Tim Wood Powell     The value of knowledge

Picture in your mind your organization’s typical customer or client.  Now picture the moment that customer purchases your product (or service).  Each transaction with that customer is preceded by some calculation—whether rigorous or informal— that your product is “worth it” compared to alternative solutions.  This worth-it-ness is called your product’s value proposition.

The sum of each of those value calculations over time is essentially your customer relationship with that customer.  In turn, the sum of all your customer relationships is pretty close to the value of your whole enterprise.  Each happy (successful) company starts with a happy (satisfied) customer—and the ability to scale that happiness across many customers.

Let me illustrate.   Apple (AAPL), in the waning days of a prolonged economic downturn, reported selling 3 million iPads (at $500+) in its first three months, and that same number of iPhone 4s (at $200+) in its first one month.  Millions of people (including me) made a decision to part with their hard-earned money, and possibly forego other purchases, to have one of these tools/toys (tooys?)

As a result, Apple reported record third quarter revenues of nearly $16 billion and its stock jumped by more than 6% in the following week.  There’s a direct, often immediate, connection between the happy customer and the happy company.

That’s why stock analysts spend time talking to retailers about how a product is faring at point-of-sale.  I discounted most of the recent negative press about the iPhone 4— because I could walk by the Apple store every morning and see people still lined up to get it.

What’s a value wave?

To remain effective, value propositions must evolve over time.  Author Adrian Slywotsky called this value migration, defined thus:

Customer priorities—the issues that are most important to them, including and going beyond the product or service offered—have a natural tendency to change; business designs tend to stay fixed.  When the mechanism that matches the company’s business design to the structure of customer priorities breaks down, Value Migration begins to occur.

Value migration is like a train leaving the station.  If it leaves without you, it’s a threat that can de-value—or even render irrelevant—your business model.  If on the other hand you’re “riding the value train”—that is, you rapidly identify, understand, and act on the relevant shifts in value—it’s an opportunity to create even greater and more lasting value for your customers.

Often this migration is “lumpy”—uneven and unpredictable.  It occurs in clusters, in a social dimension, tipping-point style.  We call this a value wave—when many people make a similar value shift at about the same time.

When a value wave hits your industry, your value proposition—what customers expect from your organization—must also migrate to adapt to the new needs.  If it does not, the customers themselves migrate by choosing alternative sources of value—that is, of needs and wants fulfillment.  (In strategy terminology, such alternatives are called “substitutes”.)

Staying with and benefitting from a wave is basically what surfers do.  So maybe an even better metaphor is “surfing the value wave.”

Is your alignment process working?

In too many organizations, the process that aligns business design with customer priorities is either too slow, broken, or entirely non-existent.  Leaders are left without a way to reliably detect shifts in those priorities.  Even customer research is not often designed to identify these trends. A typical result is that the organization finds out too late, when customer themselves have already started to migrate to competing solutions.

Though it’s usually better to respond late than not at all, it’s far better to have an early warning system in place to detect value waves when they start—such that corrective actions can be taken in time.

Economic stress accelerates value waves

During times of economic stress as we’ve recently experienced, the tendency for customer priorities to change is both sharpened and accelerated.  Here in the US, we’ve experienced huge value waves—tsunamis, in some cases.  These include the mass consumer migrations away from landline phones toward cell phones, and away from SUVs toward more fuel-efficient cars.

In my January 2009 post “The tough get going”, I called on organizations to face this challenge and address it aggressively:

Value creation doesn’t stop in a recessionary economy like this one—but it does change, sometimes dramatically and very fast.  Value can migrate from one economic sector to another.  This is because each “value chain” interacts, and displacements in one—for example, you lost your job—cause displacements in another—for example, you cut out overpriced coffee and other non-essentials.

To manage value migration, first document it

I’ve recently led a team here at TKA to develop solutions that will rapidly identify and measure these changes and recommend steps that might be taken.  Using econometrics and business analytics, TKA has developed a technique called Value Alignment™ to develop value metrics and assess shifts in value. TKA Value Alignment brings various proprietary tools and techniques to bear in designing and building a systematic process to bring your organization’s business model—and especially its value proposition—into alignment with the shifting priorities of your customers.

We’ve been telling selected clients about these developments, and will have details we can share soon.

Thanks to Reuben Danzing for his thoughtful comments.  His main criticism was that I sound obsessed by “value”.  I plead Guilty As Charged.

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