Value Proposition Design Archives - Entrepreneurs with Denis Oakley

Entrepreneurs with Denis Oakley

I HELP BOLD LEADERS TRANSFORM THEIR BUSINESSES AND THE INDUSTRIES THEY COMPETE IN

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Value Proposition Design

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Pretotyping

A few weeks ago I asked some of the other 500 Global mentors what they’d recommend reading on startups. I got a lot of great advice – many of the books I’d already read. A few I’d never heard of and they were the first that I bought.

One of these was Pretotyping.

It was an absolute joy to read as Alberto was writing about many of the things that I preached over the years. I called it stupidly simple MVPs.

Imagine that you are an investor. A bright young chap comes to you with an idea that could change the world. (Yep, let’s yawn).

The chap, who was Singaporean or Malaysian, had read about flexible video screens and how there was a possibility that they could be woven into t-shirts.
So he connected the dots. T-shirt with Video screen + advert + 8 billion people = $$$$$$

The problem was that he didn’t have the technology and he didn’t have the money to create the technology.

So he needed an investor.

The sums he’d done meant he was looking for $ 2-4 million just to get a product to a proof of concept stage.

What do you think his chances would have been with a VC?
I thought they were slim too.

Working on the pitch deck was unlikely to lead to great results.
The key thing was…

Is this a stupid idea?

or

Does it have legs?

How can we test this in the few hours that we had?

Because it was hackathon or similar we’d been given some free t-shirts.

I scouted for some masking tape and a pair of scissors.
Then we cut a hole in the t-shirt, tape the iPad behind it and downloaded a coca-cola advert to play on repeat.

We used the Coca-Cola advert because Coke we knew it worked – Coke had a big marketing budget and great production quality.

Then it was off in a taxi to the local mall.
The entrepreneur walked around – feeling uncomfortable – as the advert blared out from his chest.
That told us something but it wasn’t the experiment.

Pretotyping
Here’s me holding an iPad Pro to my chest to replicate the experiment. Originally it was a smaller iPad, ugly masking tape and a handsome model. When we did the prototype we also realised that it wasn’t a gender-neutral product…

The real experiment was the two people who shadowed him. One counted the number of people who looked at the screen. The other tried to count how long they watched.

In a busy Asian mall on a Saturday afternoon, it bombed. Nobody cared. A few people glanced, no one commented, vision didn’t linger.

The cost of the experiment was a few hours and an event t-shirt.

The benefit – the entrepreneur didn’t waste months/years of his life pursuing something that didnb’t work.

I have no idea what he did after that – I certainly didn’t see him back in the mall the next week with an improved version – so I guess he took the failure as the kiss of doom.

This is what prototyping is all about. How can we get the simplest faster possible test of the idea in front of people so that we can validate it early?

When do you use it?
Frankly, as soon as you have an idea – try prototyping it. DO NOT waste any time building anything before you do!

If you can’t spend some more time thinking about it, read Alberto’s book, or call me!

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Value Creation and Value Capture

Today I’m going to talk about value creation and value capture. These are closely related terms that are significant when you are designing a new business model or undertaking a process of business model innovation.

Value creation is creating value for your customers. The more value the better.

Value capture is capturing the value you create and turning it into profit.

Value Creation and Value Capture Examples

Let’s start with a simple example.

Google by figuring out how to get search to work well created lots of value for consumers. By working out how to integrate AdWords into search it created a huge amount of value for businesses. It was then able to capture a significant amount of the value that it created for businesses through the way it monetised the ad auctions.

Uber figured out how to create value for car drivers and passengers by connecting both of them quickly and easily. Passengers got lifts faster. drivers got spare cash. Both got lots of value. Uber didn’t capture much value (it’s burned through billions in venture capital money) – to penetrate and win market share it let passengers and drivers keep most of the value it created – even subsidised them.

JP Morgan at Standard oil created lots of value for consumers by offering them a cheap and reliable source of oil products. By running a vertically integrated monopoly he captured a huge amount of value and become one of the richest men in the world.

Gambling companies and casinos create a minimal amount of value for consumers – a transitory feeling of success as they win – but they do capture a huge amount of value from the transaction.

How to Create and Capture Value

Almost everything in business is based on how you create and capture value. When we look at it through a business model innovation lens there are a few differences.

We are looking for ways of creating value that is different to anybody else. This may be about creating value in a new way – say the Segway or the C5 for personal transport. or it may be about changing existing ways of creating value – for example, electric and self-driving cars rather than the old car industry model.

What is important then is to think about how you can do things differently. Different, not better.

This is the huge advantage of the business model canvas, which is the tool that I use to do a lot of my work.

You can work through dozens or hundreds of models, exploring ideas to see how they could create value in new and different ways. Because it’s on paper it’s understandable and explainable and concise. It doesn’t get drowned in the noise of the conversation around the board table.

A Value Creation and Capture Model

It’s also worth quickly stepping back to see how the process of creating and capturing value works over time.

Paul Verdin and Koen Tackx created a simple model of how value creation and capture works (and this maps fairly well to the business model lifecycle).

Value Capture and Value Creation - Model - Fig 1
Value Creation & Value Capture Matrix

We have a matrix setting off value creation and capture again each other. The nightmare position is where you have high sales, but low profitability.

This is the position that Uber is in as mentioned earlier. Next, you have a heaven position where you have high (and growing) sales and high profitability. At the moment Google, Apple and Facebook are all in this position.

In the next stage, the dream, you are a monopolist – officially recognised or not. Many state-owned telco and electricity companies are in this position, their ability to capture value only constrained by regulation.

Finally, you have the hell position that many companies find themselves in – low (or low growing) sales and low profits.

Value Capture and Value Creation - Model - Nightmare - Fig 2
Startups are good at creating value, but less good at capturing it

When you undertake business model innovation you enter the market with fast-growing sales – but frankly, profitability is usually low. This can be due to difficulties in market adoption, or because you are pricing for penetration – as amazon did for years.

Value Capture and Value Creation - Model - Heaven- Fig 3
Unicorns have discovered ways of creating and capturing value – why they are seen as so successful

What you need to quickly do is to get to a position of strength. If your business model is creating value that is similar to other players the huge risk is that you will fall into hell, rather than reaching heaven. This is one of the key reasons why I spend so much time on business model innovation.

New ventures tend to either fail in the nightmare stage, or descend into hell. The only way to avoid this is by maximising the amount of value that you create. The business model has to accelerate the value proposition or you fall out of orbit.

Value Capture and Value Creation - Model - Dream- Fig 4
Monopoly – the dream of every capitalist according to Marx

This is the dream. JP Morgan achieved this. The EU has run anti-monopoly and anti-trust cases against both Microsoft and Google for abusing this market position. In some ways, this is an equivalent point to the cash cow in the BCG matrix.

This is the classic low effort, high return position – for many get rich quick schemes this is the goal. Maximise value capture at the expense of value creation

Value Capture and Value Creation - Model - Hell- Fig 5
Hell – where you can’t capture value or create it in a highly competitive environment

And finally, the monopolist is taken out of heaven by a series of astute tactical moves designed to preserve market share. These slowly whittle away at the profitability of the business. Gravity sucks it down into hell.

How do you avoid this? Simple enough, you then start a new process of business model innovation

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Value Creation and Value Capture