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Entrepreneurship

The Key to Creating Intrinsic Value in Business

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Value creation is the essence of business. Value is what attracts and keeps customers. Value is what attracts and retains employees. It’s also what attracts and maintains relationships with investors, suppliers, distributors and the wide range of other stakeholders who are critical to the firm’s long-term success.

A business that does not create value will eventually fail.

How to Create Value as a Means to an End

To know how to create value in business, it’s helpful to understand what it is. It may seem a simple matter, but it is actually a topic that philosophers have debated for millennia. For many business people, value roughly translates into price, the amount someone else is willing to give us in the marketplace, in exchange for our good or service. This is the notion of “exchange value” and it is the secret sauce of supply and demand and what makes a market whir.

Economists also talk about a slightly different notion of value, which is its “use value,” or utility.  Here, we’re talking about how valuable something is to me. It’s not the exchange value that you and I both agree on, but how much use I as an individual get out of particular product or service. Our different perspectives or circumstances might well result in wildly diverging valuations for the very same thing.

Use value and exchange value are critical things to get right when you’re running a business. If you don’t know how to assess the use value, or utility, of a particular technology, process, or even of a person, you are going to misunderstand how they fit into the overall value-creation process of your firm. If you don’t know how to properly assess the exchange value of your resulting goods and services, you will fail to read the market, and falter in marketing and sales.

Use value and exchange value undergird modern economics and our understanding of the way business works. They are also both examples of a broader notion of value called “instrumental value,” which is to say value, as a means to some other end. With use value, a machine or a person is as a means to create products and services. With exchange value, those products and services are a means to earning money.

If you’re getting the instrumental value of the inputs or the outputs of your business wrong, you’re probably not going to be in business over the long-haul. There is a class of businesses, however, that work with instrumental values, while also keeping an eye on another type of value.

How to Create Value as an End in Itself

While instrumental value is a means to some other end, “intrinsic value” is a fundamental consequence of something’s very existence.

Intrinsic value is not the kind of topic you find most economists spending their days contemplating. Although value investors use the term in a specific sense, the kind of intrinsic value I’m talking about is more the domain of philosophers, spiritualist, psychologists and anthropologists, musicians and artists.

Every once in a while though, you will bump into a business person who seems to operate in this field of intrinsic value creation. You tend to find them in those businesses that focus obsessively on quality or on design. You can also see their telltale marks in firms that seem to pay inordinate attention to how their products and services are actually being used by customers – not just whether those customers are satisfied with them, but whether they are successful with them.

Creating Intrinsic Value for Customers

From a customer perspective, we all know that there are some products whose value extends far beyond mere economic calculation. It might be our child’s teddy bear, our wedding ring, or a book whose message or story touched us deeply. The same is true, of course, with services. It might be an ambulance driver going above and beyond the call of duty, a sympathetic person at an airline call center during a family emergency, or a college professor who changed the direction of your life.

For these people, and in some cases, the organizations behind them, the product or service is not just a means to make money. These offerings have intrinsic value in themselves. In other words, with this rare breed of business, the object of production and the act of service create meaning through the ways in which customers interact with them.

One might say that these products and services have a certain something, a quintessence, that cuts to the essence of their value proposition, channeling a kind of invisible, intrinsic value to their users.

Every time a child hugs a teddy bear as she nods off to sleep at night, value and meaning are created. That value isn’t captured in the books of the teddy bear manufacturer, designer or retailer, but it is there, quietly accruing in thousands of little beds throughout the world, invisible to the calculations of the economist.

Creating Intrinsic Value for Employees

As important as these myriad sources of uncalculated value truly are, it still undervalues the full intrinsic value creation of most firms. This hidden component of value centers on the meaning we create through our work.

For every kid whose life takes a change for the positive as the result of some professor’s extra little bit of attention, there is a teacher who derived some sense of purpose from trying to make a difference. For every beautifully designed car, there is a team of designers who gained a wonderful sense of meaning from getting that one right. In some of these cases, there may be financial rewards associated with these employees’ extra effort, but that’s not the reason they do it. As author Dan Pink explains so wonderfully in “Drive,” they do it for reasons that go far beyond rational economic considerations. They do it for a sense of “autonomy, mastery and purpose.”

