1 Confidential - for classroom use only The Value Proposition

1Confidential - for classroom use only

The Value Proposition


The Value Proposition

A business or marketing statement that summarizes why a

consumer should buy a product or use a service.

This statement should convince a potential consumer that one

particular product or service will add more value or better solve

a problem than other similar offerings.

Companies use this statement to target customers who will

benefit most from using the company's products, and this helps

maintain an economic moat.

The ideal value proposition is concise and appeals to the

customer's strongest decision-making drivers. http://www.investopedia.com/terms/v/valueproposition.asp?viewed=1


The Value Proposition: Another View

Jill Konrath, author of Selling to Big Companies, defines a

business’s value proposition as

“a clear statement of the tangible results a customer gets

from using [its] products or services.”

In other words, how the customer will benefit from using the

specific product.

The purpose of your value proposition is to identify and satisfy an unmet need that your target market possesses.

Your value proposition should create a strong differential between you and your competitors.


Per ARINCWhen defining your value proposition, if you can clearly answer the following questions in a way

that is meaningful to your customer, you have gone a long way in developing a winning offer:

1. What do we do in helping our customers increase their revenue?

2. What do we do in helping our customers decrease their costs?

Other important questions:

─ What do we do in helping our customer increase their profitability?

─ What do we do to help our customers better respond to the needs of their customers,

to new opportunities that might be presented by their customers, or to threats?

─ What do we do to help our customers improve their productivity?

─ What do we do to help our customers improve their cycle time/speed?

─ What do we do to help our customers improve the satisfaction, retention, and growth

of their customers?

─ What do we do to help our customers improve their quality?

─ What do we do to help our customers improve the satisfaction of their employees?


Four Types of Value PropositionA value proposition is the strategic framework for a value statement. The value statement is rhetoric.

It tells the buyer why he or she should buy. A value proposition is the justification for the statement.

In order to exploit the window of opportunity, we have to position our technology in such a way that

end users are persuaded to look at factors that favor us and not the competition.

We can identify at least four logically distinct factors for value propositions, although the precise

mix used in the value proposition for any specific technology is an empirical question tied to what end

users and buyers want and with what technologies you are competing.

1. Cost leadership bases competitive advantage on price. The key here is often leveraging economies of scale.

Temporary cost leadership can be gained through first mover advantage….

2. Differentiation involves developing a family of services or features that meets divergent sets of end user needs better

than the competition. It achieves a competitive advantage by building on ‘’platform” technologies to provide the

different price/performance bundles for different customer segments.

3. Focus is a strategy based on careful attention to buyers’ and end users’ specific needs. It is the kind of approach

where close contact with the customer is maintained, so the products, processes, or services sold have been carefully

developed to calibrate with the performance requirements and desired features of a customer segment.

4. Rapid response is being the first to find a way to meet emerging end-user needs. This strategy works well in

embryonic markets and enables selling to small numbers of customers. On the one hand, the dominant design is non-

existent, and on the other, end-user needs are in flux. The number of products and/or services offered is large and

rapidly changing, so it does not make sense to lock-in, and heavily invest in, a given product or service design until the

market stabilizes. Phyl Speser, The Art and Science of Technology Transfer (Wiley: 2006).


The Value Proposition as a Positioning Statement

A value proposition in business and marketing, is a statement summarizing the customer

segment, competitor targets and the core differentiation of one's product from the offerings

of competitors. In Crossing the Chasm, Geoffrey Moore writes, "Positioning is the single largest

influence on the buying decision".

Geoffrey Moore's value proposition should answer the questions: "Why should I buy this product

or service?" as well as "Why should I do anything at all". It is a clear and specific statement about

the tangible benefits of an offering.

Here is a template for creating a value proposition, which may be referred to as a positioning

statement. Note the first portion of the value proposition asserts the value of the offering and the

second sentence asserts the positioning of that value.

1. First Sentence:

─ For (target customer)

─ who (statement of the need or opportunity),

─ the (product/service name) is a (product/service category)

─ that (statement of benefit).

2. Second Sentence:

─ Unlike (primary competitive alternative),

─ our product (statement of primary differentiation).


