Imagine for a minute that you’re one of the Airbnb founders that have put up an exciting story for the new economy and platforms era. Their story is about iterating to find the right strategy to disrupt an existing market with a compelling value proposition. A mix of opportunity, customer insights and an innovative way of solving a unique century-old problem. Just think, consumers were looking for an affordable place to stay anywhere on the planet and people who owned extra space in their home wanted to make some extra money and Boom came Airbnb as a solution.
We could also imagine the first insights within a traditional incumbent, with comments like “no one is going to rent a room to strangers in their home” or “people won’t like to stay in strangers’ houses”. At the same time, I remind that my grandma lived in a very small town in a big house located in a rural area where she raised 10 wonderful boys and girls. The kids kept on leaving as they grew up rendering more and more space every coming year. She used to rent her extra space to workers who spent the season in the area. She was happy to cook for them and she got some extra money on the way which was not a norm at all at that moment in time. We can say that the Airbnb model already existed but there was no united platform that brought these two people (host with extra space and guests looking space) together. With the advent of modern technology, cellular devices, and the internet, bridging the gap became possible and Airbnb did it with adequate ease.
Understanding the difference between creating value and capturing value
Airbnb took advantage of this opportunity to create value and capture value. How? by coordinating the elements of the value chain and leveraging on technology. Their strategy was based on the facilitation of the guest demand and host supply. In a singular effort, they put all their energies into coordinating different activities to match guests and hosts, which made the business viable. This includes a revenue and cost model and a rating system to ensure trust between the parties. Airbnb transformed my grandmother and her guest’s experience into a seamless on-demand experience, making it easier for both parties to find each other and exchange value for services.
Their ability to reach potentially millions of consumers illustrates the power of a good strategy, defined as a plan for creating and capturing value. These are exactly the kind of miraculous events in business that gets us all excited. Stories like Airbnb and other profitable startups should be a great motivating factor for all startups. However, a side note of caution should also be attached which reads that all great ideas do not form million-dollar companies. There are equal numbers of examples where bright ideas did not formulate into history-changing companies.
For this reason, when innovating it is fundamental to understand the difference between creating value and capturing value. There is a marked dissimilarity between the best writing author and the best-selling author. As per the rule of thumb, remember that you create value when customers are willing to pay for your goods and/or services more monetary value than used to create these goods and/or services.
…if your customers are not willing to pay more than your expenditure, you need to revisit your strategy”
Today many businesses are suffering due to “lack of value creation model, which translates into lack of strategy”. Remind that having this strategy right could be the difference between a great idea and a profitable innovation. A firm captures value to the extent that it appropriates the value that it has created, rather than that value being claimed by others, such as your rivals, your suppliers, or your buyers. For doing so, after defining this strategy, your company needs a plan for how they will capture value. This is the essence of strategic planning, thinking about the interplay between value creation and value capture.
Strategic plan, a consistent decision-making pattern with a goal in mind that unites the company efforts
Let’s turn now to a very different example, in the area of social enterprise and review how they defined their strategy to create and capture value. Kiva is an international non-profit organization that was founded in 2005 in San Francisco. Kiva is a lending platform where entrepreneurs in need reach out to people who are affluent enough to lend money for a cause. Kiva acts as a bridge between the lender and the borrower through a value creation model that facilitates the complete process, which in turn harbors exchanges and reduces transaction costs. Their strategy is straight and simple and they put in place all resources and efforts to develop their model.
For example, in terms of go-to-market, they eliminated the middle man through a web platform that can be accessed by any person with a cellular device. Local microfinance institutions collaborate with local and international partners to bring about a free-flowing financial mechanism where there are no middlemen and money changes hands with efficacy and speed. By doing so, they facilitate the interaction between borrowers and lenders in one singular motion via their crowdfunding platform. The complete amount goes from the lender’s pocket to the borrower’s pocket. This combined with better interest practices makes this program a huge success from a strategic standpoint.
Kiva’s revenue model is aligned with its strategic focus. Yes, Kiva has no fixed commission based upon the money going from one party to another. Therefore, all the money is transferred without any cuts or commissions. The Kiva system is completely paid through donations made by people who want such organizations to thrive and assist people in making a standpoint of their own. All projects requiring financial assistance go through an approval process after which it is put up for a crowdfunding campaign.
Today, 98.6% of the money borrowed is returned. This statistic alone allows people to trust the system whether they are borrowing or lending. This also creates an environment that makes the money exchanging process simpler and trustworthy for all parties.
Kiva based its value creation model on the whole agenda of helping entrepreneurs in need get on their feet financially. There were places around the globe where the interest rate was 50% which effectively meant that an entrepreneur had to earn hard to achieve break-even on his financials which is not an easy task, especially when the debt mounted faster than you can earn from the borrowed money. The whole model adds value to another ecosystem, which is why Kiva’s overall strategy is a hit amongst startups around the world and people who would like to help, alike!
When a strategic planner talks about strategy in the form of winning a match or scoring more points than the opponent, it misses the mark. A strategy is much more than one game or one match. It is a consistent decision-making pattern with a goal in mind that unites the company and avoids bad erratic decisions. It is much more than just one head of the company declaring the strategy of the month. For being productive, the strategy has to be much more than just a wish.
Airbnb and Kiva demonstrate that defining a good strategy and plan first is a fundamental base for success. Many companies over the years fail due to a lack of strategy and its successful implementation. They fail the most basic test of strategy, which is of making a firm choice. Your strategy is the basis for all resource allocation decisions. Therefore, the best way to avoid inconsistent decisions is to have a clear strategy and further plans if one or the other strategy doesn’t work the way you have envisioned.
Have you had a real-life experience where the strategy was overlooked for generic goals and it ended up like a sinking ship? Or did you ever saw a successful strategy pull the company out of a raging storm? If yes, do let us know with your comments.
Airbnb – https://www.airbnb.com/
Kiva – https://www.kiva.org/