Charlie Alfred’s Weblog

Alignment

In the general case, value models help to explain what how a person will make decisions and take actions.  They describe how an individual prioritizes benefits, what level of a benefit they desire, what tradeoffs they prefer, and what risks they are likely to accept.

However value models play an even more important role in organizational situations, where groups of people are called on to act as one. In this situation, the group has a value model which is some composite of the value models of its members.

This entry will briefly explore the first scenario – the usefulness of value models in one-on-one alignment situations. Subsequent entries in this blog will consider two common many-on-many alignment situations:

o   members of a team trying to reach consensus

o   a product development organization deciding what type of product to build

Each of these alignment discussions is intended as an introduction to the value modeling process, which will follow.

Value Models and Alignment

An Individual or a Group of individuals have a value model (conscious or unconscious) which guides their thinking, and is illustrated in the following diagram:

The top three boxes represent the individual’s (or group’s) role as a provider of value.  Virtually all entities exist to provide value to somebody.  Corporations have customers, employees, and stockholders.  Parents provide value to their employers, children, and  community.  Even rock bands provide value for their fans, concert promoters, record labels (and pharmaceutical suppliers).

These three boxes represent provider value as:

o  success factors (what things must I do or what results must I accomplish to generate value),

o  constraints and uncertainties (what forces shape my environment or current situation), and

o  challenges (what obstacles and risks must I overcome – or said a different way, what constraints and uncertainties provide the greatest impact on value).

The four boxes on the bottom represent consumer value.  Once the individual is clear about their purpose and why it is challenging, he or she is motivated to formulate a plan or strategy for how to achieve it.  Challenges, derived from success factors and external forces in the provider value model become the cornerstone for this plan.  In addition to the external forces which lead to challenges, the individual is likely to have their own set of internally imposed  constraints.  These may lead to the identification of new challenges.

A very important step is formulating this plan is prioritizing  challenges.  This involves careful consideration of at least three key factors:

o  Importance  – How much value results from various degrees of success in addressing a challenge?

o  Difficulty      – How much impact do the external forces linked to this challenge have on value?

o  Centrality    –  How many other challenges or decisions depend on the approach chosen for this challenge?

Once the challenges are sorted out, the individual analyzes them and identifies alternative approaches for addressing them.  Each alternative approach typically involves several related decisions.  These approaches consider resources in a broad sense, considering capabilities that are immediately available as well as those which may need to be acquired externally.  After comparing the costs and benefits of each approach, the most preferred approach is chosen.  The decisions which make up the chosen approach may place a new set of internal constraints, which can add to or change the priorities of the remaining challenges.

As the formulation of the strategy unfolds, certain patterns or rules begin to emerge from the approaches which address the most important challenges.  These patterns or rules describe the underlying principles of organization and theory of operation of the whole.  Capturing and articulating these principles is critical to providing coherency and conceptual integrity for the remainder of the strategy.

As an example, the United States Constitution captures the core principles for the federal government:  branches of government, separation of powers, and system of checks and balances.  These principles derive directly from key success factors articulated in the Declaration of Independence: government exists to serve the people  and people are born with certain inalienable rights.  They also derive from certain known constraints and risks, such as tyrannical governments and the fact that power corrupts.

Finally, once a strategy is formulated, the individual must identify what set of capabilities are needed to implement the strategy.  This leads naturally to an evaluation of which capabilities are directly available and which should be acquired.  In some cases, this decision is clear cut, and in others, an assessment must be made regarding whether it is better to in-source or out-source.  The net result is a first-order approximation of what benefits are needed.

In summary, this flow from value provider to value consumer provides a coherent connection between an individual (or group’s) purpose, challenges, approaches, and the benefits they seek.   The most important thing about such a value model is its resilience over time, in the face of change.   The benefits sought by a value consumer will remain constant, as long as all the boxes in the stack remain constant.  If their key success factors change, it is likely that the benefits they seek will change.  If their environmental constraints or risks chance, so will their benefits.  If none of these change, but their approach or capabilities change, the benefits they change are likely to change, in response.

In the 1800’s, we used history to forecast weather.  If today is sunny and warm, there was a good chance that tomorrow will be also (except in New England, of course, where if you don’t like the weather, wait an hour).  Or, if last January was gray, cold, and snowy, this January is likely to be similar.  However, as the ability to measure and monitor weather variables improved, we became much more able to predict the forces which cause weather patterns to change: barometric pressure, high and low pressure systems, and warm and cold fronts.  Value models which link a purpose to benefit needs, have the potential to do the same.

Influencing a Decision Maker

Value models have some important applications to several types of one-on-one situations:

o   Person-to-person sales

o   Real estate agent with a potential home buyer or seller

o   Convincing your boss to authorize a proposal

o   An opening or closing argument by a courtroom lawyer

o   A physician trying to help a patient make a decision regarding an elective procedure

Each of these situations has two important similarities. Somebody is in a situation where they need to make an important decision, and someone else is in a position to influence this decision.

The better that the influencer understands the decision maker, the more effective the influence will be. However, the influencer has his or her own value model, which encapsulates their success factors, constraints, uncertainties, challenges, approaches, etc.

Bill Stinnett’s excellent book, Think Like Your Customer: A Winning Strategy to Maximize Sales by Understanding and Influencing How and Why Your Customers Buy addresses this subject extensively. Bill keenly observes that every sales situation is characterized by three points:

Point A: The situation your prospective customer finds himself or herself in presently

Point B: The state where your customer chooses to buy a salesman’s product or service

Point C: The desired situation that your customer wishes to reach.

