The Missing Business School Discipline: Value Creation

“Because the?purpose?of?business is to?create a customer, the business enterprise has two — and only two — basic functions: marketing and innovation. All the rest are costs.” Peter Drucker

Executive Summary

Creating value for others is the responsibility of all professionals. At one end of the professional spectrum, the innovations produced are incremental, and at the other end, transformational. In between, millions of professionals are responsible for making significant innovative contributions to their customers and enterprises. But experience shows that few know how to create value because these skills are only sometimes taught and rarely taught in business schools. This lack of knowledge also implies that subjects taught in business schools can be misaligned with the purpose of business – creating value for others.?

The Need??

Business schools teach subjects like strategy, leadership, project management, finance, teamwork, and entrepreneurship. These and other skills are essential, but, as Peter Drucker indicates, a company's core responsibility and, thus, its managements' core responsibility is to "create a customer." Of course, this is a responsibility of all professionals because every task in an enterprise is to satisfy either an external or internal customer need.

Certainly, of all professionals, business majors should understand how to perform the enterprise's most basic function. No one would go to a surgeon who had only read books about surgery, and not actually performed them.?But how many business graduates know how to create value???Unfortunately, very few.

If a university is teaching management subjects, what is the end objective? It is to facilitate the creation and delivery of value to customers. The same answer applies to strategy, leadership, teamwork, finance, intellectual property, entrepreneurship, and most other subjects taught in business schools. But absent an understanding of the objective – creating value for customers – these programs are likely to be, at best, limited in effectiveness. In the worst case, they may be misdirected or counterproductive. It is like teaching chess when the game to be mastered is soccer. There may be appropriate analogies between the two activities, but the lessons are likely meaningful only if the teacher has mastered soccer.??

Not Taught

My partners and I have held workshops on value creation and innovation with thousands of professionals from leading global companies and universities. Unfortunately, few know how to create value for others. On average, after just a two-day workshop, we find that, if completed, only about a quarter of a company's "most important" initiatives would provide significant value to their customers or company. They conclude this after we provide a framework for deciding. Others have estimated that less than 5% of all new company product initiatives are commercially successful. [1]? Venture capitalists typically look at a hundred proposals to fund one. [2] We should not accept this poor performance. ??

Many of the professionals in our workshops are graduates of the world's top universities. For example, I recently held a series of workshops with over a hundred MBA students and graduates from a top-ten-ranked international business school. These students had all worked in companies before their studies. And the graduates were now senior managers, vice presidents, and CEOs in global companies. By any criteria, they were a remarkable group. But were they knowledgeable value creators – a core responsibility of their jobs???

I start workshops by asking participants if they are value creators. In this case, as is typical, only about 20% of the hands went up. More likely were value creators, but initially they were unsure about what that meant. I then asked a series of basic questions such as, what are the definitions of innovation, customer value, and the value proposition? They wrote their answers on sticky notes and posted them on the wall. I then had then look at their answers. They discovered that there was no agreement.

Unfortunately, many of the answers given were wrong, and the others given were, at best, ambiguous. For example, none of the participants mentioned that innovation must include a business model. Instead, they answered by naming examples of exciting products or noting that solutions had to be new or novel. These answers were incomplete.??

If people don't use a product, it might be an invention, but it is not an innovation. There are over 4,000 mousetrap patents, but only a few are available and used. [3, 4]?For example, there are only about two dozen unique designs on Amazon, and most are derivatives of the original Victor spring trap shown below. Almost all the other 4,000 patented traps are waste. No one wants them. More generally, only about 3% of all patents have commercial value. [5]

Discipline of Value Creatin

As SRI International's CEO, I hired hundreds of brilliant professionals from the world's great schools. SRI is an enterprise that develops products and services for others. Among other innovations, SRI developed with its partners the US standard for HDTV, Intuitive Surgical, and Siri, now on the iPhone.??

When first hired, these brilliant graduates all knew how to solve problems. But they still had to learn how to identify and develop solutions that mattered to others.?Knowing how to identify and address the unmet needs of others is a separate discipline, the discipline of value creation.??

