The New Role Of The Firm is Captured In The 4V’s Business Model.

Source code is original writing, describing a system that can be executed by a computer. It’s a facilitating device.

The source code embedded in the research paper Subjective Value In Entrepreneurship by Professors Per Bylund and Mark Packard provides the executable description for a business system and a business model. And it does not require a computer to execute – an entrepreneur can do it.

This particular source code defines a new business model for the firm on two vectors:

  • Redefining value: value is subjective not objective. It exists as a feeling in the mind of the consumer or customer. It has nothing to do with any quantifiable amount whether measured in dollars or some other metric.
  • Redefining the role of the customer: since value is a feeling in their minds, it follows that they, not firms, create value. There is no value without consumption. 

These two redefinitions require a third: the redefinition of the role of the firm. If firms don’t create value, what is their role in value generation?

The firm pursues new economic value on the consumer’s behalf, by identifying potential value, presenting the opportunity for value to the consumer and making it as easy as possible to experience it, and helping the consumer to assess the new experience and make adjustments and improvements if they’re called for.

This new role for the firm can be captured in the 4V’s business model.

V1: Value Scouting

In the past we have classified firms’ contribution to the economy and society in terms of output (what they make or assemble and sell)  or in terms of accounting (revenue and profits). But now we can view them differently through the new lens of how they enable consumers to experience new and increasing value.

Consumers can assess their own value experiences, and they may be able to identify (although not always articulate) those elements of the value experience that are especially valuable, and those that fall short. The genius of the consumer is always to be seeking new and better value experiences, but they don’t always know where to look to find them. They recognize their own dissatisfaction but are not necessarily the ones to source or design a new solution.

In one of his annual CEO letters, Jeff Bezos said this:

It’s critical to ask customers what they want, listen carefully to their answers, and figure out a plan to provide it thoughtfully and quickly (speed matters in business!). No business could thrive without that kind of customer obsession. But it’s also not enough. 

If listening to customers is not enough, what is missing?

The biggest needle movers will be things that customers don’t know to ask for. We must invent on their behalf. We have to tap into our own inner imagination about what’s possible.

This is the essence of the Value Scout role of the modern firm: the capability to identify value potential based in customer needs yet not well-articulated by them. The resource to tap into to accomplish this impossible-sounding task is dissatisfaction. Customers don’t always know what they want, but they do know what they are unhappy about or less than satisfied with. The great economist Ludwig von Mises called this feeling “unease”. It’s non-specific but it’s an open-ended request for help to make things better in some way. 

What’s the entrepreneur’s value solution for unease? Jeff Bezos suggests wandering:

No customer was asking for Echo. This was definitely us wandering. Market research doesn’t help. If you had gone to a customer in 2013 and said “Would you like a black, always-on cylinder in your kitchen about the size of a Pringles can that you can talk to and ask questions, that also turns on your lights and plays music?” I guarantee you they’d have looked at you strangely and said, “No, thank you.”

Since that first-generation Echo, customers have purchased more than 100 million Alexa-enabled devices. 

Another way to think about new value creation opportunities is to stretch the analogy of service. Services are eating the economy. Services represent around 77% OF US GDP and 65% of world GDP. And goods are just a physical embodiment of the services they can help deliver – like the black cylinder in the kitchen that Bezos referred to. 

Why are services so pervasive? It’s reasonable to assume that people crave service. A good thought experiment  is to ask, if people could have more servants, what would they have them do? Alexa is a servant who is always on call, will answer many questions, connect the user to further services, and generally facilitate a more convenient life. A life with servants. The apps on smartphones are like digital servants, and will be more so in the future as they become more intelligent and more digitally augmented. What will we ask them to do for us?

V2: Value Process Facilitation

The second role of the firm today, complementary to the value scout role, is to act as value facilitator.

It’s the consumer / end user who creates value. Firms compete to facilitate the consumer’s act of value creation. To bring the means of experiencing value up to the point where the consumer merely has to say yes to it, to press the button, to make the exchange. Everything else has been done for them in the lowest cost, most convenient, most technologically advanced and most attractively designed manner.

In the Economics For Business entrepreneurial process map, the value facilitation steps are Design and Assembly. Design is the transformation of the imaginary constructs that come from Value Scouting – i.e. an imagined solution to a customer’s unease or dissatisfaction – to a detailed plan for implementation and the assembly of resources to execute and bring the solution to market.

