable business outcomes based on contextual use (that is, the term value means different things, depending on the term's application). As an example that's relevant to this book, Agile, Lean, VSM, and DevOps all share the idea that organizations must deliver value from a customer's perspective. However, they have different strategies to achieve that goal. Moreover, IT specialists and business analysts need to understand that the folks they interact with within other departments may have entirely different thoughts on what the word value means.

Using an analogy, we have a situation a bit like the story of the blind men describing an elephant. Because they cannot see, the blind men have a limited understanding of what an elephant looks like, based only on what they can experience through touch, as shown in the following diagram:

Figure 1.2 – The six blind men and the elephant

For those not familiar with the story, the first blind man touches the trunk and exclaims, "The elephant is like a thick snake"; however, the next blind man touches the ear and says, "No, it's like a fan". Next, another touches one of the elephant's tusks and says, "I don't know what you guys are talking about; it's a spear". The next blind man in line touches the elephant's leg and proclaims, "The elephant is like a big and stout tree trunk", but the blind man who touches the side of the elephant believes they have come up against a wall. Finally, the blind man who touches the tail believes he has caught hold of a rope.

There's only one elephant, but the blind men have different theories of what the elephant is, based on their particular "hands-on" experiences and their lack of a holistic view. The same issues face business analysts when they seek to understand what adds value to a business. So, before we can talk about how Agile, Lean, VSM, and DevOps improve value, we need to spend some time understanding the term's many contextual uses.

This chapter explores the many variants of value with that goal in mind, spanning ownership, accounting, marketing, supply chain, Agile, Lean, and DevOps.

Viewing value from the context of business assets

In its most straightforward context, the term value implies an asset's worth expressed from a monetary, material, usefulness, or personal view—for example, there are many ways to express public companies' business value, such as shareholder value, a firm's monetary value, value capture, fair value, and market value.

Shareholder value relates to the price of a company in terms of the value given to stockholders' shares. The shareholder's value fluctuates on the market's perception of its ability to sustain and grow profits over time. From this perspective, a company's value is roughly equivalent to the number of outstanding shares times the current share price.

Monetary value is an expression of the money an asset—such as a company, product, property, land, or service—would bring if sold. In other words, monetary value is an expression of how much money something is worth on a free and open market. Monetary value determinations come from the dynamics of supply and demand—for example, increasing the supply of a product relative to demand decreases its value. In contrast, limited supplies with high demand drive the price up.

If you talk to a Master of Business Administration (MBA) graduate or an accountant, they may use the term value capture. In their context, value capture describes a process to retain a percentage of the value provided in every business transaction, most often in the form of profit-taking. However, in matters related to public financing, value capture implies using public financing to develop infrastructure that improves a municipality's value as a whole and the value of adjoining commercial properties.

Fair value is an evaluation of business assets (and liabilities) for financial reporting in line with a country's standard accounting practices, often used to assess value in sales, mergers, and acquisitions. The International Financial Reporting Standards Foundation (IFRS Foundation) is a nonprofit industry standards group that defines globally accepted accounting standards, published as IFRS standards. IFRS standard 13 (https://www.ifrs.org/issued-standards/list-of-standards/ifrs-13-fair-value-measurement/) defines fair value as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price)".

Finally, market value is a determination of what a company is worth under current market conditions. Market value is the estimated price that an asset has in the marketplace or the value that the investment community gives to the equity position—that is, the price a third party pays to obtain a position within a business or other asset in exchange for its stock or securities.

We now have a broad understanding of the term value as it applies to the ownership of businesses and other assets. But the term value can also have a contextual meaning that identifies the importance of specific business relationships, such as value chains and value networks. Value-added (VA) relationships are the topic of the next section.

Viewing value from the context of business relationships

The concept of value in terms of the ownership of business assets is straightforward in contextual use. People and businesses invest time, money, and resources to improve their business asset value, but businesses also gain value by leveraging relationships with suppliers and other partners.

In the most general sense, all external partners provide products or services to support another entity's business goals, though both partners receive value from the relationship. But here, again, we need to carefully define the types of partner relationships to understand the value each provides. For example, a business may have suppliers that deliver components and materials used in their products and deliver them to the consumer. Other partners may resell or rebrand another company's products. There are multiple variants of these relationships, such as reseller, VA reseller (VAR), and original equipment manufacturer (OEM).

A reseller is like a retail outlet that purchases and then resells products to its customers. A retail partner may be a traditional brick-and-mortar company, an online reseller, or a hybrid blend.