Big Companies Fail

I started my career at RCA Laboratories, with superb professionals working on exciting projects like HDTV and what would have been the begining of Internet, with partners like Citicorp and Nynex. But like in most companies, I was not trained to be a value creator. Our teams participated in activities like "ropes and ladders" and other team building events. These activities could be fun, but they seemed misplaced, and the lessons to be learned didn't last. I always wondered, why weren't we learning about teamwork while doing our jobs?

GE bought RCA, and the research laboratories where I worked in Princeton, NJ, became part of SRI International in Silicon Valley. Unlike RCA, SRI didn't give me millions of dollars to spend each year. Instead, they expected me to earn millions. Unfortunately, my team and I didn't know how.

We started figuring out what to do by reading all the top-rated innovation books and talking to numerous "experts," but little helped. There was endless material on the "what" of innovation and entrepreneurship. But we needed the "how" of value creation, and there was little guidance. It took several years, but by trial and error, we mastered fundamental value creation principles and began growing. Eventually, I became CEO of SRI. [6]

A Management Failure

This experience significantly changed how I thought about my mangement responsibilities. Specifically, why hadn't I been trained to perform this fundamental professional responsibility early in my career? It is a professional life skill.

Every CEO says they want their company to be better at value creation and innovation. In the survey quoted in this paper, 75% of the CEOs said it is one of their top three priorities. [7] If so then, why don't they teach their staff to master it? It is one of the least expensive and highest payoff actions they can take.

When I went to SRI as CEO, I planned to teach everyone, at an appropriate level, the discipline of value creation. We had developed concepts and methods that worked, and training everyone when they were first hired was inexpensive. I was sure this would give us a compelling competitive advantage, and it did. [6]?

Core Definitions

Value creation is the process of addressing a significant unmet customer and market need with a better solution than any alternative while satisfying all stakeholders. Customer value is defined as customer benefits over customer costs. It is a subjective quantity that only the customer defines. That new customer value becomes an innovation when delivered into the marketplace with a viable business model. Entrepreneurs are often engaged to raise resources, recruit a team, and bring that new value to customers in the marketplace with a profitable business model.??

When professionals understand the core concepts of value creation, they can be much more effective managers. Strategy, management, leadership, teamwork, and even entrepreneurship begin and end with value creation – the purpose of business. Management courses may be exciting and helpful, but they can be misdirected if not focused on creating and delivering customer value.??

Understanding value creation and innovation should be a core business school discipline. But unfortunately, today, most business schools do not teach these skills. If taught at universities, it is generally out of engineering departments. But even then, the programs available primarily focus on specific aspects of value creation, such as design or aspects of entrepreneurship.??

A Responsibility of All Professionals

As I described, a fundamental responsibility of a professional in any enterprise is to be a value creator. In 2020 the professional class in America was about 65 million. [8] At one end of the spectrum, we have essential service functions, like professionals in a tax preparation company serving middle-income families. Millions of professionals are in jobs like this in disparate disciplines and businesses, including chefs, construction managers, healthcare professionals, and many in a company's operating functions.?

The value-creation opportunities in these positions are typically small, but they are there. In these jobs, most of the work follows set recipes. The objective is often to standardize and optimize the work. Nevertheless, opportunities for improvement are always possible. For example, when I was CEO at SRI, we trained everyone at their appropriate level in the basics of value creation, including our security guards. That surprised people. But they were often asked to address issues when first greeting visitors. We wanted our guards to set an example of our methods and human values, and they did.??

World-changing entrepreneurs like Edison, Jobs, and Musk are at the other end of this spectrum. The number of American professionals at this transformational level is likely only 10 to 100. Of course, a much larger entrepreneurial class creates hundred-million to billion-dollar revenue companies. But it is still a small group, possibly around 1,000 to 10,000 people. For example, in 2020, America started around twenty $100-million revenue companies yearly. [9] Yet, only 0.04% of all companies reach $100M in annual revenue. [10] At SRI, we created billion-dollar value companies, but even with 3,500 highly trained professionals, we rarely had a CEO for our more significant innovations. With our partners, we recruited them.??

Universities have roughly a million PhD-level R&D staff. Unfortunately, only a few understand value creation, and even fewer make good CEOs for significant innovations. Of course, there are always exceptions in a cohort of such superb professionals, but they prove the rule. It doesn't help that most government R&D programs, apart from DARPA, do not use productive value-creation principles.

