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).
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.
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.
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.
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
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