A VAR is a firm that enhances the value of another company's products with customizations or services. For example, a recreation vehicle (RV) manufacturer typically buys the bare truck chassis, engine, and tires from one or more primary automotive and truck manufacturers. It then adds the body and internal furnishings that make the vehicle fit for camping. VARs can also provide services around another company's products, such as installation and configuration services, consulting, troubleshooting, repair, or customer support.

An OEM firm typically takes another firm's products and rebrands and sells the original product under their company's name. The OEM can also provide product and service extensions, similar to the VAR type of business VA relationship. Regardless, the OEM procures the primary manufacturer's additional rights to rebrand its products as their own.

Establishing business relationships as value networks

A value network includes any set of connected organizations or individuals working in an integrated and collaborative manner to benefit the group as a whole. A business-oriented value network helps members buy and sell products, organize and distribute work, and share information. While there are many types of value network relationships, they all fall within two broad categories: internal or external value networks.

Internal value networks include people within an organization collaborating to achieve mutual or reinforcing goals. These internal value networks usually work within the bounds of established business processes or value streams. Both business processes and value streams describe structured approaches to work.

The term business processes tends to be associated with traditional cross-functional and bureaucratic organizational structures. The value stream concepts came out of the Lean and Lean Six Sigma approaches to product delivery. Later sections of this book provide much greater detail on the subjects of Lean production and value streams. For now, think of value streams as a series of activities that deliver products and services aligned with customer needs. Moreover, Lean production is an approach to improve product and information flows across value streams.

An organization that scales multiple but small agile-oriented teams, working in an integrated, coordinated, and synchronized fashion to develop and deliver large products, is another example of an internal value network. The Agile teams may also employ Lean product development concepts, often referred to as Lean-Agile methodologies or frameworks.

External value networks describe the cross-organizational interactions of third parties that lie outside the primary business entity's bounds but contribute to its success. In other words, the external value network has a mutual interest in supporting or benefiting from the goals of the primary business entity. In this context, external value networks include agents, business partners, customers, consultants, product users, stakeholders, suppliers, and any other person or entity participating in a value-adding relationship.

Internal or external value networks create value through their relationships, cross-functional or value-stream-oriented processes, and their specific roles within a business enterprise relative to products and services. The relationships must be mutually beneficial—in other words, all parties within the value networks receive value from their relationships. When this is not the case, the networks fail to meet their goals and expectations, and the relationships usually become disruptive. In extreme cases, the networks fall apart and the participants exit their business or employment relationships.

Additionally, participants within value networks must hold up their end of the deal. Ineffectual participants weaken the entire network, and others must step in to fill the void—assuming that is possible. On the other hand, one advantage of having a value network is that the participants can provide the resources, skills, experience, and redundancy to step in and help the weaker elements get up to speed or overcome their limitations.

This section concludes our discussion on value networks. In the next section, we look at a complementary concept referred to as value chains. Instead of looking at VA relationships as networks, value chains describe a company's activities to add value to its products and services.

Establishing business relationships as value chains

Value chains are the processes or activities by which a company adds value to its products and services. Value chains include product life-cycle activities, spanning product ideation, design, receipt of raw materials, and adding additional value through production processes at a more granular level. Value chain processes also include promoting a product, taking an order, and then selling the finished product to consumers.

Michael Porter coined the term value chain in his book Competitive Advantage: Creating and Sustaining Superior Performance (1985). Porter describes the primary value chain activities for adding value and competitive advantage in terms of the following five elements:

• Inbound logistics: Receiving, storing, and processing raw materials and inventories.
• Operations: Converting raw materials into a finished product.
• Outbound logistics: The distribution of products and services to customers.
• Marketing and sales: Including advertising, promotions, and pricing strategies, and managing all sales channels (online, inside direct, outside direct, indirect through resale partners).
• Services: These help maintain products and improve consumer experience—including customer support, product maintenance and repair, refunds, and exchanges.

Value chain analysis offers a strategy to use value chains for competitive advantage. Value chain analysis evaluates the activities involved in changing the inputs for a product or service into an output valued by a particular customer type. A value chain analysis starts with identifying every production step required to create a product and then discovering ways to increase the overall value chain's efficiency.

Michael Porter's view of value chain management (VCM) theories supports the traditional views of using business processes, best practices, organizational assets, and human resources (HR) to achieve a competitive advantage, driving further growth in the market. Michael Porter notes explicitly that his approach is to implement an activity-based theory to drive competitive advantage.

