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42. Per Bylund on Economics of Value vs. Economies of Scale

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Good economic theory predicts effective, cutting edge business practices. For example, the dynamic flexibility of capital resource allocation predicted by Austrian Capital Theory is being realized today via digitization, dematerialization and agile organizational innovations. Entrepreneurs who fully embrace Austrian theory can be leaders in the field of business implementation.

At the same time, economic theory evolves and it’s important to keep up. This week we talked about the economics of value and how this body of theory is superseding old mainstream economic theories from the industrial age. We focused specifically on the industrial-age concept of economies of scale.

Economies of scale can feel daunting to small and medium-sized businesses (97% of all businesses) because of the implication that big businesses enjoy unmatchable efficiencies, advantages in procurement and hiring, and asymmetrical bargaining advantages when negotiating with smaller business as vendors or suppliers.

But this industrial age economic law is not applicable to today’s entrepreneurial businesses. It applies to commodity businesses competing to make the same product and sell it to the same customers. It was historically possible to invest in capital to increase output per worker and lower variable costs to their lowest possible level, thus achieving a price and/or profit advantage, as well as an experience curve benefit of perfecting methods through extended high volume applications. Today, entrepreneurs don’t compete with commodity businesses, or in commodity markets.

Entrepreneurs compete on value, not on cost. Entrepreneurs put the customer in prime position, not production. They select a customer group to serve in the best possible way – so that those customers can experience maximum (subjective) value. Superior service to selected customers to facilitate value for them – not low cost – creates entrepreneurs’ competitive advantage.

Instead of pursuing greater and greater unit volume to lower unit costs, entrepreneurs utilize the customer empathy and feedback cycle to increase the level of value they can facilitate for customers. They process more and more customer feedback to understand better how to improve their experience.

Instead of scaling up, entrepreneurs scale down. Personalization and customization are increasingly effective routes to customer value experiences. Producing less unleashes scarcity, exclusivity, limited availability and uniqueness as value signals to selected customers.

And, when needed, scale can be rented. In the specialized areas where economies of scale are relevant – particularly in shareable infrastructures like the Amazon Marketplace platform or cloud computing – entrepreneurial businesses can “download scale from the internet”, i.e. take advantage of the platform’s scale without building it themselves.

The same customer-first, value-centric model applies In B2B markets. Entrepreneurs identify ways to fit into the customer’s system in a unique or superior way to re-balance asymmetric bargaining power. Relationship, not scale, brings advantage. Entrepreneurs always put customers and their value experience first, in both B2B and B2C.

Scale is a choice for the entrepreneur. Choose which customers to serve at what scale. The cost connection with scale is far less important than in the past.

DOWNLOADS & EXTRAS

Economics of Value vs. Economies of Scale PDF: Our Free E4E Knowledge Graphic

Understanding The Mind of The Customer: Our Free E-Book

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37. Curt Carlson’s Systematic, Repeatable Process to Generate Customer Value

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Is successful value creation through innovation the product of genius? Or of luck? No, it’s the product of a system, applied with discipline. Utilizing the system can result in repeated success in customer value generation.

Key Takeaways and Actionable Insights

Curt Carlson is the world’s leading expert practitioner. He is the founder and CEO of Practice Of Innovation, LLC, and was President Of SRI International, identified as the most successful innovation company in the world based on its development and introduction of globally important innovations like Siri for the iPhone4 and HDTV. Under Curt’s leadership, SRI grew 3.5X and created tens of billions of dollars of new customer value.

Curt believes any company can systematically generate new value for customers, and reap the rewards of the market for doing so, when they rigorously apply three fundamental rules.

  1. They have a simple value creation methodology that everyone in the company (and its collaborative partners) can describe, understand and apply every day in every job function. (Curt’s test: ask everyone in the company what the firm’s value creation method is: if they can’t describe it, there isn’t one.)
  2. They have metrics to define innovation work that is important rather than merely interesting. While subjective value is not quantifiable, there are proxies for measuring importance and market potential.
  3. They have a system for active learning. Innovation is a learning science, and active learning is a specific, high speed, high productivity version of learning, applying the best learning science principles.

