Dunkin Donuts

Regarding the concepts discussed so far in my blog, don't take my word for it. As you can probably tell, I will use examples pulled from real companies to support the fruit stand concepts. Here is a link to an excellent article from New York Magazine. The article highlights a clear value proposition created by Dunkin Donuts. You will see the different customer value they are targeting.

http://nymag.com/nymetro/news/bizfinance/biz/features/15139/

All Things to All People

"All things to all people" is not a new statement by any stretch. There is nothing groundbreaking about it. However, this concept seems to take over business strategy and is the enemy to success.

Ray, our second fruit stand owner, seems to have put together a solid business. He focuses on many good things, and at a glance we are tempted to agree he is on the right track. However, if you look at the components of value we outlined in our previous posting, you will see he is spreading his approach too thin. He is attempting to try to deliver differentiated value in multiple areas such as low price, product leadership, intimate service, etc. This is a losing game that will result in a net loss business model.

Redesign your business to deliver focused value to select customers.

Why is the Value Proposition so Important

Why is a Value Proposition considered STEP ONE in strategic planning? Our take is simple. How well an organization creates value for a chosen customer is the number one reason for bottom-line success. A value proposition is NOT a marketing term. It is not something the biz dev, marketing, and sales guys/gals should be exclusively in charge of. The value proposition surpasses everything else inside the firm as the single most important element to driving shareholder value. Without this crucial element in place, how can the customer be expected to select your offering over others? Without this crucial element in place, how can your employees possibly know how to execute?

A value proposition shapes decisions that managers make: budgets, channels, and corporate culture. Executive teams spend weeks discussing the mission and vision of the company without touching on the most vital of all elements. Why? Our experience has shown that customer value propositions become marketing ploys. They change constantly any time a competitor does something new. Also, executive managers don't understand the value proposition concept as a key step in strategic planning. Many managers will put in place an operating initiative such as reengineering or Six Sigma and believe those concepts will create a sustainable advantage. The only sustainable advantage is decided by the customer. Market leaders don't change their fundamental customer value. They continue to improve it.

Choose Your Customer

In order to hone your value proposition and choose different components of value, you will need to clearly identify who your customer is. As we discovered with Marco's fruit stand, he has chosen a customer who is willing to pay (a little bit) more for the "best tasting fruit" in the area. When starting his fruit stand, he identified a customer demographic that preferred high-end organic fruit. This customer would drive past several other fruit stands to fill their need for the best tasting and nutrient-rich fruit. This customer looks for shops that constantly innovate and offer the latest and greatest products.

Marco excels and differentiates from the other fruit stands through his rigorous approach to delivering the best product...period. Marco knew he had a customer that would love this value proposition. He says, "Customers who are looking for a low price or lots of selection don't come here. They go down the street, and that is fine with me."

CHOOSE YOUR CUSTOMER

Honing the Value Proposition

In most of our strategy workshops, when we ask if businesses can be great at all of those components of value, we get a number of responses. We usually hear several answers that suggest you have to try to be great at all of them, and sometimes we hear answers that suggest lumping several of them together to focus on. The answer that we're looking for is the latter one. However, you have to be careful about which components you select to focus on. Some of the components, when you analyze them, are impossible to deliver together in a way that differentiates. In other words, it is very difficult to be great at offering a low price and delivering customization at the same time. Customization requires internal resources that cost money. This additional cost creates value for the customer that should be reflected in the price.

Of the components of value listed below, which ones might you be able to combine to offer to your customer in a differentiated way? In other words, which ones can you excel at?

Image
Time (Speed or Time Saved)
Price
Relationships
Performance
Convenience
Specific Solutions
Results
Hassle-Free Service
Ease-of-Use
Customization
Quality

Components of Value

As a part of STEP ONE, it is a good idea to separate many of the possible ways to create customer value. These can be referred to as components of value. Here are a few to consider:

Image
Time (Speed or Time Saved)
Price
Relationships
Performance
Convenience
Specific Solutions
Results
Hassle-Free Service
Ease-of-Use
Customization
Quality

Can a business be great at all of these? Can a business differentiate in all of these areas?

Before You Do Anything!

Before you do anything else inside your organization, define specifically, clearly, and with a rigorous approach your firm's value proposition.

This is STEP ONE in strategic planning. If you are working on a strategy and haven't completed this vital step, then you are setting yourself up for mediocrity. Yes, mediocrity. I wouldn't say failure, but to most shareholders, mediocrity is considered failure.

