Value Innovation

We didn’t reinvent the circus. We repackaged it in a much more modern way. Guy Laliberté, Founder of Cirque de Soliel

     With big ideas and scarce resources, entrepreneurs must be efficient in their decisions and discerning in their management of time and money. The concept of value innovation is well suited to evaluating how to compete efficiently and effectively.

What is value innovation?

     Value innovation is the parallel pursuit of product differentiation and low cost, creating a rise in value for both buyers and the company (your startup). The value to buyers is derived from the product’s benefits minus its price. The value realized by the company is generated from the product’s price (company revenues) minus your cost (company expenses). Value innovation is achieved when the whole system of benefits, price, and cost is aligned.

     Value innovation and value curves are linked, as discussed in the article Charting Your Company’s Future. 16 Value curves are the tool for developing and delivering value innovation. The value curve is a diagram that compares certain product or service factors on a relative scale of low to high. Factors often include features, benefits, price, brand, location, and a variety of other factors seen by customers. Diagramming each competitor’s value curve alongside one another can identify value gaps, and highlight opportunities for entrepreneurs.

What value innovation opportunities are there for law firms?

     For illustration, consider a traditional law firm. They are often based in opulent offices and expensive neighborhoods. They deliver a high quality of work based on their attorneys, which are very well educated, very well credentialed, and very well compensated.

     Traditional law firms are expensive to hire. Legal costs are among the largest expenses of startups. Entrepreneurs may hire attorneys to assist with their corporation formation, operating agreements, employment agreements, patents and trademarks, and sales contracts.

     Due to the expense of law firms, entrepreneurs are increasingly turning to the Internet for their legal needs. Companies like LegalZoom and Nolo offer self-service, web-based tools and documents for entrepreneurs. As an online service, there are no opulent offices. Expensive attorneys are replaced with software and online tools that entrepreneurs complete based on prompts from the website. While the quality and customization of the contracts, filings, etc. from these online providers may be less than what a traditional law firm can offer, the cost savings for a suitable solution is compelling.

     These online legal services companies operate on a different value curve than traditional law firms. Experienced, talented attorneys are replaced with software. Customized services from traditional law firms are replaced with a semi-customized, template-based solution. For relatively simple, straightforward legal needs, the cost savings versus work quality equation is increasingly favoring the online providers.

     As an aspiring entrepreneur that may be interested in the legal services market, starting a traditional law firm or a wholly online legal services company is ill-advised. There are significant competitors already operating on these two ends of the legal services spectrum. The alternative? Use the value curve to map where an opportunity may exist for value innovation in legal services

     Perhaps I can create a new age law firm that blends an online, self-service model with limited human intervention. If customers desire a face-to-face interaction with an attorney, perhaps I can do this affordably via web conferencing in lieu of expensive office space. Or if the attorney costs are still too high, perhaps I can use legal assistants or paralegals for the interactions, and hire attorneys as supervisors.

     While research and analysis is required to fully develop this idea of a new age law firm, this illustration exhibits that value curves are a valuable tool for entrepreneurs. We can consider different features, price points, and costs, and assess the positives and negatives of tradeoffs. We can create new features, and change the value proposition for customers.

What are the keys to delivering value innovation?

     To deliver value innovation, focus on four questions that align with what to eliminate, reduce, raise, and create within the venture.17 Are there select factors that we can eliminate that are of limited to no real value to our target customers? A second element that we’ll explore is reducing factors. Are there factors on the value curve that we can reduce without significantly reducing the value delivered to customers? Another element that we’ll examine is raising certain factors. Lastly, we’ll consider if there are new factors that we can create? When we look at these four questions collectively, we’ll gain insights into how we can deliver value innovation to successfully compete in the marketplace.

What existing factors can you eliminate?

     Your startup’s elimination of factors that are delivered to customers today by competitors is certainly easier said than done. While there’s the concern for eliminating factors that truly matter to customers, it is unlikely that the customer values every factor at a high level. If we can identify those factors with minimal value, we can consider eliminating them and investing our resources in those factors that add value. This give us the opportunity to deliver a faster, better, and/or cheaper solution for customers.

What is Cirque du Soleil’s value innovation?

     By illustration, we will explore Cirque du Soleil. Perhaps you’ve seen this next generation circus on their touring show. They’ve been very popular in Las Vegas for the last twenty years.

     Cirque du Soleil made a conscious decision to eliminate factors at the conception of their company. If you are able to identify factors to eliminate, you can save the expenses of money and time. You can reinvest those resources into factors that do add true value for customers.

