Creating Value for the Market with Technology-based Offerings
By Ron Ozminkowski, Founder & President, Analytic Strategies & Consulting
“It is unusual for tech executives to face criminal charges when their startups collapse under the weight of unrealized promises.” So wrote Bobby Allyn of National Public Radio on January 3, 2022, in his coverage of the trial of Elizabeth Holmes. She is the former CEO of Theranos, which purportedly developed a low-cost technology to collect and analyze blood droplets to screen for evidence of hundreds of illnesses. The tech didn’t work; Ms. Holmes went to trial and lost and now faces the prospect of prison time and significant fines. She will be sentenced in September. Sunny Balwani, the form COO and President of Theranos, is currently on trial for his role in that debacle.
With the Theranos affair as an obvious and important exception, technological innovations rarely succeed or fail primarily because of the technologies they embody. A solid technology is necessary but not sufficient for success. Even when the technology is great, technological innovations often fail because stakeholders and potential clients do not recognize or downplay the value those innovations may bring.
To create value, one must know exactly what to create, and what, where, how, and when to scale that offering.
With that in mind, this article is about creating tech value for customers (i.e., creating customer willingness to pay for a new technology or tech-based offering). It is also about creating value for the employees and vendors who create the offering, thereby enhancing their willingness to sell their services or wares to the companies producing the offering, for a relatively low price.
According to Felix Oberholzer Gee (2021), the Andreas Andresen Professor of Business Administration at Harvard, the difference in client willingness to pay and employee/vendor willingness to sell measures the value created for the marketplace and the firm producing the technology-based offering. Therefore, he says, emphasizing both is the key to success. Emphasizing just one over the other may lead to a prolonged state of mediocrity, if not a slow and painful demise for the tech initiative.
The Basics
To build support for a technological innovation, it must be clear to staff and the marketplace:
- how that innovation dovetails with the mission of the firm (i.e., what its reason for being is) and
- how it aligns with the vision of success that the firm is trying to establish.
Vision is always forward-looking; it reflects how you would like the technology to be viewed by potential employees and clients (Collins and Porras, 2018).
If the alignments between the innovation, company mission, and vision are understood, the fundamental goals of the innovation will be easier to grasp and support. Such support must be ongoing in the face of competing initiatives and threats though, so a sense of urgency must be conveyed, and constant reminders and recommunication will be required to maintain support for the technological innovation (Kotter, 2012).
To clarify the goal of the innovation, create its vision statement, and align these with the company mission, Michael Porter (2018) suggests getting answers to these five questions:
- What do your clients want from the solution? Which clients?
- Will they support the underlying technology as a solution component? How can it benefit them – what is its marginal value over other technologies?
- What are your fundamental goals for innovation and why are these important?
- What synergies will be created between the use of the technology and other business initiatives? The more synergies there are, the more support across the firm there will before the new technology.
- When does it make sense to stop innovating, to avoid spreading resources too thin? This is an important aspect to consider for scaling the innovation too, as noted by List (2022).
John P. Kotter, a world-renowned leadership guru from Harvard, notes that questions like these should be considered by a guiding coalition of staff and stakeholders selected from many levels of the organization and externally. Create and use that coalition frequently to build and maintain support and address conflicts that are bound to arise over time.
Porter (2018) adds that significant efforts should be made to create and report meaningful measures of success for the innovation. His preference is to report return on invested capital (ROIC) in the technology because that is familiar to business and financial managers across the firm. According to the Corporate Finance Institute (2015), ROIC is defined as operating income from the tech solution divided by the book value of investments in it. ROI can be calculated annually or as a long-term stream (both are recommended).
Another measure of success favored by economists is the net present value (NPV) of the tech offering. NPV is the difference between inflation-adjusted and discounted benefits (e.g., revenues) and the costs of producing the innovation over its useful life. While ROIC tends to be calculated annually in nominal (unadjusted) dollars, NPV better accounts for changing prices and the changing value of a dollar over time. NPV also provides a long-term view of performance, which can help guide strategy.
With a higher immediate focus on customer value instead of profits, other useful metrics to gauge the value of your tech solution should be favored as well. These include its contributions to employee and client satisfaction and morale, and its impact on the firm’s reputation. The Net Promoter Score (NICE, 2021) is often used to measure satisfaction or reputation, but this is a quick and dirty (i.e., not always reliable or valid) measure that should be supplemented with more rigorous measures (Sadfar and Pacheco, 2019). Pulse or other employee surveys can measure employee morale and related concepts (Qualtrics, 2022).
Creating Customer Value
There is an old axiom in economics that has been illustrated repeatedly in virtually every industry. Its truth really isn’t up for debate since it has been evident in so many places for so long. It goes like this:
People do what you pay them to do, so pay them to do what you want them to do.
