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Value Networks: A Guide For Systems Innovators
Value Networks: A Guide For Systems Innovators
Value Networks + +
A guide for systems innovators
Overview
This guide is designed to help you better understand value networks and how to develop full
value business models which account for not just the parts of a system but also the whole.
By the end of the guide, you should have a better understanding and capacity to work with
full cost accounting models, negative and positive externalities, the workings of cooperative
games and service value ecosystems. These insights will help you to better understand how
to attempt to shift a system to a new equilibrium by closing feedback loops, changing the
incentives in the system towards cooperation, and realizing the emergence of new macro-
level value flows.
Guide Contents
Can you define the intrinsic and extrinsic values in the system?
What value flows are currently being accounted for and which not?
What kind of accounting metrics could we create to benefit activities contributing to the
whole system while charging those that deplete from it?
Externalities
Overview
The aim of full cost accounting is to ultimately help us to internalize the externalities that
currently work to degrade our social, economic and environmental systems. The aim is not for
us to make single point interventions and ad hoc solutions but take a systematic approach to
creating self-sustaining systems by accounting for all factors involved and closing the feedback
loops. An externality is simply some kind of value that is not being accounted for in the
current organization. For example, the elderly care a family offers to its members is not
accounted for in our GDP metric; this is a positive externality. Inversely the risks taken by
financial institutions that will be paid for by public tax money in case of a crisis is a negative
externality.
Positive Externality Negative Externality
E.g. beekeeping has the positive E.g. car traffic has a negative externality
externality for local farms of pollinating of noise pollution for pedestrians and
crops local residence
Brocken Feedback
Externalities are things that we can put external to our
domain of value and interest. All negative externalities
result from actors creating boundaries wherein they
account for and optimize for some form of value while
externalizing some form of entropy to the broader
system. Externalities are essentially broken feedback
loops in our accounting systems created by pushing some
form of value - positive or negative - outside of the
boundary of the system wherein we account for cost and
benefits. The key mechanism supporting this is the
disconnection between the system and its environment
that creates the boundary enabling the externalizing
process.
Closing Loops
We solve for externalities by connecting and thus closing
loops. We increase the connectivity and interdependence
between the system and its environment to increase the
feedback loops. This requires the system to start to
account for those factors and thus start to manage for
them. One good example of this is the warning signs on
the side of cigaret packets that make you aware of the
negative externalities of smoking on your body. They are
trying to connect you with the negative externality that
you are creating so that you recognize your
interdependence and factor it into the equation under
which you are making your decision to smoke.
Making Connections
An externality is not necessarily something that is far away, it is simply whatever actors
exclude from their value system so that reducing it has no reduction to their payoff.
However, connectivity takes this barrier down requiring us to recognize the value of
the other entity and factor it into our decision. This connectivity can be of many
different kinds. Communication is a form of connection that can enable positive
interdependence and there is a robust finding in the social dilemma literature that
cooperation increases when people are given a chance to talk to each other.
Cooperation generally declines when group size increases. In larger groups, people
often feel less responsible for the common good, as they are more removed from it
and the other people with whom they share it. Thus resulting in the potential for
greater negative externalities and the need for more rules and regulations to prevent
the system from degrading.
Example
Fossil fuel energy systems are a good example of a system that involves negative externalities whose
removal can work to create an alternative value stream and shift the system to a new equilibrium. The
externalities from coal, oil, and other fossil fuels are now well known; climate, military interventions,
air pollution, etc. The cost of these fuels in many countries is heavily subsidized as typically drivers are
only aware of the price of a gallon of gasoline that they pay for at the pump which fails to account for
the extensive externalized costs. The result of this broken feedback loop is the undervaluation and
overconsumption of these fuels which contribute substantively to the current sustainability crisis.
New Equilibrium
Some countries are now working to reconnect these feedback loops. For example, the Scandinavian
countries levy high taxes on gasoline to approximate a more accurate cost of its use. Once consumers are
made to pay the true cost of fossil fuels renewable energy sources become much more cost-competitive.
This has resulted in the development of a whole new economy and energy system. For example, Sweden
has been successful in developing a renewable energy infrastructure which now provides for over half of
its energy consumption. It is interesting to note that now coal is no longer the cheapest way for Sweden
to produce energy or electricity, i.e. they have shifted the economic equilibrium. This is an example of
systems change in terms of creating a new attractor and equilibrium in the system through closing
feedback loops to change incentives and realize the emergence of a new sustainable value network.