Though his approach sounds somewhat similar to Lean Development concepts, Porter's orientation is oppositional to Lean's initial focus on the customer. Porter advocates a strategy of building and delivering a product cheaper and faster than your competitors, which, in his view, automatically drives new customers and growth. However, Lean practitioners believe we must first focus on customer needs before refining activities to deliver what our customers want—otherwise, we'll miss the mark.

Now that we've made that point, let's explore value from a customer's perspective.

Defining customer value

Customer value is the value received by the end customer of a product or service. In the previous section, you learned that Lean Development strategies emphasize assessing activities to add value and eliminate those that do not add value.

Lean Development strategies make sense because, ultimately, customers are the sole arbitrators of what value means to them. Customers perceive value in terms of utility or usefulness, quality, and benefits. Our ability to deliver what they want is the determinant of customer satisfaction.

But customer value is a tricky thing. It would be nice if all our customers valued the same things. In such a homogenous world, we would only have to produce one variant of a product and be the most efficient producer. Of course, we would also have to be competitive across marketing, sales, delivery, and support processes. Such a market supports Michael Porter's view of using value chains to create a competitive advantage.

But that's not the world in which we live. Instead, customers have different budgets and different desires in terms of the features and functions they prefer. In a traditional mass-production model, marketing and sales organizations try to influence customer behavior by telling customers what they should like about their particular products and services. That strategy allows the producers to follow Michael Porter's guidance on improving value chains.

That strategy might work for a while, but only up to the point where other competitors start asking customers what they want and then deliver better offerings. As a result, customer-oriented value delivery strategies had to evolve. By the 1980s and 1990s, customer relationship management (CRM) and Lean Development strategies became mainstream practices, to focus on adjusting product development and delivery efforts to address customer needs for mass markets and profitable niche markets.

Lean manufacturing, also known as lean production, is a modern instantiation of production methods derived initially from Toyota's operating model, known as The Toyota Way and the Toyota Production System (TPS). The term Lean did not come from Toyota but was instead coined in 1988 by John Krafcik, who was then studying management and performing research under the direction of James P. Womack. Krafcik's research was part of a 5-year study at Massachusetts Institute of Technology (MIT) on the automobile's future. Krafcik's research produced much of the data referenced in the book The Machine That Changed the World (Womack, Jones, Roos; 1991). But it was Womack's, Jones', and Roos' book that articulated Lean manufacturing concepts and introduced the term lean production.

The lean concepts defined by James Womack and Daniel Jones contain five fundamental principles, outlined as follows:

• Precisely specify value by specific product
• Identify the value stream for each product
• Make value flow without interruptions
• Let customers pull value from the producer
• Pursue perfection (Womack and Jones, 1996, p.10)

CRM is a data-centric approach to managing information and interactions with customers and prospects. Specifically, CRM methods and software tools apply data analysis techniques to customer data, to better understand their history with the company and improve customer relationships. CRM is primarily a marketing-oriented function supporting their objectives to improve customer retention and drive new sales growth.

With CRM and Lean, organizations have the tools to determine what value means from a customer's perspective and then align organizational activities and resources to deliver that value. Some other methods and tools aid in identifying customer perceptions of value—for example, marketing and product management functions may conduct focus groups and initiate surveys to collect customer data. In turn, that data helps support analysis across analytical techniques, such as the following:

• Voice of the customer: A term used to describe the process of capturing customers' expectations, preferences, and dislikes.
• Customer utility map: A map of six utility levers to deliver exceptional utility to buyers against six stages of various buyer-experience cycles.
• Kano model: A method to understand, categorize, and prioritize five customer requirements (or potential features) for new products and services.
• Customer journey map: A diagram to illustrate the steps your customers go through to engage with your company, be it a physical product, an online experience, retail sale, a service, or some combination of all of these.
• Empathy map: A method used by user experience (UX) designers to understand user behavior and also visually communicate findings to other stakeholders, to provide a shared understanding of the prospective user.
• Customer value management (CVM): A method to assess the perceived value of an organization's product and service offerings. Value is assessed in terms of benefits, functions, and performance to the price, the cost, and profit margins.

This subsection concludes our discussion on the various definitions of value and why products and services must consistently deliver value from the customers' perspective. We've also learned how CRM methods and tools with Lean practices help us discover and deliver value to our customers. But how does a business entity know if they have a viable value proposition? That is the topic of the next section.