Goodwill desires to create social value, and otherwise ‘trying to do the right thing’ are laudable but insufficient to create long-lasting change, even in non-profit organizations. When financial incentives favor tech process A, don’t expect people to spend much effort on tech process B instead. Creating innovations successfully means paying people to do so – there is just no way around that. If the financial incentives in your firm are not in favor of investing in your favored process A, either change the incentives or change the process. The latter is likely to be much easier.
To create value with your technological innovation, Oberholzer-Gee recommends using the steps in Table 1 below, to increase the willingness to pay for it by clients and decrease the prices employees and vendors charge for selling inputs to it. Some input from other leading experts is included in the table as well.
| Increase Willingness to Pay (WTP) by: | Decrease Willingness (Prices) to Sell (WTS) by: |
| Thinking about customers’ best interests first, not profits. Align key performance indicators with these interests. This will create opportunities for value-based pricing and profits will come. | Paying fairly and just as (if not even more) importantly, create attractive working conditions and a sense of inclusion, to improve morale, quality, productivity, and reduce turnover |
| Making high-quality products – minimum viable products may not be good enough to scale well. | Rewarding every little success along the way, publicly and often. |
| Providing great (not mediocre or just good) service; improving the client experience will keep them coming back and create new opportunities for sales that would not otherwise occur. | Coaching for individual improvement privately. See Nine Lives About Work by Buckingham and Goodall (2019) for how best to do this. |
| Selling complements – products or services that raise WTP for your tech offering | Looking for and adopting economies of scale. See List (2022) for more on this topic. |
| Working with vendors who complement rather than a substitute for your tech offering | Creating opportunities for staff and vendors to learn relevant skills for their jobs and the jobs they want. Help them learn from each other as well. |
| Embodying your tech with a small and manageable number of value-creating features; don’t try to do too much. | Giving managers and staff the financial incentives and resources to increase WTP and reduce WTS |
| Knowing when to quit–when the marginal costs of production exceed the marginal revenues from the offering (List, 2022) | Empowering employees at all levels (not just managers) to take broad-based actions that promote quality of product and a sense of control over one’s job (Kotter, 2012) |
| Frequently communicating how the added value is obtained or works, using effective visuals. | |
| Creating value inside your industry first, then across industries. Do both to thrive in red (competitive) and blue (non-competitive) oceans. See Kim and Mauborgne (2015) for blue ocean strategy recommendations. |
Limitations and Conclusions
We have just scratched the surface in describing what it takes to create value with tech offerings. The references noted in this article provide a lot more detail and are highly recommended.
Next, to create value, one must know exactly what to create, and what, where, how, and when to scale that offering. We’ll talk about those in a later post, leveraging the insights of Kieron Dey, co-founder of Nobi Group, and John A. List, award-winning professor of economics at the University of Chicago. Their science-based experiments provide many useful insights on how to build, test, and scale offerings. Their books are cited below and are highly recommended.
The upshot of this article is that so much about technology is not just about technology. Principles of good business and effective management and communication will more likely determine the fate of your technological innovations (and might just keep you out of jail, too!). Good luck!
References
M Buckingham and A Goodall. Nine Lies About Work: A Freethinking Leader’s Guide to the Real World (2019). Boston, MA: Harvard Business Review Press
J Collins and JI Porras, Building Your Company’s Vision (2018). Reprinted in On Strategy for Healthcare, Cambridge, MA: Harvard Business School Publishing Corporation.
Corporate Finance Institute. What is Return on Invested Capital? (2015) on https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-roic/
K Dey. Competitive Innovation and Improvement: Statistical Design and Control (2015). Boca Raton, FL: CRC Press.
WC Kim and R Mauborgtne. Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant (2015). Boston, MA: Harvard Business Review Press.
JP Kotter. Leading Change (2012). Boston, MA: Harvard Business Review Press.
J List. The Voltage Effect: How to Make Good Ideas Great and Great Ideas Scale (2022). New York, NY: Currency, an imprint of Random House.
NICE Systems, Inc. What is a Net Promoter? (2021). See https://www.netpromoter.com/know/
F. Oberholzer-Gee. Better Simpler Strategy (2021). Boston, MA: Harvard Business Review Press
M Porter. What is Strategy? In: On Strategy for Healthcare (2018), Boston, MA: Harvard Business Review Press.
Qualtrics. The Ultimate Guide to Employee Pulse Surveys (2022) on https://www.qualtrics.com/experience-management/employee/what-is-employee-pulse-survey/
K Sadfer and I Pacheco. The Dubious Fad Sweeping Corporate America. Wall Street Journal, May 15, 2019.