Valuing Externalities
It is possible to create value models around externalities. We do
this by identifying the cost created by the externalities. For
example, crime or pollution create externalities that have a real
cost associated with them - in this case, ones born by the local
community and government. Now we identify the broken
feedback loop and look at the incentives that this creates for the
actors. We then ask how can we use information or value flows
to reconnect that feedback loop, to incentivize them to take a
different action or incentivize someone else to counterbalance
their action. In the case of dropping litter, we could take the
money the municipality is paying to clean it up and turn that into
a token that anyone can earn for picking up litter. For example,
this is the value model behind social impact bonds - such as
those for crime reduction - we take the cost that is being paid to
reduce the externality and create a value model around it that
anyone can form part of by providing a solution to the problem.
Working With Externalities
Another example of a value model built on externalities are
businesses formed from data - this time working with positive
externalities. We all produce data all the time, every day but this
typically forms a positive externality as we do not capture and
valorize it ourselves. For example, take the app Waze which
collects data from each driver’s mobile phone that has the app
installed and aggregates it to provide real-time traffic information.
In this way, they have harnessed the small positive data externality
of each user to create something of value for all. Indeed this is
what many of the online platforms of today do, YouTube or
Facebook work with externalities to create new value models.
They provide the infrastructure for people to create and share
content and then capture some of the value created by producers.
Although these companies capture the externalities for private
ends it is equally possible to build the same value models that
work for the community to build commons and start to shift the
system to a new equilibrium.
Transitions
During a phase transition the system becomes
chaotic and unstable. A bifurcation forms as
New the old incumbent systems collapse and
Positive
Equilibrium separate from the new emerging networks. Too
Externalities
many negative externalities and the system
collapses to a lower equilibrium. With
Destabilizes sufficient positive externalities new structures
can emerge and take it to a new equilibrium, at
a new level of complexity enabling it to
Current
Negative
operate successfully in a broader environment.
Equilibrium
Externalities In this context the aim of systems innovation is
to create the value networks that harness and
support positive externalities and reduce the
negative ones so as to create a new
equilibrium state of operation in the system.
Key Considerations
Ask yourself what are the externalities in the system; both positive and negative?
What information flows or value exchanges need to be changed to close the loops?
How could positive externalities be harnessed to create a coherent value network and
the emergence of a new level of functionality in the system?
Cooperative
Equilibria
Overview
In every socio-economic organization, there is the opportunity for collaboration and cooperation
which leads to optimal outcomes for all and there is the opportunity for competition and conflict
that will lead to suboptimal overall outcomes and unequal pay-offs for actors. The point of a
social or economic institution is to achieve cooperation and the optimal overall outcomes that
result from them. As current institutions reach the limit of their capacities to do this the job of
system innovation is to develop new cooperative structures that can function at the new level of
complexity we find ourselves in today.
The Two Equilibrium
Every game has two equilibria, there's a good equilibrium where
everybody cooperates resulting in everybody gaining, and
there's a bad equilibrium when nobody cooperates, nobody
gives in and nobody gets anything. The optimal overall
equilibrium is typically very fragile, it's enough for one person to
deviate from the good strategy and the whole system can
deteriorate. In contrast, the bad equilibrium is often very stable.
Trust is about our ability to stay in the good equilibria where all
benefit, but this does not happen by accident, these cooperative
structures have to be built. In almost all aspects of human
activity, value flows from cooperation, thus value models can be
built within ecosystems by creating attractors towards
cooperation; turning competitive frictions into synergies.
Shifting to a Cooperative Equilibrium
Part of our job in shifting systems is to identify locations of friction because of competition and
conflict within the network and work to turn those into cooperative dynamics from where new
value can flow. Our aim is to turn negative synergies into positive synergies.
Positive Synergy +
- Negative Synergy
Social Dilemma
The challenge of creating cooperative structures is captured in the concept of the social
dilemma. At their core, social dilemmas are situations in which self-interest is at odds with
collective interests; where what is an optimal choice in terms of payoffs to the individual results
in a negative externality and suboptimal outcome for the whole. Social dilemmas can be found
in many situations of interdependence; from resource management to relationship
development, to international politics, public goods provision and business management.
