This is part-two of a four-part series of blogs by our January Guest Blogger, Paul Barnett, that will be followed by a live event to further explore and discuss the issues raised. Part One explored the problems associated with how we think, define, measure and account for value, plus some of the consequences. In this second-part Paul explains in more detail the impact in relation to innovation.
Most major projects involve innovation in some form or another, but even in cases where they do not, some of the reasons both innovation and major projects fail or disappoint are similar. The root cause of the problem has been well research, defined and articulated by Curt Carlson of The Practice of Innovation (TPI), and formerly president and CEO of one of the world’s most productive innovation enterprises based in Silicon Valley.
Having discovered, “only 5% of venture capitalists in Silicon Valley make all the money, and 70% lose money”, and “only around 20% of all investment in research and development creates any real value for stockholders”, he set out to understand why. He wanted to know how we can “innovate smarter”. His conclusion is that in most cases “failure starts at the start”, with the lack of a real value proposition. And, if you can’t describe your value proposition you don’t know what you’re doing”.
Readers of the first part in this series of blogs will note, the last sentence echoes my statement, “if you can’t define what value you create, who for, and how your strategy is probably not worth any more than the paper it is written on”.
Carlson goes on to say, “the real focus needs to be on value creation” where value is defined by the customer, not by the business or organisation. Value is a customer perception – or a patient, citizen or client perception. Management Guru Peter Drucker also said the only purpose of an organisation is “to earn and keep a customer”, and the only way to do that is to create customer value. But let me stress that attention must also be given to the value demanded by all those upon whom the business or organisation depends to create and deliver customer value – suppliers, distributors, employees and society as a whole. This may seem obvious, but it is far from common sense as Ron Adler explains in detail in his excellent book, The Wide Lens: A New Strategy for Innovation, which deals with “the innovation blind spot”, which recognises that, “with ever greater frequency, your success depends not just on your ability to execute on your own promises, but on whether a host of other partners-some visible, some hidden – deliver on their promises too”. The sponsors and managers of major projects may have a better understanding of this than many, but the frequency of failures and disappointments suggests otherwise.
All interests must be considered, but they rarely are. The biggest mistake may be made by the firm that focuses on maximising shareholder value, especially in the short to medium term. This leads to an immediate conflict of interest between shareholders and customers. Another problem stems from the false idea that all the interest associated with an enterprise must compete for a fixed amount of value in what Michael Porter called the Value Chain. In truth, the value chain – the process or activities by which a company creates value, including production, marketing, and the provision of after-sales service – does not need to be about creating a fixed amount of value, and fighting for the largest share of it.
This focus on competition, with the aim of achieving a “sustainable competitive advantage”, made Michael Porter the most famous of all management gurus. But value creation is not a zero-sum game. Business owners, employees, suppliers, distributors and others could collaborate to co-create an endless amount of value in a positive-sum game. This realisation led me to re-think my approach to the management of a twenty-five-year-old firm in a traditional industry that had been in long-term decline. I changed the relationship from transactional competitive relationships to collaborative ones. In the first year we grew sales by 105%, and we quadrupled turnover in three years with no additional investment. For 25 years all that value had been left on the table because of the nonsense of the dominant logic. And I firmly believe that the dominant logic blinds us to the vast amount of value that could be being created. Using the iceberg analogy, I suggest the value in most ventures stays submerged and out of sight below the waterline.
Carlson suggests the value propositions should ideally offer solutions to meet big and real needs that offer important opportunities, not just opportunities that the firm finds interesting. He proposes “innovation for impact” as the driver, where the “level of surprise is a good indicator of the likely impact”. Well, there are certainly enough big unmet needs and challenges that offer such opportunities. But my own story, mentioned above, suggests that there are plenty of opportunities even in more mundane long-established industries.
After delivering hundreds of workshops Carlson remarked that not one client was able to provide a well-defined and coherent value proposition. And, of the many pitches made to him by entrepreneurs over the years, he says 95% also fail in this regard. They focus instead on a process or an approach to an opportunity the firm finds attractive, with little regard for what the customer really thinks. And it is often assumed that the customers will see value in it, but such assumptions often prove to be false.