In other words, part of the reason we go the extra mile in our work centers on a type of value that goes beyond our traditional notions of economic exchange.

There is something tremendously powerful about our drive for meaning. When we find meaning in our work, it can act as a powerful aphrodisiac, an injection of inspiration capable of getting us through the most trying of times. It might be the firefighter who has seen her work translated into a saved life. It might be an engineer whose solar panel design single-handedly resorts in the reduction of millions of pounds of carbon that might otherwise be dumped into our atmosphere. Or it might be that teacher who has seen the effect his connections with students can have on the long-term direction of their lives.

For these people, work is not simply a means to a paycheck. For these people, work creates value through helping them to create meaning of their lives. It is what enables them to be of service to the world and the company’s that offer this type of work create a powerful attractor for the best and brightest employees.

Meaning, Mission and Value Creation in Business

Businesses that know how to engage this quintessential quality of intrinsic value creation have a huge advantage over firms that wield purely instrumental notions of value creation.

Firms that create intrinsic value through meaning face a kind of paradox. That meaning and purpose, that desire to serve a mission, is what creates economic value for the firm. It’s what brings people to work and what draws customers in. No mission, no money. And yet, missions are ultimately dependent upon the firm’s ability to generate revenues. No money, no mission.

Managing this paradox of value creation requires that firms get a much deeper understanding of the nature of the value they create – both value as a means to money and as an end in itself. Businesses that know how to master the tension between instrumental and intrinsic value creation are businesses that know how to translate meaning into money.

These are the truly great mission-driven companies, the ones that attract and engage us the deepest.

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About the Author

This article was written by Gideon Rosenblatt of The Vital Edge. Gideon ran an innovative social enterprise called Groundwire for nine years. He worked at Microsoft for ten years in marketing and product development, and created CarPoint, one of the world’s first large-scale e-commerce websites in 1996. The Vital Edge explores the human experience in an era of machine intelligence.

Entrepreneurship

The Brittle vs. Ductile Strategy for Business

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Companies and startups often pursue a path of “brittle strategy” and in it’s execution, it can be translated, in layman terms, into something like this:
Heard about the guy who fell off a skyscraper? On his way down past each floor, he kept saying to reassure himself: “So far so good… so far so good… so far so good.” How you fall doesn’t matter. It’s how you land!
– Movie : La Haine (1995)

Brittle strategy :

A brittle strategy is based on a number of conditions and assumptions, once violated, collapses almost instantly or fails badly in some way. That does not mean a brittle strategy is weak, as the condition can either be verified true in some cases and the payoff from using this strategy tends to be higher. However the danger is that such a strategy provides a false sense of security in which everything seems to work perfectly well, until everything suddenly collapses, catastrophically and in a flash, just like a stack of cards falling. Employing such approach, enforces a binary resolution: your strategy will break rather than be compromising, simply because there is no plan B.
From observation, the medium to large corporate company strategies’ landscape is often dominated by brittle “control” strategies as opposed to robust or ductile strategies. Both approach have their strong parts and applicability to corporate win the corporate competition game. The key to most brittle strategy, especially the control one, is to learn every opponent option precisely and allocate minimum resources into neutralizing them while in the meantime, accumulating a decisive advantage at critical time and spot. Often, for larger corporations, this approach is driven by the tendency to feed the beast within the company that is to say the tendency is to allocate resources to the most successful and productive department / core product / etc.. within the company. While this seems to make sense, the perverse effect is that it is quite hard to shift the resources in order to be able to handle market evolution correctly. As a result of this tendency, the company gets blindsided by a smaller player which in turn uses a similar brittle strategy to take over the market.The startup and small company ecosystem sometimes/often opts for brittle strategy out of necessity due to economic constraints and ecosystem limitations because they do not have the financial firepower to compete with larger players over a long stretch of time, they need to approach things from a different angle. These entities are forced to select an approach that allows them to abuse the inertia and risk averse behavior of the larger corporations. They count on the tendency of the larger enterprise to avoid leveraging brittle strategies, made to counter other brittle strategies. These counter strategies often fail within bigger market ecosystem as they are guaranteed to fail against the more generic ones. Hence, small and nimble company try to leverage the opportunity to gain enough market share before the competition is able to react.

