Value Conversion

Both Value Network Analysis (VNA) and Social Network Analysis (SNA)

draw from exchange theory and address the question of how 

social relationships convert into other forms of value.

How people create value

As individuals we have both financial and intangible assets. We might have some money or capital (financial assets); we have some tools and ways of working (internal structure); we have expertise and know-how (human competence); and we have our reputation and personal network (external structure). This also holds true for organizations.

We put these assets into play for economic or social gain by converting them into value offerings for others. The primary economic engine is people - who convert their competence and other assets under their control into negotiable forms of value that can be deployed or delivered to others. Negotiable value is an important qualifier as a clearly defined deliverable allows people to negotiate an exchange of value where they can perceive reciprocity or a potential gain.

In turn, when people receive value inputs they convert them into some kind of gain, asset, or capability for themselves. They will use knowledge inputs for example to improve competence; payment for services improves financial assets and so forth. If we can more deliberately work with these value conversion dynamics we can not only better utilize and leverage the assets we have but can also link value flows to the accumulation or growth of those assets.

Value Conversion

Participants in a value network, either individually or collectively, utilize their tangible and intangible asset base by assuming or creating roles whereby people convert those assets into negotiable forms of value that can be delivered to other roles through the execution of a transaction. In turn, the true value of deliverables received is realized by participants when they convert them into gains or improvements in tangible or intangible assets. The Value Conversion Model in Figure 1 illustrates this value conversion (Allee, 2008; Allee and Schwabe, 2009).

Figure 1: Value Conversion Model

A simple example of value conversion would be an intangible asset such as competence in product marketing competence being converted into a negotiable form of value such as marketing services or reports. People also accumulate assets or realize value from various inputs. An example is when a tangible value input, such as a purchased report on market intelligence, is converted into a non-financial asset of increased levels of marketing competency.

Figure 2: Value Creating Networks

The emergent purpose and value dynamics of the network are revealed through the particular pattern of roles and value exchanges in service to achieving an economic or social goal. Shared purpose and values may be either tacit or explicit but can be deduced from the network patterns and the nature of the exchanges. Value is continually being negotiated in this context of both individual and overall purpose and values.

Acceptance of any value offering is contextual and dependent upon the functioning of the whole network or system of value. In other words, a deliverable might be considered to be of value in one context but not in another. Value is therefore an emergent property of the network; understanding the functioning of the network as a whole is essential to understanding exactly how and why value is created. Although it is useful at the role level to understand one's role in the network and manage one's value inputs and outputs, the dynamics of value in a network are dependent upon network effects, and one cannot determine value by simply adding up all the roles and their outputs (Allee 2008).

This value network model assumes sustainability of the network is dependent upon there being a high level of perceived value from the view of the participants. They must feel their participation brings them direct benefit. Sustainability of the network increases as the participants realize increasing value from their interactions and if the network itself is perceived as being of high value in terms of its social or economic outcomes. 

As an example, a research project in 2007 (Allee and Schwabe, 2009; Allee et al, 2007) demonstrated that VNA is a useful method for describing intangible value conversion at a macro level. This research was an evaluation study for the European Commission to better understand the impact of research networks on Intellectual Capital formation and competitiveness in regions. At the levels of organization, network, and region, value network patterns were linked to specific patterns or "thumbprints" of anticipated Intellectual Capital formation, using the VNA methodology.

Implications

The practical implication of this work is that it provides a possible solution to one of the most challenging business issues in the intangibles economy: describing and monitoring the role of intangibles in value creation. Many acknowledge that approximately 80% of a company's value lies in intangibles, yet practical methods for managing intangibles are not widely used. This problem is especially intense in government, civil society and non-profit organizations, and networks. In these cases value impacts are exceedingly difficult to describe in only tangible or financial terms. VNA offers a scalable method for understanding the dynamics of intangibles and value creation at virtually every level of complexity from shop floor to regions and global networks.

References

Allee, V. (2008), "Value Network Analysis and Value Conversion of Tangible and Intangible Assets," Journal of Intellectual Capital, Volume 9, Issue 1, pp 5-24.

Allee, V. and Schwabe, O., "Measuring the Impact of Research Networks in the EU: Value Networks and Intellectual Capital Formation," paper presented at the European Conference on Intellectual Capital, Haarlem, Netherlands, April 28-29, 2009.

Allee V., Innocenti A., Koumpis S., Mavridis A., Molinari F., Pasher E., Shachar S., Schwabe O., Tektonidis D., Tresman M, and Vontas A., (2007), "Effectiveness of ICT RTD Impacts on the EU Innovation System: Final Report," Evaluation Study for the European Commission, DG Information Society and Media Directorate C Lisbon Strategy and Policies for the Information Society, Unit C3 - Evaluation and Monitoring, December 11, 2007.

Allee V., Innocenti A., Koumpis S., Mavridis A., Molinari F., Pasher E., Shachar S., Schwabe O., Tektonidis D., Tresman M, and Vontas A., (2007), "Effectiveness of ICT RTD Impacts on the EU Innovation System: Annex to the Final Report," Evaluation Study for the European Commission,DG Information Society and Media Directorate C Lisbon Strategy and Policies for the Information Society, Unit C3 - Evaluation and Monitoring, December 11, 2007.

Granovetter, M. and Swedberg, M. (2001), The Sociology of Economic Life, Westview Press, Boulder, CO.

Homans, G.C. (1958), "Social Behavior as Exchange," American Journal of Sociology, Vol 63, pp 597-606.

Taug, J. (2004), "Intangibles and Capital Conversion in Complex Organizations," dissertation, Fielding Graduate Institute, Santa Barbara, CA.

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