In this week’s podcast, we focused especially on the simple, effective value creation methodology that Curt identifies by the initials N-A-B-C.

NABC Innovation Process

Click the image to view and download the full PDF

N is the identification and quantification of the important customer need. In B2B businesses, it’s possible to monitor financial flows and identify needs based on quantifiable elements – cost savings, time savings, and measurable quality improvements. In consumer businesses, need identification is much harder, and quantification impossible except by proxy, since needs are subjective and individual. Importantly, they are also multi-dimensional, and need identification must encompass all the dimensions.

It’s important to deeply understand human wants, whether it’s for convenience, or higher order wants such as pride and identity. Surveys told Steve Jobs that consumers wanted a “new keyboard” for existing Nokia phones that were hard to use. Jobs’s intuition was that what they really longed for was convenience. The touchscreen on the iPhone provided convenience and opened a doorway to all kinds of additional services.

A is the Approach the entrepreneurial innovator takes to meet the customer need. The approach is the design of an experience that the customer will desire. The Approach mist embrace both the assembly of the right resources into a technical solution, and the business model so that the solution makes money. There’s an iterative back-and-forth between technical solution and business model that can continue for years. Nike’s technical solution for shoes is good but not unique; its business model for sponsoring athletes to inspire aspirational consumers who wanted to “be like Mike” (or today like LeBron) elevated their offering from product to experience.

B is Benefits Per Costs. Curt uses this construction to emphasize that there are large buckets of both benefits and of costs. Benefits include not just features and performance and appearance, but also the feelings produced by the experience. Costs are similarly multi-layered: not just dollars, but also the effort required to acquire the product, and perhaps to master its use, the opportunity cost of what is given up, durability, and more. The innovative entrepreneur must look at costs from all of these angles and calculate that the “benefits per costs” for customers are much better than alternatives.

Curt’s rule of thumb is 2X to 10X better. People measure perceived benefits in percentages. 10% better, 50% better, 100% better than the status quo or the alternatives. Transformational innovations are 2 – 10X better.

C is the competition and other alternatives – both today and in the future. What are all the other ways the customer can experience the benefit they seek? What are alternative ways for them to spend their money – perhaps on a different experience that’s not a direct substitute but on which they’ll spend instead of buying our solution. How does your innovation fit into their lives so compellingly as to become preferred over all these alternatives?

N-A-B-C is a simple framework, but it’s not easy to achieve results. It requires iteration at speed among many collaborators (including customers, and possibly investors), all with different and specific talents and tacit knowledge. No individual can command sufficient knowledge, so team learning – active, comparative learning, frequently updated – is critical to the outcome.

The result is transformational: for customers who experience new value, for the firms that facilitate it, and for the individuals who practice the discipline of innovation.

DOWNLOADS & EXTRAS

Download Curt Carlson’s NABC Innovation Process PDF: Our Free E4E Knowledge Graphic

Buy a copy of Curt Carlson’s book, Innovation: The Five Disciplines For Creating What Customers Want.

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13. Per Bylund on Subjective Value

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Per Bylund talks to Hunter Hastings about the value-centric model for successful entrepreneurship, and we provide an infographic to help you apply the model to your own business.

Show Notes

Subjective value is an important subject in economics — and even more so in entrepreneurship, where it is fundamental to what entrepreneurs do. It’s the critical factor in entrepreneurial success. Business schools talk about “creating value” and “value added” as if value creation were an objective process. But it’s not. And businesses can fail if they misunderstand value, because they can easily produce something for which there is no market.

Value is a felt experience, 100% inside the consumer’s head. Value is a satisfaction that consumers feel. It’s the result of an escape from or a relief from a felt uneasiness, or felt dissatisfaction. That’s often called a “consumer need” in business language, but unease or dissatisfaction are better words to describe what the consumer feels before the entrepreneur’s new solution is offered. Unease and dissatisfaction are hard to articulate, they are emotional conditions, they are affected by context and circumstance, and they can be inconsistent and idiosyncratic. The consumer feels, perhaps vaguely, that life could be better, or their current circumstances could be improved. Value is the feeling the consumer experiences in the period after having consumed the entrepreneur’s offering that relieves this vague feeling. They feel better – perhaps in a way that the entrepreneur never expected.

