« W-A-V-E-S for a Wider Application of Value(s) across the Enterprise System » – Shared Value Initiative

shared value initiativeI take the opportunity of a recent comment I left on an article of the Shared Value Initiative to forward a presentation in English of the application of the Value(s) approach to a company :

W-A-V-E-S for a Wider Application of Value(s) across the Enterprise System

Let us dream of a company where:

  • Strategy would target delivering to each of its stakeholders –investors, customers, employees, suppliers and partners, administration, environment, society and NGOs…- more value = more satisfaction and less costs
  • Products and services would enthusiasm actual and future customers, improve employees skills and wellbeing, develop suppliers long term strength
  • Each function would be managed with KPIs showing its contribution to these goals and to the success of the other company’s functions
  • Industrial and information processes would produce only outputs useful to these functions role versus the company’s stakeholders, with efficient production and IT systems
  • Each actor would bring its time, skills and motivation against not only money but also wellness at work, a sense of personal and collective usefulness, and long term personal achievement
  • Each person would achieve its goals by collaborating to others’, in the respect of each other’s values

A company with more value(s) in management? How is it possible?

Value/system methods:
A collective book « Valeur(s) & Management: des méthodes pour plus de valeur(s) dans le management » [Value(s) & Management: methods for more value(s) in management] has been published in april 2013, listing dozens of methods and detailing 18 of them which share common concepts :

  • The value concept, where value = perceived usefulness / perceived costs, targets solution improvement by :
    • Improving its usefulness, by answering better to its purposes/goals for the different stakeholders of its life time : user, buyer, distributor, manufacturer …
    • Avoiding unuseful spending of resources, not participating to the purposes : money, raw material, time, comfort, security …
    • A benefits / costs analysis
  • A system approach, where each actor is depending from the others :
    • things are defined by their goal, modeled from relations with their environment
    • in a continuous flow of transformation of inputs to outputs
    • each analysis must be replaced in a global view, integrating the whole life cycle and considering different levels of goals
    • actors and objects are in continuous interaction and evolution
  • The importance given to meaning and dialog
    • every analysis must be made with the people involved or impacted : the stakeholders
      • needs have to be expressed by those having them (they often must be helped …)
      • a change is effective only if it is accepted or –better !- proposed by those who are impacted, and it is implemented with them in short retroactive loops demonstrating results and progressive improvement

Tools exist to help implement these concepts: system modelling allows to trace the flows of exchanges which leads to the value perceived by stakeholders. We believe their systematic use would help provide a new foundation to the improvement of corporate performances in many (all?) domains: products and services, industrial and administrative processes, organization and IT, business model, strategy, interpersonal communication,…

The basics tools of system modeling are taken from “La théorie du système général »  formalized in France by Jean-Louis Le Moigne in the ’70s from « The general system theory » developed by Ludwig Von Bertalanffy in the ‘50s. They can be found under many different names and variations in methods like Shared Value, Value Analysis, Lean, Business Analysis, TOGAF … (see a list here in French) … We’ll especially use the following ones:
– Define relations between elements of the environment
– Define usefulness for stakeholders
– Consider different steps in the life cycle and stakeholders categories
– Value = perceived usefulness / perceived costs
– Relations between system components

A New « Discours de la Méthode » 

It seems that the commonalities of these methods – developed independently by various specialists – are derived from the new trend of thought carried by the system approach? A new paradigm is developed there that goes beyond Cartesian reasoning in the same way that Einstein’s relativity has overcome Newton’s physics:

Yesterday :

  • Newton’s physics correctly describes the behavior of objects on our scale,
  • Descartes was obviously not wrong in writing the  » Discours de la Méthode « , from which emerges the scientific reasoning which has so greatly advanced our society!

