Value-in-Exchange

Dr. Adam Tacy PhD, MBA avatar
What we’re thinking

Our traditional model of value (value-in-exchange) sees manufacturers increasingly embedding value through the supply chain and exchanging it with customers for cash at a point of exchange. Customers then use up/destroy that value.

Such a model leads us to define innovation in terms of creating, or adding, more value (but never really defining what value is beyond the most a customer will pay).

It’s been a wildly successful model over the centuries. However it has several growth blind spots that are now limiting growth; not least before, after and across the exchange point and its anti-circular economy traits

With growth stagnating in our economies, it is time to evolve our view (to value-in-use or value-through-progress).

Key concept: Embedding and Exchanging value

Let’s dive into our traditional model of value, value-in-exchange, and see the success it has had, and the challenges it brings for the future.

value-in-exchangeA view of value creation that sees value as a property of goods/service. Manufacturers embed value through taking an input and creating an output. Value is realised at the point of sale by exchanging for cash. When that exchange is with an end customer, they then proceed to use-up or destroy that embedded value.

This is the model you’re likely familiar with. Where manufacturers embed value in products, signalling that through price. You pay a manufacturer to own those products, with the embedded value, and then go about using up it up, or destroying it.

In this way, value is seen through the lens of price. McKinsey goes as far to say:

A product’s value to customers is, simply, the greatest amount of money they would pay for it.

Golub, H., and Henry, J. (1981) “Market strategy and the price-value model” via “Delivering value to customers”, McKinsey (2000)

Value-in-exchange really does seem to reflect our every day experiences and we see it in our every day language – buying food, paying for transport, subscribing for music and films, and so on. It forms part of what Vargo & Lush call goods-dominant logic (to distinguish from their service-dominant logic with its value-in-use model).

This way of thinking influences innovation, which is typically seen as an act of creating or adding more value. Which on the surface sounds fine, yet we have an innovation problem.

It’s been a wildly successful model. However with its heavy focus on a point of exchange, it has several blind spots that hide growth opportunities. Additionally, value itself is surprisingly hard to define.

Are we reaching the end of this model’s usefulness? It has the following constraints:

  • missing opportunities before, after and across the point of exchange
    • consistency over customisation
    • chase next exchange over extending/recovering value
    • more exchanges over circular economy
  • goods over services – short-sightedness on solution space
  • marketing myopia
  • simple exchange over business model innovation
  • judging value is done by the manufacturer/provider

Let’s look at how we define, create, and measure value. This will lead us to the blind spots and challenges we’ve mentioned. And to why innovation in value-in-exchange is prone to disappoint 94% of executives.

defining value – the greatest amount of money a customer would pay for a product

Take a moment. How do you define value?

I would guess you define it like most of us, reflecting your daily experiences of exchanging your hard earned cash for products – your car, fuel, train journey, lunch, coffee, books, etc. Merriam-Webster defines value as both a noun and a verb:

  • noun:
    • the monetary worth of something
    • a fair return or equivalent in goods, services, or money for something exchanged
    • relative worth, utility, or importance
    • something intrinsically valuable or desirable
  • verb:
    • to consider or rate highly
    • to estimate or assign the monetary worth of
    • to rate or scale in usefulness, importance, or general worth
https://www.merriam-webster.com/dictionary/value

As we examine this definition, we can see how it aligns with the concept of value-in-exchange. Value is the monetary worth of something, and the equivalent in money for something exchanged. Something we estimate the monetary worth of.

Despite this high-level clarity, value is ”a concept that is difficult to define” (see Grönroos (2008) ”Service logic revisited: who creates value? And who co-creates?”). And “how do you define value? Can you measure it? … remarkably few suppliers in business markets are able to answer those questions” (Anderson & Narus (1998) “Business Marketing: Understand what customers value”).

Karababe and Kjeldgaard further highlight there are a multitude of value concepts, each lacking a definitive basis:

…use value, exchange value, aesthetic value, identity value, instrumental value, economic value, social values, shareholder value, symbolic value, functional value, utilitarian value, hedonic value, perceived value, community values, emotional value, expected value, and brand value are examples of different notions of value, which are frequently used without having an explicit conceptual understanding in marketing and consumer research.

