Creating value
Ultimately, this book is about value creation and an organization's ability to create value on demand, efficiently, and continuously. Most importantly, our efforts to deliver value must align with our customers' perspectives on what adds value to their experiences with our organization and our products and services.
The definition usually ascribed to the term value creation is relatively broad, and we need to understand what people mean when they use that specific term. In its simplest expression, value creation is any process or activity that creates outputs that have more value than its inputs.
Displays of the input-transformation-output process (a.k.a. the input-process-output (IPO) model) incorporate a functional graph that displays the inputs, outputs, and required processing tasks required to transform the inputs into outputs. See the following diagram for an illustration of this:
Figure 1.3 – IPO model example
The inputs represent the flow of information and materials into a process from external sources. The processing step includes all activities (steps or tasks) required to transform the inputs into something of value. The outputs are the enhanced data and materials flowing out of the transforming process.
The IPO graphic displayed in Figure 1.3 demonstrates a value-adding activity. The value-adding process increases the value of goods and services and, by extension, improves the value of the business. The value transformation process only works if customers desire the outputs sufficiently to acquire them. It's the creation, delivery, and acquisition of value by customers that drives, in turn, shareholder value.
From a financial or management accounting perspective, we convert inputs to create outputs that drive monetary value across the value chain of an organization's products, services, and processes. However, the financial definition of creating value is limited and does not capture the full measure of the things that add value within an organization. Equally important are relentless and continual innovations, the labor and ideas of people, and branding.
As Lean-Agile and DevOps practitioners, you own the efforts associated with relentless and continual innovations, plus you provide the labor and ideas to generate value from digitally enhanced products and services. In addition, the product management and marketing functions are responsible for branding as part of their demand-creation efforts (that is, promoting the product's value proposition to create brand awareness and thereby generating customer demand to acquire the product).
Keep this simple IPO model in mind, as it forms a basic graphical approach to viewing most value stream activities. The primary difference is that we'll decompose the process function to show all associated activities and their value-adding interrelationships.
In the previous section on value propositions, you learned that our customers' experiential-based perceptions of value change over time. For that reason, value creation hinges on an organization's ability to create value on demand, efficiently, and continuously. In other words, an organization is under constant stress to change, and change is challenging in the best circumstances.
Change at a macro level occurs when an organization defines a new business strategy and potentially profitable value proposition. This type of change is much harder, especially when the organization needs to evolve from its traditional hierarchical and bureaucratic organizational structure.
Such change cannot occur solely through mandates, as any business transformation strategy of this magnitude fails without executive support and leadership, proper planning, and a controlled rollout. We'll table this topic for now and revisit it in Chapter 6, Launching the VSM Initiative (VSM Steps 1-3)
In the context of Agile's values and principles, change occurs at a micro level quite frequently, with every development iteration. This type of frequent change occurs because small, autonomous, and self-sufficient teams automatically self-organize to deliver the expected incremental value achievable within the planned time horizon— usually 1 to 4 weeks.
Moreover, at the end of each iteration, the teams conduct retrospective events to evaluate areas for improvements, and those improvements should begin in the next iteration. Teams operating with agility implement processes, such as Scrum, use change to their advantage when delivering customer-centric value in a repetitive and controlled fashion.
The following section describes the essential values and principles of Agile and Lean Development concepts.