We are involved in a project for a global growth company where we have recently carried out a project with focus on developing products faster and more efficiently. The project was, in our opinion, a success.
The client company, which is recognised as one of the world’s leading experts within their area of expertise, was, basically, satisfied. However, because they act the way they do when clients are at their best, they ask anyway: Seeing that we are capable of reducing the lead time of a project from 600 to 300 days, why not reduce it to 100 days?
It is, of course, quite the party-killer in a situation where we had expected to get a pat on the shoulder for our efforts. But he is right. Why do we consider good results as final when we are fully aware that in 12 months from now, we will be able to create the same percentage improvements one more time and once again 12 months later? Why do we not change our mindset radically, raise the bar and reap the full benefits now? And once again – not in 12 months, but in six months?
Recently, we had the pleasure of discussing strategy with Roger Martin, Dean of the Rotman School of Management. According to Martin, today, most strategic work suffers from a gap between analytical and intuitive thinking. This is primarily caused by the fact that strategy has become an analytical discipline where predictability is rewarded more than results. Rather promise little and surprise positively than reaching for the stars and risking not quite reaching them – analogously to the above example.
However, large innovations solely based on analyses of the past are rare. For even though the analysis is imperative in order to being able to understand and generalise and, thus, scale, the tempo and complexity in our surrounding world have reached a level where we need to change the balance between value creation and our need for predictability. Those of us who think analytically must learn to speak an intuitive language, and those who think intuitively must learn to communicate in an analytical mindset. Both sets of competences are absolutely necessary. Even though innovation and intuitive thinking are closely linked, it is only when rationality and analysis are involved in the process that the large-scale commercial and business breakthroughs take place.
Companies such as Apple, Google and Just Eat are good examples. Their development has been unpredictable, but their value creation has been immense, because they have been able to combine intuitive and analytical thinking. Whether we, as Roger Martin, call it Design Thinking is of minor importance. We MUST be able to combine that which is rational and analytical with that which is intuitive and irrational. In this cross field, limitations turn into opportunities. This is also where the most successful companies operate and the best employees thrive, develop and generate most value.
Thus, the question presented in the beginning of this article is just a logical consequence of the reality we live in and a question that we – who are well on in years – must get used to being asked: Why not? ...
Understanding the why, what and how of business model innovation
Short-term competitive advantage is created by exploiting existing business models. However, in the long term, all markets mature, competition intensifies and turbulence increases. Consequently, new sources of growth must be explored, and fresh answers to enduring success must be found. The answer used to be innovate or die. But research shows that pouring more money into pure product innovation does not lead to improved performance. We need to dig deeper.
To succeed in innovation and to seize new opportunities, the scope of innovation must be expanded to encompass the full business model, and new processes must be mastered. This article explores how an innovative business model is linked to customer value creation, defines growth opportunities and presents key success factors to exploit the potential of business model innovation.
Rethink customer value creation
Delighting customers is the heartbeat of every business
While pundits claim that the only constant in the world of business is change, one factor remains unchanged and stable. At the heart of any business should lie the aspiration to delight customers. It might seem deceptively simple, but, in reality, this core tenet is challenged every day.
What is customer value?
The idea of ”delighting customers” can be translated into the equally simple idea of ”creating value” for customers. But what exactly is customer value, and how can it be defined?
Firstly, customer value cannot be equated with low price. More precisely, value creation is a trade-off between certain benefits and costs associated with the value proposition over its entire life cycle. The total value of ownership must be calculated to assess the value creation potential.
Secondly, value lies in the eye of the beholder. Value is subjectively judged by the customer, which means that we must identify perceived benefits and costs. All insurance companies know this fact as they, in reality, sell products which, hopefully, are not used. Value is not related to product attributes, but rather customer benefits.
Thirdly, the value creation potential must be adjusted for the riskiness of the value proposition. All innovators know this by heart. New products that are relatively unknown are always harder to sell than well-known products because of a higher perceived risk.