Today :

  • Einstein has more exactly explained the functioning of matter, of which Newton’s physics is only a special case (very useful)!
  • The system approach[1], in which Western science rediscovers principles already present in Oriental approaches, goes beyond the Cartesian reasoning of the Enlightenment, opposing the 4 principles established « to lead well its reason »
The principles of the ‘Discours de la Méthode’ : The ‘system’ principles :
> Evidence: knowledge is absolute > Evidence: knowledge is absolute
> Analysis: understanding the whole by its parts > Globalism: understanding the object by its environment
> Causality: causes / effects relations > Teleology: goals / means relations
> Completeness: make sure you do not omit any details > Agregativity: choose an overall representation

These system principles are found in the Value (s) methods. The third principle of teleology, especially, refers to the relationship between goals and means: this is the utility, the purpose, the basis notion of value. These principles could be summarized as a way of analyzing, a posture in the analysis of an object:

Instead of considering, as Descartes proposes to understand an object: Systems thinking considers :
> What’s going on inside > What’s going on outside
> Relations between components > Relations between interactors
> Causes in the past: « why? » > Goals, towards the future:  « what for? « 

This is another way to look at things:

> Descartes proposes to study the interior of the object of study and the cause-effect relations between its components:

 

> Le Moigne proposes to study the outside of the object of study and the goals-means relations between the elements of its environment:

 

The two approaches are therefore quite complementary. But the system approach allows an open-mindedness and degrees of freedom that we have all too often found to be cruelly lacking in Cartesian reasoning!

The ‘systemic’ approach[2] therefore envisages studying an object under three aspects:

  • functional aspect (« what the system does ») that is sensitive to the purposes of the system, where one studies the environment without detailing the system itself (« out of the box »
  • structural aspect (« how the system is composed ») which aims to describe the structure of the system, the arrangement of its various components. This « analytical » approach focuses more on the relationships between components than on the components themselves
  • historical (or « genetic » or dynamic aspect: « what the system was or becomes ») that is linked to the evolutionary nature of the system, endowed with a memory and a project capable of self-organization, of regulation.

It seems[3], moreover, that the Enlightenment movement responded in the 18th century to the excesses of a clergy refusing the questioning of dogmas (creation in 7 days, heliocentrism …): the best way to avoid mixing a rigorous reasoning, necessary for the understanding of phenomena, with spiritual considerations, was to remove the question  » what for?  » leading to purpose and transcendence. Besides, Descartes, even if he did not question his faith, wrote a discourse on method and not a treaty, to avoid the wrath of the Inquisition which had just condemned Galileo for the second time. After Rabelais’s declaration « Science without conscience is only the ruin of the soul », Descartes separates science and consciousness, as Edgar Morin[4] reminds us: « … in opposition to traditional science whose effectiveness is based on Separation between the subject and the object, facts and values ​​ ». Since then, scientists and spiritualists have claimed a distinct field of action. Developments in life sciences, cybernetics and computers, as well as in business sciences, have put this question of meaning and purpose back on the agenda. Many scientists argue for a reintroduction of meaning in semantic reasoning, to complement Cartesian deterministic reasoning.

What if the system approach made it possible to reconcile the analysis of goals and causes? The two French theorists of systemic thought lay the foundations:

  • Jean-Louis Le Moigne in «La théorie du système général» establishes the systemic modeling, facilitating the expression of the purposes (functional aspect) and their relation with the components of the solutions (structural aspect)
  • Edgar Morin in « The method« [6]  builds a new paradigm to create « transdisciplinary thinking », emphasizing the taking into account of complexity, evolution and regulation, interactions between actors (historical and dynamic aspect), emerging properties …

 

Value vs Values
Management approaches widely use the terms ‘value’ and ‘values’ with different meanings and nuances, but these are usually as quite opposed:

Value = money = wealth, OR = utility
Values = ethics = caring about people and planet

One notes that the company is a mean for stakeholders to exchange what they have against something that will create ‘value’ for themselves:

  • Clients exchange money, but also time, comfort, information… against a product/service, which will itself create value for themselves or their own customers: satisfy physical, intellectual, psychological, social status… needs,
  • Vendors exchange the same product/service, but also marketing and supply chain costs and time… against money, but also reputation, long term relationship…
  • Each of them perceives more ‘value’ in what he gets than what he gives, even if the same things are indeed given and received on both sides! If not, the exchange will not happen (or at least not last long). So the exchanged ‘valueS’ are subjective and relative to each stakeholder.

