Value innovation – a big leap into the blue ocean

PART 11

Last week, we introduced the concept of the Blue Ocean strategy. We explained in brief the concept and the four guiding principles to be aware of when creating the Blue Ocean strategy. We also spoke about ‘value innovation’, which is the cornerstone of strategy. We ended the article with the following paragraph:

The most successful value innovations will lead to values that are multiples of the firm’s costs of goods and/ or services. This allows a price that is both far below the customer’s perceived value (thus catalyzing sales) and far above costs (thus catalyzing profits). Let us continue. Setting the price of a product divides this economic surplus between the supplier (in margin) and the consumer (in that the willingness to pay is higher than the price). Value innovation requires creating enough economic surplus to support a price that makes business sense and thrills customers with the benefits, while technology innovation may be a means to create this economic surplus, it is only one of many means. Even in cases where technology plays an important role, for example in Microsoft’s operating system, it is enablingthevalueinnovation.

Value innovation process

Based on the interviews with ‘innovative companies’ and value innovation principles, a team of experts has developed a process model that translates value innovation into organisational reality.

The model is divided into three primary sections:

Providing exceptional value to the most important customer / increas-ing enterprise value

The five-stage value innovation process

The key cultural factors influencing the enterprise’s ability to valueinnovate The drivers of the process, providing exceptional value to the most important customer in the value chain, which in turn fuels enterprise value, are shown in the model’s lower disk.

Enterprise value is delivered through a reiterative business process, based on ‘five stages’ (shown in the central disk). We visualize the disk as rotating, providing the mechanism to drive value innovation and keep it focused on the result. The stages are:

Business Intelligence Value Modeling and Analysis

Decisions and Prioritization

Communications and Implementation

Value Validation The force in the model is created through the reinvention culture, shown in the upper disk. We visualize this disk as having great weight, which relentlessly drives further value creation when directed correctly through the business process. The ability and effectiveness of an organisation to value-innovate is influenced largely by its ‘culture’.

To break these cultural barriers, Dr Gary Hamel, American Business expert, has described a few requirements which are needed. He says if these prerequisites are available, any company can have its ability to bubble up billion-rupee ideas. According to him, there must be: An authentic market for new ideas.

Teams crossing all functions and comfortable with intense, detailed, high-energy debates where the focus is on the most important customer and the business environment.

Systems thinking permeating all planning.

Recognition of the difficulty of managing risk for economic outcomes and quantitative tools used to evaluate a broad range of ideas and scenarios.

Trust, honesty and candor throughout the organisation.

Five stages

Now let us go to the five stages we indicated earlier and discus their objectives, top-level tasks and ‘best practices’ and instruments to be used.

Stage 1—Business Intelligence

The first stage of the Value Innovation Process (VIP) calls for the identification of new business models and opportunities that will create exceptional value for the most important customer. This high-level thought process captures inputs from multiple sources and builds on core competencies to generate value propositions from which the most important customer will perceive high value in the product, service or delivery. Inputs to the VIP can come from multiple sources, including: The company idea process, innovation mentoring, alliance partners, customers, vendors and the general public.

Stage 2—Value Modeling and Analysis

This stage requires that the value propositions developed in Stage 1 be validated through discussions with key customer risks and uncertainties are identified and ‘killer issues’ surfaced.

Stage 3—Decisions and

Prioritization

Here, the risks and uncertainties identified in Stage 2 are quantified using focused market research and testing in the hands of the ultimate customer. A series of instruments are available to help the team with its decisions.

Stage 4—Communication/ Implementation

After a ‘Go’ decision following Stage 3, project teams are assembled for each value proposition and move into action. To maximize project success, the best project leaders (future general managers) are selected, every team member is an ‘A’ player and each project is championed by members of the senior management team. For each project, the business opportunity is described fully and communicated; the path forward is clearly articulated.

Stage 5—Value Validation

This is the last stage before the new business is launched. Only when it is clear that the new business opportunity or model or the new product opportunity, creates exceptional value for a key customer and that success will increase the company’s value, will the new business be launched.

Applying value model

How can CEOs refocus their thinking? There is no single prescription that fits all situations, but there are a few crucial points. Fundamentally, it is important to remember that, “Value innovation can occur with, or without, technology innovation in any organisation and at any time in a sustainable manner with the proper process.”

This means that CEOs’ role is similar to a marriage broker, trying to find the right match between business opportunity and technology capability. Sometimes this marriage may be driven by technology; sometimes the marriage will be driven by business opportunity.

Because of the natural biases in a technology organisation for the former, the CEO should be especially vigilant to find and support marriages that start with a business opportunity capable of delivering significant value to the most important customer.

The CEO should also encourage value innovation from all parts of the organisation. He should not let technology alone assume the mantle for innovation; rather, let it be in service of value innovation from whatever source.

Parting note

As a parting note today, we will listen to a few comments made by Renée Mauborgne at an interview after her keynote address at the 2013 Annual Danish Top Executive Summit recently. The interviewer asked her whether some companies create a better innovation framework than others.

She replied, “They differ in relation to ‘value innovation’, which the Blue Ocean strategy deals with and in relation to ‘innovation’ in general. The latter is a very broad concept which includes technological development, ‘creative destruction’, entrepreneurship and much more.”

“Innovation is most commonly perceived as being powered by technology and as taking place without having to change one’s corporate strategy. ‘Value innovation’ links innovation to utility value, price and costs. This makes it a more strategic point of departure. When trying to achieve a competitive advantage for a business, this effort should always be based on the business strategy – not on political initiatives or cultural factors.”

“Creating growth and earnings is a deep-seated impulse in most businesses. The need to create value innovation is particularly prevalent in highly developed and mature markets. China and India no longer need to stay within their respective national borders. Instead they are throwing themselves headlong into the global marketplace with strong brands. And they are willing to take risks to create value innovation and thus, to create Blue Oceans.”

(To be continued next week) (The writer, a corporate director with over 25 years’ senior managerial experience, can be contacted at lionwije@live.com)