By Ron Ozminkowski, Ph.D., Founder & President, Analytic Strategies & Consulting
A few weeks ago, CXOTech Magazine included my post about how to create value for the marketplace with technology-based offerings. The crux of that article is about establishing a vision for innovation that aligns with your company’s mission and makes sense to the market. The correct vision will reflect the market’s future sense that ‘yeah, we really do need to buy that’ product, machine, platform, or service, and it will promote recognition of your firm as the best one to satisfy that need. It will also inspire your workers and partners to build it well.
Most of the article focused on creating value for customers using methods developed by Felix Oberholzer-Gee (2021), the Andreas Andresen Professor of Business Administration at Harvard University. He describes how to increase client willingness to pay for new technology or tech-based offering. He also shows how to create value for the employees and vendors who contribute to the offering, thereby enhancing their willingness to sell their services or wares to the company producing the offering, for a relatively low price.
As Oberholzer-Gee mentions, the difference between 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.” He says more value translates into happier clients who will return for your offerings. They will then come to you with great ideas about mutually beneficial future endeavors. Happy clients who recognize outstanding value may become your best marketers and partners, enhancing your (and their) reputations, revenues, and profits. Happy employees gain more fulfillment from their work, reducing turnover and resulting in high-quality output.
There are still two key missing pieces of our tech puzzle, though. These include exactly which offerings to create, and how to scale them. In this post, we start in reverse order, focusing on how to scale, which means “achieving the desired outcome when you take an idea from a small group –of customers, students, or citizens, for example—to a much larger one” (List, 2022, page 6). Think of scaling in terms of selling a lot of your offerings, influencing a lot of people, or getting many to participate or go along with your latest, greatest idea.
The reason for starting with how to scale is that many of the questions which must be answered to figure out how are also critical for figuring out what to scale. The ‘what’ question will be addressed in the final part of this series, coming soon.
John A. List is the Kenneth C. Griffin Distinguished Professor in Economics at the University of Chicago and the Distinguished Professor of Economics at the Australian National University. In his book, entitled The Voltage Effect, he mentions five threats to scaling new ideas and presents four strategies to enhance scaling. The threats include
- Moving forward with false positives, which means erroneously selecting offerings to scale that resonated well with your test audience but are not likely to resonate well with many other audiences,
- Failure to understand how your customers’ characteristics and needs vary across markets,
- Not differentiating between components of your offerings that are fixed and cannot easily be scaled vs those that can be – if the key attributes to market success are set (such as one person’s expertise), they cannot be scaled because they cannot easily be duplicated.
- Failure to recognize” spillovers” (i.e., other things) that occur when your offering is used but still get in the way of scaling it, and
- The “cost trap,” which means developing offerings that are just too costly for people to buy.
Among these five, the last is probably the easiest to prevent. We should know early whether an offering will be very costly to develop; if so, it is likely to be too costly to buy. Admittedly, this is general advice, and there are exceptions, the most notable being the iPhone, which took over 6 years and thousands of developers to create, yet which has scaled enormously (Wikipedia, 2020). Unless you have something like that time horizon and budget in mind, it is not safe to go down such a road. The four other threats to scalability would have to be demonstrably minimal. The five strategies to enhance scaling Dr. List mentions (see below) would need to be executed in a stellar manner. Those who want to go big too quickly often go home earlier than they expected.
Items 1) – 3) in List’s list make intuitive sense and need less discussion here, but his book still provides several useful illustrations of why these are important, and it is worth a close read. I will also refer briefly to items 1) and 2) in the last part of this series, when I focus on what to scale.
Item 4) may be less intuitive. According to Dr. List, spillovers are things that go hand in hand with your offering. They may be unexpected, unintended, and unpreventable phenomena that affect many people, and they might not become apparent until the offering is scaled. If an offering with large spillover effects is scaled too quickly, the externalities can lead to its painful demise.
Dr. List cites increasing payment rates for Uber drivers as an example. This led to higher prices which increased driver compensation in the short run, but it also led to fewer riders who wanted to pay those higher prices. Eventually, driver earnings fell back to before the compensation increase, leaving drivers and riders less satisfied.
There is a lot more to be said about spillovers in his book. My interpretation is that a slower and steadier approach to scaling may shed some light on spillovers and help avoid pain down the road.
Dr. List provides the following strategies that can enhance the likelihood of successful scaling. Some of these align well with insights provided by Professor Oberholzer-Gee too. They include:
- Developing the right incentives for people to design the offering correctly and to stick with its key scalable attributes,
- Marginal thinking,
- Knowing when to quit, and
- Designing sustainable organizational cultures.
I alluded to item 1) in my previous post when I noted the famous axiom from economics that says people do what you pay them to do and not much else. Once you learn what it takes to scale an offering, create the financial incentives to perform those activities and eliminate financial incentives that get in the way.
Item 2) means two different things, and both are important. I interpret Professor Oberholzer-Gee’s notion of marginalization as a reference to complements: the other things that people want when they consume your offering (the jelly to your peanut butter, so to speak). Identifying those complements creates opportunities for partnerships with other organizations that increase your likelihood of successful scaling, and theirs too.
Professor List refers to scaling at the margins, which means investing in scaling only to the point where the last dollar you spend reaps an equal dollar in revenue. If the investment in scale is too large, or if it adds to a sunk cost that cannot be recouped, eventually, some of your dollars will be wasted. A focus on marginal thinking can identify which dollars are useful and which should be directed elsewhere.
Item 3 also is a reference to two important themes, one from Professor Oberholzer-Gee and another from Professor List. The former refers to the famous axiom: don’t let perfection be the enemy of the good. Make the offering good enough to create lasting value, but it can never be perfect, and searching for perfection might just increase the price to the point that decreases the number of purchases, revenues, and profits. The latter theme is Dr. List’s reference to opportunity costs. Every dollar invested in scaling is a dollar that could have been invested elsewhere (and vice versa). The secret, then, is to stop scaling at the point when additional dollars can be invested elsewhere with higher returns.
Item 4 is the most important point in List’s list, in my view. It also aligns with a point made by Oberholzer-Gee. Both authors stress the need to treat employees with respect and give them the incentives, resources, environments, and tools they need to create valuable offerings. Doing so results in higher quality and lower turnover, greasing the skids for scaling too.
Final Comments and Coming Attractions
As you consider how to scale existing offerings, keep in mind the wisdom of Drs. List and Oberhozer-Gee offer. Think about what the threats and success factors may be in advance. Before moving forward, spend the time and money to identify and investigate these in detail. Document and work through examples with your teams. Doing so will help focus your efforts on issues that can avoid pitfalls and increase the likelihood of success.
By now, it should be clear that much of what drives technological innovation is not technology per se. Business and economics acumen is equally large, if not even greater, determinants of success. Getting help from experts in these realms where needed may be the best investment you make.
With all of this in mind, the final post in this series will address the question of what to produce. We will tackle that question in my next post; stay tuned.
I would like to thank Dr. Justin Holz for many helpful comments on an earlier draft. His insights helped make it better. Any remaining errors are mine.
J. A. List, The Voltage Effect: How to Make Good Ideas Great and Great Ideas Scale (2022), New York, NY: Currency, an imprint of Random House.
F. Oberholzer-Gee, Better Simpler Strategy: A Value-based Guide to Exceptional Performance (2021), Boston, MA: Harvard Business Review Press.
Wikipedia, History of the iPhone (2020), on https://en.wikipedia.org/wiki/History_of_the_iPhone