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This chapter is from the book

This chapter is from the book

The New Value Chain

Most innovation teams start with product or technology features, rather than an experience or event. If you start with the product, you will create a tactical intellectual property. If you start with the experience or event, you will create a strategic intellectual property.

The old value chain starts with identifying user needs—a point of departure conditioned on the assumption that users can identify and articulate those needs. This is done by focus groups, usually in an environment that does not resemble the user environment in the least. At best, this process will deliver added value, a tactical application.

By contrast, the new value chain starts with behavior mapping and a deep understanding of people’s motivations. This is accomplished through personal observations and immersion in the user’s lifestyle and mindset, with the expectation that the observer’s perspectives will reveal insights into the meaning behind an experience. This process creates strategic value.

On the other side of the new spectrum is marketing, which is concerned with creating additional value at certain stages of a product or service cycle through branding and image. At this stage, the artifact already exists, so the required ability is creative: to translate the product’s desired image into a symbolic language that is easily understood by the target demographic. It is the creation of new perceptions and new loyalties, but with an end result that does not change or improve the performance of the artifact itself. This is tactical value.

Strategic and tactical intellectual properties reflect themselves into the market potential or the value of an idea. But a strategic idea will always be worth much more to businesses and organizations than a tactical one. While the old value chain creates tactical intellectual property, most often as protection against similar competitive offerings, the new value chain creates pre-competitive, strategic intellectual property—new business platforms.

The tactical protects; the strategic creates. It’s the difference between adding and creating value. Between creativity and imagination.

Let’s look at some examples.

Creating Strategic Value 1

  • One minute it was a rock and the next a talisman, a charm, a fetish, a relic. It became a stone made sacred by human imagination.

    —D. Stephenson Bond, Living Myth

To create value from a tree, we might produce a table. This is a strategic innovation. To add value to a table, we might stain it, or paint it white, or make it expandable to accommodate various numbers of people. This is a tactical innovation. If we look at the past 50 years, we find ripple effects radiating out from the discovery of any new strategic innovation—artifact, technology, or service.

The eggbeater was a functional object before the electric motor was invented. The electric motor added tactical value to the manual eggbeater by improving on the performance, speed, and amount of effort required to use it, making for a more comfortable user experience. But the egg does not know this—the outcome is the same whether it is whipped by hand or machine. The omelet is fluffy either way, so the value add is tactical.

In creating value, one uses a completely different set of skills, which illustrates the difference of scope between strategic and tactical innovation. To add value, we need the skills of the technician—problem solving or technical know-how—whereas to create value, we need the skills of the creator—imagination, insight, and curiosity. Most schools educate students into the “hows” of adding value rather than the “hows” of creating value. But skills do not create; the mind creates.

Lego: Playing with Value

Since 1947, Lego has successfully added value to plastic in the form of the well-known Lego brick. The Lego system is an excellent example of a good toy. Its principal feature is that all pieces in a set are compatible. In a sense, the physical fit of the pieces expresses the behavioral rules of games. All Lego parts obey the rules at all times. Playing with Lego establishes a soothing repetition of motion (snapping together the pieces), which results in a satisfying accumulation of overlapping shapes and forms. Within its established constraints, a Lego brick can be used to create any form.

Each eight-studded Lego brick weighs 2.5 grams, so there are 400 bricks per kilogram of ABS plastic. At a going rate of $2 per kilogram of ABS (a non-discounted price; Lego probably pays a bit less because of the volume purchased), this means a material cost of 0.005 cents per brick. So for each bucket of 500 bricks that sells for about $15 in North America, the material cost is $2.50, exclusive of the bucket. This is a value add of 600 percent on the initial material costs. (Note: This does not take into consideration marketing and tooling costs.)

Now consider Vezok, a character from Lego’s recent Bionicle series. It retails for $8.99. It has 41 pieces that weigh a total of 100 grams. That makes the material cost 20 cents, resulting in a value add of 4,495 percent. Or is this a value creation of 4,495 percent?

Beware Vezok’s Fury!

In 2001, Lego launched the first Bionicle series with the “Quest for the Masks” scenario, a collection of characters accompanied by related products, interactive activities, Web forums, and online games. Each successive year, Lego has developed the narrative further by introducing new characters into the story. The Bionicle series takes advantage of Lego’s capability to make small, perfect plastic bits that fit together flawlessly, but it also has a compelling story to captivate users and the technological components to keep them in the story of “the moment.”

Consider Lego’s description of the Bionicle character Vezok:

  • “Nasty and vicious, Vezok’s fury is always on the verge of exploding. In battle, he relies on a harpoon that pulls him through the water and a buzzsaw that hurls water daggers. His powerful impact vision and ability to absorb the powers of his enemies makes him a devastating opponent.”

This is no longer just a plastic brick. A brick does not come with a narrative—that must be created in play. Vezok comes with a narrative—one that is further expanded through play. The narrative is where the creation of value takes place. Bionicle is a strategic platform for multiple play experiences.

Creating Strategic Value 2: Starbucks

The idea of drinking coffee dates back 500 years or so to the early Ottoman Empire. People gathered in Turkish coffeehouses to drink strong brews from small cups. They smoked tobacco (and who knows what else) from communal hookahs and relaxed over genial conversations. This was an important social event, a celebration of humanity and community. But for many years, coffee was merely a food subgroup in North America, disconnected to any function beyond filling a person’s stomach with caffeinated fuel. Remember in old Westerns the coffee made in huge pots to make sure the job got done before sundown?

As a North American business model, a successful coffeehouse was nonsense until the early 1980s, when Howard Schultz, the vice president of a Swedish housewares manufacturer, observed coffee customs in Milan. “Coffeehouses in Italy are a third place for people, after home and work,” he’s reported to have said. “There’s a relationship of trust and confidence in that environment.”

The details of the total experience mattered. That’s what Schultz—who became the CEO of Starbucks and spearheaded its rise to an international franchise—understood. Schultz saw that we have two sides to our brain and our being: We want to have and we want to be. We want coffee but we also need to belong. Starbucks is a place where you can have and be at the same time. That is a Big Idea. It is not the product—coffee—or the process of roasting it. It is not the espresso maker. It is the entire context. The Big Idea is first the consideration of the event—the experience and the product as the strategic offering—and then the impeccable execution of this insight.

The Big Idea has to do with imagination. It has to do with understanding the possibility of the coffee bean and the context of humans looking for a particular experience along with their coffee. The insights that led to Starbucks’ success were firmly rooted in the new value chain, beginning with imagination.

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