Price, value and ‘the market’

How do we make sense of ‘value’ in enterprise-architecture – particularly when we introduce the economists’ notion of ‘the market’ into the picture?

In the midst of the same LinkedIn discussion on capability and suchlike, mentioned in the previous post here on product versus service, I’ve been having a great back-and-forth with Charles Rosenbury, around that question of value. In what follows, Charles’ comments are in blockquotes, and my responses are in ordinary-text:

“The market always predicts future values correctly. I say this because, aside from the market, things have no value. Well, some things have value without a market, but not generally things we would be called in to be an architect for.”

Yikes! – apologies, but I’ll have to disagree very strongly on that one:

  • it depends on what you mean by ‘value’
  • it depends on what you mean by ‘market’
  • it depends on what you consider as the scope of architecture
  • it depends on what you mean by ‘predict’
  • it even depends on what you mean by ‘future’

Quick summary:

  • value must be measured more than in solely monetary terms: trying to force everything into monetary terms will guarantee architectural failure, and probably business-failure as well
  • the boundaries for ‘market’ are recursive, in exactly the same sense as for ‘organisation’ or ‘enterprise’: if you’re not very careful about how to select and describe boundaries, the term itself can be worse than meaningless
  • we can argue endlessly about the ‘proper’ scope for enterprise-architecture, but the fact that it is uncertain means that many of these discussions risk being pointless at best, destructive at worst
  • any futurist would tell you that there’s no such thing as ‘predict’, especially in the sense that most economists use the term in relation to ‘the market’ – the best we’ll ever get is ‘futures’, not ‘future’
  • ‘future’ is, by definition, an infinite variable, from sub-microseconds to astronomical-epochs – which ‘future’ do you mean, because the ‘value’ is different in each!

Sure, we can use economics-concepts such as ‘the market predicts future value’, but in architectural terms they are, bluntly, utter meaningless garbage. (They’re mostly garbage for economics too, which is precisely why our current global-economics is in such a hellish mess…) For an architecture, the practical way out of that mess is:

  • be clear and explicit what you mean by ‘value’ (and it must be more than just money)
  • be clear and explicit what you mean by ‘the market’ (and also its intersection with the broader shared-enterprise)
  • be clear and explicit about your description of the scope of the architecture (and it must be more than just an ‘inside-out’ view from the organisation)
  • be clear and explicit about which futures (plural) you’re working with, and the ranges of variance across those multiple futures
  • be clear and explicit about the timescales (plural) and how those timescales intersect

It’s only if you do that that you’ll have much chance of making sense of the overall architecture – and hence where terms such as capability, function, process and service fit in with it.

One other quick clarification: value is in the eye of the beholder.

It isn’t just the company that determines value. It isn’t just the shareholders who determine value. It certainly isn’t just the architect or the marketing-department that determines value. Value is co-created by all of the stakeholders, across the whole of the shared-enterprise space – including those who may not be directly involved in any transactions, but are still either active or passive stakeholders in the overall outcomes of the shared-enterprise.

If this isn’t clear to you, you should not attempt to do business-related architectures, because you will cause damage to your organisation and enterprise, especially over the medium to longer term.

You Have Been Warned, etc? :-|

[There was then another follow-on from Charles, to which I replied as follows: ]

“So while one cannot measure everything in terms of money, one must find a common denominator.”

Why? To me, there’s a circular-argument there that you seem to have missed.

“For example, what is the value of the loss of life? In my opinion, the value of life is immeasurable. But I must measure the value as something because I cannot spend limited resources on an unlimited value.”

Nope. That’s a choice, an arbitrary assertion.

For example, your mother cooks the family Thanksgiving dinner. It has very real value to the family: but do you immediately try to convert that value into monetary terms? If you do, don’t be surprised if your mother gets very angry indeed at the insult – which destroys the value of the dinner.

In short, don’t make the mistake of trying to convert everything to money: it doesn’t work. Treat each form of value in its own terms first, and only then, in some cases, do a cross-conversion to money. And remember that the forms of value that you didn’t convert to money still continue to exist – or rather, they do as long as you continue to pay proper attention to them.