Connecting
At the core of the social dilemma is the question of what people value
and how far that value system extends. Wherever we stop seeing
something as part of us or our group we create a boundary and
beyond that negative externalities accumulate, depleting from the
whole and resulting in the social dilemma. However, by building
further connections so that people recognize their interdependence
with what they previously saw as external they will start to factor it
into the value system under which they are making their choices and
reduce their negative externalities. Externalities are always a function
of independence. If two things are one, then there is no possibility for
externalities as the accounting for the whole will be the same as the
accounting for the parts. The more independent they are the greater
the possibility of a divide between these two and externalities. Thus
all solutions to externalities and the social dilemma will involve
creating positive interdependence between the elements in the
system, but different approaches will do this in different ways.
Realizing Cooperation
Cooperation may be achieved through several different possibilities, it may be built into the dynamics of
the game as would be the case with a positive-sum game where payoffs are positively correlated. In such
a case the innate structure of the game creates an attractor towards cooperation because it is both in the
interest of the individuals and the whole organization. For example, each person choosing to drive their
car on the correct side of the road is a game where cooperation is achieved because of the inherent
dynamics of the game. Equally, cooperation may be achieved by external enforcement by some
authoritative third parties such as governments and contract law. Here we cooperate in a transaction
because the third party is ensuring that it is in our interests to do so by creating punishments or rewards.
Likewise, cooperation may be achieved through peer-to-peer interaction and feedback mechanisms. For
example rating systems on e-commerce sites work to ensure that the sellers act in the interest of the
buyers because they have the power to leave negative feedback if they don't.
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Building Peer Cooperation
Given the proliferation of connectivity we now have the
possibility to design and build new cooperative structures
using peer interaction, which can result in much more
efficient and scalable systems relative to the centralized
systems we use today that come with the high overhead
costs of bureaucracy and are limited in their scaling
capacity. Building systems of peer cooperation means
enabling ongoing interaction, with identifiable others,
with some knowledge of previous behavior, lists of
reputations that are durable and searchable and
accessible, feedback mechanisms, transparency etc. These
are all means of fostering positive interdependence once
interconnectivity is present and through them, self-
regulating and sustainable systems of cooperation can be
formed.
New Incentive Structures
Given the proliferation of connectivity, we now can design and build new cooperative structures
using peer interaction, which can result in much more efficient and scalable systems relative to
the centralized organization we use today that come with the high overhead costs of
bureaucracy and are limited in their scaling capacity. Building systems of peer cooperation
means enabling ongoing interaction with identifiable others, with some knowledge of previous
behavior, lists of reputations that are durable and searchable and accessible, feedback
mechanisms, transparency, etc. These are all means of fostering positive interdependence once
interconnectivity is present and through them, self-regulating and sustainable systems of
cooperation can be formed.
Where are the points of conflict and competition in the system that persist?
What new value flows could be realized if those were turned in to cooperative structures?
How could we use connectivity and feedback to enable peer interaction towards the emergence of new
cooperative structures?
Service Value
Ecosystems
Overview
The best way to think about the value that a whole network delivers is to think of it as a service.
Service systems represent a whole new paradigm in how we think about the systems we design,
one that shifts the focus from products and individual organizations to integrated systems.
Within the services paradigm, the post-industrial world is saturated with products, and people
who no longer want more things. They just want the functionality of these things that is their
service. So I don’t want to have to worry about by bank account and different credit cars I want a
financial service that is there when I need to pay for something and not when I don’t, it is all
about high-level functionality rather than the specific separate things required to realize those
outcomes.
Service Systems
A service system is a coherent combination of people,
processes, and technology that delivers some value to an
end-user. Service systems are a type of complex socio-
technical system that is designed to deliver some
functionality within a particular context to a particular
end-user by aggregating different resources, technologies,
and people through procedures. In a service system, many
actors must work to gather to deliver the desired
outcome, which links them into a positive-sum dynamic
and promotes cooperation. Any industry can be
"servitized". Take for example carpets, they are
traditionally sold per square unit, but now companies are
providing them as a service to the office owners at an
ongoing fee without any exchange of ownership.
Building New Connections
Ecosystems deliver added value by harnessing the
capacities of different organizations. To realize this we have
to connect across diverse actors. Each organization has its
strengths and weaknesses, it has its own view of the world,
it only sees so much. An organization becomes myopic
because they are driven by efficiencies to optimize. As an
ecosystem builder, we should be looking across the network
to connect organizations with different knowledge,
expertise, and capabilities. This connecting is dynamic, it
has to be done at the right time. We can leverage arbitrage
in a productive way because if we can see across the
ecosystem we can see what from one context could be
transposed to another to create value.