The same applies to exchanges with employees (money, status, relations, work conditions, career… against time, skills, motivation…), suppliers (products/services, innovations, stable supply, market information… against money, strategic partnerships…), shareholders (dividends, share selling price, image, industrial synergies … against investment, management involvement…), and also environment (expecting respect against decent life conditions, air, water…) and the society (expecting employment, local wealth improvement, tax money… against infrastructures, education, security…), etc.

When it comes to exchanges with people (it always is!), the company may not respect them, but taking the ‘values’ of customers, suppliers, employees, society … into account certainly is part of the exchange of ‘value’ with them! This show value and values more like sources of opportunity and synergy more than opposite.

Each company is built on the choice –explicit or implicit- to consider certain stakeholders value(s) as a priority: the neo-liberal public-owned company usually focuses on shareholders short term profit by share value, while social entrepreneurs choose employment of specific publics as a priority, profit becoming a ‘constraint’ for long term growth … So even if one of their stakeholders get priority, every company HAS to deal with the satisfaction of EACH of its stakeholder to secure its sustainable future!

Application to the company
The goal of a company is commonly defined as “creating wealth”, where in capitalism the first beneficiaries are the shareholders. This is obviously not wrong, but many employees, managers and even shareholders do not see this as a motivating goal, and are looking for more meaning and purpose in companies!
Applying the value/system approach allows to build a more fulfilling vision of a company:

  1. Needs: “a company, what for ?”

– Define relations between elements of the environment:
Le Moigne models a company as a system in direct contact with external entities: shareholders, clients, employees, suppliers, administration, environment and society (its ‘stakeholders’)
The company manages and transforms flows between these stakeholders : money, products and services, information, energy …

company model

– « For whom ? » : Define usefulness for stakeholders
System modeling allows to complete and precise the performances required for the company, its purpose: every company is built to generate value for each of its stakeholders, through what is exchanged with them:

  • For shareholders: a financial value, where they will get more money from the company that they put initially, but often also a benefit from participation to decisions or to a global project
  • For customers: a use value, where products and services received have more usefulness that what they cost them in money, but also time to access, etc.
  • For suppliers: an economic value, where the price received overcomes the resources they put in their realization, but where they may also get visibility on their future, validation on their strategy, etc.
  • For employees (which are not part of the company, but are linked to it by a contract and their ‘engagement’) : an economical value, where salary balances the time, energy and skills invested, but they also receive a social status, work conditions, improved employability, social interactions, respect for their personal values,…
  • For the environment : a respectful impact (no pollution) is supposed to balance the resources (air, water …) and life conditions it ‘freely’ supplies
  • For society (government, NGOs, local authorities and public…): a respect of community rules, minorities, local industrial network, etc. must balance the infrastructures and services it supplies (roads, schools…), as well as the image it vehicles of the company.

It is easy to see that the value perceived by each stakeholder from their exchange with the company is very different, is not always/only measured in economic terms, and can even be subjective or irrational! We should therefore talk about the company value(s), the explicit management of which could provide meaning for the company stakeholders! This finding is not a political or economical a priori, but a direct consequence of the rational use of system modeling.

When modeling what happens further from the elements in direct contact with the company, we show its insertion into a more global ‘ecosystem’:

company ecos
The company’s products/services, outputs from successive transformations from raw materials, are often inputs of its clients own products/services, which will find their real use only during final consumption by final users.