Design is rigorous. Assembly is exacting. Value facilitation requires unflagging effort to remove all barriers, both perceptual and functional, that might impede the customer’s decision to experience a firm’s offering. You can think of it in terms of customer work: how much work do they have to do to avail themselves of your product or service. Is the “servant’ you are providing doing all the work, or leaving some to the potential user? Customers are finding more and more that there are servants and services available to do more and more of the work, so if your offering falls below their emerging standard of convenience, you might meet market resistance.

V3: Value Monitoring

Once the customer has made the decision to experience the service the firm is providing, the firm’s role switches again. Value creation is now entirely in the customer’s hands. The role of the firm is to monitor the experience, and the customer’s assessment of the value of that experience. 

Value monitoring can be quite challenging. Can a representative of your firm be present to observe the consumption experience? If you are operating a sports venue or a theater, or a transportation service or a delivery service, that’s possible. Make sure your employees are trained to observe and report back what they see, and make sure they feel encouraged and rewarded to be accurate observers and reporters. 

If you are operating a website or e-commerce business, you can certainly digitally observe the clicks, time spent browsing, and other behaviors that might constitute part of a value experience. 

These observations are, of course, of behavior, not feelings. Don’t make the mistake of confusing one with the other. To understand feelings of satisfaction or dissatisfaction with the experience, it’s necessary to either ask questions to empathically diagnose customer feelings, or to use inductive reasoning from the behavioral data to translate it into what you think may be the feelings at work, and then find a way to verify your theory with further testing. The connection between behavioral data and feelings is very hard to make. It’s a core skill of entrepreneurial business, and requires effort and continued investment in developing the skill.

V4: Value Agility

The identification of customer feelings about their value experience leads to adjustment of the features of the service and/or of its delivery, or adjustment in value communication so that the customer’s expectations are a closer match for their actual experience. It is the agility of firms as service  providers to adjust rapidly upon the receipt of experiential data from customers and to introduce continuous innovation into the market that marks out the most successful competitors. 

Customers’ value creation never ceases. Their dissatisfaction is never completely eased. They always seek betterment. Value agility matches the customers’ continuous discovery of new needs, and identification of new possibilities, with a flow of new innovation generated in response by the entrepreneurial firm. As many productive resources as possible should be dedicated to agile innovation and as few as possible to maintaining the status quo. 

Value agility is the ultimate commercial proposition.

When Businesses Re-Think Value Using A Subjectivist Approach, Many Beneficial Consequences Follow.

When businesses take the time and analytical effort to think about value and to define it from the customer’s perspective, they will realize the opportunity to re-shape their business models and manage their business in new ways.

Here is a quote from a respected business source, highly ranked on the Google search page:

What’s the purpose of your business? Some would define it as profitability, cash flow, security, or freedom. The purpose of a business is to serve the values of you as the owner. Its purpose is value creation for the owner.

And, in a 2020 post, respected consultancy McKinsey demanded a clear definition of value and then failed to give it.

Particularly at this time of reflection on the virtues and vices of capitalism, we believe it’s critical that managers and board directors have a clear understanding of what value creation means. For today’s value-minded executives, creating value cannot be limited to simply maximizing today’s share price. Rather, the evidence points to a better objective: maximizing a company’s value to its shareholders, now and in the future.

These quotes are a tiny slice of what’s out there: multiple definitions or approximations or circumlocutions for value.

Value is not a thing. It can’t be created or maximized. Value is a personal feeling of satisfaction experienced by an individual, in their own mind. It’s positive, because it occurs when an experience is preferable to an alternative or to an expectation or to what went before. It can be expressed or communicated by the individual, but it can’t be measured.

The purpose of a business is not “value creation for the owner” but the facilitation of value for the customer. That word facilitation is important. When a customer senses value potential – the possibility that a consumption experience might be satisfying and fulfilling to them – they may seize it. They buy, they use. They create value. There is no value without consumption. Value is in the customer’s domain. They are the ones who discover new values; they are the ones who innovate, because without them there is no innovation. Innovation is an experience of the customer.

The business is the facilitator for the customer.  This role is a major change for many businesses compared to the way they currently think about themselves. There are numerous significant implications.

Businesses and customers co-navigate the uncertain seas of value.

In their recently published paper, Subjective Value In Entrepreneurship, Professors Per Bylund and Mark Packard point to the value uncertainty that both consumers and businesses experience. Consumers know what problems they are trying to solve or what dissatisfactions they are trying to overcome, but they can’t know whether the business’s offering is going to deliver the satisfaction they are looking for. Will this suit make the right impression in the office? Will this spaghetti and meatballs remind me of the time I spent in Rome? Will this car deliver 35 mpg even though I use it mostly just to ferry the kids back and forth to school? Consumers can never be sure that they’ll have the experience they want.

