HBR On Strategy: Don’t Just Create Value. Capture It.

Release Date: October 16, 2024

In this insightful episode of HBR On Strategy, hosted by Julia Kirby, Stefan Michel, Director of the Executive MBA Program at IMD and Professor of Marketing and Service Management, delves into the critical distinction between value creation and value capture in business strategy. Michel introduces a comprehensive framework designed to help organizations systematically capture the value they generate for customers, ensuring sustainable profitability and competitive advantage.

Introduction: The Value Capture Blind Spot

Julia Kirby opens the discussion by referencing Michel's article, "Capture More Value," highlighting a pervasive oversight among businesses:

"Many companies spend a lot of time on innovating in a sense that they create more value for customers. And what they often miss is to think about how to capture that value." [02:25]

Michel emphasizes that while creating value is fundamental, the ability to capture that value is what truly drives business success. His research identifies patterns and strategies that organizations can adopt to ensure they not only deliver value but also retain a significant portion of it.

Stefan Michel’s Framework for Value Capture

Michel presents a systematic framework comprising 15 strategies categorized into five key areas. This framework serves as a guide for businesses to explore various avenues for capturing value effectively.

1. Change the Price Mechanism
2. Change the Payer
3. Change the Price Carrier
4. Change the Timing of Value Capture
5. Change the Segment

1. Change the Price Mechanism

Altering how prices are determined and structured can unlock new value capture opportunities. This includes shifting from flat pricing to dynamic or performance-based models.

2. Change the Payer

Michel illustrates this with the example of LifeStraw, a product designed for developing countries that filters bacteria from water:

"By using LifeStraw, you don't need to boil the water, which reduces the need for wood and lowers CO2 emissions. The resultant carbon credits pay for the LifeStraw, saving lives without requiring the end-users to bear the cost." [04:00]

This strategy involves identifying alternative sources to pay for the value created, such as third-party funders or environmentally driven incentives.

3. Change the Price Carrier

This strategy involves shifting where the price is attached within the value chain. Michel cites Nespresso as a prime example:

"Nespresso moved the price carrier from kilograms of coffee to individual cups, allowing them to charge a premium for each serving." [05:15]

By changing the unit or context in which pricing occurs, companies can better align with customer perceptions of value and willingness to pay.

4. Change the Timing of Value Capture

Adjusting when value is captured—either upfront, over time, or based on usage—can enhance profitability and customer satisfaction.

5. Change the Segment

Targeting different customer segments or tailoring value capture strategies to specific groups can uncover hidden opportunities for revenue.

Real-World Applications and Examples

Michel provides several compelling examples to illustrate his framework:

• Nespresso (Price Carrier)

  • Context: Instead of selling coffee by the kilogram, Nespresso sells it by the capsule, allowing for premium pricing per cup.
  • Impact: Increased profitability through premium pricing aligned with customer convenience and product quality.

• Google (Auction-Based Pricing Mechanism)

  • Context: Google’s advertising model uses auctions to determine the cost per keyword, capturing maximum willingness to pay from advertisers.
  • Quote: "When you advertise at Google, you don't get a fixed price. Instead, you bid for keywords, allowing Google to capture nearly the full willingness to pay in the market." [06:26]

• Bossart (Value-Based Pricing)

  • Context: A Swiss company sells pre-lubricated screws. Rather than pricing based on production costs, they price based on the value provided to customers, such as reduced maintenance.
  • Impact: Enhanced customer value perception and mutually beneficial pricing structures.

• Government License Plates (Changing the Payer)

  • Context: Governments auction unique license plates, capturing high willingness to pay from individuals desiring specific numbers.
  • Impact: Significant revenue generation from a non-traditional pricing strategy.

Implementing the Framework in Managerial Settings

Michel advises that value capture should be integral to every strategic and innovative initiative. He underscores the importance of cross-functional collaboration rather than delegating value capture solely to pricing or sales teams.

"This requires a joint effort of several cross-functional teams within your organization to think about this regularly and systematically." [10:39]

Two primary uses of the framework include:

1. Offensive Strategy: Developing new ideas to capture additional value.
2. Defensive Strategy: Identifying and mitigating competitors' value capture innovations that could threaten the business.

Diagnostic Tool: The framework can help managers understand competitive movements and internal blind spots, enhancing strategic responsiveness.

Case Study: Driving Margin Improvement

Michel recounts a case involving a large service company with over 200,000 employees facing stagnant margins (~5.5%). The CEO set an ambitious target to increase margins to 9.5%. Using Michel’s framework, the company explored 24 value capture innovation cases across various markets.

• Process:

  • Reviewed each case and discussed applicability.
  • Identified new approaches to value capture.

• Outcome:

  • While the company did not achieve the 9.5% margin goal immediately, the exercise sparked creative thinking around value capture.
  • Opened new revenue streams and heightened managerial awareness of value capture strategies.

"This helped to open new revenue streams within the company and also made top management more alert to look into innovations from both value creation and value capture perspectives." [11:10]

Conclusion: Embracing Value Capture for Strategic Success

Stefan Michel concludes by reiterating the necessity of integrating value capture into strategic thinking and innovation processes. The framework provides a common language and systematic approach for teams to explore and implement diverse value capture strategies, ensuring that businesses not only meet customer needs but also sustain and enhance their profitability.

"Every time you think about strategy and innovation, ask yourself, how do we capture more value? This framework gives you the tools to do so systematically." [12:47]

Final Thoughts

This episode of HBR On Strategy underscores that successful business strategy goes beyond creating value—it necessitates a deliberate approach to capturing that value. Michel’s framework offers a valuable toolkit for managers and innovators aiming to enhance their organizations' profitability and competitive edge through strategic value capture.

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