At that level of modelling only appear competitors, which may take clients and suppliers away from the company.
The company strategy should require to detail the levels of performance to be achieved through the exchanges with the company stakeholders, taking into account their own stakeholders needs and requirements.

These strategic requirements cannot be defined correctly without a constructive dialogue with each stakeholder, which may reveal specific needs, e.g.:

  • A specific shareholder would look for rapid return through dividends, while another for a medium term increase in the share price on the stock exchange, and another industrial investor would look for value chain synergies or the valuation of its brand on a new market. Instead a ‘social entrepreneur’ would first target employment of specific groups, profit becoming a ‘constraint’ for growth.
  • Suppliers segmentation according to their potential impact on the company competitiveness, medium and long term suppliers strategies, interest to keep suppliers innovation only for the company… would lead to very different relations and processes

It becomes then obvious that the long term satisfaction of each stakeholder is depending on the satisfaction of the other company stakeholders: no long term profit without enthusiastic customers, motivated employees, stable suppliers, respected environment… Any company appears as a system, managing exchanges between interdependent external elements. Many experts consider that each company determines a priority between its stakeholders, leading to define ‘one goal’ for the company, aiming at satisfying this particular stakeholder: this is at the root of many debates around the importance of shareholders, clients, employees… Even if one category of stakeholders is considered as a priority, his satisfaction becoming THE goal of the company, a system view of the company underlines the interdependency between all stakeholders. Even if ONE ultimate goal is set, it could not be achieved (in the long term) without achieving the other objectives, satisfying the other stakeholders. For example, a public-owned company will target shareholder revenue, but has to take care of clients, and even employees and suppliers. A social entrepreneur will target employment as a goal, but has to generate profit for its investors, to be able to invest for durability and competitiveness!

The prominence of a certain class of stakeholders is ‘only’ a strategic choice: shares revenues will be preferred in a capitalistic company, while employees skills development will be preferred by a social enterprise, and another specific objective in a not-for-profit… Every one of them has anyway to secure its economic survival if not growth, and to insure the long term satisfaction of its stakeholders.

System modeling goes along the most recent theories of the firm: ‘stakeholders theory’ and ‘contracts theory’, and offer them a solid scientific background, validated from the latest scientific theories enlarging thinking from ‘deterministic’ to ‘system’.
Stakeholder requirements can be expressed by modeling their relationships with their own environment: upstream and downstream industrial sectors, direct and indirect competitors… to be expressed in terms of purpose, usefulness, and flows transformation.

– “When ?”: Express stakeholders needs at every life cycle step
By analyzing the company life cycle, from its creation to its end, we see that their stakeholder and what performances they require from the company do significantly change: for example (not exhaustive)

  • At the company creation:
     Materialize the project of the will-be entrepreneur: an idea, a specific skill to implement, a lust for autonomy…
     Multiply the money ‘bet’ with high risk by initial investors on the will-be entrepreneur project
     …
  • When activity starts :
     Develop the company products market and/or market share
     …
  • At stabilized regime :
     > Long term :
     Secure investors return on investment
     Develop future offers for potential clients with potential customers
     Secure future capability from potential suppliers
     …
     > Medium term :
     Secure availability of required skills
     Improve price competitiveness of products with actual suppliers
     Adapt production tools and processes to required improvements of products performances and costs
     Develop products visibility for the potential clients
     …
     > Short term :
     Secure actual clients satisfaction with quality, delays and costs compliant with the promises made
     Manufacture required products from actual suppliers offers and employees skills
     Manage financial flows from clients to suppliers and employees
     Manage natural, human, political … hazards
     …
  • End of life :
     Secure transmission of accumulated capitals (financial, physical, employees skills, clients and suppliers relationship …)
     …

2. Ressources : What for ?

– Value = perceived utility(ies) / perceived cost(s)
The company not only has to answer different requirements for its stakeholders, but has to do it in way they perceive a positive value in their exchanges with the company: each of them has to think he gets more than he gives! A client will get a product/service where he perceives more usefulness that the price and the time its costs to get it. In the same exchange, the company has to find more usefulness in the money received than to the goods/services delivered! In the same way, thanks to the dissymmetry of their situations, each exchange between the company and its stakeholders has to create value: each one receives more than he gives. Each company definitely is creating value(s)!