Karababe, E. and Kjeldgaard, D. (2013) “Value in marketing: toward sociocultural perspectives”

Maybe through exploring how we create value we can find a practical perspective of what it is.

creating value

In the value-in-exchange model we perceive successive manufacturers or service providers as embedding value into their products.

This is something we can readily visualise in the following diagram (the grey part):

Value-in-exchange graphical representation: i) value is successively embedded by manufacturers in the supply chain ii) value is exchanged at a point of exchange iii) customer destroys/uses up the value
Graphical representation of value-in-exchange: i) value is successively embedded by manufacturers in the supply chain ii) value is exchanged at a point of exchange iii) customer destroys/uses up the value

For instance, a car holds more value than its individual components, which in turn are more valuable than the raw materials used to make them, and so on.

Whilst we can argue that services are somewhat different, we force them into the same value-in-exchange model. Service providers embed value when designing a service, say, their cleaning service. The output of that service is what they exchange with consumers for cash – units of cleaned rooms.

Value is a property of goods and services. One that increases, and gets exchanged and acquired through the supply chain. Our gaze always lands on outputs, which are transformed inputs.

Ultimately there is a point of exchange with an end customer/consumer. This is where hard earned cash is handed over in return for the product. Once that occurs, the customer owns the embedded value. As a manufacturer/service provider our job is done, and we’re busy off elsewhere looking to make the next exchange.

What does the end customer do with the value they now own? Let’s find out.

destroying value

Now the customer owns the embedded value, they simply go about destroying and/or using it up. This is the red part of the above diagram.

You’ll recognise this from our car example. You instantly destroy a portion of the value you’ve acquired as soon as you drive a car away from the dealer. Then you gradually use-up the remaining value by using the car over time (due to wear and tear). Or the chocolate bar you eat, almost instantly destroying the value.

With services we talk of the customer as the consumer, consuming the service.

Unfortunately, how we create/destroy value hasn’t helped us better understand what value is. It shows us there are two distinct phases and an exchange. The implications of which we’ll shortly come back to.

Perhaps how we measure value might help?

measuring value

One thing we see from the above is there is an exchange of value. Usually cash is exchanged for a product with embedded value (though it could be another product). The arbitrator of this exchange is price.

Ask yourself, what do you instinctively feel holds more value: a diamond worth thousands, or a false diamond (say a zirconia stone) worth less than a hundred?

In the value-in-exchange model, price serves as the primary measure of value. Essentially, the higher the price, the more valuable we perceive something to be. McKinsey succinctly captures this concept:

A product’s value to customers is, simply, the greatest amount of money they would pay for it.

Golub, H., and Henry, J. (1981) “Market strategy and the price-value model” via “Delivering value to customers”, McKinsey (2000)

As such, we see manufacturers predominantly judging value and signalling that through price. Anderson & Narus (“Business Marketing: Understand What Customers Value”, HBR, 1998) encapsulate this as the equation:

incentive\_to\_buy = (Value_{prod} - Price_{prod})

Where the difference between value and price of a suppliers product is the customers incentive to buy (i.e. to exchange).

Manufacturers generally take one of two approaches, which are the base of Porter’s: differentiation and cost leadership (Porter (2004) “The Competitive Strategy: Techniques for Analyzing Industries and Competitors“).

They may believe they offer superior value – differentiation – and will set the price as high as possible to maximise each exchange. However, market dynamics does come into play, and customers may not always be willing to pay the set price, causing price to drop. The point being is that we see manufacturers determining value.

Alternatively, some manufacturers aim for lower prices to encourage maximum number of exchanges – cost leadership.

