Posts Tagged ‘value creation’

The African Informal Sector: GDP Contribution vs Scale of Human Impact

The informal economy in sub Saharan Africa (SSA) tends to be measured as a share of GDP, counting its contribution to the national economy. By this metric, Nigeria has the most economically empowered informal sector, contributing over 60% to the GDP. On the other extreme, South Africa, has one of the smallest contributions to the GDP from the informal sector, but the highest unemployment rate.

Yet both Nigeria and South Africa are neck to neck when it comes to the title of “largest economy on the African continent”, or place in the top 3. So what does this tell us about these IMF metrics being used to measure the informal sector?

The human impact story is missing from the equations

South Africa might have one of the smallest informal sectors in terms of contribution to their GDP, but the number of people generating their income from the informal sector is almost as large as Tanzania, whose informal sector contribution is more than double, second only to Nigeria.

WIEGO’s research, from which the above employment figures are drawn, highlights the social impact and scale of the informal sector in human terms. Already, the informal sector’s employment opportunities are growing faster than the much smaller formal sectors in most major African economies. New graduates and working age adults still need to find a way to put food on the table.

Its not enough to simply look at GDP contribution when it comes to the complex value embedded (and untapped) in the informal economies of these nations. Where social safety nets are scarce, and systems variable in their functioning, the human and social impact of the informal cannot be ignored in development planning and policy design.

Strategy and Operational Excellence: Trade-Offs Made in Design and Thinking

“Managers must clearly distinguish operational effectiveness from strategy. Both are essential, but the two agendas are different.

The operational agenda involves continual improvement everywhere there are no trade-offs. Failure to do this creates vulnerability even for companies with a good strategy.

The operational agenda is the proper place for constant change, flexibility, and relentless efforts to achieve best practice.

In contrast, the strategic agenda is the right place for defining a unique position, making clear trade-offs, and tightening fit.”

 “What is strategy?“, Michael E. Porter, Harvard Business Review, Volume 74, Number 6

With reference to my previous post, I thought to clarify my thinking a little further.

Design (not design thinking), very clearly falls in the realm of operational effectiveness, as derived from the explanation given above – let’s use that old classic, the iPod, as a commonly understood example – it is very well designed. It would not have reached it’s iconic status if it were not well designed.

But just for the sake of this thought experiment, let’s say that Apple’s strategy could be framed as “leader in the market of portable, user friendly, hard drives that allow you replay the stored information. Hypothetically, mind you, and with respect to the iPod only, for the purposes of this conversation.

Steve Jobs’ vision was clear and Apple’s unique value proposition – the user experience – well differentiated. But his strategy of maintaining leadership in this category [clearly defined, per Porter’s definition] is supported by his operational effectiveness in releasing a new product [in the same product category – strategy] with a quality and frequency that left the other players breathlessly behind.

Had he not had this clear strategy he could have done any number of things that many do to maximize the revenue generation possibilities – released an iPod clothing line, offered iPod accessories, distributed toy iPods in Happy Meals, whatever came to mind.  But any of these tactics would have moved him away from his core value proposition.

This would have been short term thinking, how to maximise the cachet of the iPod brandname or, you could say, the outcome of not having a well defined strategy from the very beginning. By continuing to make trade-offs that he did in his decision making and tightening fit, he continued to maintain his strategic agenda, envisioned in advance for Apple’s forward momentum.

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A company can outperform rivals only if it can establish a difference that it can preserve. It must deliver greater value to customers or create comparable value at a lower cost, or do both.

The arithmetic of superior profitability then follows: delivering greater value allows a company to charge higher average unit prices; greater efficiency results in lower average unit costs. – ibid

On the other hand, at the time of the iPod’s heyday, just prior to the iPhone’s full scale disruption, there was much discussion on some of the design choices made, particularly in the arena of customer service.

Some may recall that the battery could not be changed in the original iPod and customer service for the product was nowhere near what today’s CX and UX gurus would advocate.

Here’s the snippet from the wayback machine linked above:

Its battery wears down and can’t be easily replaced because an iPod can’t be opened up by mere mortals. All of these were conscious design choices Apple made.

There’s something in that and I’ll be coming back to it, but in the context of this post one wonders whether trade-offs such as these,  in operational effectiveness, make for good strategy in the long run?

The Value Creator’s Dilemma: Opportunity and Growth in a Dog eat Dog World

There are two mindsets – the ‘competitive’ mindset where the market is believed to be finite in scope and scale, that assumes that resources are scarce, an approach to strategy based on solely on the competitive aspects of fundamental frameworks like Porter’s Five Forces. Or as I see it, a zero sum game.

That is, the mentality that thinks that ‘if the other guy wins, I lose’ or ‘If I win, the other guy loses’. That makes sense in poker, which is in fact a game, but not, imho, in the business of value creation, revenue generation and growth. It assumes the pool is stagnant.

The other mindset – one that is quite rightly gaining traction, but has yet to be wholly understood in the context of growing the market or generating revenue – is that of a ‘value creator’. The ‘value creation’ mindset believes that the market is infinite, in scope and scale, it assumes that value can be added, enhanced and created, it’s an approach to strategy that does not need ‘one right answer’ as the goal before it’s implementation. And due to this basic difference, there cannot, thus, be a zero sum game.

That is, ‘if I win, I would have created value, adding to the pool from which my wins come to me, therefore I’m not taking away the other guy’s wins which existed before I came along and added some more.’

Let me try to explain this thought a little further. Here is the basic ‘Competitive Forces‘ Model by Michael Porter, better known as the ‘Five Forces’:

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This reference site offers a cautionary note however:

Porter’s model is particularly strong in thinking outside-in. Care should therefore be taken not to underestimate or underemphasize the importance of the (existing) strengths of the organization (inside-out) when applying this five competitive forces framework of Porter.