Of course, the company will be looking to maximize this value creation, either by improving the perceived usefulness for stakeholders, or reducing their costs, linked to the resources implemented to transform the concerned flows.

– Relations between system components
It is possible to model in the same ‘system’ way the participation of a company components to each flow managed, by visualizing which services and actors manage these flows:

inside company model

(adapted from « La théorie du système général. Théorie de la modélisation », 1977, PUF. Reedited in 1986, 1990, 1994 and 2006 as an e-book)

This system modelling allows formalizing the process implemented by a company to manage each of the flows generated by and to its stakeholders. These flows are managed by sequences of operations that most often cross different ‘functions’ in the company. The interfaces between functions generate risks of lower performance. This modelling show the interest of managing these trans functional processes globally, from stakeholders upstream (e.g. suppliers) to others stakeholders downstream (e.g. clients):  a ‘management by processes’ to be piloted with KPIs defined with the relevant stakeholders.

inside functions company model

The different ‘functions’ in the company specialize in ‘creating value’ for their own internal and external stakeholders:

  •  in the short term, Purchasing manages material and subcontracting flows fro Actual Suppliers towards Employees and Production, as well as money flowing from Finance (coming from Actual Clients) towards Actual Suppliers ; in medium term, they manage information flows between RD (needs) and Potential suppliers (offers), and Finance (improved costs and cash …) ; in the long term, they manage information flows between Potential Suppliers and CSR (respect of environment and society) and Direction (partnerships, make or buy …), while improving the ‘suppliers capital’ ;
  • IT manages information collection, security, treatment and availability of information between the company functions and external stakeholders, while contributing to increasing its ‘organizational capital’ ;

We’ll present later how to use the same ‘system modeling’ approach to optimize these processes themselves, and how to ‘zoom’ on smaller company parts –business units, functions, services- to optimize their local performance while contributing to the global company value creation.

Let us take note that each of the flows managed and transformed by the company between stakeholders leads to an accumulation that constitute a form of ‘capital’, insuring long term competitiveness to the company and should be closely managed:

  • The financial capital is the stock of money accumulated by the company, from investors’ initial inputs and regular clients’ payments, before it is used to pay suppliers and employees or reimburse investors. Part of this capital is necessary to cope with the dis-synchronization of between clients’ inputs and suppliers’ outputs, to with hazards in futures operations and to reinvest in required skills and tools. The accumulated surplus profit is often considered as the priority objective of the company and the object of all attentions of managers.
  • The physical capital is made of tools, buildings … also considered as a priority, but its financial measurement often gives a limited vision of its real usefulness: it should also be measured in terms of obsolescence.
  • Skills accumulated by employees may also be considered as a human capital (or resources or, even better, wealth), from which the usefulness should be related to the actual and future needs of the company, and of its stakeholders: the employees. Too many companies have suffered of not managing the loss of skills linked to retiring or licensing, even at very operational levels. Employees’ wellbeing is increasingly recognized as a source of engagement and productivity, therefore competitiveness.
  • Other information flows also create immaterial capitals which should be later useful to the company and its stakeholders: actual and potential clients information are today the subject to careful consideration; the quality of relations with strategic suppliers has recently been pointed out by Prof. John Henke as of strategic importance.
  • Even the environmental capital and the reputation capital of a company (and its brands) appear decisive for a company’s future.

It may be difficult to measure these different capitals in economic or financial terms, but it is relatively easy to measure each of them in its own terms, by indicators relative to the flow they manage, according to the levels where they are considered useful by the relevant company stakeholders: turnover and employability of/for employees, quality of relations, participation to innovation and stability of/for suppliers …

 

3. « Change what » to improve a company?

