Phase I of the Business Model: Value Creation
At the foundation of an organization’s ability to create value are core competencies and capabilities. The terms core competencies and capabilities are often used interchangeably, which is both confusing and incorrect. A core competency is defined as a primary area of expertise. Popularized by authors Gary Hamel and C. K. Prahalad, a core competency represents the collective learning of an organization that brings together knowledge, skills, and technology, resulting in the ability to execute a value-producing process at a world-class level.23 Simply put, a core competency is what you know. Common examples of core competencies include Honda’s engine design and development, McDonald’s food delivery system, and Canon’s optics and imaging expertise. Keep in mind that a core competency isn’t just something that you know pretty well; it’s competitively important knowledge embedded in an organization that results in the ability to develop and execute to a world-class standard. To determine your company’s core competencies, dig into the following three questions.
- 1. What are the areas of knowledge and skills your group possesses?
- 2. Are any of these areas currently best in industry?
- 3. Which of these areas produce the greatest differentiated value for customers?
Once the core competency or competencies have been identified, the capabilities can be established to deliver the value identified in the value proposition created in phase I of the business model. A capability is an organization’s potential for using its resources to carry out specific activities to create value. Capabilities refer to the competitively relevant activities performed with key resources. They are the purposeful configuration of resources through activities designed to drive your strategy’s success. Simply put, capabilities are what you do.
Common examples of capabilities include Walmart point-of-sales data analytics, eBay’s alignment between software developers and marketers, and General Mills’s brand management. When attempting to identify capabilities, it’s easy to fall into the trap of recording a laundry list of things you do. Keep in mind that capabilities are the competitively relevant activities—the ones that use resources in a way that creates differentiated value for internal or external customers. To determine your organization’s capabilities, start by asking the following three questions.
- 1. What are your group’s top three capabilities?
- 2. What evidence supports these as being comprised of competitively relevant resources and activities?
- 3. What are the top three capabilities of your most dangerous competitor?
Once the core competencies and capabilities are identified, they can be used in the service of customers as articulated in the value proposition. The value proposition describes the rationale behind why customers would choose this particular offering over others. While the value proposition would appear to be an obvious given for the leaders of any organization, the research shows it’s not. As authors Kaplan and Norton write, “In our research, we have found that although a clear definition of the value proposition is the single most important step in developing a strategy, approximately three-quarters of executive teams do not have consensus about this basic information.”24
The value proposition can be broken down into four pieces:
- 1. Who: Customer to be served
- 2. What: Need to be met or job to be done
- 3. How: Approach to satisfy need or fulfill job
- 4. Benefit: Customer’s advantage of using the offering
The value proposition begins with a specific customer segment and their unmet need—the job to be done. Authors Johnson, Christensen, and Kagermann have identified four barriers that prevent people from getting jobs completed: insufficient wealth, access, skill, and time.25 Starting with these barriers for jobs to be done can immediately open up the range of possible solutions that can fulfill an unmet need. This job/need mindset also factors in non-traditional competitors or sub- stitutes—solutions that are different but can fulfill the same function. For instance, beginning with a job to be done like cleaning a floor can provide innovative options ranging from the Dyson vacuum to a Swiffer to the Roomba cleaning robot. The value proposition for a Dyson vacuum might look like this:
Dyson serves middle-class and affluent customers with highly effective dirt removal from carpeted or non-carpeted floors by using bagless vacuum cleaners with cyclone technology in a stylish, see-through design, resulting in less time needed to clean.
In this example, we see the elements of the value proposition clearly identified using the following framework:
Dyson serves middle-class and affluent customers with highly
effective dirt removal from carpeted or non-carpeted floors by What
using bag-less vacuum cleaners with cyclone technology in a How
stylish, see-through design resulting in less time needed to clean.
In developing the elements of the value proposition for your offering, consider the following criteria:
- 1. Customer: The adage, “You can’t be all things to all people” applies here. All potential customers are not your target customers. Your target customer is the group that finds the most value in your offering and provides you with the best economic return. Amazon.com CEO Jeff Bezos describes the importance of focusing on the customer, “We innovate by starting with the customer and working backwards. That becomes the touchstone for how we invent.”26 Strategist Keniche Ohmae echoes Bezos’ sentiments when he writes, “Before you test yourself against the competition, your strategy takes shape in the determination to create value for customers.”27
- 2. Need/Job: Giving careful consideration to the customer’s unmet need or the job to be done forces you to shed the internally focused product/service mentality and concentrate on providing new or unique value. Using a customer’s needs as the driver for evolving your offering challenges the status-quo approach that lulls so many leaders into complacency. As former Harvard Business School professor Theodore Levitt writes, “Customers attach value to a product in proportion to its perceived ability to help solve their problems or meet their needs.”28
- 3. Approach: The approach signals to customers how your offering will provide value that other potential choices will not. It captures the method for delivering differentiated value that moves your offering to a unique position in the market. In short, the approach is your strategic direction, since it shows how you will allocate your resources to provide differentiated value to customers. Dyson offers his perspective on approach, “The root principle was to do things your way. It didn’t matter how other people did it. And so I have sought out originality for its own sake, and modified it into a philosophy which demands difference from what exists even if only to redefine a stale market.”29
- 4. Benefit: While it may seem obvious, it’s important to include the benefit of using the offering. What is the resulting customer advantage of using your offering versus other offerings for the need/job at hand? Benefits generally fall into three categories: quality (more effective); convenience (saves time); and cost (saves money). A leader needs to be able to clearly articulate which of these benefits the offering provides and quantify it if possible in terms of efficacy, time, or money. As Washington University professor Todd Zenger writes, “Essentially, a leader’s most vexing strategic challenge is not how to obtain or sustain competitive advantage—which has been the field of strategy’s primary focus—but, rather, how to keep finding new, unexpected ways to create value.”30