Chapter 2

Levels of Value

Introduction

The previous chapter explained the need for transformational innovations to

provide solutions to the challenges facing our society. Awareness is growing that
these societal and environmental challenges need a collaborative effort by large
corporations, innovative entrepreneurs, non-profit organizations, governments and
citizens. If they are well designed, transformational and innovative solutions create
value for their users and for the organizations involved in developing and deliv-
ering them, and as a result they generate sustainable value for society at large.
But what does value actually mean in this context? The word value is used very
often, but it certainly does not mean the same to everyone in every context. To better
understand value, it is important to distinguish the level at which it is perceived. Four
distinct levels of value are relevant in the context of innovation: value for users, value
for organizations, value for ecosystems and value for society. As shown in Fig. 2.1,
these levels overlap. The values of the user need to be included in those of the
organization, those of the organization need to be included in the values of the eco-
system and those of the ecosystem in turn need to be aligned with those of society.
Transformational innovation addresses value for all four levels at the same time. But
value has a different meaning at these different levels, and it is important to have a good
understanding of what these levels are, and what value means at these different levels.
Although the concept of the levels is more general, and could be applied for
various purposes, the discussion of the levels in this chapter is limited to the
context of innovations that aim to create value through transformation.

Value for the User

The first level addresses value for the user. The user is the ultimate target of
innovation. He is the client, who is expected to use the system, product or service.
For transformational innovations it is important that the use of the product is a

E. den Ouden, Innovation Design, DOI: 10.1007/978-1-4471-2268-5_2, 13

Ó Springer-Verlag London Limited 2012
14 2 Levels of Value

Fig. 2.1 Levels of value

pleasurable experience. If the user does not continue to use the product for an
extended period of time, it cannot be claimed to be a success. This differs from the
traditional business view which focuses more on the sale of the product, and is less
concerned with its extended use over time.
The buyer and the user may be the same person, but often they are not. The
person buying the product may buy it for someone else as a gift, or on behalf of
someone else. The buyer may be an individual, such as a family member, but may
also be someone from an organization. In healthcare, for example, doctors or
insurance companies in many cases take decisions for patients. This wider notion
of people involved in the total process around decisions and the implementation of
innovations will be addressed in the section on ecosystems.
Value for the user addresses the definition of a value proposition that is
attractive to the user. That means it is important to deeply understand the moti-
vational values of the user, especially for innovations that aim to change user
behavior [6]. If these values are not taken into account users may stop using the
product or service, and the potential value of the innovation at other levels is then
lost.
If a larger user group is needed to create an impact at societal level, it is also
important to understand the differences between individual users and user groups.
Both cultural differences [3] and personal preferences may influence the adoption
of a product or service [20]. Users’ motivations may differ. One person may be
prepared to sacrifice some comfort to achieve a particular goal. For example some
people do not mind turning their home thermostat down a few degrees to save
energy, and just wear warmer clothes. Others may not be prepared to make such an
Value for the User 15

adjustment. It is therefore risky to judge a larger group of people on the perception

of a few representatives.
The ultimate solution for transformational changes is not to require users to
make sacrifices. Instead the aim should be to create such a pleasurable experience
that they will use the product even more often than they first envisioned.
A transformational innovation helps the users to look differently at themselves and
change their actions and behavior. Moreover, if the experience is pleasurable it
will also help the widespread adoption of the innovation, as users will recommend
the product or service to others [19].

Value for the Organization

The second level of value concerns the organization. Organizations are required to
design, produce and market new, innovative products and services. An organiza-
tion in this context can be a for-profit or a non-profit organization that is inno-
vating to create sustainable value for itself by providing added value for its
customers. At the same time, it also creates value for their employees by providing
jobs.
In business management, an organization is characterized by a more formal
pattern of social relationships, and by having a defined goal. Often the overriding
purpose and objectives are encapsulated in a mission statement, which is used to
communicate this purpose to all stakeholder groups, both internal and external, and
to guide employees in their contribution towards achieving it. The strategic intent
reflects the direction in which the organization intends to develop. It should be
both understood and interpreted by all employees in relation to their work, and is a
crucial element in strategic management [15]. Many business managers regard the
process of creating value largely as a top-down endeavor. Innovation is regarded
as one of the business processes of an organization, and mostly these processes are
guided by targets from the top. The organization’s vision of an attractive market or
competitive opportunity is implemented into innovation projects. These follow an
efficient innovation process to translate the vision into a market reality [5].
Organizations are also social systems that interact with other social systems
whose values and goals are oriented towards those of the wider society. Key
requirements for organizational maintenance are those that apply to all social
systems: adaptation, goal attainment, integration and value maintenance. Sociol-
ogists cast doubt on whether it makes sense to refer to organizations as institutions,
which pursue organizational goals. There are many studies that show that official
goals may bear no relationship with actual or operative goals; that organizations
frequently have multiple and conflicting goals; and that goal displacement may
occur [16]. The informal culture of work within organizations has a significant
impact on what is done and how it is done. Many good ideas for innovative
solutions to meet market needs or improve performance arise spontaneously from
staff working either directly or indirectly with customers. For this bottom-up
16 2 Levels of Value

