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The Goal of Business

Innovation and the idea that we are not just in it for the cash

Mon Sep 23 19:45:23 2013

Mark Freel

This is the second article written from my notes taken during the 'Innovation for Everyone' masterclass held at Lancaster University and hosted by Lancaster University Management School (LUMS). The talk was presented by Mark Freel who teaches at the University of Ottawa and Lancaster University, I should also point out that he is the 'RBC professor for the commercialization of Innovation'.

A sort of metric

There is a pertinent question that I am sure everyone in business has been asked at some point in their lives and was posed to us by Mark:

>What is the goal of business?

The answer he almost invariably gets, and one which he assures us some people are very insistent to point out is the only goal is:

>To make money

There is however a different approach we can take. If the only goal of business were to make money there would be no appreciation of product. It is true that some people, and businesses try to enhance profit margins as much as possible and at any cost, but as can be seen from the recent food scandals this can often backfire with disastrous results.

That is because to the consumer the purpose of the business is not to make money but to provide them with a product they are willing to pay for and they judge that based on a 'value'.

>The goal of business must therefore be to create value

A couple of things came to my mind when this was suggested:

How then do we measure this value?

Well if our product or service is in demand and we get repeat business that is some measure of the value.

How do we determine the factors governing what value has been gained?

These can be done with a survey, but may also be judged by how our customers interact with us. Do they say favourable things, or do they curse us for being the only, poor, solution in a depleted marketplace?

How do we determine whether we are pursuing the best business goal when we give that value?

This last is the topic that Mark addressed. How do we measure the value to the product being made in a way that can be of use to a business. He suggested the following understanding:

  • Let 'V' be the Value of the product to the customer
  • Let 'P' be the Price per unit
  • Let 'C' be the Cost of production

With this in mind:

  • V minus P is the Consumer surplus
  • P minus C is the Profit per unit
  • V minus C is the Value created

So as long as Value is higher than Price we will have a consumer surplus - the product will be wanted.

So long as Price is higher than the Cost to create the item we will have a profit.

The difference between Value and Cost is therefore the Value Created.

One could infer that to increase the 'Value Created' we must either lower the cost of production or increase the price without sacrificing the value to the customer as less sales would be less consumer surplus.

However if we increase the price we lower the differential of value to price, and if we lower the price we lower the profit per unit.

The profit per unit doesn't affect the value, but it does affect how much we as a company earn.

The danger, and one which we see quite commonly, is that the cost of production decreases, the price either remains the same at which point the company grows, or the price has to drop due to market pressures which can directly impinge on the value to the customer.

Would people want an Aston Martin car so much if they were as cheap as a Honda Jazz?

>There is an inverse relationship between creating value and making profit, increased value is higher cost.

You have to stay within an area that is called the Efficiency Frontier - you have to create enough value to cost of production to stay flexible and to push the boundary. Innovation may be about pushing or changing that frontier. Push out the frontier to utilise the same cost to more value, or change the value co-efficient. Innovation adds more value without changing too much of the cost in production.

Customers typically want more of the same but for less prices:

Disruptive Innovation

> I asked my customers what they wanted and they said "we want faster Horses" (Henry Ford)

Sometimes you need to have 'disruptive innovation'. That is the fact that you have to change the environment so that the customer comes to want your product. As the Henry Ford quote above shows, and what is commonly known, sometimes people do not know what they want as they cannot see the value of the item you are trying to sell them.

So people when asked what they need to make their lives easier didn't say a horseless wagon, they said they needed faster horses. They needed more of the same but not at an increased cost.

But you cannot change the world too quickly. people do not always see innovation as a good thing, they like the comfortable and the familiar. You have to take some of the old with the new when we make changes, even social changes. So a piece of technology may be massively smaller/different yet still packaged for a good deal of time in the same way. Think of all the empty space inside a DVD player, or a digital watch, or an electronic carriage clock.

So sometimes understanding the customer, reacting to their needs or what they don't like is innovation.

There are a few things we can identify as 'Customer Driven Innovation':

  • Look outside the organisation - start with the customer;
  • Observe customers - walk in their shoes;
  • Make customers active, make them an ingredient in your recipe;
  • Make a connection, create fans;
  • Don't be afraid of the unexpected.

And some ways in which you can utilise the consumers of your product or services:

  • Recruit the right customers - early adopters are best;
  • Use a structured approach - what do you want, how would you use it, what is the job that it needs to do;
  • Manage your expectations - customers often ask for things you cannot deliver;
  • It's more about needs than solutions;
  • Seek fresh eyes in evaluating ideas.

There are several types of customer:

  • The enthusiast, a small percentage of people who are geeks about your service or business;
  • The early adopter - the people who catch on to a new thing early, always having the latest new item, gadget or toy;
  • The early majority - a third of all people;
  • the late majority - the next third;
  • Hangers on - those who seek to change just as all the innovation as gone and the market is stable and not expanding;

Most people fall into the early majority or late adopters, as an innovator you need the early adopters, they will let you know what the early majority and the late majority will really need as consumers, not enthusiasts.

>The customers you most want are the 'Early Adopters'.

Final Thoughts

What is the outcome of what you are doing when you innovate? What is the primary objective? How can we achieve that?

These are some of the larger questions that should be asked by everyone seeking to be dynamic and innovative in business.

Outcome driven innovation

How do customers think about value?

  • Customers buy products to fulfill a need, either a physical or emotional desire. Customers have to want something, they may not know what that want is, you have to see and fill those wants.

The job is a primary unit of Analysis

  • Products come and go the job is stable. You need to go out to see the customer and find out what they use and what they really want - go out and figure what the jobs are.

Ideas Versus Execution

  • Extraordinary execution of the ordinary - sometimes being great at something is innovative as you do more than others in your field.

So what are the domains of innovation? How and where can we utilise innovation in our companies? There are multiple domains of innovation:

  • Innovation in products;
  • Innovation in processes;
  • Innovation in markets and marketing;
  • Innovation in administration and work organisation;
  • Innovation in supply chains;
  • but maybe not in the business model.

A few final thoughts to summarise:

  • Invention is not a common part, it is more likely to be imitation and borrowing;
  • technically mundane works quite well;
  • What you are innovating doesn't have to be high risk;
  • good ideas are everywhere don't be afraid to look in odd places or explore new ideas;
  • innovation is about satisfying need, those needs may not be understood or apparent.
  • Innovation shouldn't be for innovations sake - innovate to create value;
  • Maximise the business between value and cost, If it doesn't raise V or lower C don't do it;
  • What value do your customers perceive and what are your value creation processes;
  • Understand how your customers use your products and services;
  • Emphasise on 'technology use' not 'technology creation'.

Once again I am deeply indebted to Mark Freel for such a thoughtful lecture and for Lancaster University Management School for inviting me and filling my Wednesday morning and these two blog posts with a lot of material to chew over.