Searching for Value

In the post based on a Peter Drucker quote - Every practice rests on a theory, even if the practitioners themselves are unaware of it (Robert January 1, 1988), I argued that within the context of growth, there was a difference between picking the right ideas and evaluating whether an idea was good enough. I proposed that the former was a theory challenge and the latter an evaluation challenge. Sustained value accretive growth requires management teams to solve for both.

In the first of two articles, The Role of Commercial Theories in Sustaining Value-Creating Growth, written to address this, I made a distinction between right strategy and good strategy. Right strategy is the search for and selection of the right ideas. The article argues that ideas are the source of value. A relevant problem solved with a unique solution. Furthermore, growth needs to create real value over time. The net return received from commercializing an idea exceeds the weighted cost of capital needed to do so. Sustaining this over long periods of time, or finding and segueing many good ideas, has eluded the best management teams.

Sourcing and backing the right ideas is a search for value problem. What in the future will offer up value potential? Making sense of the past and correctly interpreting the present is hard. These exercises are fraught with bias. This reflected in Leo Tolstoy's – “In every description of a battle there is a necessity of lying" (Tolstoy January 1, 1905). Why exactly were we successful, what conditions precedent existed, what did we miss, who’s viewpoint? Predicting an emerging future and the strategic and value dynamics therein is substantially harder. We are faced with a bunch of knotted problems:

1.     Are the current ideas we operate going to stay relevant?

2.     How are customers perceptions of value going to morph?

3.    Where are we most likely to be disrupted. The problem or solution end of our ideas?

4.    How do we defend and grow our incumbent positions?

5.    How do we create adjacent new positions in response to our predictions?

We are moving away from the light and into the fuzzy dark. This imposes real strategic tension. What direction are our domain of problem – solution sets moving, why and what are the value potential implications. This requires a solid dollop of imagination and foresight. We leave the safety of big data validation and enter the space of beliefs and hypothesis.

This presents three core challenges:

1. Where to look?
2. What to look for?
3. How to look?

What is our metaphorical flashlight? I would argue it’s your theory of value. I first encountered this term through the work of Todd Zenger and Teppo Felin. (1)

A theory of value is your accumulated, best imagined and critically examined body of knowledge about where, how, and why your past, current and future actions have and will create, capture, and return value. It’s your navigational star. Your unified sense maker. It explains, predicts, and guides strategic intervention.

A theory of value has two parts.

1. Some conception of what value is and what it looks like into the future. It’s difficult to search and spot a target you cannot define.
2. A set of beliefs or premises about the future, that in aggregate, substantiate a set of realistic value hypothesis. This tells us where we think the target is best situated.

Armed with both we have a frame to guide our search. Ideas that fall within our search vector and offer up sufficient potential are “strategically right”. That’s not to say they are good enough.

A theory in this context is a mix of proven and unproven hypotheses. Past successes have proven that initiating beliefs about value potential where true, proven so by executing them through a set of in-market strategies. Future based hypotheses are your most informed, best imagined and carefully curated assertions about what problem categories or domains will remain relevant within an unfolding future. These categories can be broad e.g. building information management, personal hair care, distributed communication.

The problem category needs to be anchored in an initiating problem – solution combination or idea. In Disney’s case likable, noble animation characters, expressed through fantasy films and cartoons, meeting the entertainment needs of children and their families. In an attempt to maximise the value potential of this initial position, Walt Disney theorized that merchandise licensing, music, publications, comic strips, and theme parks offered up value promise. These related and adjacent sub-categories presented points on a map as to where value would most likely be located. They represented Disney’s growth path. This map, available in Disney’s Recipe (Zenger, Harvard Business Review 2013) has proven to be not only accurate but immensely lucrative.

Theory as a search engine, does not explain how to maximise value creation and capture within a given idea. This falls within the domain of strategy. Theories thus inform right strategy. As Zenger writes, theories "are a guide to the selection of strategies, a meta-strategy of sorts – a strategy for strategies” (Zenger, Beyond Competitive Advantage 2016). Which sub-categories to pursue and in what order is a staging problem that strategy needs to engage. As are the business model and value propositions of each.

In summary, sustaining and growing value over long periods of time requires the sourcing, configuring and enabling of multiple strategic positions. This incorporates finding an array of interesting ideas, building differential positions for each, and scaling the embedded potential. Doing this once is an achievement. Doing it repeatedly requires a myriad of skills spanning idea search, assessing value potential, idea selection, productization, go to market strategies and operational execution. Without a well-documented theory of value guiding where to look and what to look for, strategy loses its navigational star.

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BITS Framework is a value derivation framework and strategy enablement tool. The framework is premised on the fact that all value creation and capture occurs through the combined effect of:

1. Initiating beliefs about the world and possibility therein 

2. Ideas that solve relevant real-world problems, imbued with real value potential 

3. Strategies that enable the extraction of their value potential through differential action

BITS stands for Beliefs, Ideas, Theories, and Strategies. The framework stages these value constructs into a unified thinking frame used to situate, source, evaluate and enable value.

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Notes

Prof Teppo Felin and Prof Todd Zenger have written extensively on the concepts of theories of value. Two of their papers

1.      What is the theory of your firm - https://hbr.org/2013/06/what-is-the-theory-of-your-firm

2.      What Sets Breakthrough Strategies Apart - https://sloanreview.mit.edu/article/what-sets-breakthrough-strategies-apart/

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References

Robert, Michel. The Strategist CEO: How Visionary Executives Build Organizations. Greenwood Publishing Group, January 1, 1988.

Tolstoy, Leo. The Complete Works of Count Tolstoy. J. M. Dent & Company, January 1, 1905.

Zenger, Todd. Beyond Competitive Advantage . Harvard Business Review Press, 2016.

—. Harvard Business Review . May 28, 2013. https://hbr.org/2013/05/what-makes-a-good-corporate-st.