Capitalism, as Peter Drucker remarked in 1954, is in the first instance about creating value for customers. The significance of his dictum becomes ever more important in the fast-changing customer-centric marketplace of the 21st century. As some firms learned to cope with this new context, the initial gains came from upgrading existing products and services, thereby avoiding disruption. However, most of the extravagant profits of the trillion dollar firms came from the creation of new businesses and opening up new markets, turning non-customers into customers.
The Emergence Of Serial Innovators
And we are now seeing something new: the emergence of serial innovators. Firms like Amazon, Haier, and SRI International, have demonstrated the capability to systematically create major new businesses, one after the other. This phenomenon is not simply the result of top talent or a brilliant CEO, like Steve Jobs at Apple: it occurs because these firms have had systematic processes in place specifically designed to create new value from new businesses.
At the other end of the spectrum, we saw in Part 1 of this article why firms that focus on generating value for themselves and their shareholders tend to destroy value, rather than create it. We also saw why calling shareholder capitalism “value creation” is a masquerade and why stakeholder capitalism is a dead end. Both shareholder capitalism and stakeholder capitalism are relics of 20th century thinking. 20th century firms were generally unable to create new businesses at all: when new businesses did emerge, they were one-off discoveries: strategy departments and R&D groups were often where great ideas went to die.
In the 21st century, creating value for customers is the name of the game. As firms learned how to cope with the fast-moving customer-centric marketplace with Agile management practices. they were able to upgrade existing products and services through cost reductions, time savings and quality enhancements for existing customers. This enabled them to keep up with the competition and fend off disruption to their business. That at least preserved the status quo.
Market-creating Innovation
But the more advanced firms discovered something new. They discovered how to generate innovations that led to entirely new markets, turning non-customers into customers. This is where the major gains in value creation occur.
Efficiency gains, time savings, and quality improvements operate within a limited frame. Market-creating innovations open up markets which didn’t previously exist.
· Sometimes they transform products that are complicated, inconvenient, and expensive into things that are so much more affordable, convenient, and accessible that many more people buy and use them, for example, a weekly playlist of your favorite music in Spotify’s Discover Weekly.
· Sometimes the new products meet a need that people didn’t realize they had and create a “must-have” dynamic for customers, for example, Starbucks coffee or the iPhone.
A value creation process can be both a spotlight and a knife. It can shed light on things that the firm could be doing that will add new value. And it can also enable firms to eliminate or transform costly functions and processes that are adding little or no value to any external customer, like 20th-century-style HR or budget functions.
Market-creating innovations usually don’t come from resolving customer complaints or asking existing customers what they want: As Henry Ford allegedly said, if he had asked customers what they wanted they would have requested a faster horse.
Creating A Common Language For Innovation
A value creation process creates a common language for talking, thinking, and taking action about, value creation. There are multiple frameworks being promoted today. This article highlights the process developed at SRI International. (Future articles will discuss the processes at Amazon and Haier, as well as Rita McGrath’s Looking Around Corners, Blue Ocean Strategy, and the Business Model Canvas.) A key step is to choose one and stick to it, so that everyone in the firm speaks the same language.
Few enterprises today have a shared language for value creation. Many are like a Tower of Babel with conflicting definitions, and approaches, which slows down any possible value creation.
A value creation process is not about taking risks. A value creation process is about gathering different perspectives so as to achieve risk mitigation. Innovation is not the result of luck. It takes discipline, commitment, and hard work. A strong value creation process aims at making success inevitable.
Customer Needs, Not Wants
A key aspect of market-creating innovation is to focus on real needs, not apparent wants.
· When Apple was inventing the iPhone, customers said they wanted more physical keys. Steve Jobs identified the real need: greater functionality. The result was zero physical keys and the touch-screen keyboard. They didn’t need more keys.
· At Spotify, users had trouble finding songs they would like among the 20 million songs Spotify had available, and asked for a better search capability. Management responded by assigning more than 100 developers to improve the search function. However a team of 4 developed—without management approval—a capability to deliver a weekly playlist that gave access 30 new songs, personally crafted to that user’s personal tastes. Users didn’t need better search: they needed quicker and better access to new music.
Customer value is not just about customer benefits. It’s about customer benefits minus customer costs. Often, the biggest competitor to any new product or service is that the customer does nothing: the cost to the customer of adopting the new product or service is perceived to be too high.
The SRI Value Creation Process
Among the various value creation processes, the SRI value creation process is simple, clear and capable of deep impact. A strength is that it puts the emphasis on customer Need, as discussed in a recent Harvard Business Review article: “Innovation For Impact.”
SRI’s value creation methodology has four components: NABC.
N – (most important) what is the customer’s need?
A – what is our unique approach for meeting this need?
B – what are the benefits/costs for the customer and for SRI
C – what is the competition for meeting this need (including the customer doing nothing)
Holding regular value creation forums generated a continuing search for an important unmet customer needs, and the adoption of a shared language and understanding of the fundamental concepts and processes for customer value creation. The forums let any staff present value propositions that demonstrated how their work was adding value to customers. It also developed joint learning and shared expertise in the art and science of value creation.
What’s particularly interesting about the SRI process is that the value creation process became part of the firm’s culture: every conversation tended towards the most important question that all 21st century firms must now address: “how does this activity, function or proposal add value to external customers?”
And read also:
The Four Keys You Need To Achieve Strategic Agility: SRI
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Why Your Firm Needs A Systematic Value Creation Process - Forbes
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