While Point B is the objective of the salesman, it usually is an insignificant intermediate point for the customer. To illustrate exactly how true this is, imagine a young couple, facing a snowy winter in New England (Point A), who wants to escape to Hawaii for a February vacation (Point C). They talk with a couple of travel agents who research some alternative airline and hotel packages (Point B). Even though the purchase of the airline and hotel reservations is what generates the travel agent’s commissions, booking reservations is at best an interim step for the couple. Golf, surfing, exploring lava fields, or sipping tropical drinks on the beach while watching the sunset might be part of the vision, but making reservations, checking luggage, and enduring 14 hour flights are nothing but necessary overhead. A travel agent who stresses an ocean view room, a private balcony, and access to championship golf courses is linking to Point C. A travel agent who focuses on arrival and departure times, aisle seats, and automatic flight check-in is stuck at Point B.

In this context, alignment represents the degree to which the influencer can align their own value model with the value model of their decision maker. This alignment is commonly referred

to as a “win-win” scenario. In his best seller The Seven Habits of Highly Effective People, Steven Covey wrote, “Seek first to understand, then to be understood.” The influencer wins by helping the decision maker win, not merely by trying to convince the decision maker to make a decision which benefits the influencer.

Negotiation

Roger Fisher and William Ury extend this concept of alignment to bilateral and multilateral negotiations in their book Getting to Yes: Negotiating Agreement without Giving In. They contrast the effectiveness of traditional “position-based” negotiation with “interest-based” negotiation.

The poster child for position-based negotiation is the typical labor/management negotiation which ends in the labor union calling a work stoppage. Each party in a position-based negotiation views the process as a zero-sum game. Any concession they make from their position is a sacrifice, which must be compensated for or exceeded by a sacrifice made by the other side. Sometimes one side is much more powerful than the other, and it eventually forces the other side to concede. In many other cases, the sides have relatively equal power, and an extended stalemate is reached. In this case, the win-lose positional struggle quickly degrades into a lose-lose situation.

Interest-based negotiation is based on understanding and aligning the value models of the negotiation participants. Party A finds it in their best interest to give up some amount of X, in order to get some amount of Y. This tradeoff works out as an increase in value for Party A because the increased value of Y is greater than the value lost from the reduction of X.

In a zero-sum game (i.e. position-based negotiation), person B would suffer a loss in value equal to person A’s gain. This would be a win-loss scenario, not a win-win. However, value is subjective, and therefore is not a zero-sum game. It is completely possible for Party B to derive more value from the same exchange that gains value for Party A.

The figure below uses consumer-provider utility curves to illustrate the dynamics of a win-win scenario:

o  The seller has excess inventory which he wants to sell before the end of the accounting period.

o  The yellow box in the lower-left graph represents the seller’s value if he can convince this buyer to increase his order quantity from 1 to 2.

o  The buyer’s utility curve is shown by the blue box in the upper left graph.   The shift from order quantity 1 to 2 is the buyer’s sacrifice (warehouse space, carrying cost) to buy more than he needs.

o  The lower-right graph shows the value sacrificed by the seller when price is discounted.  For prices in the upper left area of this graph, profit margins are strong, and value decreases more slowly.  Near the center, the value decline accelerates as profit erodes to loss.

o  The shift from 1 to 2 in the upper right shows value increases as the price discount rate increases.

o  In summary, the fact that the width of the yellow regions (gain in value) is larger than the blue regions (sacrifice of value) shows that a larger price discount to move product is a win-win situation.

Value Model theory shows us that value is a subjective perception of benefits, while obstacles and risks are subjective perceptions of constraints and uncertainties respectively. As a result, unless two people have exactly identical sets of perceptions, the game will not be zero sum. A family whose two children have grown and gone off to college sell their 4 bedroom house

to a young couple with three young children. The sellers find the house to be too big for their needs and too much work to take care of. The buyers have run out of room in their small starter home, and want a big back yard for their children to play in.

For another example, consider the November 2005 trade between the Boston Red Sox and Florida Marlins, where Boston traded four prospects to the Florida Marlins for ace pitcher Josh Beckett and third baseman Mike Lowell. The Red Sox picked up a proven pitcher to shore up the front of their starting rotation, and a gold-glove third baseman, while the Marlins unloaded millions in salary and several excellent young prospects. This is a trade where both teams came out ahead. The Red Sox have a rabid fan following that expects them to be competitive every year, and an ownership and revenue base which allows them to afford the game’s second highest payroll. The Marlins play in a smaller market and its owners do not have the same financial resources. As a result, they must continually find the best young players they can.

Summary

Understanding of people’s value models plays an extremely important role in two common one-on-one situations: influencing a decision maker, and negotiation. Reaching alignment requires understanding a fundamental premise – the value perceived by any party is subjective, and is based on their goals, environment, approach, and existing capabilities.

Understanding this premise allows either (or both) party to find solutions which improve the value of both. When a home-buyer signs a purchase and sale agreement with a home seller, both realize value. One party liquidates an asset, while the other acquires some needed space. When a real estate agent advises the buyer that the property has an attractive price, given its size, condition, and location, both realize value. The buyer benefits from the real estate agents knowledge of the market, and the real estate agent earns a commission for facilitating the sale.

Of course, it is entirely possible for one party to capitalize on its knowledge of the other party’s value model. In their book, Freakanomics: A Rogue Economist Explores the Hidden Side of Everything, Levitt and Dubner analyze data on real estate transactions in the Chicago area, and observe that when real estate agents represent themselves, their properties sell for x% more and stay on the market for an average of three weeks longer, compared to when they represent a client.

Generally, one-on-one situations are simpler, because often there are only two main participants. Connecting two points with a straight line is much simpler than using regression analysis to find the equation that best fits many points.

In many cases, the two participants will be composite entities (like companies and labor unions) which aggregate many value models, each with varying degrees of authority and power. These cases will involve a large number of influence and negotiation relationships in order to ripple-up to the composite value model.

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