Typically, successful entrepreneurs have learned how to be productive value creators through hard-won experience over many years. The average age of a successful entrepreneur in the US is around 45. Significantly, entrepreneurs who start in their 20s and 30s often ultimately form more successful companies than those founded by older entrepreneurs. Experience matters. [11]??

The Opportunity

Between these two extremes we find most of the US professional workforce.??There are perhaps 20 million who are expected to make significant innovative contributions. They include over three million Ph.D. in various R&D and creative activities. This group of 20 million represents the backbone of most companies.??

In our experience with thousands of teams in enterprises of all types, few in this group know how to systematically create value for others. Even fewer academics understand value creation, and, as noted, business schools rarely teach it. Most innovative programs in universities are from the science and engineering departments.?

Many universities now have programs in entrepreneurship, such as represented by the excellent I-Corps program from NSF. [12] The Kern Family Foundation also offers a family of programs centered around entrepreneurship. [13] The d.school at Stanford is an excellent program for design innovation, and the Bio-X program at Stanford is a splendid example of value creation, innovation, and entrepreneurship. [14, 15] But Bio-X is the rare exception, available to only a small number of students.?

Co-op universities such as Northeastern, Drexel, and Kettering produce remarkable graduates who have some value creation skills. Other universities have developed specialized programs focused on critical thinking, innovation, and entrepreneurship, such as Aalto University, Dyson Institute of Engineering and Technology, Olin College of Engineering, and Minerva University.?

Worcester Polytechnic Institute, a STEM (Science, Technology, Engineering, and Math) university, has committed to providing graduates these value-creation skills. WPI pioneered project-based education in the 1960s and will be the first university to deliver value creation and innovation skills to all its graduates. [16]??

These examples and their results are impressive, but they only influence a relatively small number of graduates. As described, innovative performance can be much better. We typically find that improvements of 2 to 10 times are possible by focusing on value creation and innovation, albeit this is only being realized in a limited number of enterprises.

If the premier business schools addressed this issue and made it a priority for all graduates, it would change expectations and business practices of companies and other enterprises globally. The positive impact on society would be profound.?

The Leap to Failure

The primary innovative failure is the leap from an initial idea to a solution without identifying an actual unmet need. People see a problem and then jump to an offering without developing a compelling value proposition. They then create a venture or business plan, try and launch the product, and fail.?

Many learn concepts like the Business Model Canvas (BMC), aspects of entrepreneurship, and the structure of a venture pitch deck, like that shown from Sequoia Capital. However, jumping to these concepts before developing a compelling value proposition is a mistake. They add confusion while giving the illusion of accomplishment. Structures like the BMC can be helpful checklists, but they are not useful value-creation frameworks.

In our workshops, we see many innovative failures from those who started from the BMC.? It is an example of a widely taught business concept that is often misapplied because the fundamentals of value creation are not understood.

Innovation starts with value creation that continues until there is a compelling, quantitative value proposition for the proposed innovation. Once determined, writing a venture pitch is relatively straightforward.

The challenge is always to define a significant unmet need with a unique and defensible solution and a profitable business model. Musk demonstrates that the back of a business card is large enough to summarize a compelling business case. Unfortunately, only a few people who study entrepreneurship learn how to create customer value. Learning about entrepreneurship and business should start by learning the discipline of value creation.

Of course, the value creation process never stops. Developing a persuasive offering and business model takes enormous time and effort. And even after a product’s launch, it may take years to figure out the customer's actual needs and how to address them with a compelling offering and business model.??

It is often said that?“No new venture survives first contact with the market.”??Often true, but as General Eisenhower said, “The plan is nothing; planning is everything.”??The exploration of the value space around a proposed solution is like the process of planning.?In the end, the team gets a deep, shared understanding of the situation, market needs, and ecosystem.??That shared understanding has a large impact on successfully executing the business plan.?[17]

A Family of Skills

Management is a complex, challenging profession that requires mastering a broad family of skills. In addition to holding programs on teamwork and project management, companies also use multiple innovation methodologies to improve results. These include Design, Agile, Scrum, Lean, Six Sigma, but they traditionally do not start with value creation, which is where the majority of all failues begin.?

