Value, value exploitation and learning

Thirty years of studying lean transformations through the implementation of lean systems – what general lessons can we draw? No two lean efforts are the same because any lean system is a set of systematic responses to specific problems, and no organization faces exactly the same problems because they don’t start from the same place. On the other hand, no lean program is completely different either because many of these problems are “typical” problems you’ll find anywhere, such as responding better to customers specific requests, spotting quality earlier in the process and getting people to react smartly or reducing lead-times.

What framework can we learn from lean? What unique perspective can help us look at any organization and business and say with confidence which is the way forward and what is a move in the wrong direction? Taking a high enough view, we can distinguish three distinct components: value, the exploitation of value, and learning to improve both.

Value is the benefit in terms of usefulness and quality at an affordable price that the organization will offer to its customers, staff and suppliers as well as society at large (one can argue that mass selling of tobacco or risky house loans or is of use to customers but no benefit to society). Value is largely defined by users in the satisfaction they get from what they acquire relative to what it costs them: value = benefits/costs. Value is a subjective feeling of worth, which somehow must be captured as an objective set of value characteristics in order to be manufactured at scale – even artisans and artist will have a core of common activities to produce an object uniquely valuable to its acquirer:

·???????Value to customers:?a product or service that reflects true quality, and somehow combines performing in the core job it’s supposed to do, do it reliably and robustly, as well as thoughtful details that make it uniquely pleasurable to use – this for an affordable price.

·???????Value to employees:?the opportunity to practice a meaningful, interesting activity and grow personally and professionally in a supportive work environment, trusting one’s teammates and one’s officers for their competence and care – at a fair wage.

·???????Value to suppliers:?contracts that support the growth of the business by rewarding unique know-how and investment in delivery of reliable quality and short lead-times as well as the opportunity to explore innovation and reinvest in maintaining core systems – at a profit.

Value, however, as desirable as it is, is rarely free: it requires investment and cash to produce. This means producing for a profit in order to generate the cash needed to run the business day to day, to fund the maintenance of tools and systems, and to invest in further value-creation activities. Value production is accompanied by value exploitation: how to make a profit from producing value. In general, this is seen as counting and totaling costs, adding a profit margin and selling it at that price. In practice, none of these activities are that easy. First, the market usually has its own price, imposed by customer alternatives. Secondly, real costs are notoriously difficult to calculate, which you’ll find out every time you try to get profit figures for any activity: calculating a margin on variable costs (purchases going directly towards the activity) is easy, but attributing fixed costs to have an idea of profit is pure accounting artistry, and often sophistry. Finally, finding a sustainable margin is the on-going headache of most business leaders.

The classical view of business is that you divide labor into specialisms, optimize the exploitation of each of the resulting segments by increasing volume over the fixed cost (and thereby reducing unit cost), and that overall this will add up to smart exploitation of the value created. The flip side of this is that you systematically reduce costs of all activities that do not produce obvious volumes, such as, say maintenance or education. This view has the systematic bias of investing in machines and systems that promise economies of scale (more volume at less cost) and squeezing run activities such as training people (better replace them with a system), research, or even keeping old systems running well. The natural conclusion of the mainstream view is that you exploit customer segments until they run dry and then look for new “blue ocean” segments to milk, making wild product or service gambles in the process. MBA classes endlessly repeat the few spectacular success stories of finding new niches, but this is nothing else than survivor bias – we look at the few that made it, not the many that failed and got purchases, dismembered, bankrupt and simply forgotten. Better be lucky than good any day, but still, global outcomes haven’t been too great lately.

The lean view is that rather than optimize value exploitation area by area, you seek to improve value exploitation by eliminating waste (activities that are paid for but don’t immediately contribute to delivering value to customers) from the total system by improving cooperation between specialism and investment of all people in improvement activities. One way to look at it would be to separate activities into value-side activities (they contribute to delivering quality and lead-time to customers today) and non-value-side activities, such as producing to inventory because once we run the machine it’s cheaper to keep going, or adding elaborate administration processes to more finely control activities (rather than train the people to do it themselves), and so on. This approach hinges on constantly asking oneself three questions:

• Where is the value in what we do and what is waste (as in: unnecessary work to deliver value)?
• How can we better collaborate across specialisms to deliver more value with less waste (which requires listening hard to what others mean by value)?
• ?What do we need to improve in how we work to make better collaboration easier and more fluid? (which often means changing how we work to get value closer to the final process – what in lean is called kaizen).