It’s the same for businesses. It’s impossible to know how the consumer will feel, and impossible to know whether the specific combination of features and benefits and website design and advertising and customer service will precisely meet one customer’s requirements, and to know how much different the next customer’s requirements will be.

The customer and the business are both searching for the perfect intersection of wants and solutions. Neither one of them can know exactly where that intersection lies. This makes them equal partners in value in a way that businesses have not typically treated customers in the past. Value is created by customers; businesses facilitate. Innovation is actualized by customers; businesses bring it to market. Discovery of new uses and applications is the task of the customers; businesses observe and adapt.

Businesses must grant customers a new co-equal role.

A business or brand is just one part of a value facilitation network.

When the consumer experiences value, it’s experienced within a consumption experience system. Tide laundry detergent is consumed as a combination of chemicals designed to get clothes white and bright and smelling nice. It’s used in a washing machine, of which there are numerous brands and types and sizes the world over, connected to all kinds of water systems with many kinds of water (hard, soft, mineral, etc.). It’s used on all kinds of fabrics, at many different temperatures and altitudes. It may be used in conjunction with other additives such as bleach or fabric softener. The washed clothes may be to wear at school or on the sports field, or to the office or to a party. They may be worn in all kinds of weather. The washing detergent is bought on a trip to the supermarket along with other groceries, and must be transported from the store to the laundry room.

The consumer has a system. They have a lot of household chores and they allocate them to certain times of the day or week and they have certain ways of completing those chores. They experience value within this system. They orchestrate all of their providers to make the system work for them.

It’s important for value facilitation for businesses to see themselves as a node and a set of connections within a value facilitation network – a value net. What is the best way to fit in to make the consumers’ system work best for them, on their terms? How do different consumers’ systems vary? How does that affect the business’s “fit”? How can a business fit more consumer systems? How can a business earn greater significance in a consumer’s system by helping them orchestrate, or by helping them with multiple jobs rather than one?

Business is a responder rather than an initiator.

A major change in business mindset is called for when value is redefined as subjective, and as a consumer experience. Our traditional mythology of business is as the proactive initiator of relationships with customers, the discoverer of new techniques, the innovator, the advertiser pushing new solutions to a grateful crowd of takers. The “great men and women” theory of business as led by extraordinary visionaries fits this mold of thinking. The Steve Jobs attitude of “people don’t know what they want until I design it for them and present it” is similarly reflective of the accepted imagery that business leads and people follow.

In reality, business is the follower, or at least the responder. The demand for innovation and better service and better experiences comes from consumers. They are the ones who cultivate the realization that not everything works as well as it should, that the levels of service that are offered are not good enough, that experiences could be better. They send out signals to this effect via what we call dissatisfaction or unease with the status quo.

The effective businesses are those that respond best to these signals, the ones with the best antennae and with the best interpretation of signals that may be coded in a different language than businesses are used to. These businesses are especially tightly coupled to their customers. They are skillful in exercising empathy, and in imagining experiences from the consumer’s perspective. They exhibit better understanding.

The consumer signals indicate there is potential for new value. The task of business is to see this potential and fashion a responsive offer that can trigger its realization. It’s a humble approach to business, an assembly of experiments to see if they can get to the right response, rather than a magisterial strategy or business plan for success.

Here’s a simple example. A recent Ford F150 truck re-design features an interior with a flat surface work “desk” for using a laptop, and an exterior power supply for plugging in all kinds of electrical equipment (the ad shows a DJ hauling and plugging in his gear). Did Ford independently initiate these ideas? No. They responded in an agile way to the practices of truck owners, some of whom spend hours a day working in their cabs, including computer work, and some of whom are entrepreneurial DJ’s hauling their gear to where the gigs are and asserting their independence from other people’s power sources. The consumer acts, the business responds. That’s the new subjective value generation method.

Subjective value thinking puts business in a different place in society.

When the purpose of business is to facilitate valued experiences for customers, to help them achieve betterment in their lives, and to find meaning and purpose in the successful pursuit of that betterment, we can view businesses in a new light. We can discard the cynical expectations of exploitation of unsuspecting customers instilled in us by our Marxism-tinged educators, and embrace the understanding of businesspeople devoted to the betterment of customers, and thereby the betterment of society. Businesses are sustained by the entrepreneurial ethic of serving others in order to help themselves. This ethic is the foundation of economic society, and subjective value thinking highlights it in the most appropriate way.