And quite rightly, since it’s a model that is used for analyzing the industry in which the company is a part of, rather than an analysis of the corporation itself. Better suited for the use by external management consultants than a corporate planner.

I would hazard a guess however that  ‘competitive strategy’ has been understood only it’s basic terms of competition without the nuances of strategic thinking behind it.

In 2001, Fast Company printed an article on Michael Porter’s contribution to strategic thinking and his opinions, which I find extremely relevant, particularly as we look to creativity, innovation and design as value creators for competitive advantage.

I’m reproducing here, a significant yet relevant portion of Porter’s insights, in order to support my viewpoint:

There’s a fundamental distinction between strategy and operational effectiveness.

Strategy is about making choices, trade-offs; it’s about deliberately choosing to be different.

Operational effectiveness is about things that you really shouldn’t have to make choices on; it’s about what’s good for everybody and about what every business should be doing.
[…]
… only strategy can create sustainable advantage. And strategy must start with a different value proposition.

A strategy delineates a territory in which a company seeks to be unique. Strategy 101 is about choices: You can’t be all things to all people.

The essence of strategy is that you must set limits on what you’re trying to accomplish. The company without a strategy is willing to try anything.

If all you’re trying to do is essentially the same thing as your rivals, then it’s unlikely that you’ll be very successful. It’s incredibly arrogant for a company to believe that it can deliver the same sort of product that its rivals do and actually do better for very long.

That’s especially true today, when the flow of information and capital is incredibly fast. It’s extremely dangerous to bet on the incompetence of your competitors — and that’s what you’re doing when you’re competing on operational effectiveness.

What’s worse, a focus on operational effectiveness alone tends to create a mutually destructive form of competition. If everyone’s trying to get to the same place, then, almost inevitably, that causes customers to choose on price. This is a bit of a metaphor for the past five years, when we’ve seen widespread cratering of prices.

There have been those who argue that in this new millennium, with all of this change and new information, such a form of destructive competition is simply the way competition has to be.

I believe very strongly that that is not the case. There are many opportunities for strategic differences in nearly every industry; the more dynamism there is in an economy, in fact, the greater the opportunity.

And a much more positive kind of competition could emerge if managers thought about strategy in the right way.

In sum, the much more positive kind of competition that Porter is talking about, one that demonstrates comparative advantage, offering different choices for different needs  can only emerge from the return to the basics of business.

That is, to create a strategy based on differentiation. Set yourself apart in the market, offering a unique product that no rival can offer, simply by virtue of it’s roots – it emerges from your understanding of your core value proposition, that differentiates you from any other, and then enhancing, creating and finally communicating that difference.

And that is where the basic principles of design methodology – design thinking, if you must – together with the basic principles of strategy can come together to provide you with the tools to observe the market, draw your insights on your intended ‘user’s needs, create a product or service for those ‘as yet undiscovered’ needs and so, create your market.

Which in turn, implies that you are then not taking away somebody else’s share of the pie, because you are baking a new pie.

M-PESA and the service innovation framework (review)

A former student of mine just mailed me this article “Extracting Key Lessons in Service Innovation” (pdf) by S.Wooder and S. Baker, recently published in the Journal of Product Innovation Management, January 2012 edition. Here is the abstract of the article:

This paper describes how Sagentia—working with Vodafone, Safaricom, and other organizations—played a significant role in the creation and delivery of a landmark mobile money transfer and payment service for emerging markets, starting in Kenya. In this profile we examine the organization aspects and approach that contributed to the success of the service: the lessons we learned as the technology provider and how the experience has informed and strengthened our service innovation processes.

Reading through, what I found most valuable among the basic principles so simply and clearly articulated, was this insightful description of service innovation, as pertaining to the ways that a human centered design innovation team can work to improve the customer experience for any company, large or small:

What Is Service Innovation? Creating and Delivering Value

We are familiar with service innovation examples such as music download, loyalty programs, franchise chains, ticket/check-in kiosks, and online tax returns.

Service innovation can be described as a combination of technology innovation, business model innovation, social-organizational innovation, and demand innovation, with the objective of improving existing services (incremental innovation), creating new value propositions (offerings), or creating new service systems (radical or transformational innovation) (IfM and IBM, 2008). The key components of service innovation can be distilled down to “participative” value delivery; […]

So if the service is considered to be:

• something that may or may not entail physical product delivery or consumption
• a value delivery mechanism that connects the enterprise to the customer
• the combination of a value proposition, a delivery mechanism, and a customer’s experience

Then service innovation is simply innovation applied to one or more of the following areas:

• new concepts and/or value propositions
• new delivery mechanisms and/or business models
• new experiences

[…] Successful service or product innovation encompasses progress from the creative act (the so-called fuzzy front end) to the commercialization act (execution) and beyond that to sustainability and evolution of the innovation. Our simple framework for service innovation is shown in Figure 3

And they share with us the mapping of MPESA on to this service innovation framework.

The authors conclude their informative article with the following words:

Key lessons that were highlighted by our experience with M-PESA include:

• Learning in a detailed sense the needs of users in new markets and ensuring that it is possible to implement these needs and requirements as part of a pilot process;
• “Keeping it simple”; particularly in the early stages of the service, it is important to focus on a small set of compelling, marketable functions and features;
• Ensure that flexibility and agility, the ability to react and to respond to changes in the business model, are designed into the system; and
• For a service to succeed, it requires a critical mass of users as soon as possible; identifying mechanisms to motivate users to take up the service is an important part of the service innovation process.

The results of the study cannot claim to be generally applicable; however, it has allowed the “usefulness” of the conceptual stages in the service innovation framework to be empirically tested in a real-world example, and the vulnerabilities and strengths are better understood as a result.

This post was published previously in December 2011