innovation to flourish, the organization must encourage the development of

organizational creativity at all levels, a key element of any innovation culture [5].
Organizations may choose between different strategies to create value. The
classic strategies for competitive advantage as defined by Porter are: lowest cost,
differentiation and focus [18]. These can be translated into three value disciplines:
operational excellence—offering the best price and/or the least inconvenience to
the customer; customer intimacy—understanding the fulfillment of customer needs;
and product leadership—delivering unique value products [21]. But as Ohmae
already emphasized more than 20 years ago: a value-adding strategy is created not
by setting out to beat the competition but by setting out to understand how best to
provide value for customers [14]. This also requires a shift from a focus on the
organization and its needs to a focus on the end-user, so that the assets that represent
real value can be identified [23]. Innovation requires constant redefinition of value
by correctly guessing the customer’s unarticulated desires and applying the orga-
nization’s expertise to satisfy them [5]. This means that it is not enough just to listen
to the voice of the customer. This provides valuable input on the user, but will not
drive new innovations. Transformational innovations by definition address unmet
needs, which users are often unaware of. This means organizations need to come up
with more radical solutions that create new markets. Or as Verganti stressed:
traditional market-pull methods of innovation—which scrutinize customer accep-
tance before releasing products to the market—sometimes even restrict radical and
significant innovation. This is because radical innovation assumes a different
context and user approach than those of products already on the market. Instead, for
radical innovations that aim to create a new meaning, organizations should
‘propose’ new products and services [22].
An organization’s identity can be stated in five categories: the essence of the
organization—who you are at your core; the nature of the offerings—what you offer
to others; the effects of heritage—where and when you came to be who you are today;
the sense of purpose—why you are in business; and the body of values—how your
identity is manifested [8]. The true identity of an organization is defined across these
five categories. A company can design products or services specifically to create
visual brand recognition, so that they carry distinctive references to the ‘character’ of
the brand as manifest in the defined core values. An example of a company that is
successful in this is Volvo. Its designs consistently express the core value of safety,
along with the typical Scandinavian design that combines functionality and sim-
plicity with beauty and elegance. A typical design element is the strong ‘shoulder
line’ of all Volvo models that makes the sides look more solid and thicker, con-
tributing to the impression of safety [11]. Some organizations are so successful in
creating loyalty among their customers that they turn into ‘lovemarks’. These brands
resonate at an emotional level, and seduce customers beyond reasoning to buy and
use their products, often at a premium price [7]. This is an interesting aspect related
to transformational innovation, because companies that are able to create such a
strong bond with their customers are better positioned to seduce them into changing
their behavior. Of course this is only possible if it is done in an authentic way, without
violating the trust that consumers put in the brand and the organization.
Value for the Organization 17

Sociologists point out that business managers need an understanding of how

wider relationships of power and control in society affect, and are affected by,
organizations [16]. This relates to the discussion of what is regarded as being part
of the organization, and what is not. In this book the organization is regarded as the
structure for which the chief executive is directly responsible. It excludes the wider
view of the supply chain, customers or other partners with whom contracts are
established. These extended views will be discussed in the next section: the
ecosystem.

Value for the Ecosystem

The third level of value concerns the ecosystem. Most innovations require more
than just one organization and a user group to be successful in the market. Many of
today’s innovations are not just solitary products, but combinations of products
and services within larger systems. In many cases different organizations are
involved in these larger systems, which will be called ecosystems in this book.
These organizations can be of many different types: profit and non-profit organi-
zations, public and private organizations or industrial or regulatory organizations,
to name just a few. Each has a specific role in the ecosystem: for example sup-
plying part of the innovation, advising users, providing maintenance services or
approving a new product prior to market introduction. Ecosystems stretch beyond
the traditional value chain, the supplier–customer network, or the ‘extended
enterprise’, which also includes suppliers to suppliers and customers of customers.
Ecosystems include all stakeholders that have a direct or indirect role in the
various phases of the innovation: the definition, creation, realization and extension.
In the industrial economy, the most suitable model was the value chain. But this
model no longer fits the new economies of knowledge and transformation.
Knowledge, competences and relationships are more important, which is why value
networks or value constellations are becoming the dominant model [13]. In such
business networks, organizations can achieve greater value than they would be able
to achieve on their own. But it requires mutual commitment and mutual dependence
to create inter-organizational systems that promote the creation of value [1].
Emergent value networks are formed by negotiation of interests and positions; this
is a dynamic process [10]. The actors in this process have to understand not only
who is going to contribute what kind of resources and capabilities, but also who will
be the provider of specific generic services such as billing, customer care or service
management. This is a complex process due to potentially conflicting interests of
the organizations involved, which are often from different industries [4]. In the early
phases, the process is even more complex due to the inherent uncertainty about user
needs and behavior. This uncertainty is particularly high in the case of more radical,
transformational innovations, and an iterative process will be applied to elicit the
user needs by ‘proposing’ innovations and improving them where needed. For the
actors in the emerging business ecosystem, this uncertainty will limit their ability to
secure good positions in the ecosystem right from the start.
18 2 Levels of Value