Ductile strategy :

The other pendant of the brittle strategy is the ductile strategy. This type of strategy is designed to have fewer critical points of failure, while allowing to survive if some of the assumptions are violated. This does not mean the strategy is generally stronger, as the payoff is often lower than a brittle one – it’s just a perceived safer one at the outset. This type of approach, will fail slowly under attack while making alarming noises. To use an analogy, this is similar to the the approach employed with a suspension bridge using stranded cables. When such a bridge is on the brink of collapse, will make loud noises allowing people to escape danger. A Company can leverage, if the correct tools and processes are correctly put in place, similar warning signs to correct and adapt in time, mitigating and avoiding catastrophic failure.
To a certain extend, the pivot strategy for startups offer a robust option to identify the viability of a different hypothesis about the product, business model, and engine of growth. It basically allows the Company to iterate quickly fast over the brittle strategy until a successful one is discovered. Once found, the Company can spring out and try to take over the market using this asymmetrical approach. For a bigger structure, using the PST model combined with Mapping provides an excellent starting point. As long as you have engineered within your company and marketed the correct monitoring system to understand where you stand at anytime. Effectively, you need to build a layered, strategic approach via core, strategic and venture efforts combined with a constant monitoring of your surroundings. This allow you to take risks with calculated exposure. By having the correct understanding of your situation (situational awareness), you will be able to mitigate threats and react quickly via built-in agility. However, we cannot rely solely on techniques that allow your strategy to take risk while being able to fail gracefully. We need techniques that do so without insignificant added cost. The cost differential between stranded and solid cables in a bridge is small, and like bridges, the operational cost between ductile and brittle strategy should be low. However, this topic is beyond the scope of this blog post but I will endeavor to expand on the subject in a subsequent post.
Ductile vs Brittle :
The defining question between the two type of strategies is rather simple: which strategy approach will guarantee a greater chance of success? From a market point of view this question often turns into : is there a brittle strategy that defeats the robust strategy?
By estimating the percentage of success a brittle strategy has against the other strategies in use, weighted by how often each strategy is used by each competitor you can determinate the chances of success.Doing this analysis is a question of understanding the overall market meta competition. There will be brittle strategies that are optimal at defeating other brittle strategies but will fail versus robust. However, the robust one will succeed against certain brittle categories but will be wiped out with other. Worse still, there is often the recipe for a degenerate competitive ecosystem if any one strategy is too good or counter strategies are too weak overall. Identifying the right strategy is an extremely difficult exercise. Companies do not openly expose their strategy/ies and/or often they do not have a clear one in the first place. As a result, if there is a perception that the brittle strategy defeats the ductile one, therefore the brittle strategy approach ends up dominating the landscape. Often strategy consulting companies rely on this perception in order to sell the “prêt a porter” strategy of the season. Furthermore, ductile strategies tend to be often dismissed as not only do they require a certain amount of discipline, but also the effort required in its success can be daunting. It requires a real time understanding of the external and internal environment. It relies on the deployment of a fractal organisation that enables fast and risky moves, while maintaining a robust back end. And finally, it requires the capability and stomach to take risk beyond maintaining the status quo. As a result, the brittle strategy often ends up more attractive because of its simplicity, more so that it’s benefit from an unconscious bias.

The Brittle strategy bias:

Brittle strategies have problems “in the real world”. They are often unpredictable due to unforeseen events occurring. The problem is we react and try to fix things going forward based on previous experience. But the next thing is always a little different. Economists and businessmen have names for the strategy of assuming the best and bailing out if the worst happens, like “picking pennies in front of steamrollers” and “capital decimation partners”.
It is a very profitable strategy for those who are lucky and the “bad outcome” does not happen. Indeed, a number of “successful” companies have survived the competitive market using these strategies and because the (hi)story is often only told by the winner’s side only, we inadvertently overlook those that didn’t succeed, which in turn means a lot of executives suffer from the siren of the survival bias, dragging more and more corporations into similar strategy alongside them.
In the end all this lot ends up suffering from a more generalized red queen effect whereby they spend a large amount of effort standing still (or copying their neighbors approach). This is why when a new successful startup emerges, you see a plethora of similar companies claiming to apply a similar business model. At the moment it’s all about UBER for X and most of these variants. If they are lucky, they will end up mildly successful. But for most of them, they will fail as the larger corporations have been exposed and probably bought into the hype of the approach.
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About the Author
This article was written by Benoit Hudzia of Reflections of the Void, a blog about life, Engineering, Business, Research, and everything else (especially everything else). see more.
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Entrepreneurship