The figure below shows a progression of how different skills can fit together. It starts with value creation and proceeds through a series of steps to a business plan and product launch. As the initiative moves forward, various methodologies may be used, including Agile for software development and Design for product design and the user experience. Developing an elegantly designed product with a surprisingly convenient and engaging user experience can deliver enormous customer value, as Steve Jobs proved. Versions of Six Sigma may be used after launch for improving manufactuaring or other operations. A typical feature of all these methodologies is an unrelenting focus on the market ecosystem and iteration with prospective customers, teammates, and partners.??

A business plan describes all the elements needed to create and deliver the product, such as manufacturing, marketing, sales, customer service, and financing.??These steps are expensive, so it is essential that the initial value proposition is compelling, quantified, derisked, and complete.??

As shown in the figure, the use of NABC value propositions continues, because each new added function and task must describe how it provides the most value for customers, inside and out.?

Practitioners learn these management skills while doing the desired task – "learning in the flow of work." Learning to be a value creator is just as complex as learning to play a musical instrument. Unfortunately, while working at RCA, with a few excemptions, I participated in programs that violated this principle, like wilderness challenges to learn teamwork. [18] Sometimes they were fun, but they had little lasting impact, and I always wanted to get back to work.

Now, when I discover a company where employees are building Lego block bridges to learn teamwork, I suspect their management doesn't understand anything about value creation and innovation.??Imagine proposing such an activity to Jobs or Musk!

The 3-Laws of Value Creation

Value creation is a separate discipline based on unique concepts, tools, and methods.??It is an activity that addresses complex problems through directed search, discovery, and invention to identify and create sustainable new value of importance to others.??

It is not appropriate to comprehensively describe the discipline of innovation in this post.??It includes a family of concepts and tools, including the basics of team formation and motivation.?[6, 19] I will only describe three functions that, in some form, must be in place for the value-creation process to be efficient and effective.??These three functions are also necessary to establish the framework for professionals to learn the full scope of concepts that go from value creation to complete business plans.?

These concepts, the "3-Laws of Value Creation," set the foundation for productive value creation.?[20]

1. Shared Concepts: Use shared concepts and methods focused on the customer and value creation to allow efficient and effective collaboration.

2. Important Customer Needs: Focus on important unmet customer and market needs, not just ones of interest, to make an impact.??

3.??Recurring Team Forums: Hold recurring team Value Creation Forums (Forums) to learn, improve, and synthesize solutions faster than the competition.

Shared Concepts: Value creation teams are interdisciplinary where each professional bringing unique concepts, skills, and perspectives.??These concepts and perspectives must be aligned for the team to solve their problem rapidly and successfully.??

The most critical conceptual framework is the "value proposition." It has four fundamental elements.??The goal of value creation is to address a significant unmet end-user and market?

• Need, with a unique, compelling, and defensible?
• Approach for the offering and business model, with superior?(i.e., 2-10X)
• Benefits/costs (i.e., value) when compared to the?
• Competition and all other alternatives.

This framework is called an NABC value proposition.??It is the starting point for every activity whose objective is identifying and addressing the needs of others.???When developing the value proposition, these four ingredients interact and change.??More complicated frameworks add complexity and reduce effectiveness.??

It is challenging to address these four questions completely, succinctly, and quantitatively.??But they set the direction for all subsequent work, so if they are wrong, the initiative is going in the wrong direction.??Over time, the value proposition addresses other critical issues, like risk mitigation, to create a complete business plan.

Value creation starts by developing a value proposition focused on the end user.??If the end-user is not addressed, nothing else matters.??Value propositions are then created for the other stakeholders, including the enterprise, investors, team, and buyer, if they are in front of the end-user.?

Important Customer Needs: Value creation stars by identifying an actual unmet customer need.??Not doing this is the primary source of failure.??Most new teams identify a problem and then jump to a solution, which is almost always either not the best or wrong.??

Almost all the presentations we see at first are "Big A's," where teams jump to a solution.?[21]?They are all about the Approach and lack detail for the need, benefits per costs, and competition.??These presentations are not helpful.??They are another version of the "leap to failure" described earlier.?

It takes many iterations to flesh out a complete and compelling value proposition.??Trying to do this alone takes significant time and resources. More often, it leads to failure.??We help teams to improve and learn faster in Value Creation Forums (Forums).