The term ‘ecosystem’ stems from biology. It was first used in 1935 to describe a
natural unit that consists of living and non-living parts, interacting to form a stable
system. The fundamental concepts of ecosystems include the flow of energy via food
chains and food webs, and the cycling of nutrients bio-geochemically. Ecosystem
principles can be applied at all scales—thus principles that apply to an ephemeral
pond apply equally to a lake, an ocean or even the whole planet [17]. The analogy
with the business world is recognized by several authors, especially in the knowl-
edge economy. Like business networks, biological ecosystems are characterized by
a large number of loosely interconnected participants who depend on each other for
their mutual effectiveness and survival. And like business network participants,
biological species in ecosystems share their fate with each other. If the ecosystem is
healthy, individual species thrive. But if it is unhealthy, individual species suffer
deeply. And as with business ecosystems, reversals in overall ecosystem health can
happen very quickly. Just like business networks, evolved biological ecosystems—
from the Atlantic Ocean to the Amazon—are essentially communities of entities
with differing interests bound together in a collective whole [9].
Moore defined a business ecosystem as an economic community supported by a
foundation of interacting organizations and individuals—the ‘organisms’ of the
business world. This economic community produces goods and services of value to
customers, who themselves are members of the same ecosystem. The member
organisms also include suppliers, lead producers, competitors and other stakehold-
ers. Over time, they coevolve in their capabilities and roles, and tend to align
themselves with the directions set by one or more central companies. Those com-
panies holding leadership roles may change over time, but the community values the
function of an ecosystem leader because it enables members to move towards shared
visions, to align their investments and to find mutually supportive roles [12].
In the context of transformational innovations the uncertainty is very high, and
will be addressed through an iterative process. This also means that the ecosystem
will evolve dynamically alongside the creation of the value proposition. Some
organizations will exit the ecosystem at certain points because they feel there is
insufficient value left for them. Others may enter at a later stage, bringing in new
knowledge and experience and thus influencing the value proposition. These
dynamics are an inherent part of the process, and should be regarded as necessary
to ensure the highest possible value for all members of the ecosystem.
Society is in many cases also a stakeholder that is part of the ecosystem. This
can be a specific community such as a neighborhood in which a new, sustainable
street lighting system is installed, or it can be society as a whole.

Value for Society

Society is the highest level of value in the model. Users, organizations and eco-
systems are all part of society. In many cases the impact of innovations on society
is underestimated. Of course, organizations do their best to understand the value of
Value for Society 19

innovations at all levels, and to benefit from it directly or indirectly. But inno-
vations also have their costs, and not all of these costs are taken into account in an
integrated model. Indirect costs of producing goods are often not taken into
account. Lester Brown gives an intriguing example of what is wrong with the way
calculations are made [2]:
One of the best examples of this massive market failure can be seen in the United States,
where the gasoline pump price in mid-2007 was $3 per gallon. But this price reflects only
the cost of discovering the oil, pumping it to the surface, refining it into gasoline and
delivering the gas to service stations. It overlooks the costs of climate change as well as
the costs of tax subsidies to the oil industry (such as the oil depletion allowance), the
burgeoning military costs of protecting access to oil in the politically unstable Middle
East, and the health care costs for treating respiratory illnesses from breathing polluted air.

Based on a study by the International Centre for Technology Assessment, these costs now
total nearly $12 per gallon of gasoline burned in the United States. If these were added to
the $3 cost of the gasoline itself, motorists would pay $15 a gallon for gas at the pump. In
reality, burning gasoline is very costly, but the market tells us it is cheap, thus grossly
distorting the structure of the economy.

In the end, society as a whole suffers from such distortions because in the end
the bill is paid by citizens, either by living in a polluted world, or by increased
taxes to cover the costs of cleaning up the mess. In this sense citizens are always
stakeholders of any innovation, as the ecological footprint of the products and
services consumed affects them directly or indirectly. A more integral view on
value is needed that will help organizations to create innovations that bring value
to users and society. Such an integral view should include potential harmful
effects, and support creative processes to reduce harm and increase value.
On the upside, understanding the issues in society also provides a basis for
many new transformational innovations. There is plenty of room to improve the
quality of life for many people: both in the Western societies, where poverty has
mostly been eradicated, although many people live unhealthy lifestyles, and in the
developing societies, where the first step is to create a certain level of wealth
through innovative solutions that provide income for many.
The next chapter will explore more deeply what value actually is from different
perspectives in the social sciences.

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