It’s also not uncommon for manufacturers or service providers to provide a base product or service and offer additional features at extra cost. Low-cost airlines provide a notable example, with a base fee for a seat and additional fees for baggage, printed tickets, assigned seats, and so forth. Each option taken is an additional exchange of value – how valuable are they to you.

\begin{aligned} (Value_{prod} - Price_{prod}) = & (Value_{base} - Price_{base}) + \\ & (Value_{opt_1} - Price_{opt_1}) + \\ & \vdots \\ &(Value_{opt_n} - Price_{opt_n}) \end{aligned}

This gives us a perspective on value relating to product features. Yet still is based on how much customers are willing to pay (exchange).

That makes successful innovation challenging. There can be some innovation in adding new features or bundling/unbundling products. But before we discuss innovation and challenges, we should recognise this model’s undeniable success to date.

The model’s benefits – previous wild success

Our value-in-exchange model is the foundation of neoclassical economics. Adam Smith captures this in his 1776 classic “Wealth of Nations”. He argues that a nation’s wealth relates to maximising the amounts of gold and silver received for the goods and services it supplies*.

There’s no doubt it has been a wildly successful model – look at the growth we’ve had since Adam Smith’s time. Using Gross Domestic Product for England as a proxy for economic growth, growth increased from £14.6 billion to £1.67 trillion by 2016 (adjusted for 2013 prices! (source)).

Its success comes down to the strong focus on the point of exchange. This drives the manufacturers’ behaviours – seeking to maximise the size of each exchange or maximise the number of exchanges. Such focus has driven improvements in products year after year.

It’s worth exploring the implications of our traditional value model to get us in the frame of understanding its blind spots.

* It’s interesting to read the discussion that Adam Smith originally introduced both value-in-exchange and value-in-use concepts before settling upon viewing his world through value-in-exchange (see Vargo, Maglio and Akka (2008) “On value and value co-creation: A service systems and service logic perspective”; European Management Journal; vol 26)

Implications of value-in-exchange

Prahald and Ramasawan summarise the implications of value-in-exchange in their 2004 book “The future of competition – Co-creating unique value with customers”.

Here is their key diagram where we see the premises, implications and manifestations of value-in-exchange. What is interesting is the customer/consumer view is missing. Value-in-exchange is very internal focussed.

Value Creation Frame of Reference

They start with the basic premise that value is created by the firm. We can then read their diagram horizontally or vertically.

For example, agreeing with this basic premise leads us to also believe the premise to the right; that products and services are the basis of value. Which implies we believe consumers represent demand for firm’s offerings.

Reading downwards, starting with the premise that value is created by the firm leads to the implication that the point of exchange is the focus of value creation (what they call the firm-consumer interface). Which subsequently manifests as a focus on value chains and internal process quality.

Now we start to see why the customer can be forgotten in this model. Although the right side talks of customising and staging experiences we often find the point of exchange focus leads us to the model’s blind spots.

The model’s constraints – blind spots on future growth

The era of strong growth fuelled by the value-in-exchange model may be coming to an end, with growth showing signs of stagnation. I make the not unreasonable assumption here that innovation (creation of successful new products) drives growth.

Various countries experienced slowing GDP growth between 1969 and 1990, indicating potential limitations of this traditional model.

Indeed, in 2024, the chief of the IMF warned of the ‘tepid twenties’!

Our medium-term outlook for global growth remains well below its historical average. It is just, just slightly above 3%. Without a course correction, we are indeed heading for ‘the Tepid Twenties’ — a sluggish and disappointing decade

Kristalina Georgieva, International Monetary Fund chief, April 2024

I believe several blind spots inherent in the value-in-exchange model contribute to this economic/growth stagnation:

  • missing opportunities before, after and across the point of exchange
    • consistency over customisation
    • chase next exchange over extending/recovering value
    • more exchanges over circular economy
  • short-sightedness on solution space
    • goods over services
    • marketing myopia
  • simple exchange over business model innovation
  • judging value is done by the manufacturer/provider

Let’s explore these.

consistency over customisationmissing opportunities before the point of exchange

Our focus on exchange encourages us to favour consistent products that demand minimal customer involvement. This allows for mass production, reducing costs and providing repeatable value.