Recurring Team Forums: The solution to complicated interdisciplinary problems requires team members to repeatedly come to gather to share individual learnings and synthesize valuable solutions.??To facilitate this result, hold recurring team Value Creation Forums.??These are typically 60-90-minute meetings where participants hear three to six 2-10-minute NABC presentations, one after the other.??After each presentation, the presenter is asked to remain silent and listen actively to the feedback.?

The facilitator then calls on people randomly to give feedback to the presenter from the perspectives of different stakeholders: what was good, what could be improved, and the "eyes" of the end-user and funder.??This feedback is a "reframing" method; looking at a problem from different perspectives.??It helps people overcome their conceptial biases and rapidly identify gaps in their value propositions.?[6, 19]

The Forum structure also allows another reframing method, called comparative analysis.??It is a technique we use constantly for basic life decisions.??We ask, "Which is better, A or B," and then decide.??The short NABC presentations allow the Forum participants to notice in each presentation what was done well or poorly.???These insights help all the teams reframe and improve their value propositions. This unique compariative property of Forums create rapid, compound learning.??

All the feedback in Forums is positive and constructive, but it is still a competitive environment where everyone is comparing their performance against whoever is best. This drives performance without management having to say anything.?

The chart shows the progression of value creation.??Most people work on "interesting problems" with few positive results. This is because they don't ultimately matter or because so many others work toward the same ends and get their first.??

At the start of a significant unmet opportunity, typically, little is known.??But if the unmet need is important, and by regularly participating in Value-Creation Forums, the probability of success is surprisingly high, although seldom ending the way first predicted.??

Exemplars

These practices cannot be learned and understood just from lectures or books; they require repeated practice.??In a university or company, it typically takes over eight Forums for teams to internalize the basic concepts and apply them to their initiatives.??Different organizations archive this in multiple ways.??

At SRI when I was CEO, Forums were the ongoing, enterprise-wide practice for developing innovations in all areas.??New employees immediately participated in a three-day workshop to learn the fundamentals of value creation and to start their projects. These practices transformed SRI, which had been failing for twenty years and was close to bankruptcy.??The company grew revenue over three times and systematically created one multibillion-dollar company after another. [6]

The University of Michigan's initial cohort of value creators consisted of six interdisciplinary research teams, each with three to five members.??They participated in an eight-hour introductory value creation workshop and then met for 90 minutes every two weeks for four months.??

At Northeastern University, we have created a hybrid model called the Carlson-Polizzotto Value Creation Program.??It consists of eight online modules, where each module teaches a core value creation concepts followed by a 90-minute Forum focused on that concept.??This program is now in trials with companies.

The value creation program at WPI is taught in multiple ways.?[22]?There are ongoing workshops and Forums for student-team projects and for faculty to develop new R&D proposals.??In addition, the core value creation concepts are being integrated into traditional disciplines.??The student teams address problems appropriate to the disciplines taught. For example, in a strength of materials class designing a bridge for specific end-users.?

Business school classes, including MBA programs, can also integrate the material into traditional disciplines, such as intellectual property, strategy, and finance.??For example, in a financial class, by developing an improved financial structure for a startup. At the Universety of Pennsylvania basic value creation concepts are integrated into a course on intellectual property [23].??

Conclusions

Innovation is the primary driver of growth, prosperity, meaningful employment, and resources for social responsibility.??It is how companies succeed, survive, and how some thrive.

All innovations that propel society forward begin with core concepts defined by the discipline of value creation.??If prestigious business schools, and other university departments, taught these core value-creation skills, it would accelerate progress across society.? Unfortunately, only a few universities teach these skills today, and almost no business schools.??

Because value creation is the predicate for a business education, and because it is mostly missing from today's business school curricula, it represents a major opportunity for progress.??If taught, the graduates from these programs, who then become managers and professionals, would be more productive.?[24]

In addition, as these professionals became senior managers and CEOs, some would encourage the teaching of value creation across their enterprises.??Experience suggests that doing so would profoundly improve society's innovative performance.

Note to readers: I would love your feedback on this post and other ideas you have along these lines.