This model can be used to redefine any organization’s strategy, to build a new business model, target new potential markets, design synergies across the value chain …

– Creating value(s) for each stakeholder
The ‘system’ vision of the company and its components allows to (re)define its strategy as ‘generate which value for which stakeholders’!

Of course some may be prioritized by certain categories of firms: shareholders for stock market corporations, employees for a social enterprise … But none of them can be neglected on the long term ! Exploring their respective needs has to be done by listening to their own values. The company results will then be measured with indicators of stakeholder needs satisfaction from their exchanges with the company: these are not all being finance-driven, eg. employees’ wellbeing, suppliers engagement, …

– Creating value(s) by useful transformation flows
The company can be modelled as a set of processes transforming upstream stakeholders’ inputs (suppliers’ goods, employees work, shareholders money…) into downstream stakeholders outputs (clients services, employees salary, suppliers money…). These material, financial, information flows can be optimized by avoiding to spend resources that do not contribute to downstream stakeholders’ satisfaction.

– Manage short, medium and long term processes
Stakeholders have different horizons for their needs: e.g. shareholders want dividends in the long term compared to suppliers and employees. Each function in the company has then to manage different processes with different skills:

  • Short term = Operations : create value for customers
    o Manage material, energy, subcontracting … flows from suppliers, transformed by employees into products/services,
    o Manage money flow from customers towards employees, suppliers …
    o Target short term stakeholders performance: suppliers’ compliance with Quality, Delays and Costs; customers QCD satisfaction; …
    o Functions involved : procurement > manufacturing > sales > supply chain > billing
  • Medium term = Management : adapt Operations contribution to current stakeholders satisfaction
    o Manage information flows about satisfaction and evolutions of actual stakeholders needs
    o Target medium term performance : react to QCD failures and improve value creation for current company stakeholders
    o Functions involved : purchasing > quality > operational marketing > operational HR > supply chain > accounting
  • Long term = Strategy : adapt to future stakeholders and needs evolutions
    o Manage information flows about long term evolutions and environment of current company stakeholders, e.g. stakeholders’ own stakeholders (competitors, other value chain actors …) or future potential stakeholders (market segments not yet targeted, potential suppliers …)
    o Target long term performance : improve value proposition on QCD, react to stakeholders risks, target new stakeholders and needs
    o Involved functions : upstream purchasing > R&D > engineering strategic marketing > finance

Other applications
This system / value(s) approach has been used to model and optimize industrial and information processes inside or across companies, to (re)design products and services for innovation and/or cost reduction, to improve marketing, purchasing, R&D…, to adapt IT systems, to prepare for sustainability and CSR, and even interpersonal relations and individual development.

The ebook “A quoi ça sert ?” (What for ?) presents[1] the application of Value(s) reasoning and system modelling to numerous topics, showing how it helps finding new areas for corporate performance :

  • Help ach decision maker to achieve more with less resources, at his own responsibility level, in coherence with the other corporate actors and functions and with the company’s external stakeholders, by defining specific and common goals, using common sense to create value while respecting each other’s values
  • Allow supporters of the most efficient performance improvement methods in each domain to understand how to work in synergy with specialists in other fields of corporate performance, and therefore contribute to more global performance in value creation.

E.g., the same questions and system modelling helps answering the question of Value(s) creation in the following domains:

  • A corporate entity or business units
  • A functional domain : Purchasing
  • An organizational / information process
  • An industrial process
  • A product
  • A training budget
  • a school’s educational project
  • time management
  • life …

More than 100 methods already applied for corporate performance improvement use this system/value approach. Details available in the book “Valeur(s) & Management”, “à quoi ça sert ?” and the blog http://valeursetmanagement.com/

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[1] Sorry, only in French for the moment …

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