Taken altogether, customer value can be expressed as:
Customer value = (perceived benefits – perceived life cycle costs) x (1 – perceived risk)
Outside pressure from investors triggers the desire to focus on short-term optimisation putting long-term customer and, thus, shareholder value creation at risk. Diverse stakeholder groups compete to capture attention and influence key decisions through rhetoric or regulations. Inside impediments come in many shapes. Actions of the past such as investments and strategic choices create commitments that are hard to escape when customer needs are changing. Often, the understanding of customer needs lacks depth or is based on false assumptions, thus limiting capabilities to conquer a differentiated position in the marketplace. Management incentive structures are aligned with a strong focus on ”running the business” rather than ”developing the business”. Mental blinders tend to pop up resulting in a bias to run business as usual, and new ideas are judged unattractive due to the risk of cannibalising the current business. And the list continues.
Altogether, the simple goal of delighting customers is not that simple at all. Even though it has been proven time after time that customer-centric organisations are the most successful, it is complex and challenging to walk the talk. Moreover, the ways in which organisations deliver valuable customer experiences have dramatically changed in the past decades.
Focus on customer benefits – not product attributes
A quick glance at the history of delighting customers shows that focus has expanded from fulfilling simple needs to addressing the full range of advanced customer needs, and the scope of innovation has been widened from basic products to integrated solutions. In other words, the key driver has been growing attention to manipulating all parameters of the business ecosystem in order to deliver customer value.
In the days of mass production, customers were delighted by simple products fulfilling basic needs and wants. Henry Ford famously dictated in 1909 that customers could have the functional benefits of his Model T, while he cared less about fancy colours: ”Any customer can have a car painted any colour that he wants so long as it is black”. Cars were black and nothing but black.
However, excess post-war production capacity and a frugal culture created the perfect storm, motivating companies to find new ways of reaching the heart of their customers. Increasingly, generic products were differentiated and associated with emotional and social benefits. The rise of branding and segmented marketing strongly indicated a shift towards a broader concept of customer value creation. The shift is beautifully portrayed in the TV series Mad Men about the American flourishing advertising industry in the 1950-60's and the boom of Madison Avenue ad agencies.
Who is your customer?
Simple questions usually turn out to be tough ones. Theodore Levitt asked: ”What business are you in?”. We also need to ask: ”Who is your customer?”. While the examples mentioned show the importance of the end user, value creation should be managed for all touch points that your offerings have before reaching the final customer.
In the insulation industry, Rockwool has analysed and designed value propositions for all customers involved with their core product. The chain of customers includes building owners, architects, contractors, sub-contractors, installers and distributors. Moreover, a careful evaluation of different segments within each customer group needs to form the basis for the design of different value propositions for every group.
In the case of fast-moving consumer goods, all companies face similar challenges. Value creation cannot only focus on the end consumer, but should also consider the needs of the shoppers buying the goods, the retailers selling the goods, the wholesaler distributing the goods and even external partners responsible for production. Before pouring a simple glass of milk, customer needs must be served appropriately many different places in the total consumption chain.
In parallel, the strong focus on tangible products was replaced with the idea of comprehensive value propositions and selling total solutions to customers. Solution selling emerged as a discipline in the 1970s and is still an effective approach to customer-centric sales. In fact, many businesses are still on a journey from delivering products to creating solutions composed of both tangible products and intangible services. The trend has also been dubbed servitisation of manufacturing, which also highlights the shift towards designing all aspects of the customer experience as well as tailoring the experience to individual customer needs. Customer delight was no longer perceived as a result of simple products, but integrated solutions with a carefully designed and value-adding layer of experiences that surrounded the core product.
In the 1990s, Joe Pine and Jim Gilmore portrayed the rise of the experience economy in which they claim that work is a theatre and every business a stage. Accompanied by branding strategies that engaged all five senses and even experiences designed around the idea of catalysing personal transformations, the experience-centric thinking supplemented past logics of value creation. On the one hand, products developed into solutions. On the other hand, fulfilment of functional needs was accompanied by addressing more sophisticated customer needs.
Recent developments in the ways of delivering customer value might be considered as a counter-reaction to the mainly narcissistic attempts to achieve experienced-based differentiation. Fuelled by financial meltdowns, rising awareness of human impact on the environment and increased global inter-connectedness, most organisations are now consciously evaluating how to fulfil altruistic benefits for customers. In other words, how to incorporate elements of selfless concern for the welfare of others in their value propositions, e.g. cradle-to-cradle principles and the ambition to safeguard the planet for the coming generation through company-wide social responsibility, plays a still more vital role in order to delight customers (figure 1).