This approach has two significant implications. Firstly, it reduces our interest in customizing products, causing us to miss opportunities to create additional value before the exchange.

While not all products benefit from customisation, we often restrict customisation options where they do. For example, car manufacturers limit choices to a range of paint colours and option packs to reduce costs and maximize exchanges.

Vargo and Lusch argue in “The Four Service Marketing Myths” that we should reframe inconsistency as customisation; and see that as a positive attribute.

Secondly, this bias towards standardised products leads us to favour goods over services. Even when services are considered, we try to standardise them like goods. We’ll come back to this shortly.

chase next exchange over extending/recovering value – missing opportunities after the point of exchange

Value-in-exchange thinking not only risks constraining growth before the point of exchange but also overlooks what happens afterward.

Typically, once an exchange occurs, the customer begins using or destroying the embedded value, while businesses focus on securing the next exchange with a different customer. Furthermore, a customer using up value is a positive because it leads to more future exchanges.

Consider the example of buying a car. Once you drive away from the dealer, some value is immediately destroyed as the price drops significantly. Over time, driving the car consumes the remaining value until it becomes junk.

But is this the end of the value story? Not at all. Activities such as repairing, servicing, and modifying can recover and add value. Eventually, selling the car retrieves some value.

Attempting to see various value recovery approaches customers make; in value-in-exchange thinking these are after the point of exchange and so often not interesting to manufacturers
Attempting to see various value recovery approaches customers make; in value-in-exchange thinking these are after the point of exchange and so often not interesting to manufacturers

Osterwalder and Pigneur discuss value appropriation, consumption, renewal, and transfer in “Modelling value propositions in eBusiness”. However, these activities are often ignored in our current model.

In value-in-exchange thinking, these occur after the point of exchange and are often overlooked by manufacturers. Focusing solely on the point of exchange means missing opportunities in repairing, recycling, refurbishing, and reselling products. While this might be a strategic decision, it leaves opportunities for others to exploit.

Moreover, disregarding value creation pre- and post-exchange hinders the transition to a circular economy.

more exchanges over circular economy – missing opportunities across the point of exchange

Unfortunately, the ‘embed-exchange-use/destroy’ approach of the value-in-exchange model aligns with the linear economy’s ‘take-make-waste’ paradigm.

Value-in-exchange view of value encourages a linear economy thinking
Value-in-exchange view of value encourages a linear economy thinking

This perspective encourages linear thinking and stands in stark contrast to the principles of the circular economy. In fact, manufacturers benefit when customers deplete product value quickly, as that leads to more exchanges.

The Ellen MacArthur Foundation reached a similar conclusion, stating that one of the biggest challenges in transitioning from linear to circular economy is revisiting the very notion of value creation (Ellen MacArthur Foundation, 2023).

one of the biggest challenges…to transition from linear to circular is that it requires…revisiting the very notion of value creation

Ellen MacArthur Foundation (2023) “From ambition to action: an adaptive strategy for circular design

A sobering observation from the 2024 Circularity Gap Report highlights a 21% drop in the share of secondary materials consumed globally from 2018 to 2023.

The share of secondary materials consumed by the global economy has decreased from 9.1% in 2018 to 7.2% in 2023—a 21% drop over the course of five years.

Circle Economy Foundation (2023) “The Circularity Gap Report 2024

This decline underscores the consequences of value-in-exchange thinking, which lacks interest in post-exchange activities and offers no incentive to design products pre-exchange for sustainability. Why invest in making products recyclable or repairable if it might reduce the number of exchanges?

Of course, external pressures sometimes require manufacturers to adopt more circular practices than the value-in-exchange model would suggest.

For example, many countries mandate deposits on plastic bottles. In Sweden, this is legally required. Producers/resellers must sign up for a deposit scheme to sell drinks in plastic bottles, and consumers pay a deposit, which they get back when recycling the bottle. In 2022, Swedes recycled 86.7% of plastic bottles and 87.8% of cans sold.

goods over services – short-sightedness on solution space

The value-in-exchange preference for standardised products leads us to favour goods over services.