“In a business, it is the job of the c-level staff to determine whether something has more or less relative value to the company.”

Apologies, but that’s absolute nonsense. It might well appeal to C-level folks’ sense of self-importance, but the reality is that value is determined as a co-creation by everyone involved in the shared-enterprise. If this isn’t obvious to you, try moving around from the C-suite to the shop-floor, across the customer-space, across the shareholder-space, and across different communities within which the organisation operates.

(By the way, don’t confuse price with value: they’re not the same things at all.)

“The architect may also describe that one solution has more capability than another for smaller differences in cost.”

That one I’ll agree with – as long as it’s fully understood that ‘value’ has a much broader meaning than merely monetary terms.

“Let the accountants worry about the value.”

That’s architectural suicide. :-) Also strategic suicide: by the nature of their work, accountants look back, not forward – hence inane pseudo-strategies such as “Last year +10%”.

“As for the future, it will take care of itself.”

No, it won’t – not for us, anyway. That’s precisely why architects’ responsibilities exist.

“But the future does not exist, and value is temporal. So the value of anything is what it is now.”

Value is dynamic, which is not the same as saying that value is temporal. When you’re dealing with real-people – rather than economists’ imaginary notions of ‘the market’ – you’ll realise that people’s assessment of value depends on an immensely complex interweaving of perceptions of time.

“So the market always has the correct price, but the future may change it.”

Apologies again, but that’s flat-out circular-reasoning. Popular with economists, I know, but absolute rubbish.

First lesson for any enterprise-architect: do not trust a single word said by any so-called ‘economist’ – because they live in an imaginary world of ‘perfect markets’ and ‘rational actors’, and have not the slightest clue about how the world really works. The word ‘economy’ literally means ‘the management of the household’ – which, in essence, is the core of the responsibility-scope for an architect, at the respective scope of ‘household’. The sole focus of almost all ‘economists’, and almost all business-schools, is the management of the money – which is merely the easy part of managing a household. As an architect, to understand what your architecture actually needs, you need to understand the whole of the respective household – not merely an arbitrary self-selected subset of that household. Very, very big difference…

[I then went back to a somewhat earlier post by Charles: ]

“I am not saying that capability does not have value. I am saying that capability is not defined by value.”

I’d strongly agree with you there. I’m a bit worried, though, that you might still be confusing ‘price’ or ‘monetary return’ with ‘value’.

“For example, consider a car company. It has the capability to make a car either red or green. They both cost the same amount to make, but the red car sells for $100 more than the green car because people are willing to pay more for red.”

That’s a price/value relationship, which has little or nothing to do with the capability itself. (It’s an interpretation of a monetary evaluation of the potential use of the capability, which is not the same as the capability itself – ‘has-a’, not ‘is-a’, as you yourself say later, and with which I would agree.)

“The company has the same capability for both, but the value of the capability to make a red one is higher.”

Nope. That’s a ‘valuation’ of the potential return from the use of the capability – an attribute assigned to the capability, not of the capability.

“The capabilities are equal. The values are different. If this is true, then value cannot be a part of the definition of capability.”

Sort-of… but only ’sort-of’. The valuations are different, but not the inherent value of the capability as ‘ability to do something’ – don’t mix these up!

[Charles came back with - to me - rather too much of 'the usual excuses': ]

“Perhaps you live in a utopia where management approves project budget based on non-financial aspects. I don’t…”

…and neither do I.

“so I will have to continue with my belief that management is concerned about the money.”

Yes, management is. But architecture must be concerned about more than just the money - otherwise we will not be able to describe how or where the money comes from. Or goes to. Or how they intersect.

It is possible to do some aspects of business-architecture whilst sticking solely to conventional money-oriented views of how business operates.

It is not possible to develop a viable enterprise-architecture whilst sticking solely to conventional money-oriented views of how business operates.