Alternatively…

The solution that will be developed must articulate

1. For (customers)

2. Who (statement of need)

3. The (product or service name)

4. Is a (product category)

5. That (compelling reason to buy)

6. Unlike (the primary alternative)

7. Our product (primary differentiation) Copyright 2004, Arthur A. Boni, Ph. D. All rights reserved.Arthur A. Boni, Ph. D.John R. Thorne Chair in EntrepreneurshipDeputy Director, Donald H. Jones Center for Entrepreneurship Tepper School of BusinessCarnegie Mellon Universitywww.ece.cmu.edu/~ntolia/elunch/docs/Screening_Guides-1.ppt


By Way of Summary: NABC

Per Carlson and Wilmot:

1. What is the important customer and market Need?

2. What is the unique Approach for addressing this

need?

3. What are the specific Benefits per costs that result

from this approach?

4. How are these benefits per costs superior to the

Competition’s and the alternatives? Curtis R. Carlson and William W. Wilmot, Innovation, (Crown Business: 2006).


Value Proposition Designby Alexander Osterwalder, et. al.

(John Wiley and Sons: 2014)


The Business Model Canvas and Market Fit


The Value Proposition Canvas

http://accel.no/value-proposition-canvas/


http://steveblank.com/2013/12/02/when-

customers-make-you-smarter/


http://steveblank.com/2013/12/02/when-

customers-make-you-smarter/


Strategy Canvas

http://strategycanvas.org/#/edit/3qar6Y2cyb


Ten Questions to Assess the Strength of the Value Proposition

1. Is it embedded in a great business model?

2. Does it focus on the most important jobs, most extreme pains, and most essential

gains?

3. Does it focus on unsatisfied jobs, unresolved pains, and unrealized gains?

4. Does it concentrate on only a few pain relievers and gain creators but does those

extremely well?

5. Does it address functional, emotional, and social jobs all together?

6. Does it align with how customers measure success?

7. Does it focus on jobs, pains, or gains that a large number of customers have or for

which a small number are willing to pay a lot of money?

8. Does it differentiate from competition in a meaningful way?

9. Does it outperform competition substantially on at least one dimension?

10. Is it difficult to copy?Osterwalder, Alexander; Pigneur, Yves; Bernarda, Gregory; Smith, Alan (2015-01-23). Value Proposition Design: How to Create Products and Services Customers Want (Strategyzer) (Kindle Location 2194). Wiley. Kindle Edition.


The Value Chain


StrategyStrategy is about deciding

1. what to sell and to whom so that sales and cash flow targets can be met

2. what activities need to be performed to produce and deliver the selected products and services to the selected customers

3. what resources need to be available and what infrastructure needs to be in place for these activities to be performed efficiently and for efficiency to improve over time

And then strategy is about

─ effectively and efficiently carrying through on goals and objectives

─ constantly evaluating the results of strategic efforts and flexibly making adjustments as required in the face of changing circumstances

Good strategic management requires

─ environmental scanning

─ internal analysis


The Value Chain

For Porter, competitive advantage is not

about trouncing rivals, it’s about creating

superior value. Moreover, the term is both

concrete and specific. If you have a real

competitive advantage, it means that

compared with rivals, you operate at a

lower cost, command a premium price, or

both. These are the only ways that one

company can outperform another. If

strategy is to have any real meaning at all,

Porter argues, it must link directly to your

company’s financial performance.

Anything short of that is just talk. Joan Magretta: Understanding Michael Porter: The Essential Guide to Competition and Strategy (Harvard Business Review Press: 2011)


The Value Chain and Competitive Advantage

To better understand the activities through which a firm develops a competitive advantage

and creates shareholder value, it is useful to separate the business system into a series of

value-generating activities referred to as the value chain. In his 1985 book Competitive

Advantage, Michael Porter introduced a generic value chain model that comprises a

sequence of activities found to be common to a wide range of firms. Porter identified primary

and support activities.

The goal of these activities is to offer the customer a level of value that exceeds the

cost of the activities, thereby resulting in a profit margin.

It is in these activities that a firm has the opportunity to generate superior value. A competitive

advantage may be achieved by reconfiguring the value chain to provide lower cost or better

differentiation.

The value chain model is a useful analysis tool for defining a firm's core competencies and

the activities in which it can pursue a competitive advantage as follows:

1. Cost advantage: by better understanding costs and squeezing them out of the value-

adding activities.