In fact, we’ve long regarded goods as advantageous to growth due to various properties they have. We can separate manufacturing and use, distinguishing the embedding of value from its destruction. Tangibility allows the creation of inventories, further supporting and reinforcing the value-in-exchange perspective.

When we do consider services, we attempt to standardise them to behave like goods. In doing so, we see them as having intangibility, heterogeneity, inseparability and perishability. Zeithmal, Parasuraman and Berr call these the IHIP properties in “Problems and Strategies in Service Marketing”). They have evolved into the 5Is of services; where we see services as:

  • inconsistent
  • intangible, where we cannot create an inventory
  • delivery and consumption are inseparable and require customer involvement

These are the opposite properties to goods. They encourage a goods vs. services mindset, where goods take precedence and services are seen as inferior. And a clear example is the music industry’s struggle to move from selling products (CDs, vinyl…) to streaming. Vargo and Lusch term this goods-dominant logic.

However, in today’s world, this goods vs service debate doesn’t fully hold. Modern goods are increasingly intangible, like digital music, videos, and eBooks, which eliminate the need for inventories. Even tangible goods are moving towards minimal inventories with approaches like just-in-time management. Future advancements like 3D printing will likely further reduce the need for inventories by transitioning more goods to a digital format until needed.

We saw earlier that Vargo and Lusch argue in “The Four Service Marketing Myths” that we should see inconsistency as the more positive customisation. They also argue that the other traditionally negative attributes of services should be seen positively:

  • intangibility => unless tangibility has a marketing advantage, it should be reduced or eliminated if possible
  • inconsistency => the normative marketing goal should be customization, rather than standardization
  • inseparability / involvement => the normative marketing goal should be to maximize consumer involvement in value creation
  • inventory => the normative goal of the enterprise should be to reduce inventory and maximize service flow
Vargo and Lusch (2004) “The Four Service Marketing Myths”; Journal of Service Research 6(4):324

marketing myopia

The goods vs services distinction is a clear instance where value-in-exchange thinking risks creating short-sightedness (myopia) in our growth.

More broadly, a focus on exchange can lead to Levitt’s “Marketing Myopia”, where we define customer problems through the lens of our existing solutions and miss the larger picture and evolving customer trends.

We get there since our existing solutions currently give a good flow of exchanges and that is hard to give up and move to something else.

simple exchange over business model innovation

Continuing the above theme, the value-in-exchange model favours business models that make the exchange simple. Typically we observe bi-party, one-off exchanges.

Whilst other business models work, they are not front of mind:

  • Subscriptions – are really a series of exchanges, where each exchange is at a lower value than a single exchange they replace.
  • Subsidised models – often increase the parties involved and lower the price – that risks reflecting lower value.
  • Platform as a Service – lower size of exchange as customer only pays for use

The resistance/slow offering of these alternative models is driven by our final challenge of value-in-exchange: who determines/judges value.

judging value is done by the manufacturer/provider

Finally, the value-in-exchange model assigns the primary role of judging value to the manufacturer or producer. Their judgement is typically reflected in the price.

We can of course argue customers ultimately determine value by their purchasing decisions. However, the initial judgment rests with the manufacturer.

A salient case in point is supermarkets and their introduction of self-service check outs. These are clearly of value first to the supermarketiwners (reduction in cost, higher throughput). Then those owners justify that by judging these are valuable to customers – hence the large scale replacement of manned checkouts.

But as supermarkets are finding, customers are rebelling. Theft has increased (countered by more anti-theft approaches, which alienate customers more). And the use of self checkout is not as high as expected. Some supermarkets are even removing self checkouts. More on this here.

You’ll hopefully not be surprised to find out that value-in-exchange thinking also drives our view of innovation.

Relating to innovation

Remember we discussed earlier about value and price being related as a customer’s incentive to buy (incentive\_to\_buy = Value - Price )? Well, we find this again, sitting at the heart of our value-in-exchange view of innovation. We innovate to increase that incentive to buy. In other words, we’re meeting the following equation:

(Value_{innovation} - Price_{innovation})>(Value_{existing} - Price_{existing})

Unpacking this, we innovate to increase embedded value and/or to reduce price. From a manufacturer’s perspective, reduced price usually comes from reducing costs – where some of those cost savings may be passed on as price reductions.