The first step in STEP ONE is to do some looking around. For example, look at your favorite websites, visit your favorite places to eat, and research market leaders in other industries. Look at how they create value and hone in on who their target customer is. Then look at how they are set up to deliver that value. Zappos.com, a leading online shoe store, creates value by offering low-priced shoes, huge selection, and hassle-free service. Their operating model is set up to deliver those "components of value" in a way that could be classified as excellent.

Anybody care to guess what STEP TWO is?

Chipolte

Have you ever had a burrito from Chipotle? This food chain is quite astonishing. They have taken the fast-food concept to new standards, and their shareholders are reaping the benefits. Like Starbucks, Steve Ells, the founder of Chipotle, has created a superior experience. The company's "Food with Integrity" philosophy is a truly disciplined approach in the space. They're obviously differentiating on the Best Product value proposition. They deliver the best ingredients and have focused their operations on ensuring they stay ahead of the game with regards to what they put into their foods. Additionally, they deliver on other components of value, such as speed and price, reasonably and adequately.

Steve Ells was recently interviewed on CNBC. He stated the success of the business is due to their focus on superior ingredients, a focused menu, and a casual dining experience. They don't get caught up in the next new menu innovation but rather focus their R&D on working with suppliers to improve the food quality and taste. They stick to their squirrel-like focus and constantly improve upon it.

Incidentally, the stock is up over 50% in 6 months. You could have bought it last October for $48 per share, and today it's topping $120 per share.

Ray's Fruitstand

Ray has created a fruit stand with lots of selection and keeps his prices lower than any other stand in the area. Additionally, Ray has hired several staff members and usually keeps at least two at the stand at all times to ensure every customer gets intimate attention. He is proud, as he has recruited a very knowledgeable and experienced staff. He also wants to have the best tasting fruit in the region and pays top dollar to his vendors who drop off shipments several times per week.

Sounds pretty good, huh?

Regarding Ray's internal processes and systems, he has created an environment where he and his staff focus heavily on improving the many processes they have. Additionally, they spend a lot of time working with vendors to create cutting-edge planting, harvesting, and transportation systems to ensure they have the best organic fruits available.

Ray believes he has to undercut his competitors on price since he sells a product that at times can resemble many other products. This drives him to constantly look at ways to make things cheaper and reduce his costs. At the same time, he believes that he has to take advantage of the trend of selling the latest organics with tons of selection. He sells just about every fruit you can think of.

Regarding customer service, Ray strives to train his staff to walk up and down every aisle with the customer. He believes in a very individualized and intimate approach.

3 Value Strategies

A number of best-selling authors, including Michael Porter, have talked about 2 or 3 general value propositions organizations can choose to focus on delivering to their customers. These should be the foundation of any complete strategy or strategic planning process.

Value Strategies:

1. Lowest Total Cost. 2. Best Total Solution. 3. Best Product/Service.

These Value Strategies encompass two elements:

1. The Value Proposition. 2. The Operating Model

Let's take look at an example:

Staples, the office supply store. What's their tag line? I'll tell ya..."that was easy." They build their marketing around the "EASY BUTTON." So, their value proposition is to deliver ease-of-use, convenience, and speed. Therefore, their operating model must be designed to implement and deliver those components of value in a way that makes them different and keeps the promise to the customer of making it easy.

Does this sound obvious? I bet it does. So why do companies fail to stay true to their value strategy and constantly slip into creating an operating model that looks like any generic company?

Value Proposition

In my initial post, I refer to three rules for market leading organizations: 1. Choose your customers/clients. 2. Organize the business around delivering specific value to those customers. 3. Have the discipline to stick to the first two.

As we go through the strategic planning process both in concept and in practice with our fruit stands, we will use those rules to help formulate the plan and clear up how to create competitive advantage.

The most common mistake organizations make when planning for the future is to leap past what is commonly called a Customer Value Proposition. This element should be the absolute foundation of every activity and decision within a company. I cannot emphasize the importance of the Value Proposition enough. Essentially, to clarify the term, a Value Proposition is the specific value a company proposes to deliver to a customer. For example, Staples, the well-known office supply store, offers an "Easy" button. Their proposal to the customer is to make things easy, fast, and hassle-free. So, inside an organization where you find this type of Value Proposition, you should see operations that are set up to deliver that value in a way that makes them different from their competitors.

I'll elaborate more in posts to come, but, again, the Value Proposition is the foundation, and without a disciplined approach, organizations tend to try to "be all things to all people."

What happens when a company tries to be all things to all people?