     When we examine circuses, take a step back and think about what the circus has been for over a hundred years. It’s been reasonably affordable, and more of a family outing. It’s had star performers. Animals have been a feature, as have aisle concessions. There are multiple stages, the three-ring circus if you will, where action is taking place within each ring in parallel. Clowns and fun and humor have always been a part of it, as have thrills and danger.

     Cirque du Soleil eliminated most of these factors. They did away with the star performers. There are no animals. They removed aisle concessions and multiple show arenas. They still deliver fun and thrills.

     Cirque du Soleil added new elements, to include a single story to present a unified them for the entire show. It is a very refined experience within each of their multiple productions. There may be a dozen Cirque du Soleil shows, each with a different theme, going on globally at any given point in time. The artistry, music, and dance of their shows deliver a very different circus experience.

     They changed the value curve, and it started by eliminating what most of us perceived as the fundamental factors of the circus. They’ve created a whole new type of entertainment and a whole new type of experience. They’ve reinvented the structurally unattractive circus industry and changed those competitive dynamics. They’ve also challenged convention and dared to do things differently.

     Cirque du Soleil changed the customer. While the traditional circus focuses on families and, specifically, children, Cirque du Soleil has changed that entirely. If you take a child, particularly a young child, to a Cirque du Soleil performance, they will likely not enjoy it. It will be awkward and weird, perhaps scary for younger children. It’s clearly aimed at an adult audience.

     Adults have different needs, different wants, and a different willingness to pay. Ticket prices for a Cirque du Soleil performance may be triple or quadruple your traditional circus like Barnum and Bailey. With a different market, a different feature set, a different experience, and a very different price point, Cirque du Soleil may align more with a Broadway show.

     By differentiating our startup’s target customer we can gain clarity on what factors to eliminate. For Cirque du Soleil’s target of adults, a shifting away from the animals, the candies, the feature performers all made sense. Integrating factors from Broadway, the opera, and rock concerts aligned well with their customer.

     Eliminating factors requires an understanding, and perhaps a redefinition, of the customer. Who is your target customer and what are their needs and wants? What are the competitive dynamics of your industry as related to this type of customer?

     Next, we’ll examine the second step of value innovation, reducing factors.

Where can you reduce factors and not reduce value?

     While select factors may be eliminated, others may be preserved, albeit reduced. These reductions present an opportunity to be more efficient and effective than competitors. Deprioritizing these less essential factors enables you to focus on the high value factors.

What is Nintendo’s value innovation? 

     Competing directly with existing competitors is a challenge for small and large companies alike. Nintendo developed a new vision for their Wii, a new interactive game play format that abandoned the conventional keypad controller in favor of a new motion-based approach. 

     They envisioned an energetic experience that pulls kids off of the sofa and entices adults as well. Instead of sitting on a sofa or chair playing, as was done for decades, the Wii is an interactive environment. 

     They abandoned the traditional game console developer’s emphasis of better graphics, faster computing power, and complex game strategies and storylines. In this way, they reduced selected factors and emphasized others to compete in a new way with Sony’s PlayStation and Microsoft’s X-box. 

     Nintendo’s success with the Wii illustrates how companies can create new customer demand by engaging customers previously unserved in their product category. For Nintendo, these noncustomers were older non-gamers, parents who desired their children to be more active, and very young children. This lead to a console based on fun, simplicity, and interactivity. This reduced the need to invest in consoles that were expensive to build, expensive to sell, and expensive to develop games for. 

     Nintendo did not seek a better solution for an existing problem. Instead, they created new demand from new customers by focusing on new wants and needs. There are always far more noncustomers than current customers. Nintendo’s ability to look across existing boundaries of competition and rethink buyer value allowed them to create a new market space where a new type of demand could be developed.

     By reducing the technology, complexity, and graphics of gaming, Nintendo created a new type of customer. They attracted young children, the two, or three, or four-year-old, who did not necessarily have the dexterity, or the desire, to play the games that were being delivered by Sony and Microsoft. Nintendo also attracted older non-gamers, to include parents who desired their children to be more active.

     I encourage you to think less about stealing customers from competitors, and think more about creating new customers in the market. By rethinking customer value, you have the opportunity to be different. Start with a blank page when you consider what matters to customers, instead of simply assuming that your competitors have all of the right features and benefits.

     Did this reduction approach work for Nintendo? Based on sales, we see the Wii, far and away, experienced more success than the competing game consoles combined. Nintendo maintained this leadership position for a number of years. This success changed the way that Sony and Microsoft perceived their gaming consoles. While very late to the market, Sony and Microsoft did eventually bring motion-based games and accessories to the market. Nintendo had the clear advantage, focused on simplicity, and delivered an innovative, interactive experience.