2. Differentiation: by focusing on those activities associated with core competencies and

capabilities in order to perform them better than do competitors.http://www.netmba.com/strategy/value-chain/

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Managing the Value Chain

Companies have a choice

– They can integrate and execute most activities themselves, or

– They can specialize and focus on a narrow range of activities,

relying on suppliers and partners to provide other elements of the

value added

Companies ought to control any activity or combination of

activities within the value chain that drive performance

along dimensions that matter most to customers

The golden rule: integrate to improve what is “not good

enough” and outsource what is “more than good enough”Clayton Christensen, Seeing What’s Next, (Boston: Harvard Business School Press, 2004)


The Value System…organizations are elements of a value system or

supply chain. Hence, value chain analysis should

cover the whole value system in which the

organization operates.

Within the whole value system, there is only a certain

value of profit margin available. This is the difference of

the final price the customer pays and the sum of all

costs incurred with the production and delivery of the

product/service (e.g. raw material, energy etc.). It

depends on the structure of the value system, how this

margin spreads across the suppliers, producers,

distributors, customers, and other elements of the

value system.

Each member of the system will use its market

position and negotiating power to get a higher

proportion of this margin. Nevertheless, members of

a value system can cooperate to improve their

efficiency and to reduce their costs in order to achieve

a higher total margin to the benefit of all of them (e.g.

by reducing stocks in a Just-In-Time system).

www.themanager.org/models/ValueChain-Dateien/image002.gif&imgrefurl


Example: A Value System

Jakki Mohr, Marketing of High-Technology Products and Innovation, (Prentice Hall: 2001)

Suppliers

Manufacturers/OEMs

End Customers

Agent/Broker/Distributor

Distributor/Broker

Resellers

Resellers

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Multi-Level Multi-Player InnovationThe difficulty of defining technological innovation reveals the great diversity of its forms. To expose the nature of

this diversity and understand its implications, I first, paradoxically, need to simplify. Therefore, I divide the

many forms of innovation into two categories, new products and the new know-how upon which they are

based, and further stratify both know-how and products into three levels, as I explain in the following.

For any new product, the underlying know-how ranges from high-level general principles, to mid-level

technologies, to ground-level context-specific heuristics or rules of thumb. In microprocessors, for instance,

high-level know-how includes the laws of solid-state physics; mid-level, the circuit designs and chip layouts; and

ground-level, the tweaking of conditions in a specific semiconductor fabrication plant to maximize the quality and yield

of the microprocessors produced.

Individual forms of technological innovation, especially at the high level, usually have limited economic or

commercial value unless they are complemented by lower-level innovations. A breakthrough in solid-state

physics has value in the semiconductor industry only to the degree that it is accompanied by the development of new

microprocessor designs; and the new designs may be useless without the development of plant-level tweaks for large-

scale production of the microprocessor. Similarly, realizing the value of a new high-level microprocessor may require

the development of new mid-level motherboards and ground-level computers. At the same time, high-level innovations

often provide the building blocks, and a reason for lower-level innovations. A breakthrough in solid-state physics may,

for instance, provide the motive and the means for developing new microprocessor designs, and a new microprocessor

may stimulate the development of new motherboards and computers. In other words, the different forms of

innovation interact in complicated ways, and it is these interconnected, multilevel advances that create

economic value. Amar Bhide, The Venturesome Economy (Princeton University Press: 2008).

Confidential – For Classroom Use Only

Multi-Level Multi-Player Innovation

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Know-how:

High-level

Mid-level

Ground-level

Microprocessors

Solid state physics

Circuit designs

Management of specific fabrication

plant

Motherboards

Signal processing and power systems

theory

Placement and routing of board

components

Production plans and schedules

Laptop Computers

Concept of clamshell design

Model blueprints and bill of materials

Selection and ongoing

management of suppliers

High-level

Mid-level

Ground-level

Amar Bhide, The Venturesome Economy (Princeton University Press: 2008).

Confidential – For Classroom Use Only

Multi-Level Multi-Player Innovation

25

Know-how:

High-level

Mid-level

Ground-level

Coffee Beans

Plant genetics

Formula for mixing fertilizers

Harvesting schedules for a

plantation

Coffee Roasters

Laws of thermodynamics

Design of roaster drums

Roast operators’ “master taste”

Cup of Espresso

Principle of high-pressure brewing

Knowledge of optimal pressure and fineness of coffee grinds

“Pulling a Shot” on a specific machine

High-level

Mid-level

Ground-level

Amar Bhide, The Venturesome Economy (Princeton University Press: 2008).


