Phase II of the Business Model: Value Delivery
At its core, a business is a value delivery system. Once you’ve decided how to create value as described in the value proposition, you must then determine how to go about delivering that value. The deliver phase of the business model begins with the value chain, a useful tool in visualizing how an organization delivers value to its customers. While the value proposition takes an external view of value from the customer’s perspective, the value chain takes the internal organizational view. It graphically describes the business unit or group’s configuration of capabilities (resources and activities) to design, produce, market, sell, and service offerings for customers. Introduced by Harvard Business School professor Michael Porter in his book Competitive Advantage, he writes, “The value chain disaggregates a firm into its strategically relevant activities in order to understand the behavior of costs and the existing and potential sources of differentiation. A firm gains competitive advantage by performing these strategically important activities more cheaply or better than its competitors.”31
Once the core competencies, capabilities, and value proposition have been crystallized, the value chain can be created to show how they will be employed in delivering value to customers. The value chain describes how you do it. It visually shows the sequence of activities that transform inputs such as raw materials and resources into the outputs that comprise the offerings to customers. The disaggregation of value by activity also serves to shine light on the areas most responsible for contributing to the differentiated value of the offering. In markets where competitors have similar capabilities, advantage can sometimes be had by altering the configuration of activities in the value chain. While competitors can more readily copy surface elements of your business including features and attributes, it is much more challenging for them to mimic all of your activities in their specified order that deliver value to customers.
Figure 1.6 provides a general value chain for the executive education industry. The five primary value-chain activities are creation, design, marketing, delivery, and support. Three examples are provided to highlight the different approaches to providing executives with business education. The examples demonstrate the various ways to configure activities in order to provide a certain type of value to a particular customer segment. The offerings range from customized content delivered in-person to intact teams to more general content delivered virtually to individuals.
The different approaches will appeal to different customers based on their specific needs and budget. One approach is not inherently better than the others. They each offer a different mix of value. Some executives may prefer learning content with their intact team at their
Figure 1.6 Value Chain
company headquarters to speed up the practical application of knowledge and skills to their current business issues. Other executives might prefer working alongside managers from other industries to stimulate new thinking while enjoying the prestige of a highly recognized business school. Still others may prefer learning online at their own pace for a fraction of the cost of the other two options. Working through the value-chain exercise for your business will ensure that the chosen approach is optimal based on your core competency and capabilities relative to the needs of the target market.
The final aspect of the delivery phase of a business model is the channel. The channel is the access point for customers to obtain your offerings. It represents the conduit between your offering and the user. The channel is where you offer it. Effective channel selection means customers have the opportunity to see and purchase your offerings. Poor channel selection may mean potential customers never see— and therefore never purchase—your offerings. There’s a rich history of superior products and services that disappeared into the Bermuda Triangle of business because of the inability to manage the channel.
One such example is the Michelin PAX System. Unlike traditional tires, which become useless in the event of a puncture, the revolutionary PAX run-flat tire can be driven flat for 125 miles at speeds of 55 mph. When Michelin began developing the tire in 1992, it believed that this innovation would be as big a win as the introduction of the radial tire 50 years earlier. The company spent years and untold riches developing the tire, which it trademarked under the PAX label.
However, when the tire was finally introduced in 1997, consumers couldn’t buy it. The tires connect to a vehicle’s electronic system, so they could be used only in vehicles designed to accommodate them. Since electronics are added in when new cars are designed, Michelin had to wait until a willing manufacturer’s design window opened. At the time, an average auto manufacturer took three to four years to move a car from design to volume production. So, even if the tire was fortunate enough to be designed into a car model that enjoys market success, Michelin’s best case was that volume sales would begin three to four years after the tire was introduced. As it happened, even the few willing auto manufacturers with whom Michelin coordinated design cycles initially offered it as an option on only a very limited set of models.
Michelin needed to consider other intermediaries in the channel configuration as well, all of whom needed to buy into the concept before end customers could weigh in with their purchase decisions. Specifically, repair shops would need to invest in new equipment and training, and dealers would need to understand and support the PAX system. More than a decade after its introduction, Michelin’s PAX system tires were standard equipment on only a handful of car models sold in the mid-2000s.
Although the run-flat tire hasn’t taken off in the commercial channel, it did meet with success in the defense market, where it is used as a substitute for track treads in vehicles such as the U.S. Army’s Stryker troop carrier. With fewer intermediaries, more concentrated buyers, and greater perceived benefit, the military channel was a better fit, at least in the short run. The example serves as a reminder that failure in one channel is not necessarily a death knell, but can also be a wake-up call.
The potential channels for your offerings include both direct (e.g., internet, sales force, retail outlet) and indirect (e.g., manufacturer’s representatives, wholesalers, outside retail stores) options. Determining the appropriate channel mix should take into account the current level of customer awareness for the offerings, internal capabilities, volume sales goals, requisite profit margins, and the threshold level of support and service desired. Use these three questions to get started:
- 1. What are the pros and cons of direct versus indirect channels for your offerings?
- 2. Which channels provide you with the greatest combination of access to target customers and profit margin?
- 3. How can your core competencies and capabilities be used to optimize these channels?