Be very clear which type of architecture you’re trying to do… because if you try to do enterprise-architecture as if it’s business-architecture alone, you’ll get into an even worse mess than if you try to do it TOGAF-style, as IT-architecture alone.

One of the core fundamentals of all enterprise-architectures is about reframing your communication for different stakeholders. When communicating with the C-suite, you need to be able to reframe your architecture in terms that they’ll understand and can work with. Yet the same is true of communications for every stakeholder-group – and the architecture must treat all of those views as one single, seamless whole, in which “everywhere and nowhere is ‘the centre’ of the architecture, all at the same time”. If you arbitrarily privilege one stakeholder-group over all others in architecture, you will inevitably create an architecture that will fail.

Once again, You Have Been Warned? :bleak-wry-grin:

[Charles came back with a kind of verbal sigh, to which I could only concur...]

“I just wish I could get management to spend the money for the capabilities that will be helpful in the future.”

Yep. And note that that in turn depends on another kind of value, called ‘paying attention’ – which is sometimes associated with money, but does not correlate directly with it, and is often a lot more scarce… :also-bleak-wry-grin:

I know I’ve ranted a fair bit just now – but I hope you can see what I mean about the need to think much wider about value, and hence what ‘service’ and ‘product’ and the like actually mean in real economics and real-world business-practice? Because it’s the latter – the real-world stuff, not the imaginary world of money – on which the architecture actually depends. Yes, it’s sometimes associated with money, but does not correlate directly with it – and many of things we most need to work in architectures do not correlate well with money at all.

That’s a real challenge that we really must address.

Finally, a response to a comment by JD Beckingham:

“Goodwill is an example of a perceptual value being monetized for accounting purposes. All types of value (utility, quality, perceptual) can be monetized. Before doing so they should be well understood in their non-monetized form.”

Very strongly agree that all types of value should be well understood in their non-monetized form.

Also strongly agree that all types of value can be monetized. Whether they should be monetized, or whether it’s actually wise to do so, is a very different question…

‘Goodwill’ is a very good case in point: for certain types of business – mostly very stable ones with stable clientele – it does make meaningful sense in monetary terms, because past-performance and past-relationships do tend to be maintained into the future. However, for many kinds of business – especially in the days of social-media and instant anticlient-revolt – ‘goodwill’ can often be little better than a mixture of wishful-thinking and outright fraud: consider the myth of possession of ‘eyeballs’ that became a key driver to the dot-bomb collapse.

Architecture can definitely help there, by providing a means to explain that rather important difference, to over-monetised business-executives… :-| :-)

And hope this helps in general – over to you, perhaps?

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Posted in Business, Complexity / Structure, Enterprise architecture
10 comments on “Price, value and ‘the market’
  1. Gene Hughson says:

    Great post, Tom. Ever since reading Seth Godin’s “Signals vs Causes” piece last month, that theme has been playing around the recesses of my mind, and this post just reinforces it. Price is a signal of value, not the value itself.

    Market predictions of value are “better” than an individual decreeing what will have value, but that’s a far lower bar than saying the market’s valuation is always “correct”. Markets achieve this by throwing enough rounds down range that something hits the target – hardly magic. Market valuations are aggregates of all the hits and misses that represent individual valuations. The problem with aggregates is illustrated by the old saying “stick one foot in a bucket of boiling water and the other in a bucket of ice, on average you’re comfortable”.

    • Tom G says:

      Gene: “Price is a signal of value, not the value itself.” – yes, exactly.

      I like your point about aggregates and averages, too. :bleak-wry-grin:

  2. Stuart Boardman says:

    Great stuff. I was on the point of settling for just congratulating you, Tom, for an excellent article and Gene for a useful addition, when I thought of the following two things.
    I don’t think the market has anything useful to say about value. The market tells us what price can be got today for the same element of value that had a different price yesterday. This fact alone tells us that price is only an indirect measure of value. The price associated at any one time with the identical value is determined by a complex interaction of differing factors, of which the famous twins supply and demand are only one small part.
    The other thing was that all the people I have met who are good at doing business cases include the intangibles in this and do not insist on putting a financial value on all of them. Actually, doing so is a huge risk, as the judgement is essentially subjective. Nonetheless if the financial side is unconvincing, it will be hard to sell it on intangibles alone. Not that that has anything to do with value but I mention it, because it cropped up in one of Tom’s discussions.

