Don’t Just Create Value. Capture It.

Summary

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.

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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.

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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.

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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.

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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.

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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]

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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]

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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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For more insights and strategies on business management and innovation, subscribe to HBR On Strategy on Apple Podcasts, Spotify, or your preferred podcast platform.

Transcript

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[HBR Host]

Welcome to HBR on strategy, case studies and conversations with the world's top business and management experts, hand selected to help you unlock new ways of doing business. Creating value is table stakes for any business, but is your organization capturing it? IMD professor Stefan Michel studies marketing and strategy and he says that many businesses don't know how. Through his research, he created a framework for defining the value of your innovations and innovative strategies. In this episode, he explains how to apply his framework, whether you're developing new business ideas or formulating a strategy to compete with a new entrant in your market. He also discusses how value capture works in the real world, drawing on examples from companies like Nespresso and Google. This episode originally aired on HBR IdeaCast in October 2014. Here it is.

[Julia Kirby]

Hi, I'm Julia Kirby. Welcome to the HBR IdeaCast. Today our guest is Stephane Michel, who's director of the Executive MBA program at IMD in Lausanne, Switzerland, and a professor of marketing and service management. Welcome Stefan.

[Stefan Michel]

Thank you for having me.

[Julia Kirby]

Your article in the October issue of HBR is called Capture More Value. It has great advice for business innovators, but it starts with this observation about a major blind spot you say they have.

[Stefan Michel]

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. And this is really what this research is about. How can we capture the value that we create with customers in different ways?

[Julia Kirby]

So how do you think more rigorously about that? Is there some systematic way to think about value capture opportunities?

[Stefan Michel]

So what I did in my research, I looked at cases across industry, across the globe and tried to figure out patterns behind those. Value Capture Innovation I came up with 15 ways of how to capture value differently in five categories and that's what I present in this paper.

[Julia Kirby]

The five categories I remember, one of them is change the price mechanism. What else are the categories?

[Stefan Michel]

The first one is change the price mechanism. The second one is that you change the payer. So who actually pays for the value. The third one is that you change the price carrier. That means where do you put the price tag on? The fourth category talks about how to change the timing when you capture that value. And finally the fifth one is how to change the segment and capture value differently with different segments.

[Julia Kirby]

Let's get an example on the table here of changing the payer. That seems a little strange because wouldn't the consumer of the value normally be the payer for it?

[Stefan Michel]

That is most often the case, but not always. And one good example is live straw. That's an innovation created for developing countries. So it's a straw and you can drink water through that straw and it filters out the bacteria. So you get clean water when you use that straw. So the value creation is obvious. It's much safer, much more healthy. But the value capture is difficult because those people who need it most don't have the money to pay for that. So in this case, in order to make use of that innovation, you need to find a different payer. And what LifeStraw figured out is that by using this straw, you don't need to boil the water. And if you don't need to boil the water, you need less wood to burn. And with this you can achieve a CO2 reduction. And the CO2 reduction in term helps you to get carbon credits for this. So in the end it's the carbon credit to pay for the livestraw, which then saves the people's life.

[Julia Kirby]

What a clever solution. I mean, to use carbon credits to pay for a water solution. Price carrier. What does it mean to change the price carrier?

[Stefan Michel]

This is another example from a completely different market. It's Nespresso, the coffee machine and capsules by Nestle. And when you think about it, it's a great innovation in itself. The coffee is good and how it's presented and the whole ecosystem around this is really a great example of value creation innovation. But what makes this so profitable is that the price capture, the value capture, innovation, because in the end you pay $130 per kg of coffee, but no one actually pays $130 per kg of coffee, because as a consumer, you buy a capsule at a time and then it's maybe $0.50, $0.60 or $0.70. So here Nespresso very cleverly moved the price carrier from the pack of coffee, the kilogram of coffee, to one cup of coffee. And with this they were able to charge a premium for each and every cup.

[Julia Kirby]

One thing that's made such an impact on pricing since, I guess since the Internet came Along is auctioning. How does that fit into your framework?

[Stefan Michel]

So auctioning is the case of Google. As the most prominent example, when you advertise at Google, you don't get a price of how much does it cost if you want to advertise a certain keyword, but you put in your own price and then Google auctions out. So whoever pays more for a certain keyword in a certain language in a certain country gets more hits. And that's a way for Google to capture almost the full willingness to pay in the market. Another interesting example of auctioning that is on the government side is license plates. So we have seen in several countries like Saudi Arabia or Switzerland or Russia that the government sells out very unique license plate like the number one or specific numbers, maybe eight, eight in China. And then whoever bids the highest amount for a specific license plate gets that license plate. And sometimes the price that drivers are willing to pay is much, much, much higher than everyone would have guessed. It could be six digits, seven digits figure. And that's a good way for the government to capture a value that apparently exists in the minds of some drivers.

