On Value and Value Axis

theory

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What is value?

There are many contradictory theories. Value is inherently connected with ownership, and it is a measurement of how other people want (or will want) something that you control.

Almost everything has some value. Your time has value, your character, humor, body - everything has value, as others may want it. Our entire social life is organised around how much others want to be in our vicinity. Often, you trade your time to get something in reward (Facebook!).

Figuring out what others want is difficult. Figuring out how much do they want it - even more difficult (requires predicting what large groups of people will think).

Value added

You can use a number of resources you control (including your time) and create something of bigger value, that others want more than the sum of the resources. Sometimes, they do not have to value the resources at all.

Measurements

Every person measures the value differently.

Money is used to make value comparison possible. Some people will hate me for this, but almost everything (if not everything) can be measured with money, but in some cases it is unethical or inhumane to do so.

Sometimes, different measurements are used. For example, in healthcare - Quality-Adjusted life year - which means how many quality life years you will get after receiving health intervention.

Transactions

Each time two persons meet, and they both want something the other is controlling, they can exchange their rights, and end up in a situation, when they both got more value. Tangible, intangible, present and potential assets can be a subject to a transaction.

Buyer remorse

You buy something and it appears that the value you got is not something you have expected and was not worth the price.

Value extorted

By using the asymmetry of information (or situation), you get better exchanges on what you are delivering, because the other party has no choice or does not fully understand the value of the received item (how much value it will generate in the future). Buyer remorse usually appears. The edge case here - robbery (someone gets /illegal/ control over your health, and demands some assets in exchange).

Value won

When asymmetry causes acceptance of a deal worth far more to one side than expected. The “market for lemons” effect, and the rare good used car.

Lack of agency

Sometimes, time is being transacted in exchange for money. Most often, it is called “Employment”. A person wilfully trades time for money, and agrees to produce value on behalf of somebody else. Since there is a contract in the place which defines what will be done and how, such a person, for the time of employment, loses the agent status and cannot really decide what to do in time that was sold. Such a person becomes a resource-like (hence the term - human resources). I know it is dehumanising, and would like to state it in better way, so please contribute if you can.

Value chain

Value chain is just a graph of actors and controllable assets (components). The control may be direct (ownership) or indirect (any kind of agreement). What is important that with a few exceptions, value always flows both ways.

On the diagram above, there are two basic types of flow. Naturally, often, the reality is more complicated:
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Actors (humans) are using resources to build things that others want. They trade the value, because nobody is self-sufficient. We have as many human nodes as we have people in the world, or even more (animals, plants, etc, I am getting philosophical here).

Note that on this diagram the distance between nodes does not count. The diagram should look familiar, because once you understand how big is the network, you want to analyse it from the perspective of the actor, which has resources, things that he needs (and therefore wants) and things that other want from him.

  1. Transaction is usually closed with money (but does not have to).
  2. The individual has two purposes here:
    a. get as much value as possible
    b. use as little resources as possible (note, this is a bit misleading, because it is subjective. People value time, money and other resources differently).

Now, often, the resources require some other resources to work correctly. The controlling actor can redirect part of the “revenue” stream (it is not revenue, just resources that he cares more about) to close the transaction and meet component dependencies.

Since money are the most common used mean to close any transaction (they are quite universal tool for that aspect), we can remove the closing leg of all the transactions:

The last step is a recognition that, in business, there is very little agency involved. Once things are contracted and put in place, they work as the contract tells them. Sometimes, they are even very automated (I will agree to all transactions when someone is willing to pay this amount for this product). The distinction between agents and components with dependencies is not that important:

If we now rotate this and ensure that dependencies are consistently represented, we get:

and finally, a value chain:

Conclusions

Value chain is, in fact, a representation of how the identified components (read more in this post) interact with each other, and that representation focuses on creating something that others want (value). Since any model is imperfect, we have lost the ability to see how the money are flowing and who can really influence the value chain.

But we got the ability to optimise the chain to generate biggest value in the most efficient way.


Special thanks to: