The Business Model & the Value Proposition
The business world abounds with terms so heavily used they now border on
meaninglessness. Before, during and after the recent boom and bust of Internet-based and
other high-tech companies, questions about the attractiveness of a company’s “value
proposition” and the potency of its “business model” dominated the discussion of perceived
winners and losers. Yet what was called a value proposition or business model during the
recent frenzy – when just about any “me too” product or company could get funded – was
nothing more substantive or thoroughly developed than the fanciful dreams of charismatic
visionaries.
An effective, credible “value proposition” describes the fundamental attractions that will
draw consumers to a product or service. It represents the unique combination of offers –
both real and perceived – that when taken together constitute “value” in the eyes of the
consumer or client. The value proposition identifies and powerfully articulates exactly what
will make the product or service attractive in the marketplace. It is succinct and selfevident.
Consider the following: “… Delivery of time-sensitive documents and parcels at a fraction
of the cost that would be incurred by late or non-delivery…”
Just twenty words are sufficient to paraphrase the essence of FedEx’s original value
proposition. Yet this short description is remarkably potent. What FedEx realized was that
the value of what the company proposed to do was intrinsic not to using the service but to
not using it.
Whereas once it would have been unthinkable to pay a premium of several thousand
percent over standard postal rates for overnight delivery, FedEx recognized that in some
circumstances the value of doing so was completely reasonable – particularly when a parcel
“absolutely, positively” had to be there – because the cost of non-delivery could mean the
loss of millions. In that context paying a premium of 3500% (on a 34¢ expense) looks like a
tremendous bargain and the value proposition becomes “self-evident.”
Likewise, a robust business model is not pie-in-the-sky. It explains how a company will
deliver its value proposition by describing the unique elements, the critical resources,
required to produce the product or service and thereby transform an idea or vision into a
living, breathing and enduring corporate entity. Consider the following:
“… Creating, deploying and continuously improving a proprietary process that makes on-time
overnight delivery logistically possible and economically feasible…”
Anyone old enough to remember when “special delivery” meant nothing more than a few
hours saved thanks to a special trip from the post office to the recipient’s address can
recognize this brief sentence as one that paraphrases FedEx’s original business model. With
less than 20 words it describes just what FedEx intended to do and how the company would
do it. The implementation of this model created an entirely new enterprise and an entirely
new way of conducting business.
Taken together, the business model and value proposition form the core elements that
guide a company in its internal and external orientations. When presented ex-post facto as
above, these concepts seem straightforward and almost rudimentary. Yet envisioning,
articulating and then implementing them requires a tremendous amount of up-front
thought.
Often in the rush to produce a business plan and find funding, entrepreneurs and companies
forego the seemingly mundane bench work of fully fleshing out the value proposition and
business model. In some cases, as with companies like Webvan or Amazon, the value
proposition was so compelling (and new) that a certain expectation arises that the business
model will evolve to fulfill the promise of the value proposition. Think of it as the reverse
“Field of Dreams” scenario. If they come, we’ll figure it out.
On the flip side, product-centric companies, such as those that populate Silicon Valley, often
subscribe to the real “Field of Dreams” strategy; if they build it, they (the customers) will
come. Certainly this has worked countless times, particularly with breakthrough products
where no precursors indicated what consumer acceptance might be. (Think of the first
“Walkman.” Would people want to go around with appliances on their belts and headphones
jammed in their ears? Who knew!)
Much more often companies have had their “eureka” moments of product discovery followed
by the baffling discovery that the market didn’t want what could be produced. Why?
Because the equation for success in today’s market is that the value proposition and the
business model must be in congruence. This is true for new as well as established
companies.
For example, after more than twenty years of dramatic ups and downs, Apple’s value
proposition is nearly synonymous with its brand. Although Apple computers have always
cost more than PCs, the “value” in Apple’s proposition is intrinsically linked with how users
feel about themselves. They are more sensitive to matters of style than price. They see
themselves as more interested in creative outcomes than in having to spend time learning
how to use the tools required to achieve those outcomes. The “value” in Apple’s proposition
comes in saying that the Apple user can get to work right away and do wildly creative stuff
within hours.
Despite Apple’s premium prices, a certain portion of the market sees that as a value. (Plus,
they may sense a certain psychic value through their belief that using an Apple validates
their own self-assessments as more highly evolved, creative beings.) Apple’s limited (and
failed) efforts to alter its business model by commoditizing its products were completely out
of synch with its value proposition. Imagine if Apple decided to make plain beige boxes with
no stylish cachet, no ease of use and no psychic pay-off. The value proposition evaporates.