[Julia Kirby]

That seems like an extreme form of what's known as value pricing.

[Stefan Michel]

Correct. This is an extreme form of value based pricing. It's almost the perfection of value based pricing where you capture all the willingness to pay. Value based pricing in most industry is not done by auctioning but by figuring out what is the value that we create with the customer and how can we capture that value better. And one example I use in the article is from Bossart, a Swiss company that sells screws, nuts and bolts. Of course they call it fastening technology because that sounds better than screws, nuts and bolts. And what they have developed is a screw that is already pre lubricated. And when they price the screw, they don't look how much does the screw cost and how much does the lubricant cost. That would be cost based pricing. But they try to figure out how much value does it provide to the customer. An industrial company who puts together coffee machines for example, or cars of not having to lubricate each and every screw. So they try to figure out what is the value that the pre lubrication has to the customer. And based on that they set a price that creates a win win for both parties.

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[Julia Kirby]

Youm created this framework by looking around and seeing interesting examples of value capture and putting them in these categories. How do people use this framework in a managerial setting?

[Stefan Michel]

So in an ideal case, what I advise my clients is to think about value capture every time you think about strategy and every time you think about innovation. And it's very important that this framework can be used what we call to play offense and defense. So in one way you want to use the framework to come up with new ideas how to capture more value. But at the same time, you want to be very careful about looking at competitors who come in your market with a different value capture idea because they are very dangerous. If they change the price carrier, if they change the payer, they could really attack you from a site that you haven't expected.

[Julia Kirby]

In other words, you could use this as a kind of diagnostic tool because something's happening in your competitive set that is maybe blindsiding you, but. But using the framework you could understand it better.

[Stefan Michel]

Exactly. And then I think it's important that you don't delegate this to a pricing manager, for example, or to the salesforce. I think this really requires a joint effort of several cross functional teams within your organization to think about this regularly and systematically rather than just at the end of the day when you realize that your margin is under pressure.

[Julia Kirby]

Are there some organizations that you've seen actually be able to realize substantial new value as a result?

[Stefan Michel]

One good case that I recall was a company, a large service company with over 200,000 employees. They are under constant margin pressure. I think it's about 5.5% margin and usually they fight to get to 5.7 or 5.9%. But the CEO came to us and said, I want to challenge my team not to go to 5.9% but to 9.5%, which is huge. And so what we did, we prepared 24 cases of value capture innovation in different markets and then we presented them and discussed them with the top team of the company. So we went through each case and asked, so what does this mean for us? How could we use this idea? And in the end we created a list of new approaches of how to capture value. The company was not able to go from 5.5 to 9.5%. But again, this was just the trigger to get us thinking more creatively about capture more value. But what it did, it helped to open new revenue streams within the companies and also it helped the top management to be more alert on these kind of thinking to look into innovations not only from the value creation perspective, but also from the value capture perspective.

[Julia Kirby]

So that audacious goal he put on the table was really an exercise in forcing them to stop thinking incrementally about innovation and really rethink the model of the business.

[Stefan Michel]

Exactly. And I think that's the point here, that every time you think about strategy, you think about innovation, that you have the question in your mind, how do we capture more value? And this framework helps you to do this because it provides a language that everyone can use and you can go through those different patterns systematically and hopefully regularly with your team.

[Julia Kirby]

Stefan, it's a great thing that you're shining more light on this challenge of value capture. Thank you for coming in and sharing your thinking today.

[Stefan Michel]

It is my pleasure, Julia. Thank you.

[HBR Host]

That was IMD Professor Stefan Michel in conversation with Julia kirby on HBR IdeaCast. We'll be back next Wednesday with another handpicked conversation about business strategy from Harvard Business Review. If you found this episode helpful, share it with your friends, friends and colleagues and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. And while you're there, be sure to leave us a review. And when you're ready for more podcasts, articles, case studies, books and videos with the world's top business and management experts, find it [e-mail] this episode was produced by Ann Sani and me, Hannah Bates. Ian Fox is our editor. Special thanks to Maureen Hoke, Erica Truxler, Ramsey Kabaz, Nicole Smith, Anne Bartholomew and you, our listener. See you next.