Moving Between Context
Building service ecosystems is about having a broad
vision; you know multiple different places where things
happen. It is about timing because you have to connect
people and organizations at the right time. It is also
about translation; you find something and translate it
into something that can be used in a different context
by another organization. Consulting companies are
good examples of this. A global consulting company
may operate in Europe and Asia, their clients in China
may know little about what happens in Germany, the
consulting company can then create value simply by
transposing capacities and knowledge from one
geography to another.
Functionality
Most of the ways that we provide for human needs is through
centralized organizations that produce and compete within
markets resulting in zero-sum games. One way for us to shift this
dynamic to a positive sum-game is to shift the provisioning from
discrete one-off products to a service system. Services are
essentially the outcome of connecting many products through
processes; integrating products into systems of services. Service
systems can be characterized by the value that results from the
interaction between their components. A car-sharing service
might be a good example of this. By connecting people,
technology, and information, we can deliver the end-user with
close to nothing but the pure functionality or service of personal
mobility.
Service Collaboration
Servicization works to promote collaboration between
different producers. Because services are systems of
different products, processes, and people, to deliver an
end service often requires that companies collaborate
across different domains. By shifting the producer's
revenue stream away from the production of products
and focusing it on the delivery of functionality,
servicization is a powerful approach for breaking the
core dynamic driving the consumerist economic model.
With servicization ownership of the product stays with
the producer and its maintenance likewise becomes
their responsibility. In such a way they are incentivized to
produce less while delivering more functionality. The
result is an alignment of the interests of the end-user
with the producers and more sustainable outcomes for
the overall system.
Reducing Externalities
Servicization internalizes many of the negative externalities of
the industrial age product-based model as it breaks down the
barriers between producer and consumer to create enduring
relationships; where producer and consumer become co-
creators. The product-based model promoted a somewhat
antagonistic relationship between producers and consumers.
Producers were incentivized to simply produce and sell as
much as possible without a strong incentive to ensure
sustained functionality. The emphasis was on simply making
the sale which often leads to planned obsolescence and a lot of
the marketing dynamics that created mass consumerism. On
the contrary, the services model can reduce this antagonism
between producers and consumers, aligning their interests
towards delivering the function. Service systems thus promote
long-term collaborative relationships between the parties
involved to reduce overall waste and consumption.
Co-creation
In service environments, the customer provides inputs to the
service process, and often the customer is present during the
service and plays an active role. Hence, the value is co-
created by the customer and producer. Coupled to this is the
fact that end-users desire integrated services, and as services
become more technologically sophisticated with firms
focusing more on their core capabilities, networks of firms
have to co-operate over prolonged periods to ensure the
design and delivery of these services. The combination of
information technology and servitization can potentially
break down many of the barriers inherent to an industrial
economy, setting the stage for user-generated systems and
end-to-end collaboration across a whole ecosystem of actors.
Distributed Provisioning
Servitizing something makes it possible for anyone to
potentially provide that function as it now no longer requires
a large fix investment neither a large organization. We can see
this with what accommodation sharing has done to hotels or
car-sharing to taxies - the same can now be done to any social
or economic function. Just as those industries have been
opened up by servitization this approach opens the door for
new social innovations because it offers anyone who can
legitimately solve a social issue the potential to gain the
rewards for it. Reducing crime or providing for the homeless
becomes no longer about waiting for government
provisioning, but these functions could be servitized and
distributed out using and IT platform that would reward
anyone providing those services; in such a way anyone can be
remunerated for finding a new and innovative way to provide
public value.
New Alignments
The aim is to turn any social or economic function into a service
and use information technology to enable the distributed
nonlinear coordination of a large network of peer individuals or
organizations. We create an asset that represents the value to
the whole ecosystem than anyone who contributes to that gains
and anyone depleting from it pays. Public services like cleaning
up litter, maintaining parks, public security, care for the elderly,
reduction in noise pollution, civic engagement, etc. Indeed
anywhere value could be generated by the coordination of
members, we can define a token for that value and use it to
incentivize the agents towards the coordinated behavior; thus
enabling the delivery of the service through peer networks.
When we do this we are starting to account for the whole and
this paves the way for actors to start to build their value models
around creating value for the network. In such a way we can
realize a new alignment of incentives and value flows shifting
them up from the parts to the whole.
A Few Questions About Servitization
What are the organization in the systems what are their competencies and weaknesses,
Where are the gaps where things could connect or translated from one location to another to create
value?
Can you define the value delivered to you system of interest as a service?