Rapidly explained, Value Creation (vertical axis) is the perception of value that your company creates in the eyes of its customers/clients. Value Capture (horizontal axis) is the financial return your company is making by selling its products, services or experience to its customers/clients.
On the top left (High Value Creation/Low Value Capture) is the “Nightmare” box. The market loves you and you are “Customer obsessed”, truly providing value. But you are poor at converting it into a steady flow of revenues. Many dotcom firms come to mind. It is the realm of “Art for Art’s sake”. This positioning is unsustainable and the firm dies when it stops being funded by outside believers.
On the top right is “Heaven” (High Value Creation/High Value Capture). The business model has been sorted; the company keeps creating value for its customers and cashes in. Apple, after the return of Steve Jobs comes to mind, as well as companies such as IKEA or Hermes.
The bottom right box is called “Dream” by van Heck & Verdin (Low Value Creation/High Value Capture). I call it “Illusion”. This is where many companies tend to drift when being successful. Orthodoxies (“This is the way we do things here”) creep in and sacred cows are unchallenged. Courageous whistle blowers are liquidated, or told to look at the numbers. “Love this company or leave it” is the motto. The frightening “denial show” of Steve Balmer at Microsoft, years ago, comes to mind. People are in denial and the (lagging) financial indicators are (still) good.
Logically, unless we are protected by a monopoly situation, we then rapidly move bottom left (Low Value Creation/Low Value Capture) in the “Hell” box. Our arrogance and customer abuse has finally “paid-off” and we are bleeding. What is the most current top management response? Cost cutting! But that will not get us back in Heaven. It will, at best, buy us time in the Dream box. We then need to move up the Value Creation ladder if we don’t want to go back towards Hell.
I like this strategic framework because it blends strategy, company culture, leadership attitude and behaviours. And, when showing this to business leaders, the “penny drops” often. It is a nice way to explain the strategic dilemma of needing to invest in order to stay ahead of the pack whilst making superior returns to ensure we can still dedicate healthy amounts to marketing and innovation.
And most of you know this…
What is happening now is that the Disruption Economy, through technology, repositioning, creation of new needs, etc… means that the matrix itself isn’t stable. It is “moving North East” which means that, as per the good HBR blog article “Big-Bang Disruption”, commented here, we may not have the luxury to get into the “Purgatory Zone” of the Illusion but will fall directly from Heaven to Hell.
Most of the executives we speak to, recognize that threat and wonder how to deal with it. It is unsettling, as we were taught to deal with a more static environment whereas, here, we seem to be chasing moving targets…
This is what Snowden calls the complex or chaotic environment as opposed to the more stable, predictable simple and complicated ones. How do companies prepare themselves for that future?
- Strategy ceases to be a static exercise (guessing the future) and becomes “Strategize”, a permanently living process, engaging the whole organization. It enables the whole body of employees to challenge and support the existing strategy that the firm has taken (permanently preparing it for the future).
- The organization reduces its rigid layers of hierarchy to become more organic, driven by a shared and meaningful purpose and supported by a permanent feedback process. It allows the actors (employees) to know how well they are supporting the purpose. By a culture that encourages and facilitates the connection between its people, information freely flows, silos disappear and generosity surfaces.
- Leadership evolves from hierarchy-based, following the assumption that the leaders should know more than their subordinates (instilling a “seniority means superiority” culture) towards engaging leadership, acting on the subtle levers of intellect (co-creating clarity, meaning and ownership), behaviours (exemplifying and being a living proof that changes are happening in the company) and emotions (using tools such as narratives, metaphors, gestures and symbols). This is what Gerd Leonhard calls: ”From directors to connectors”.
It is only by challenging the precedent dogmas about strategy, organization and leadership that a company will be able to strive in the challenging and permanently evolving VC2 matrix of our friends van Heck and Verdin.