Stakeholder Analysis


Stakeholder AnalysisNo innovation was ever commercialized without the support of some stakeholders and the

forbearance of others

A risk-benefit ratio ultimately drives the adoption of any new innovation, and the risk-benefit ratio must be calculated on a stakeholder by stakeholder basis across the value chain

A stakeholder is any person or organization, who can be positively or negatively impacted by, or cause an impact on the actions of a company.

Stakeholder analysis has the goal of developing cooperation between the stakeholder and the project team and, ultimately, assuring successful outcomes for the project.

Stakeholder analysis therefore provides a detailed understanding of the political, economic, and social impact on interested groups, the hierarchy of authority and power among different groups and the actual perceptions of among different groups, all of which are important for the project managers to consider.

Use a stakeholder analysis to:

1. identify (and categorize) people, groups, and institutions that will influence your initiative (either positively or negatively)

2. anticipate the kind of influence, positive or negative, these groups will have on your initiative

3. develop strategies to get the most effective support possible for your initiative and reduce any obstacles to successful implementation of your program.


Reprise: Technology Commercialization Subprocesses

Stage Imagining Incubating Demonstrating Promoting Sustaining

Definition Where the prospect for a technology is combined with potentially attractive markets

Where paths to commercial viability are defined

Where a product is built

Where customers adopt the technology

Where the product is improved to meet market requirements

Expected Outcome Exciting, preferably unique technology-based idea linked to a market need

Definition of idea’s technical feasibility, commercial potential, and plan for taking it further

Incorporating the technology in attractive, market-ready products and/or processes

Getting product or process rapidly accepted by various market constituents

Generating long-term value by entrenching and expanding use of the technology and retaining a lead in it

Completion Points Technical proof of principle, filing key patent(s), preliminary vision for the technology

Preparing a business case and plan for commercialization, crafting the technology or product

Launch of commercial version of product or process

Capturing a profitable share of the market quickly

Adequate return on investments made in technology and infrastructure for commercializing it

Stakeholders Peers, colleagues, research partners, media

Investors, development partners, potential users

Potential customers, suppliers of complementary technologies, internal colleagues in other functions, business partners

Customers, end-users, opinion leaders, market constituents

Old and new customers, business partners, management

Vijay Jolly, Commercializing New Technologies (Harvard Business School Press: 1997).


Why and How Innovations Get Adopted: A Tale of Four Models

Richard R. Nelson, et. al. (Industrial and Corporate Change, Vol. 13, No. 5)


Introduction

Scholars studying innovation have proposed several different models of the

adoption process. This essay identifies two broad dimensions which differentiate

the principal models:

1. the strength of the evidence regarding an innovation’s efficacy and

2. the extent of increasing returns.

In this essay, we propose that differences across these dimensions map to four

models of the adoption/diffusion process prominent in the literature.

…we will be limiting our analysis to innovations that can be adopted by users

operating in contexts where there are some compelling objective criteria for good

performance, at least at a high level of abstraction, over which the potential user

community has only limited control.


Two Broad DimensionsWithin this general context, we propose that innovations differ along the two broad dimensions we

described above.

To recapitulate, the first is the ability to generate widely persuasive evidence on an innovation’s actual

merit, which may be influenced by the clarity of the performance criteria, or the ability to get strong feedback from

experiments, or both. We argue that an important variable here is the extent to which an innovation can be

tightly specified and replicated by other users, so that everybody is evaluating the same thing. We propose

that the adoption process for innovations that are easy to specify and can be replicated accurately differs

significantly from those that are somewhat amorphous and hence difficult to evaluate in a generally relevant way.

Also, the ability to perform experiments to generate data on performance, or in the course of use, is also essential

to getting sharp feedback, though this depends in large part on how tightly bound the innovation is.

The second dimension across which innovations differ is the extent to which the benefits of adoption are

affected by the number of users who have previously adopted. In some cases, innovations become more

compelling to potential adopters as the level of previous adoption increases; in the language of economists, there

are ‘network effects’ or ‘dynamic increasing returns’. One important source of dynamic increasing returns can

come from R&D or learning by doing and using that is stimulated by increasing purchases or use. Another source

is development and implementation of complementary activities. And as some sociologists have suggested, the

development of norms and expectations can also create dynamic increasing returns. Interacting these dimensions

yields four different models….


