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January 22, 2019

How businesses can turn non-customers to clients

HBS Professor of Business Administration Prof Ramon Casadesus-Masanell conducts a business class / COURTESY
HBS Professor of Business Administration Prof Ramon Casadesus-Masanell conducts a business class / COURTESY

What does it take to lure potential buyers in today’s highly competitive market? The Star caught up with Prof Ramon Casadesus-Masanell for insights on a key tactic: value innovation.

Prof Casadesus-Masanell is the Herman C Krannert Professor of Business Administration at Harvard Business School. He studies strategic interaction between organisations that operate different business models.

HBS is the graduate business school of Harvard University in Boston, Massachusetts. The school offers a large, full-time MBA programme, doctoral programmes, HBX and many executive education programmes.

Today, it is conducting a workshop for CEOs and business leaders at the Capital Club, Nairobi.

The Star: People often confuse added value and value innovation. Kindly tell us the difference.

Prof Casadesus-Masanell: Both notions are important in strategy. Added value refers to the difference in the total amount of value created with the firm as a participant in the industry minus the total value created if the firm did not exist. For a firm to capture value and make a positive profit, it must add value.

Value innovation refers to creating value for a market segment of non-customers: a group of potential buyers who choose not to consume the category because they do not find current offerings sufficiently interesting. A firm that successfully engages in value innovation is a firm that adds value, but the reverse is not necessarily true.

What is the difference between competitive positioning and value innovation?

Competitive positioning is all about considering industry structure as exogenous, as something that cannot be altered. Managers make choices across the firm’s value chain — culture, HR, IT, procurement, logistics, operations, marketing, sales, legal, finance — to fend off negative aspects of the industry or to take advantage of anything positive about the industry.

Value innovation considers industries as malleable, as something that can be shaped by firm choices. What’s more, successful value innovators often, but not always, create new industries by borrowing desirable attributes of offerings in related industries and rejecting those that are undesirable.

In today’s highly competitive market, what are the pros and cons of adopting a value innovation strategy?

There are two main limitations to the notion of value innovation. First, there are settings — or points of departure — from which no value innovation is possible. Recognising settings sterile to value innovation is important. Otherwise, managers may spend valuable resources, human and financial, searching for ways to innovate in creating value, where such investments are highly unlikely to produce results.

Second, over time, value innovators will be imitated. Competitive imitation will eventually require firms to think carefully about competitive positioning. Thus, competitive positioning and value innovation are complementary approaches, not substitutes, to strategy design.

How can an enterprise achieve product differentiation while keeping the cost low?

Conceptually, there are two ways. One is through innovation, all kinds of innovation and not only value innovation. Technological innovation and business model innovation, for example, can both lead to firms developing a dual advantage — product differentiation and low cost. A good example of this in the United States is CarMax, with its innovative business model to serve the used car market.

The second way is by being closer to the production possibilities frontier, or PPF, than others in the industry. The PPF is simply the set of combinations of product differentiation and low cost available given the current state of technology.

Taking the example of Coca-Cola, how can firms already enjoying market dominance use value innovation to create new markets and maintain their lead?

Value innovation is particularly relevant to firms with strong market positions. For the most part, these firms will not experience the breakthrough growth that investors look for unless they choose to address segments of non-customers.

Of course, this is not easy for large firms since they have been set up to serve the customer segments they currently target. Value innovation entails some risks, and the risk appetite of established firms may be less than what is needed. A separate, independent unit within a large firm may have a better chance of innovating in the creation of value.

In their book ‘Blue Ocean Strategy’, W Chan Kim and Renée Maurborgne talk about creating new market spaces instead of fighting competitors’ existing market share as the main thrust of value innovation. How can a startup or rival go about this, where its main competitor is virtually a dominant player?

When it comes to crafting strategies for small players to become sizeable firms in industries dominated by large incumbents, we recommend a four-pronged approach that is related to, but goes beyond, value innovation. First, devise an indirect attack; don’t go head-to-head. Second, build a strategy based on activities where your disadvantage is less.

Third, exploit some change in the environment — regulatory, demographic, technological, or customer tastes. Finally, find a way to put the established player on the horns of a strategic dilemma. Good examples include Pepsi becoming a factor in the United States during the 1950s and, more recently, Tesla and its entry into the automobile industry.

In value innovation, the target is the most strategic customer and their unmet needs. How can a company easily identify that group and its needs?

This is hard! It is easy to spot blue oceans after the fact, but hard to do so ex ante. We recommend a deep dive to identify customers of related industries who are non-customers of your industry. For example, if your company is a winery looking for fast growth, you may want to consider targeting beer and hard spirits drinkers (related industries) who rarely drink wine (your industry).

Then perform market research to find out the barriers to adoption endured by these non-customers so that a value innovation strategy can be designed to fulfil their needs.

Does HBS have any plans, in partnership with local universities like Strathmore Business School, to introduce value innovation courses in Kenya?

I would be surprised if a world-class institution such as Strathmore Business School did not offer courses that touched on ideas related to value innovation. I have collaborated with Strathmore in the past and had the privilege of teaching a couple of sessions there a few years ago. It was a fantastic experience with great students who were well prepared and first-class facilities.

At the moment, HBS has a number of initiatives in Africa, including our Senior Executive Programme-Africa and a new research office in Johannesburg. Closer to Kenya, perhaps, is our upcoming “faculty immersion”.

Together with Prof Srikant Datar, I am co-chairing this initiative, part of which will take place in Nairobi. A group of about 20 faculty members will travel in the summer of 2019 to Kenya and South Africa to visit companies and have conversations with business and government leaders to learn more about research and course development opportunities in Africa.

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