References

1. “Ten Types of Innovation: The Discipline of Building Breakthroughs,”?Larry Keeley , Wiley, 2013:?https://www.amazon.com/Ten-Types-Innovation-Discipline-Breakthroughs/dp/1118504240
2. “How Venture Capitalists Make Decisions,?An inside look at an opaque process,” HBR, 2021,?Paul Gompers:?https://hbr.org/2021/03/how-venture-capitalists-make-decisions
3. “4,000 Patents Later, Engineers Ask: Are You Smarter Than a Mouse?” October 1, 2021:https://arcca.com/4000-patents-later-engineers-ask-are-you-smarter-than-a-mouse/
4. “The Endless Quest for a Better Mousetrap,?Inventors have been refining them for centuries. What are they trying to achieve?”?Elizabeth Barber ?November 24, 2022:?https://www.newyorker.com/tech/annals-of-technology/the-endless-quest-for-a-better-mousetraps
5. “97% of All Patents Never Make Any Money,”?Stephen Key :?Innovation ?–?Starting a Business :?https://www.allbusiness.com/97-percent-of-all-patents-never-make-any-money-15258080-1.html
6. “Innovation, The Five Disciplines for Creating What Customers Want,” Curtis Carlson and William Wilmot, Crown, 2008:?https://www.amazon.com/Innovation-Disciplines-Customers-2006-08-08-Hardcover/dp/B012HUJSQW
7. “The CEO Innovation Agenda," BCG, 2021,?Ramón Baeza :https://www.bcg.com/publications/2021/understanding-ceo-innovation
8. “The Professional and Technical Workforce: By the Numbers,” DPE,?2021:?https://www.dpeaflcio.org/factsheets/the-professional-and-technical-workforce-by-the-numbers
9. “Companies That Matter,” Paul Kedrosky, 2013, Kauffman Foundation:?https://www.kauffman.org/entrepreneurship/reports/the-constant-companies-that-matter/
10. “Only 0.04% Reach?$100M,” Bill Carmody, Inc.:?https://www.inc.com/bill-carmody/only-0-04-reach-100-million-in-annual-revenue-here-s-the-one-thing-driving-yapst.html
11. “What is the average age of successful entrepreneurs?,” Alan Flores, Entrepreneur.co:?https://www.mysanantonio.com/business/article/What-is-the-average-age-of-successful-16668422.php
12. “NSF’s Innovation Corps (I-Corps),”?https://beta.nsf.gov/funding/initiatives/i-corps
13. “The Kern Family Foundation: Engineering Unleashed,”?https://engineeringunleashed.com/institution/372
14. “Stanford d.school,”?https://dschool.stanford.edu
15. “Stanford Bio-X,” https://biox.stanford.edu/
16. “Curtis and Dudley Carlson Value Creation Initiative at WPI,”?https://www.wpi.edu/about/value-creation-initiative
17. This thought was from Scott Fouse, former Vice President of R&D Locheed Martin, 12-7-2022. https://www.dhirubhai.net/in/scott-fouse-199896/
18. “Experience Compression Laboratory,”?https://www.barnum-pl.com/experience-compression-laboratory . This is the one management program I took when I worked at RCA that was extremely valuable.
19. “Innovation for Impact,” HBR, Curtis Carlson, 2020:?https://hbr.org/archive-toc/BR2006 ??
20. "The Three Laws of Value Creation, Keys for Systematic Innovative Success," Curtis Carlson, LinkedIn:?https://www.dhirubhai.net/pulse/three-laws-value-creation-keys-systematic-innovative-carlson-ph-d-/
21. "The Big A," Curtis Carlson, LinkedIn: ?https://www.dhirubhai.net/pulse/main-mistake-innovators-make-big-curt-carlson-ph-d-/
22. “Curtis and Dudley Carlson Value Creation Initiative at WPI,”?https://www.wpi.edu/about/value-creation-initiative
23. Discussions with Steven Wiener, Senior Director, Innovation & Technology - Penn Engineering, and Lecturer at The Wharton School: https://www.dhirubhai.net/in/stevenweiner/
24. “How to Advance Your Career: Be a Value Creator,” Curt Carlson, LinkedIn:??https://www.dhirubhai.net/pulse/how-company-superstar-curt-carlson-ph-d-/?trackingId=mxFRajC7dgpdkks9PSUbYw%3D%3D
25. No one would go to a surgeon who had only read books about surgery, and not actually performed them. Kartik Gada

Go here for Linkedin:??https://www.dhirubhai.net/groups/12325071/

Go here to Coursera: https://www.coursera.org/learn/valuecreation