The consumer’s perception of value can change, in unanticipated ways, and very quickly. Take food as an example. Consumer needs are changing rapidly. There’s a new unease about ingredients and methods of production. It’s not exactly clear what the consumer “wants”, but their preferences are changing to include notions of holistic health and wellness, so that taste and calories and other attributes of food are less important to them. We can’t rely on consumers wanting today what they wanted yesterday. Just look at the problems big companies like Kraft-Heinz are experiencing as they try to keep up with this rapid and broad-based change in consumer preferences. And it is even harder to predict where the consumer is going next on this journey of change.

So, if value is perceived by the consumer, what do entrepreneurs really do? Do they create value, or add value, or something else? Per Bylund thinks of entrepreneurship as facilitating value. Entrepreneurs can’t create it and can’t add it. They design a value proposition based on their empathic understanding of what the consumer wants and of their sense of unease about their current circumstances, and they present this value proposition to the consumer. Then they must listen for and measure the consumer’s response to find out if the consumer is experiencing value.

Production must be designed with the consumer in mind. The consumer is the boss, and the production chain must reflect the consumer’s preferences and change with their evolving tastes. The economists refer to consumer sovereignty — the consumer determines what is value, and therefore which entrepreneurial initiatives are successful and which are not. The successful entrepreneur designs a production chain that can deliver value. In a very real sense, the physical and financial and human capital in the production process must be a reflection of the consumer’s preferences and desires. The consumer’s preferences determine the capital structure.

And since the consumer’s preferences are continuously changing, the successful entrepreneur practices a kind of capital dynamism that follows these changes and, to the extent possible, imagines where the consumer is headed, because production takes time and entrepreneurs are always concentrating on facilitating future value.

Advertising, marketing and communications are a fundamental part of the value proposition and not a supplemental part. The entrepreneur must tell a persuasive story about the value the consumer will experience. Advertising and marketing are ways of communicating to the consumer that there are new alternatives available to them — new ways to improve their circumstances and feel like life is better. Often, the entrepreneur is a pioneer, creatively interpreting the consumer’s need and developing a solution that the consumer might not have thought of on their own, but which they’ll embrace when they find out about it. Sort of like the Model T the consumers got in place of the “faster horses” they asked for in the (probably apocryphal) store about Henry Ford. Advertising and marketing tell the entrepreneur’s story, and they’re an important and integral part of the value proposition.

This consumer-first (or customer-first) process works in B2B businesses as well. When selling to or supplying a B2B customer, it’s important to know the customer’s individual preferences and needs, which are subjective — the need to feel satisfaction — in just the same way that the consumer’s needs are subjective. In fact, since the ultimate consumer determines what is valuable throughout the production chain, an entrepreneur who is knowledgeable about the B2B customer’s end consumer can establish an advantage. Being able to demonstrate (1) a deep knowledge of the end-consumer’s needs (especially when they are changing), and (2) how to bring the B2B customer’s position into greater alignment with those needs, makes the vendor-entrepreneur an especially important partner. The B2B customer will experience their own sense of satisfaction and value in the exchange.

The entrepreneur who adheres to a value-centric process has the greatest chance of success. The entrepreneur’s process of thinking must start at the consumer and work “backwards” to production. The entrepreneur must live inside the consumer’s mind, and employ empathy to understand the consumer’s subjective needs and wants. From an empathic diagnosis, the entrepreneur designs a product or service and a value proposition and takes it to the consumer when it is ready. By this time, the consumer may have changed, and so speed and agility are mandatory. It’s easier said than done. But it is critically important, especially for a new business or initiative. For established businesses, when the consumer changes, it’s extremely hard to change with them.

Use our free download of the value-centric process for entrepreneurs to help you think about the stages of value facilitation.

Entrepreneurs Change The World For The Better By Thinking Exclusively About How To Offer New Value To Consumers.

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Original Article by Per Bylund.

Politics is hardly an effective force for bringing about positive change in society. Instead, real change, and especially such that changes people’s lives for the better, comes from elsewhere. It comes from business, and specifically from innovators, entrepreneurs, and pioneers in the market. And very often it does so despite politics and the state — or even in direct conflict with it.