     With reducing factors, recognize that it gives us the opportunity to be more efficient and more effective than competitors. Consider how you can differentiate your products from competitors by reducing non-essential factors, while retaining or elevating value for customers.

     Once the elimination and reduction of factors is complete, attention can turn to raising select factors.

Which factors can you raise above competitors?

     Think about which factors really matter. What is really needed to exceed customer desires? How does raising new factors further differentiate us in a meaningful way versus competitors, and increase our competitive advantage? Raising these high-value factors differentiates you from competitors and improves your competitive advantage.

What is Wikipedia’s value innovation?

     Wikipedia’s alignment of value, profit, and people propositions based on product differentiation and low cost delivered new value innovations. This online resource created new value for users and motivated the general public to embrace and assist in implementing the new strategy of collaboratively developing the written content of the Wikipedia encyclopedia.

     By engaging its readers and the public in developing Wikipedia’s content, the company raised the timeliness and the breadth of its content. This approach presented a sustainable advantage in cost and in value versus Encyclopedia Britannica, Microsoft’s Encarta offering, and existing and future competitors.

     If you’re under forty years old, the name Britannica probably doesn’t mean anything to you. For nearly 250 years, it was the preeminent encyclopedia that was available worldwide. At its peak in 1990, they sold 120,000 volumes per year, with many more volumes being handed down through generations of families. In 2010, the last print set of Encyclopedia Britannica was sold. In that year, they sold a small fraction of what they used to sell, with only 8,000 copies at a price point of $1,395. What happened? How do you go from being a household name globally to zero?

     There are a few factors that came into play. We may think it was the Internet. We may think that large companies are slow to evolve, and that Britannica was overly comfortable and ignored the digital and online revolutions. Well, that’s not true in this case.

     Britannica was very aware of the digital market and the transition from print to digital. In 1981, they published the world’s first digital encyclopedia. In 1989, they published the world’s first multimedia encyclopedia on CD ROM for use on PCs. In 1994, they launched Britannica online. 1994 pre-dates the majority of the large websites that you use. They were a very early entrant in the digital space. With a mobile app in 2000, and youth-focused mobile apps in 2010, Encyclopedia Britannica was continually at the forefront of developing premium digital content.

     What did happen to them was a product called Encarta, from Microsoft. Britannica delivered a very comprehensive, very high quality product, while Encarta offered a streamlined, very inexpensive alternative. Encarta’s limited multimedia element was not at all comprehensive, but it was good enough. As entrepreneurs, good enough may be exactly what we need to compete with incumbents that offer over-built and over-priced products. The typical encyclopedia consumer did not necessarily need infinite detail, and infinite accuracy, and the highest level of quality. Customers were increasingly less willing to pay for that, and that’s what we found with Britannica.

     Microsoft also had something else different from Britannica—other revenue streams.

     Microsoft was able to almost give away Encarta, because they wanted to make money by selling the Windows platform, and Windows-compatible computers as part of that experience. Britannica’s revenue streams were limited to the print copies and digital editions of their encyclopedia. Encarta was not the prize offering of Microsoft; it was an add-on, an accessory to the suite of Microsoft’s software products for the home.

     Encarta was not the final chapter in the story of Britannica. Wikipedia arrived a few years later.

     Wikipedia changed the category. It changed the product definition of what’s an encyclopedia. It brought low cost—and low in this context is zero. It created new value and covered a broader array of topics. They cover contemporary individuals, television, movies, actors, and the characters that the actors portray. The general public did not only embrace reading this new form of encyclopedia, they contributed to its creation as well, via its wiki platform. Readers are invited to be the writers. This raises the timeliness and the breadth of Wikipedia’s content tremendously. As a free service without advertising, Wikipedia’s sole revenue stream is donations.

     The Wiki Foundation drives the delivery, monitoring, and operations of Wikipedia. Salaried staff support the infrastructure of the company and supervise the site’s content. Their annual revenues are approximately $45 million. These donations are solicited from users worldwide in order to support and sustain the site. Wikipedia spends nearly $35 million of that maintaining the site, as well as other administrative and fundraising activities.

     Raising select factors is a very important piece in the value innovation puzzle. Determining which factors to raise is a challenge. Britannica mistakenly believed that detail and accuracy were key desires of customers. Wikipedia realized that the timeliness of the content, as well as the breadth of topics, were more important to customers than was the infallible accuracy or the absolute comprehensiveness of content. Wikipedia’s free price is obviously a key differentiator from Britannica as well.

