A Progress-based Theory of Value
As technology moves forward limitations are overcome and opportunities open up that allow for the incremental fulfillment of certain indelible human desires to become a matter of profit. These constant human desires constitute the different types of value drivers that motivate human actions, while the costs associated with deriving their benefit represent the different kinds of value obstacles that we face. This post will examine the seven opportunities available to engage in the technologically driven, socioeconomic progression known as innovation.
The life-cycle of new products and services evolves over three separate stages that allow for different types of innovation to take place. During the value formation stage we have the opportunity to explore market innovation through discontinuous and transformational ideas (see The Innovation Value Breakdown). In the next stage, overcoming the obstacles that stand in the way of value generation requires us to innovate through disruptive business models. While in the third and final stage, we can pursue incremental and evolutionary innovation by adding extra layers of value to the product in order to expand its market share or the size of its market.
In the value formation stage, value is created by designing products and services that offer people an easier way to accomplish something they are already striving for; such as easier forms of communications, transportation, etc. The existence of easier alternatives frees up resources that can then be allocated to other productive pursuits. This is the essence of progress and the heart of innovation.
However, the successful commercialization of new ideas depends not only on our ability to predict demand but also on our ability to minimize the transaction costs associated with logistics (production, inventory and distribution) and information hurdles (marketing and search).
In the production phase, the objective is to find creative models of production that maximize variety (fit) and quality, while minimizing the fixed and variable amount of capital and skilled labour required to overcome scarcity and coordination challenges.
In inventory strategy, our goal of maximizing demand per unit of cost leads us on a walk down the ‘long tail’. In the short term while costs are fixed, the pursuit of turnover favors products with broad appeal, but as costs fall in the long term, catering to individuality eventually becomes the dominant strategy.
However, if potential consumers are not aware of the choices available to them, their choices (or lack thereof) will often be second best. This is why well targeted marketing campaigns aimed at informing consumers (not influencing their behaviour) are necessary to help them navigate the increasingly vast universe of choice.
The challenge though is not merely to provide consumers with complete information of relevant supply, which can quickly become overwhelming. The objective is to narrow down the selection of choice to those most likely to fit their needs, their tastes and their budget, while allowing them to explore the entire inventory through an intuitive and flexible mechanism. The importance of this mechanism increases over time as our emphasis evolves from customer acquisition to customer retention.
Next, distribution focuses on delivering the benefit to customers conveniently by minimizing the time and displacement required on their part. Distribution therefore benefits: from an increasing geographic density of points of inventory; from shifting the work involved in assembly to the customer; and whenever possible, from the digitization of the product or service.
Finally, at the point of consumption we can add extra layers of value by designing the product to be easy to use, versatile and refining it to evoke an emotional response. Designing a product that is easy to use means removing any barriers to utility with the goal of making it intuitive, effortless and convenient to use. Designing it to be versatile means expanding the utility frontier by making it portable and compatible with other products, while adding perceived value through aesthetics, craftsmanship and exclusivity evokes an always welcome sense of pride.
These characteristics of shiny new objects are often mistaken with value creators, but it is important to distinguish between the functional elements that make a product or service useful, and the characteristics that make it more appealing. From an economic standpoint this distinction is not necessary, but as product strategists we should keep it in mind.