Responding to diversity in Value Models

by Charlie Alfred
Philip, Thank you very much for your comments on separating the supply-side from the demand-side. I agree with the points you raised, and have a few observations to share:
1. You observed that my article approaches the problem from the provider-side. Given the nature of my job, my original goal was to teach people I worked with about how to do a better job of software architecture. This is the main reason that the article takes this point of view.
My belief is best expressed by Dr. Russell Ackoff, former professor at the Wharton School of Business. He discusses the sibling processes of synthesis and analysis. He observes that analysis has been the predominant model of thought since the Industrial Revolution. Take a whole, break it down, and study the pieces in isolation.
Ackoff suggests that while analysis helps you to explain how things work, it doesn’t give you enough context to understand why they need to work that way, and what might cause them to change. To do this, you must study how a subject (system) functions in its larger context(s). This begins to expose which expectations, obstacles, and constraints are imposed on the subject.
In short, as a result of this research, I’ve come to the conclusion that an architect needs to:
a) start with synthesis to understand context (both shared and diverse),
b) use analysis to formulate approaches to challenges, analyze trade-offs, and mitigate risks, and
c) use synthesis to consider the feedback effect of the solution on the contexts, etc.
Ackoff’s writings have also convinced me that the scope of a system must expand to include all elements with significant inter-dependencies. The little bit of thinking that I’ve done on the subject of value suggests that the consumer and supplier sides cannot really be considered independently. This is the subject of my next observation.
2. You mention the two perspectives of value: consumer-side and supplier-side and raise the question about whether they can (and should) be considered independently or must be considered together.
As a general rule, I think that they cannot be considered in isolation:

a) In the long run, there is no supply-side value where there is no demand-side perceptions of value. In cases where demand-side utility curves are strong and inelastic, and suppliers have major market power, “long run” can be quite a long time. For example, OPEC can ignore the needs of its customers for price, supply, and to a lesser extent quality. However, this has the side effect of stimulating research into alternate sources. I agree that diversity on the demand side tends to strongly influence market segmentation in more competitive markets. While this happens a lot in dynamic markets, it also happens in ones that were thought to be stable. Southwest Airlines low fares/low cost approach has been extremely effective against United, American, and Delta.

b) Supply-side innovations often change utility curves on the demand side, by changing consumer’s perceptions of what is possible. Today, I can’t write a paper or report without having my web browser open and Google ready to run. My iPod Nano is so small and holds so much music that I want to take it to work. If I’m away from home and need to make a phone call, I pull my cell phone out of my pocket. 10 years ago, I was quite content without any of these things. It wasn’t that I was unaware of the benefits of instantaneous research, portable entertainment, or accessible communication. The main reason I was content with less than that, was that I had no idea that major improvement was possible. However, once exposed to the innovations, my utility curves (and hence, my value expectations) were reshaped for ever.

c) When faced with significant diversity in value perceptions by consumer, a provider can be faced with a difficult juggling problem. If the provider attempts to craft individual solutions, its development and operating costs can go up. If the provider attempts to create a solution that can be tailored to each context, it risks creating something that doesn’t fit any of them very well. Consider a sport utility vehicle. Buyers who like to drive it off-road want a lot of ground clearance. Suburban moms like the fact that a higher clearance gives them better visibility of the road. However, a higher clearance also tends to mean a higher center of gravity, which increases the risk of rollover in sharp turns. This is not much of a plus for the driver who wants the all-wheel drive for driving in snowy and icy climates.

In summary, the consumers and providers both win when the provider understands the value models and challenges well enough to combine the right set of diverse needs into a solution, while omitting the ones with incompatible challenges.

3. I agree completely with your point about Porter’s use of horizontal and vertical linkages. To me, the notion of linkages was key, and differentiating between those that are internal and external was less significant.
I find it more interesting that the “architectural decisions” of the firm (value change) are what determine its cost and differentiation drivers. For example, an airline like United has chosen a hub/spoke architecture and a variety of airplane types. This lets it have very frequent departures and match aircraft sizes to the flight lane. OTOH, Southwest standardizes on a small number of aircraft and prefers direct flights. This lets it reduce the costs of training and maintenance, and reduce the cost of operating large hubs. The different business architectures appeal to diverse sets of passengers, because the passengers have different utility curves. In effect, linkages tie directly back to the value models of the consumer(s) and provider(s) and the constraints
that the environment enforces on its own (e.g. how far can a 727 fly without refueling?). As a related note, I love Christensen’s concept of discontinuous innovation.

In summary, I believe that necessity is the mother of invention, and value model diversity on the demand side will force the supply side to better satisfy it. It may not be a painless transition, because a lot of firms haven’t learned how to:
a)Forget about their own agenda, and immerse themselves in their customer’s context
b)Learn how to be jugglers and figure out which things can be juggled together and which cannot.
Let me know what you think.
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