It may also come from unbundling products as we saw earlier, giving the perception of customer customisation.

\begin{aligned} (Value_{prod} - Price_{prod}) = & (Value_{base} - Price_{base}) + \\ & (Value_{opt_1} - Price_{opt_1}) + \\ & \vdots \\ &(Value_{opt_n} - Price_{opt_n}) \end{aligned}

Those familiar with Blue Ocean Strategy might recognise that that approach aims to increase value and reduce cost in parallel (through altering – increasing/decreasing/adding/removing – aspects of the offering to find areas of no competition).

defining innovation

The concept of value-in-exchange strongly influences our definition of innovation. We often say innovation is all about adding value (embedding more value in products).

The chair of ISO’s committee developing a standard for innovation reflects this focus:

Innovation is about creating something new that adds value; this can be a product, a service, a business model or an organization. And the value that is added is not necessarily financial, it can also be social or environmental, for example

Alice de Casanove, Chair of the ISO technical committee responsible for ISO 56000 (2020) – Innovation Management – Fundamentals and Vocabulary

Eventually ISO’s definition became:

Innovation: new or changed entity1, realizing or redistributing value2

1anything perceivable or conceivable. Example: product, service, process, model, method, or combination thereof.

2gains from satisfying needs and expectations, in relation to the resources used. Example: revenues, savings, productivity, sustainability, satisfaction, empowerment, experience, engagement, trust.

ISO 56000 (2020) – Innovation Management – Fundamentals and Vocabulary

Finally we start to see a definition of value that is a little better than just the “amount someone is willing to pay” we started with. It is “gains from satisfying needs and expectations”. Of which price (revenue) is one example. Along with savings, sustainability, experience etc. Yet we are still thinking in terms of embedded value (in products) that can be redistributed.

The value-in-exchange model also affects our innovation ambitions.

incremental over radical/disruptive innovation

We can classify innovative ambitions in different ways. I’ll use incremental, radical and disruptive.

Incremental innovations make small improvements to existing goods, services, or processes, such as adding an extra razor blade to a razor head. Radical innovations, by contrast, can reshape or establish entirely new markets or industries. That likely requires establishing new exchange flows.

Disruptive innovation, as defined by Clayton Christensen in “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail”, refers to a specific approach. That is different to our colloquial use of the word ‘disruption’. For instance, Uber was a radical innovation rather than a disruptive one, despite the common perception of it disrupting the taxi industry.

The value-in-exchange model, with its focus on exchange and the flow of exchanges, tends to steer incumbent suppliers towards incremental rather than radical or disruptive innovation. Why risk your current flow of exchange?

Kodak is often held up as an example of missing the digital wave. Yet this is not quite true. They invented the first digital camera prototype in 1975; created technologies to move photos from cameras to computers; and acquired a photo-sharing site in 2001 (see Anthony, S. D. (2016) “Kodak’s Downfall Wasn’t About Technology”, HBR). All things that should have pointed to their survival. They were just unable to unhook from the exchange flows of physical film. As we know, they filed for bankruptcy protection in 2012.

Blockbusters is another fascinating example of being unable to let go of exchange flows. The common narrative is it was simply disrupted by Netflix. But ex-CEO John Antioco tells a story of activist investor and new CEO forcing a reversal of an online strategy and going back to late fees; clinging to previous exchange flows

Pharma companies often fair better since they are setup with a strong focus on R&D to look for those new products and an awareness they may interrupt their exchange flows. But R&D is not always the answer, you need to have the ability to exploit innovations and courage to interrupt your flows. Xerox is well documented case of a strong R&D company that didn’t/couldn’t.