  3. Peter Murchland says:

    Tom, I appreciate the insights and perspectives you have offered here.

    I would like to take them a bit further – having a strong background in public sector and community sector organisations – I am always interested in how our EA thinking, articulation and practice can be applied to all sectors, and where we might change or adjust language to make it more amenable to a broader audience. Hence, thinking about “markets” and “economics” in the broadest sense, and not just restricted to monetary or financial considerations (as you have already indicated is important to do).

    So, I am interested in the interplay between cost, resource consumption (whether costed or not), price (where applicable), funding (and not just payment) and value.

    There are plenty of situations where the exchange between enterprise and customer is not accompanied by a financial transaction – hence, the importance of separating cost and price from value considerations, and hence the importance of better understanding value and/or other factors which influence customer / provider engagement decisions.

    So, I would encourage our thinking and discussion around markets as places of exchange, and around value where one form of value is exchanged for another.

    To make this more tangible, consider services which we regard as “free” because they are government provided (leaving aside tax as the source of funding) yet there are still choices to be made in relation to competing products or services.

    Or consider the notion of the “attention economy” – how others (whether people or enterprises) compete to gain our attention and the allocation of our most precious resource (time) to engagement with them or their enterprise.

    These types of considerations, which are quite pertinent in all sectors, take us away from debates about price and financial transactions and allow us to consider a broader range of factors which are at play as we engage with others.

    • Peter Bakker says:

      +1 from me too for Peter’s comment that

      I would encourage our thinking and discussion around markets as places of exchange

      Markets are part of the infrastructure!

    • Tom G says:

      Peter – I’ll add my ‘+1′ to this lot too! :-)

      Whenever I look at cost, I’m always assessing all types of cost – not just monetary ones. As you say, this is especially pertinent in government and the like, which is often work more with interactions (people-to-people, people-oriented services) than monetisable/monetary-form transactions.

      As several people have said, one of the more directly-important non-monetary costs is attention: money does not buy either people’s time or people’s attention, as many folks in the ‘social-marketing’ space are only just now beginning to understand. (And some still don’t, of course, having just had to get up from this to answer a phone-call from one of those they-who-make-them-shall-be-forever-damned automated ‘PPI-scam’ ‘bots… sigh…)

  4. There’s no “like” button on this site, so this is me liking Peter’s comment.

  5. Assorted thoughts as I read the post and comments:

    As a freelancer, my “product” is my “service” which is of great “perceived value” to some customers. Price varies on the “perceived” value and not the same for the same service to different purchasers. “Payment” varies in amount and by type (non-monetized). I use the term “perceived” because “value” is in the eye of the “purchaser” and not the “provider”.

    “Attention” is a huge prize today. During today’s cultural shift due to smartphones and information overload, the expense an enterprise pays in obtaining “attention” is increasing. Attention” is getting more and more expensive and more difficult to capture as we change from push to “connected engagement”. If an enterprise does not offer a means to “connect” in a social sense, you will go the way of the dinosaur. Goodwill projects do help grow the social connection as a path to attention.

    • Tom G says:

      @Pat: “Attention” is getting more and more expensive and more difficult to capture”

      Yep.

      Interesting, isn’t it, that so many of the ‘social-marketing’ gurus still think that ‘SoLoMo’ (social/local/mobile) actually makes it cheaper and easier to grab people’s attention? (See my oldish post ‘How not to do social-business’.) All that they’re really managing to do, in most cases, is massively increase the resistance to attention-theft (which is a more-accurate name for ‘advertising’), and in many cases massively increasing the anticlient risks too. Oops…

      (Congratulations on not falling into that trap in your own ‘social-business’ work, Pat! :-) )

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