     When considering encyclopedias, we would think all four of these factors are important: accuracy, detail, timeliness, and breadth. The winning entrepreneurial companies can determine which two factors are the most important of the lot, and can focus their time and resources on significantly raising those factors to deliver the greatest value to customers.

     Lastly, are there opportunities to create new factors that will satisfy customers in new ways?

What new factors can you create?

     If entirely new features or benefits can be delivered by your product or service, and you are unique in this way, you are highly valuable to customers.

What is Barnes & Noble’s value innovation?

     When we think about the creation of new factors, book retailers are interesting to examine.

     Historically, independent bookstores have been very popular. The prices were comparatively high, but they offered a very knowledgeable staff, a reasonable selection of books, a nice store ambiance, and convenient store hours.

     Generations later, the mall bookstores arrived. They were more affordable and the staff may not necessarily have been as knowledgeable. The selection was small, but the popular titles were readily available. Ambience was not really there, but the stores were generally open all day and into the evening seven days per week.

     Then, the big box book retailers arrived. Barnes & Noble, Borders, and their competitors brought even lower prices, staff that had reasonable knowledge, and a broad selection that was ten to twenty times larger than the mall bookstores. They brought a level of ambiance, longer store hours, and even cafes in partnerships with Starbucks and The Cheesecake Factory. Initially, these new factors brought significant competitive advantage over the mall bookstores and the independent bookstores.

     But, were the big box book retailers thoughtful in the long term? Did they miss something? Were the key features that they identified the right key features? Based on Borders’ later bankruptcy and financial troubles at Barnes & Noble, perhaps further factors needed to be created. Was it the online element?

     While Borders and Barnes & Noble did eventually build an online presence, they were relatively late adopters compared to Amazon.com. From 2001 to 2008, Borders

outsourced its online sales to Amazon, essentially handing customers over to Amazon

during the emergence of online retailing.

     Barnes & Noble did move quicker in the eBook reader market. They introduced the

Nook in 2009, as their tablet and eBook reader competitor. This provided them with a

factor that differentiated them from Borders, who had no such device until a year later.

Barnes & Noble is, however, still struggling.

     What do customers really want? What do they really value? Are we arbitrarily adding

factors? For book retailers, what factors should they create to improve the value that they

are delivering to customers and compete effectively with online retailers?

     When we think about value innovation, the opportunity to create new factors is

perhaps the most feasible path to differentiating your startup from competitors. Can your

new factors make the competition less relevant? What new features can you bring to the

market that are unique, highly valued by customers, and sustainably competitive for you?

     Think about the opportunity to create factors, raise factors, reduce factors, and

eliminate factors. These are all drivers of the value curve, and critical to delivering value

innovation to customers.

Entrepreneur Spotlight on Julie Uhrman, Founder and CEO of Ouya

     Julie Uhrman saw opportunity in the hyper-competitive video gaming space

dominated by industry titans. In July 2012, she entered her Ouya concept into the

Kickstarter crowd-funding site, and in one month reached pre-sales of $8.5 million. In a

field of expensive consoles and a business model unchanged for decades, she aimed to

offer a very different experience.

     By leveraging the Android software platform, and emphasizing low cost for the

consumer instead of the high technology focus of the new Microsoft Xbox One and Sony

PlayStation 4, Ouya offered a different unique selling proposition than the established

competitors. With this model, new versions of Ouya will launch annually, while

traditional game consoles cycle between four to six years.

     Ouya’s $99 price is far lower than that the $400-$500 traditional game consoles. Its

size is only a few inches cubed, and includes HDMI inputs for high-definition TVs and a

controller similar to that of a PlayStation 3 or Xbox 360.

     A major differentiator from the incumbents is its open platform, enabling independent

developers (and even game players) to easily make and post new games, requiring only a

screwdriver to make hardware modification and add-ons. With all systems thereby being

a development kit by design, any Ouya owner can be a developer without licensing fees.

All games are required to have a free-to-play aspect, be it completely free, a trial, or

purchasable upgrades.

     Julie Uhrman’s innovative product reduces or eliminates realistic graphics and

superior processing power while raising and creating new values in democratizing video

gaming, and is now selling in major online and offline retailers in the U.S. and abroad.

Ideas in Action: Value Innovation

• What factors are competitors offering that you can eliminate or reduce, without sacrificing value for customers?
• Which factors can you raise to exceed customer expectations?
• What new factors can you create that will bring new values in new ways to customers?