New entrants have an advantage over incumbents in this regard because they have no existing exchange flows to risk, making radical innovation easier to attempt. Nonetheless, they have the challenge of creating, sustaining, and growing an exchange flow.

business model innovation

A prime example of exchange-based business model innovation is the razor-and-blade (or bait-and-hook) business model. This model thrives on the necessity for ongoing exchanges for product components to sustain their functionality. Classic instances are razor blades from Gillette, printer ink cartridges from Canon, and coffee capsules from Nespresso.

Organising the firm

Lastly, let’s examine how the value-in-exchange model influences organisational structure.

Firms naturally organise around the point of exchange, focussing on sales. This setup leads to establishing sales teams dedicated to highlighting the embedded value of products and empowered to adjust prices to close deals. Separate marketing teams focus on identifying customer needs and prioritising them for implementation.

In more progressive companies, product owners are tasked with both marketing and sales, and they either own or have access to an implementation team (IT, manufacturing, process, etc.). These product owners are accountable for increasing the number, or size, of exchanges for their product.

Even more forward-thinking companies have roles such as “customer journey” or “customer success” managers. These individuals interact with customers to create value. This value is still measured in exchanges, but the intention is: happy customers make more exchanges.

In the service industry, every customer-facing employee holds a similar role. This philosophy is exemplified by former Starbucks CEO Howard Schultz, who stated:

We built Starbucks brand first with our people, not with consumers. Because we believed the best way to meet and exceed the expectations of our customers was to hire and train great people, we invested in our employees

Howard Schultz

A Starbucks employee can help a customer explore the menu (value before the exchange) and ensure a great experience (value across the exchange).

performing innovation

Who performs innovation in your organisation? It might be an R&D department, but more often, innovation is spread across the organization, potentially coordinated by an innovation team or a Chief Innovation Officer.

Is innovation your core function? I’d wager it is a bolt-on function. Your main focus is on making exchanges, right?

Now, be honest. How much have your innovation initiatives actually moved the needle? If they haven’t, you’re not alone – McKinsey reports that 94% of executives are unhappy with their innovation efforts.

In the worst case, your initiatives might just be what Steve Blank has termed innovation theatre.

Innovation theatre

Performing innovation activities that ultimately deliver few, or no, tangible results.

Steve Blank (2019) “Why Companies Do ‘Innovation Theater’ Instead of Actual Innovation”


We should be fair and acknowledge that innovation is challenging, especially within the value-in-exchange model. Value is challenging to define, so how can we add more value? While common sense suggests a clear connection between innovation, market needs, and the expectations of innovators regarding pricing, real-world examples, such as those seen on Dragons’ Den/Shark Tank, often reveal a weak or missing link.

We lack tangible levers to drive innovation, causing our teams to struggle. Additionally, our corporate ambitions are often lower than our innovation initiatives, so even viable innovation ideas struggle to gain traction.


To unlock future growth headroom, we need to evolve to a model of value that defines value in an actionable way as well as one that doesn’t have the constraints caused by the point of exchange focus. A step in the right direction is value-in-use.

Key take aways
  • Value-in-exchange is how we traditionally observe value in our world working. Cash is king, and we’ll readily exchange it for products we see as holding value (that has been progressively added by manufacturers in a supply chain). It has been a wildly successful model, driving impressive growth over the past few centuries.
  • We measure value through a customer’s incentive to buy

incentive\_to\_buy = Value - Price

  • However, it has several built in blind spots due to the heavy focus on a point of exchange. Those limits our view of value creation before, after and across the exchange. We leave customisation, value recovery and the circular economy behind.
  • Value itself is difficult to define. At best we find it is “gains from satisfying needs and expectations”. More often it is just the “amount someone is willing to pay”.
  • Innovation is about adding (embedded) value; increasing the customers incentive to buy:

(Value_{innovation} - Price_{innovation})>(Value_{existing} - Price_{existing})

  • We organise our firms around making value exchanges, looking to maximise the size, or number, of exchange. This means our innovation ambitions tend towards incremental – small changes – rather than radical – market/industry changing. Why risk established exchange flows?
  • Our innovation initiatives are often misaligned with corporate innovation ambitions; or with value as seen by the organisation.

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