This global pandemic has put the world in a state of crisis. There’s nothing good about what’s happening to the people and to the communities around the world today, but Lorenz Payonga, a graduate student at The University of Tokyo, is here to put things into perspective. Although this pandemic shouldn’t be romanticized in any way shape or form, Lorenz simply pointed out during his webinar on Innovation, Entrepreneurship, and Value Capture, that the Chinese characters for the word “crisis” are a combination of the words “Danger” and “Changing Point (Opportunity)”.
The world is in danger, but instead of focusing on only the negative aspects of the situation that we do not have control over, we should take this opportunity to make significant changes in our lives. Working from home has bought us some time that we can use to rediscover our talents, passions, and curiosities. Lorenz says we should take advantage of this time, and if you are a business owner, to take this opportunity to reevaluate your business, adapt to the new normal, and gain entrepreneurial insights for the future.
SMEs and IDEs
Lorenz says that Entrepreneurship is definitely not just about profit. He says that we should veer away from the notion that businesses are just for profit, because beyond profit lies the creation of value in society. He differentiates Small and Medium Enterprises (SMEs) and Innovation Driven Enterprises (IDEs) by saying that the latter has a global market focus, and has innovation in technology, business processes, and business models at its core, while the former has a local market focus that provides traditional businesses that have already existed in the past.
Value Creation & Value Capture
In order for business owners to create and capture value, they must first be aware of what kind of enterprise they are, as well as determine what value they want to deliver to their customers. Value can be delivered in forms beyond just cash, it can be delivered through goods, services, time, reputation, energy, health, willpower, and even relationships. Lorenz uses LinkedIn as an example – they do not provide customers with cash, but they do strengthen your network and help you build relationships in your professional life. That is the value that LinkedIn creates for their customers. Once you know what value your product or service creates for your business, you then move on to figuring out how to capture some of that value. You capture value from your customers so that you can invest that back into your business to allow growth and expansion.
The Business Model
One framework for extracting a portion of the value that your product creates for your customers is the Business Model. The business model will help you determine how to capture your value enough to allow growth, and to keep customers satisfied at the same time. When planning out your business model, you first need to consider your customers – find a way to reduce the friction it takes for them to purchase your product. The next thing you need to do is quantify your value proposition. Know how much additional value you give to your customer, and determine how much of that you will capture back.
Lorenz uses an example of a farmer and his harvest. If on a regular basis, a farmer is able to harvest one apple, but through your product, he is able to harvest 6 – the value added to your customer is 5 apples. From those 5 apples, you have to determine how much you will be charging the farmer for the success and help that you delivered through your product. Another aspect to consider when planning your business model is your competition – identify your competitive position and find ways to take advantage of it. Lastly, you have to consider distribution. You have to provide the right incentives for people you need to work with to encourage them to help you in your business.
All aspects considered, you must choose a business model that distinguishes you from your competitors. Don’t be afraid to experiment, even with models outside of your industry. In doing so, one must remember that innovation and entrepreneurship work hand in hand, and that risks in this realm, although unavoidable, must be calculated.
Pricing Frameworks
Another aspect to consider when deciding how to capture value is pricing. You have to strike a balance between attracting as much revenue as possible and attracting as many customers as possible. When you determine your pricing, entrepreneurs should remember that costs should not be the sole factor in determining the price; value is just as important. A paying customer is a necessary condition for any business, and when determining your price, you have to study your customer’s behaviors and alternatives in order to reach a point that will bring the most value to them and to you.
To sum everything up, it can be said that at the end of the day, there is no “100% right approach” to take when reevaluating your business to create and capture the most value, but what entrepreneurs need to remember is that they must constantly make room for innovation and adjustments. Entrepreneurs should always make the most out of their current situation and be sure to take calculated risks and decisions in a timely manner that will create and capture the most value for all stakeholders, and in the end, create more economic sustainability.
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