22 August 2013
Value Proposition and Business Model
Business Model Innovation, an earlier post to this blog, discussed the relationship between business model formulation and Sustainability. That post, and the study upon which it was primarily based, concluded that business model formulation is “at the crux of Sustainability profits”.
However, the term “Business Model” has become a commonplace of business jargon; more often spoken than thoroughly understood. This is the first of two posts that examine the principle components of the business model, in order to expedite formulation (or, more likely, reformulation) of your business model.
In essence, a business model consists of a Value Proposition and an Operating Model. The Value Proposition consists of that collection of tangible and intangible features and benefits that induce customers to select your offering over competitive offerings. The Operating Model consists of that set of processes, policies, practices and procedures that allow you to reliably deliver the value offered, while generating a satisfactory profit by doing so.
The Value Proposition
This post examines the first principle component of the Business Model. As mentioned above, your Value Proposition consists of a collection of tangible and intangible features and benefits intended to win your target customers’ business. Obviously, if your target customers do not perceive your Value Proposition as sufficiently attractive, good results are unlikely. Both the substance of your Value Proposition and the effectiveness of its communication are essential.
Formulating a Value Proposition involves three interrelated considerations:
>> Identify a target customer group — Preferably, choose a group that you have some knowledge of, credibility with and existing relationships within. Cold turkey is tough sledding.
>> Identify a customer problem to be solved, or need to be filled — Asking the prospective customers might work, but don’t bet on it. Henry Ford is supposed to have said “if I had asked my customers what they wanted, I would have built a better buckboard”. You have to recognize and understand a need before you can expect to provide a solution.
>> Provide a solution to that problem or need — Your offering — the solution to that customer problem or need — likely consists of a collection of tangible and intangible components (mostly intangible, or perhaps exclusively intangible). Most of those components are rather routine items: warranties, packaging, billing arrangements, lead times and so on. Most of these can be similar to competitive offerings. One or more components — tangible or intangible — should be unusual in your industry, preferably unique in your industry. These provide the points of differentiation that give your sales and marketing efforts something to talk about. Of course, all components need be delivered in a competent fashion, except for those that draw their distinction from exceptional delivery.
These three elements are not necessarily considered in the order indicated. Perhaps a solution (an invention, perhaps) addresses a problem within an identifiable group of potential customers. Alternatively, you might look within your current universe of prospective customers for a subset with a definable need (an interest in Sustainability, for example).
The Value Proposition and Competitive Advantage
Your Business Model — Value Proposition and Operating Model — needs to be based on and express that which provides your competitive advantage. Your competitive advantage provides what Warren Buffett called a “moat” around the differentiating components of your Value Proposition. The moat makes it difficult for competitors to copy those differentiating components. There are many, many possible sources for competitive advantage; including patent protection, brand strength, cost position, business relationships, etc, etc, etc.
Sustainability and the Business Model
Consider “Sustainability and the Business Model” two ways:
First, some (prospective) customers want or, better yet, need products with Green attributes (tangible or intangible). This may be because their customers are pressing them on Green issues. Or, it may be for reasons of regulatory compliance. Or, it may be that some customers simply believe that Green is the right thing for them to do, and for their suppliers to do.
Second, this blog often cites Adam Werbach’s assertion that, “… being a sustainable business means thriving in perpetuity. As Werbach suggests, Green practices have been demonstrated to be good business that can support both your Value Proposition and its accompanying Operating Model.
Either way — or both ways — you win.
The next post to this blog will focus on the Operating Model. Following that, look for a case study on Business Model formulation for an actual emerging Green business.
Thoughtful comments and experience reports are always appreciated.
… Chuck Harrington (Chuck@JeraSustainableDevelopment.com)
P.S: Contact me when your organization is serious about pursuing Sustainability … CH
This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published on Wednesday evenings.
 See Business Model Innovation, this blog: http://blog.jerasustainabledevelopment.com/2013/03/27/business-model-innovation.aspx
 MIT Sloane Management Review Research Report, The Innovation Bottom Line, Winter 2013. Available for download at: http://sloanreview.mit.edu/reports/sustainability-innovation/
 This discussion on Business Models reflects: Johnson, Mark, Clayton Christensen and Henning Kagermann, Reinventing Your Business Model, Harvard Business Review, December 2008. Reprint R0812C, available for download at: http://hbr.org/search/R0812C/0?refinement=4294841677
 Harry Beckwith’s business classic Selling the Invisible includes a chapter on why people buy what they do. Beckwith’s book focuses on services, hence intangibles. This makes the book especially useful for those of us who are used to thinking of tangible products and their attributes. Five stars for Selling the Invisible, Warner Books, New York (1997), especially Anchors, Warts, and American Express: How Prospects Think, pp 85 -100.
 Werbach, Adam, Strategy for Sustainability, Harvard Business Press, Boston (2009), page 9.