Designing value beyond the inflection point

This article is about two simple models, inflecting economies and how design plays a role in all of this.

One day you wake up to realize that your coffee beans are not all that anymore.

Progression of economic value

In 1999 Pine & Gilmore presented a model for the progression of economic value in their bestseller “the experience economy“. The model explains the generic progression of economic value that any business in our society goes through sooner or later; the shift for commodities to experiences. Prehaps the most used example is the progression from raw coffee beans to the starbucks “experience”. The great thing about this model is that it’s easy to use and applicable to almost any industry.

The different economic offerings (commodities, goods, services & experiences ( & transformations)) described in the stages of the model feel very natural. That’s because we experience them every day in our lives. It’s a good exercise to think of a random industry and see if you can come up with the specific offering in every stage.

Progression of economic value

Although the model works great, it doesn’t explain what is actually happening in an industry before it progresses into the next stage of economic offering. Just recently I came across a different model that does just that!

The inflection point

In 1996, 3 years before the experience economy was published, Andrew Grove wrote a book called “Only the paranoid survive“. In that book he describes the mathematical concept of the inflection point and applies it to business strategy. As Grove put it: “An inflection point occurs where the old strategic picture dissolves and gives way to the new“.

The inflection curve

This comes down to the fact that in order to obtain (and maintain) a competitive advantage, companies need to invest more and more in innovation while the returned value becomes less and less. I would call this the gained competitive advantage per invested euro (GCA/€). The inflection point is the point where the return on investment for a company becomes 0. When you go beyond the inflection point you actually start losing money.

The Windows OS reaching it's inflection point
Source: Jeroen van Glabbeek presentation at Mobile Monday Amsterdam

Just like the model of Pine & Gilmore, Groves concept of the strategic inflection point is easy to understand and to apply. Look at the evolution of the Windows OS for instance, going from windows 3.11 all the way to Windows 7. The investment made by microsoft has gone up with every new version while the competitive advantage they get out of every new version become smaller. Some might even argue that windows has reached it’s inflection point some time ago with the rise of cloud computing.

The inflection point is the inner working of the progression of economic value
The inflection point is the inner working of the progression of economic value

The evolution of mobile phones is another great example of an industry that’s almost hit it’s inflection point. The journey from the very first mobile phone in the early ’80s to the “full-featured & looks like an iphone”- smartphone nowadays. There’s no escaping, phone manufacturers will have to rethink their business in order to obtain a competitive advantage.

Mobile phones are hitting the inflection point

Every ride to the inflection point starts out with a breakthrough and ends up as an commodity. Andrew Grove described what Pine & Gilmore used as the basis for their book, the commoditization of economic offerings.

One day you wake up…

The road to commoditization that Grove describes is in essence the inner-working of Pine & Gilmore’s model for the progression of economic value. As an industry matures it becomes harder and harder to gain a competitive advantage. The closer a business gets to it’s inflection point, the bigger the incentive becomes to move to the next level of economic offering.

So one day you wake up just to realize that seemingly out of nowhere someone has done something that is so disruptive it shakes your whole industry. Suddenly, your pack of grinded coffee beans has to compete with a chique espresso bar. You have to completely rethink the business they are in. And that leaves you basically with two scenario’s.

You decided to stay in the same business and live with the fact that you’ll have to compete on scale. Going for large volumes and making penny margins is the only option in this situation. If executed successfully it will still earn you gigantic amounts of money. It’s all about management, standardizing and maximizing efficiency in this scenario. The industry is becoming a mono-culture, dominate by a few companies that succeeded to scale up.

In the other scenario you decide to jump into the next stage of the value model where you are confronted with an open playing-field, a lot of uncertainties and a vast amount of opportunities. The skills required in this scenario are creativity, entrepreneurship and agility. In the early days the market is changing rapidly as new rules are shaped and reshaped each and every day.

Inflecting economies

Change is happening faster than ever before. With each and every day more people have the power to change the world. You don’t need have to have a MBA degree to see that a lot of industries are currently approaching or at their inflection point. In fact it’s fair to say that so many industries are hitting their inflection point, that whole economies are approaching their inflection point. We’ve actually become so good at management that this has caused our whole economy to come close to an inflection point! (Which is not strange when you consider that our whole educational system is aimed at doing actually that.)

In an economy dominated by industries that are hitting their inflection point, you need people that challenge the old and explore the new. It’s about creating new value instead of maximizing the existing. Innovation in this era is driven by insights, not efficiency. You need people who can provide these insights and translate them into viable offerings.

The time for design

We’re moving into an era where organizations need to produce or serve for 1 instead of for the masses. Economic offerings are becoming more and more human-centered. This requires a much deeper understanding of who your customers are and what they need in order to creating meaning in their life. Currently there is a strong tendency to look at design help organizations fulfill this need.

There are (at least) two important reasons why design is attracting attention. One reason is that design thinkers (not designers per se), to stick with Tim Brown, have a better balance between left and right brain skills compared to the skill that now dominate organizations. Bringing more right brain skills to the table is a strong asset when you consider that your economic offerings need to become more human-centered.
The other reason is that design is a human-centered innovation process with it’s own proven tools and methods. Now-a-days we see that the design process is being applied to come up with answers to questions ranging from how can we improve the life of diabetics to how can we create sustainable mobility solutions in urban areas.

It’s about survival

I started out by describing two models. These models are a great way to visualize what is going on in your industry. Combine them and you’ve just created an excellent frame of reference from which you can start thinking about the future. Awareness is the first step to change.

But the models are only half of the story. To survive in an industry that is approaching it’s inflection point an organization will need different skills than it has collected over the years. It will have to move from doing things better to doing better things.

Now that you’ve come this far it’s time to grab a pen and sketch the models for your industry. Then think about the next person you’re going to hire…

Marc Fonteijn

Marc Fonteijn

Als medeoprichter van 31Volts houdt Marc zich bezig met het verleggen van grenzen binnen service innovatie. Marc helpt organisaties om waarde te creëren voor hun klanten door middel van design.

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  • Comment by Joe Pine

    Great post — well, really a “paper” — Marc! You’ve made a substantive addition to our Progression of Economic Value by relating it to the inflection point curve. I hope it wakes people up to the need to go beyond commoditized goods and services to staging engaging experiences — even to guiding transformations (the fifth and final economic offering in our Progression).

    Since I know you are working on Health 2.0 initiatives, you really should take transformations into account as well, as that is what healthcare is really about — helping us achieve our health aspirations.

  • Great ‘paper’ – thank you!

    In the ‘full circle’ vein, the skills and talents that helped launched these now mature companies are what’s needed again within the company but usually have been driven out over time. The educational system (at least here in the USA) is as mature as the industries and stuck in the same spot so it can’t help train up/educate people that can challenge the old and explore the new (for the most part).

    Insight is a key – and either as part of that, or along side that, are the ability to think laterally (paradoxically), recognize patterns (of all sizes and shapes) and recognize outliers.

    I agree that we need to move from doing things better (because sometimes ‘good enough’ is really good enough) to doing better things – and better implies effective – up til now, efficiency has trumped effectiveness, but that must change and be in ‘balance’

31Volts [Service Design]