Four Models

Interacting, these dimensions yields four different models….


Model I

The basic assumption here is that the criteria of merit are sharp and

unambiguous, and the decision makers in question sooner or later get solid

objective information about just how the innovation does in terms of these.

The system learns objectively, based on results from ex ante experimentation,

online performance, or the experiments or experiences of users.

The choices made by the various users themselves do not influence directly

the value of the innovation (which distinguishes this model from the one we will

present next), but they do provide information to others about the performance of

an innovation. Experts and their opinion can influence the speed and range of

information dissemination, and hence the time path of diffusion. However,

they cannot influence whether the innovation is ultimately accepted or not.

Most of the economic theory about the diffusion of innovation fits this mold. So does

much of the writing of technological historians, like Walter Vincenti (1994), who see

the evidence regarding the economic performance of the technological innovations

they are studying as clear and objective, at least in the long run.


Model IIThis second model differs from the first in only one regard, but it is an important one. There are

‘dynamic increasing returns’, i.e. the number of potential users who actually adopt the innovation

affects its performance.

Under the standard version of this model, when the innovation is first introduced, potential users are uncertain

regarding its value, though after a period of time technical merit becomes clear. But innovations that are

adopted are increasingly attractive, because of various types of network effects. If there is an

alternative to the innovation in question, say prevailing practice or a competitive innovation (which also would

have been subject to these increasing returns), the acceptance rate of the innovation in question when it is still

in primitive form can influence long-run patterns of adoption. Paul David’s (1985) work on the QWERTY versus

DVORAK keyboards, and AC versus DC, fits this mold. In these cases, according to David, relatively inefficient

technologies initially got chosen due to transient historical events, but were ‘locked in’ because of the

presence of dynamic increasing returns.

Note also that in the first model, opinion leaders could influence the rate at which an innovation gets accepted,

but not which alternative ultimately was chosen. In this second model, on the other hand—since the

actual distribution of early choices matters—if professional opinion can tilt the process one way or

the other early on, then that may control which technology actually comes to dominate. Ultimately, the

dominant technology holds its place because of its superior performance, though it may be inferior to what the

alternative technology would have looked like if it were chosen early on.


Model IIIThis model differs from the first two in that it is difficult to get sharp feedback about

performance that all actors interpret similarly. This could be because the objective criteria

leave considerable room for disagreement about the details. It could also be because the

innovation itself is amorphous, and hence its particular implementation differs significantly

from case to case. In these cases, diffusion can be driven by factors other than technical

merit, the focus of the ‘social construction of technology’ literature.

Socially constructed diffusion—i.e. the widespread and enduring adoption of a

technology with unclear or questionable technical merit—can occur in the presence of a

particular kind of dynamic increasing returns. If a critical level of adoption of such a technology

is achieved and if those who do not adopt are penalized (e.g. by the withdrawal of certain

services or inputs that they need in order to survive), the technology could get ‘locked in’. (For

example, bank credit may be more difficult to get if one is not an adopter, or innovators may

find it easier to attract and hold top-flight personnel.)

This means that, as in Model II, initial stochastic factors, or the position taken by

opinion leaders, can strongly influence the long run. In some versions of this model, the

key variable is the basically ideological, or politically motivated, judgements made by opinion

leaders. If that judgement is favorable, the snowball begins; otherwise it does not. But in

contrast with Model II, the resulting lock in here is the result of sustained judgements of

opinion leaders, rather than any objective criteria.


Model IV

What has been called the ‘fads’ model in the management literature is

like Model III in that objective criteria plus evidence of efficacy in

terms of those criteria do not provide strong guidance regarding

whether or not the innovation should be adopted. However, unlike

Model III, where social construction creates a bandwagon, it does not

in the ‘fads’ model, for two reasons.

First, even if a significant number of potential adopters do adopt, the

sanctions on others for not adopting are weak.

Second, opinion that the innovation is a good one may not be durable.

Thus one can see widespread acceptance of an innovation, but only weak

pressures for potential users who have not adopted to do so. And the

broad force of opinion may be fickle.

Documents

1 Confidential - for classroom use only The Value Proposition