WHAT IT TAKES: Articulating a robust value proposition
It should go without saying that a thorough understanding of the marketplace is
fundamental to crafting a robust value proposition. Alas, this is not always how things get
done. Perhaps of foremost importance in identifying a solid value proposition is an
assessment of the maturity of the market. For example, whereas there are always
opportunities for innovation, a “mature” market with a standard offering of commodity
products may have little room for a value proposition that operates on anything other than
price point.
At the other end of the time line, markets that are in the formative stages, during a period
of genesis and creativity, present limitless opportunities for value propositions potentially
attractive to mass and niche markets alike. As demonstrated by the demise of so many
web-based start-ups, the difficulty in devising an effective value proposition at this stage of
market development is the limited amount of concrete information available. Determining
whether the market really wants to purchase pet food on-line can be difficult or impossible
to know for certain without costly experimentation.
That does not imply that there’s no need for rigorous thinking and examination of market
research. And, because the value proposition and the business model must be in
congruence, there must also be a rigorous examination of whether the proposed model can
actually deliver on the “proposed” value proposition.
Continuing with the Apple case, the demise of the hand-held Newton highlights how a
failure of the business model to perform can undermine the guiding value proposition. The
Newton promised value through the ease of use and trend-setting nature of hand-held
computing and personal organizing. Apple’s business model, like Sony’s, is built around
being first to market with stylish, easy-to-use, fun and reliable products.
Facing the pull of a very attractive value proposition, Apple pushed the Newton before it was
ready. Before its time. This lack of congruence between the business model (and the
technology behind it) and the value proposition (and the market’s irrefutable will to hold a
company accountable) undermined Apple’s vanguard movement in the hand-held sector.
Once Palm figured out a business model that could deliver on the value proposition, the
market for hand-helds took off. (Ironically, Palm utilizes software developed by Apple.) And
now that the market for hand-helds has evolved from the genesis and flourishing stages, to
a transition period, Palm finds itself faced with new competition and a less compelling value
proposition.
Of course, in developing a robust value proposition, many other factors come into play.
Price, placement, distribution, ease of use, size of market, market share, and many others.
The key point is, however, that after all these factors are well understood, one should be
able to succinctly and powerfully articulate the value proposition. If that cannot be done
then a step back needs to be taken to assess whether the proposition is truly self-evident or
wishful thinking.
Finally, an effective value proposition should hold at the brand and the company level.
Developing individual value propositions on a product level requires an enormous amount of
education, can confuse the market, and create a schizophrenic enterprise attempting to
fulfill on countless promises. If a company does not have an idea of what its value
proposition is, it will have to be very lucky to deliver on it.
WHAT IT TAKES: The Business Model
The business model explains how a firm will deliver on its value proposition. The argument
can be made that this is chicken-and-egg sophistry and that the model, or the technology,
drives the value proposition. But in thinking about a guiding light, about a polestar, that
infuses a company’s culture and product line with consistency of vision, it is tremendously
helpful to have external guidance. That guidance is the market. And the connection with the
market is the value proposition. Of course, exceptions to this approach can be found. Pure
research facilities and think tanks are not expected to operate in congruence with a value
proposition. But the vast majority of businesses are. Or should.
Identifying the key components, the critical resources, necessary to deliver on the value
proposition are what will determine the key characteristics of an effective business model.
For Fed Ex, this implied a proprietary system of aircraft and hub(s) because the existing
infrastructure could not deliver the value proposition.
For Cisco, where the value proposition revolves around the ease of using one company for
up-to-the minute networking solutions, this meant a business model that could supply
relevant technology in a rapidly evolving sector. Cisco’s strategic approach to its business
model subsequently incorporated an unprecedented level of outsourcing. R&D was
essentially outsourced through continuous acquisitions. Manufacturing was handled by
large, specialized firms. These two tactical components of Cisco’s overall business model
strategy worked exceedingly well until the markets turned and the materials control aspect
of its business model faltered. The company is now faced with billions of dollars in write-offs
– the result of incongruence between one component of its business model and the cutting
edge promise of the company’s value proposition.
Conclusion:
Effective delivery of value requires the design of a business model. The path to the business
model comes in three simple, but not easy, steps:
• Know your market
• Know your value proposition
• Design your business operation to deliver value
The essential elements of the business model are:
• Knowing where the strength of the business must be located: in products, marketing or
operations
• Knowing which resources are vital to the delivery of value
For example, the Federal Express built its success on operations. Its optimized hub system
allowed it to deliver value in the form of overnight delivery. This strength means the
company still owns this market segment, even though other companies have made
attempts to enter the market.
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