Such an approach is clearly more powerful than the classical optimize-each-part-and-hope-for-the-best, but its main difficulty is in obtaining collaboration across segments and silo walls: collaboration with customers, within organizational functions, with suppliers, and across the chain of command, with one’s own staff. Collaboration requires a different approach to value exploitation because we clearly can’t take all and leave nothing and expect collaboration to work. In order to obtain cooperation we will have to split the gains from superior value exploitation from eliminating waste: for instance, it’s hard to ask someone to reduce their non-right-first-time rate if they’re paid by the volume delivered, regardless of quality. Collaborative value exploitation will require a determined win-win approach to negotiations across boundaries.

Neither value nor value exploitation systems ever last forever as the world moves on and changes. New needs or tastes appear, new tech as we’ve just seen with the AI explosion, things and their markets are constantly in flux. We can’t ever know what value is, we can only learn it, and the same goes for modes of exploiting that value.?

Here again we see two very different approaches. As Michael Porter showed, mainstream business thinking is all about the use of power to impose one’s concepts of value and value exploitation. Value is designed from a blank slate as product, price and distribution are set, and then adjusted when reality fights back. Value exploitation processes are similarly designed and nowadays often coded in with software solutions. When this doesn’t work, one just moves on to a new design and a new process – if one can. Or struggle and die. Learning does occur, but from one offer to the next, not within one offer. The key variables governing that system of value creation are design by power (CEOs, senior VPs, dominant firms, etc.) and then budget optimization for greater ROI. Not surprisingly, such an angle of view leads to a confiscatory approach to value exploitation: take everything customers will let you take, staff will tolerate without walking out, suppliers will give in under duress and so on.

The lean alternative is to build value through value streams: repeated iterations of the same offer, to be able to learn through the process of adding value to the next version of the product or service, and eliminate what waste for customers we can. Similarly, value exploitation processes are continuously kaizened to seek the productivity frontier through involvement of all people all the time in improvement – which of course requires sharing some of the gains as the whole system is built on trust, which means trustworthiness from senior leaders and middle managers.?

Learning occurs when people face troublesome problems and then deliberately practice finding ways to solve the problem. The classical approach does this with long, often one-off cycles of product offerings and process installation. The opportunities for individual learning are few, beyond moving companies or designing a new offer every so many years. By contrast the lean approach offers many short learning cycles within one offer, by?value analysis?and?value engineering?to improve customer value and by kaizen to improve the value exploitation process. Individual learning thus aggregates as collective intelligence, reinforced by the emphasis on collaboration, and as a rule, lean organizations make fierce competitors compared to others. Still, this unique approach to learning must be understood and shared among senior leaders.

I have no doubt that lean is a superior approach to growing useful, sustainable, profitable and responsible organizations. I also have come to realize that the MBA ideology of power and optimization, the very mental models it conveys, has no place for lean, because the attitude is wrong. To develop lean thinking, leaders must a priori realize that they need to:

• Continuously add value to their offers to customer, and not just seek the minimum sellable and impose through their clout on the market;
• ?Involve employees in seeking both how to add value to products and services as well as the value exploitation system and, in return, share some of this with them in terms of job safety, lifelong education and career opportunities;
• ?Seek win-win deals with suppliers in which contractors can grow their business through our own and grow into full partners, knowing that they’ll benefit from their efforts to deliver more value to final customers and better prices to their clients.

What then is your attitude to value capture? Do you firmly intend to share it in order to build trust and develop loyalty? Or do you feel that customers, staff and suppliers are out to wring every cent they can out of you so you’d better pre-empt that in being as tough as you can with every deal? The value exploitation structures that emerge from these opposite attitudes will be very different, and so will be the resulting journey of your business or organization. In human systems, much of performance rests on building trust, and tust starts with trustworthiness. Therefore, ask yourself: how trustworthy are you?