Carlson turns this usual approach on its head and defines innovation as, “the creation and delivery of new customer value in the marketplace, with a sustainable business model”. First define the need, then develop the business model. I think we could simplify this further by saying innovation is a “much needed sustainable solution to a real customer need”. This makes it applicable to all sectors. And, when it comes to identifying, ranking and prioritising needs, much work has been done on this, building on the hierarchy of needs proposed by Abraham Maslow in his 1943 paper “A Theory of Human Motivation“.
If failing to identify real needs and translating them into a well-defined and articulated value proposition represents the point at which problems start, as Carlson suggests, turning that proposition into a sustainable business model and executing it is the next big hurdle. The risks are in over-complicating and over-simplifying issues and the design, and in making false assumptions and adopting wilful blindness to the facts. Additionally, there is no opportunity for the business or organisation if it lacks the capabilities and competencies required to address the need, or it cannot access them.
These issues need to be addressed in the design stage. Most speak of designing a business model. I prefer to call it a Value Scheme to keep the focus on the purpose, creating maximum net value for the customer. I define the value scheme as: “the design that provides the means by which the firm is able to sustainably create value”. The process also considers factors that will reduce the value created, and levels of risks. Judgement and assumptions are still necessary, but the process is made more rigorous by asking “what needs to be true” to achieve success, and using a Scenarios-Based Strategy approach, defined by Paul de Ruijters of De Ruijter Strategy in his book of that name (see detail about his Masterclasses below).
Prof. Roger Martin in his books “Playing to Win” and “Design for Business” also provides a very useful start for anyone who wants to design a value scheme. He describes the process, from heuristic to algorithm – broadly speaking, from concept or idea to a codified system and the steps in between.
At this point it is worth stressing, the process should not be a one-time event. Innovation, to enhance existing products and services or create new ones, should be considered a continuous iterative process of adding more, and new, customer value. To fail to take this approach is to leave value ‘on the table’, and it puts the enterprise at risk of drifting into irrelevance over time.
That timeframe gets ever shorter, with product and business lifecycles moving ever faster. And the term VUCA, to describe the volatility, uncertainty, complexity and ambiguity of the modern world, makes the risks of shorter lifecycles even greater. Collectively they threaten the value creation potential of firms. The implication is that all businesses and organisations need to be more responsive and, to use the management buzzword of the day, more agile.
To make this real, rather than abstract, boards and executives must not only understand what value they create today, for whom and how. They must also have an eye on the future, and ensure they have the competencies and capabilities to adapt. Again Scenario-Based Strategy is essential in this process. And this reality also has implications for recruitment, talent development, ways of organising work, incentives, management and leadership styles etc. The HR function needs to be far more strategic than it has been, or the task needs to be managed by another function. Either way, getting this right will provide the firm with perhaps the greatest source of sustainable competitive advantage in the future. Getting it wrong explains the number of firms that manage to transition from one business model to another is estimated to be only 7%, and the average lifespan of a firm is now less than 15years.
In conclusion, nothing determines the future value creation potential of a firm more than its ability to innovate continuously and effectively in response to ever changing customer needs and wants, and ever shorter product and business lifecycles. But still, most firms are unable to explain what value they create today, for whom and how. The only conclusion that can be drawn from this is, they don’t have a clue how they will need to adapt, what competencies and capabilities they will need or resources they must have or have access to, to create the value customers will want in the future. Valueism, with a focus on designing value schemes and the use of Scenario-Based Strategy, is an approach that will increase survival rates and help future-proof businesses and organisations.
In the next part of this series of blogs I will explore the question of “Value for Whom?”
Paul Barnett is Founder & CEO of the Strategic Management Forum and will be delivering a series of Value Creation Masterclasses during 2019. The Strategic Management Forum is also hosting Scenario-based Strategy Masterclasses by Paul de Ruijters.
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