While technology often gets the credit for achievements of the market place, this is too much of a simplification. It is not technology per se that produces the changes and improvements; it is but a common (and eye-catching) means. The real change is brought about through entrepreneurship, specifically through what Ludwig von Mises called the entrepreneur-promoters: the pioneers, the disrupters, the creative destroyers.

These innovative and trailblazing entrepreneurs are often thought of as creators of something new. For example, it is easy to see the immense change brought to the market for personal transportation by new and innovative players like Uber and Lyft. By providing a new type of transportation — ride-sharing — these entrepreneurial firms placed themselves outside of the existing regulatory framework for taxi cabs. And thus they broke new ground and forced deregulation of the often guild-like taxi industry.

Ride-sharing is an obvious and important example of the enormous change that entrepreneurship can have on society — for the better, by providing new goods and services, and thus improving people’s lives. This is the power of the market. But that is too limiting a definition of disruptive entrepreneurship. Such change can also be brought about by incumbent business firms who pursue new and innovative business models.

A Membership-Based Auto Industry

An example of such is the recently advertised change in how automobile manufacturer Volvo intends to do business. While other automobile manufacturers are stuck, partly due to protective regulation, with producing automobiles sold through a vast dealership network, Volvo intends to stop selling automobiles. Yes, you heard that right.

The new program, Care by Volvo, is a flat-rate membership in which you are provided access to your automobile — with maintenance, service, and even insurance included. While this seems like an interesting twist on the face of it, it is a new business model that has the potential to revolutionize the automobile industry. Drivers no longer need to own their cars, and they also, as a result, do not need to worry about anything with the usage of their car. There is an immense convenience gain.

But think one step further. If a Volvo membership, rather than owning an automobile, means you have the right to a vehicle, this could change everything. Imagine going out of town, and being provided with an identical (or, if you prefer, different) Volvo when you arrive at your destination airport. The Care by Volvo program is effectively competing with the rental car business.

Further imagine that “your” Volvo is a self-driving car, as automobiles will soon be, and your leaving town means not only that you can be picked up at the airport by your preferred car, but also that the car in your driveway, or which dropped you off at the airport, can be used by others.

The future that Volvo likely envisions is one in which there is no need for ownership of automobiles because they can provide the transportation service without hassle everywhere and always. The gain is not only that resources become better utilized as automobiles no longer are parked for long stretches of time in one’s driveway or garage, but also that consumers no longer have to make capital-intensive investments in something as banal as personal transportation.

With much more efficient use of transportation resources, one can imagine how automobile manufacturers such as Volvo not only take on rental car agencies and taxi cabs, but also (out)compete public transportation systems like buses, trains, and subways.

Rather than automobile manufacturing being a stagnated industry “of the past,” and under threat from the anti-oil movement, Volvo’s business model innovation can completely change the playing field and revolutionize the entire transportation sector of the economy. (And I haven’t even mentioned how Volvo also envisions soon offering only electric vehicles .)

The driving force here is obvious: entrepreneurship. But the disruption is not from a new player, but from a player thinking anew. The step for Volvo going from a lease-or-sell model to membership is not a huge one in terms of the production or distribution process. The difference lies in how they imagine best serving their customers, and by thinking of their customers first – or the actual value of what they do – they realized they should think differently about their business. Their dealership locations become member care facilities.

By explicitly thinking of and making consumer value the purpose and goal of their business, Volvo has recreated themselves. As a result, they could disrupt the automobile industry. And in the process, they may erase the boundary between different industries involved in providing the value of personal transportation: automobile manufacturing, car rentals, taxi cabs, public transportation.

This is an entirely predictable evolution. The only reason these are considered different industries in the first place is that they started out offering different types of services based on the technology of the day. But what they really do is not to provide technological solutions to consumers, but to provide value. By recognizing this simple but often forgotten fact, artificial boundaries dissolve and more value is attainable for both businesses and consumers. Herein lies the power of business and entrepreneurship to change the world: by serving the rest of us.

Per Bylund is an assistant professor of entrepreneurship & Records-Johnston Professor of Free Enterprise in the School of Entrepreneurship at Oklahoma State University. Website: PerBylund.com.