What Kills A Startup

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1 – Being inflexible and not actively seeking or using customer feedback

Ignoring your users is a tried and true way to fail. Yes that sounds obvious but this was the #1 reason given for failure amongst the 32 startup failure post-mortems we analyzed. Tunnel vision and not gathering user feedback are fatal flaws for most startups. For instance, ecrowds, a web content management system company, said that “ We spent way too much time building it for ourselves and not getting feedback from prospects — it’s easy to get tunnel vision. I’d recommend not going more than two or three months from the initial start to getting in the hands of prospects that are truly objective.”

2 – Building a solution looking for a problem, i.e., not targeting a “market need”

Choosing to tackle problems that are interesting to solve rather than those that serve a market need was often cited as a reason for failure. Sure, you can build an app and see if it will stick, but knowing there is a market need upfront is a good thing. “Companies should tackle market problems not technical problems” according to the BricaBox founder. One of the main reasons BricaBox failed was because it was solving a technical problem. The founder states that, “While it’s good to scratch itches, it’s best to scratch those you share with the greater market. If you want to solve a technical problem, get a group together and do it as open source.”

3 – Not the right team

A diverse team with different skill sets was often cited as being critical to the success of a starti[ company. Failure post-mortems often lamented that “I wish we had a CTO from the start, or wished that the startup had “a founder that loved the business aspect of things”. In some cases, the founding team wished they had more checks and balances. As Nouncers founder stated, “This brings me back to the underlying problem I didn’t have a partner to balance me out and provide sanity checks for business and technology decisions made.” Wesabe founder also stated that he was the sole and quite stubborn decision maker for much of the enterprises life, and therefore he can blame no one but himself for the failures of Wesabe. Team deficiencies were given as a reason for startup failure almost 1/3 of the time.

4 – Poor Marketing

Knowing your target audience and knowing how to get their attention and convert them to leads and ultimately customers is one of the most important skills of a successful business. Yet, in almost 30% of failures, ineffective marketing was a primary cause of failure. Oftentimes, the inability to market was a function of founders who liked to code or build product but who didn’t relish the idea of promoting the product. The folks at Devver highlighted the need to find someone who enjoys creating and finding distribution channels and developing business relationship for the company as a key need that startups should ensure they fill.

5 – Ran out of cash

Money and time are finite and need to be allocated judiciously. The question of how should you spend your money was a frequent conundrum and reason for failure cited by failed startups. The decision on whether to spend significantly upfront to get the product off the group or develop gradually over time is a tough act to balance. The team at YouCastr cited money problems as the reason for failure but went on to highlight other reasons for shutting down vs. trying to raise more money writing:

The single biggest reason we are closing down (a common one) is running out of cash. Despite putting the company in an EXTREMELY lean position, generating revenue, and holding out as long as we could, we didn’t have the cash to keep going. The next few reasons shed more light as to why we chose to shut down instead of finding more cash.

The old saw was that more companies were killed by poor cashflow than anything else, but factors 1, 2 and 4 probably are the main contributing factors to that problem. No cash, no flow. The issue No 3 – the team – is interesting, as if I take that comment ” I didn’t have a partner to balance me out and provide sanity checks for business and technology decisions made” and think about some of the founders and startup CEOs I know, I can safely say that the main way that any decision was made was by agreeing with them – it was “my way or the highway”. I don’t therefore “buy” the team argument, I more buy the willingness of the key decision makers to change when things are not working (aka “pivoting” – point 9).

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About the Author

This article was produced by Broadsight. Broadsight is an attempt to build a business not just to consult to the emerging Broadband Media / Quadruple Play / Web 2.0 world, but to be structured according to its open principles. see more.

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