One of the trickiest tasks any business faces is to align its value proposition. This involves getting to grips with the fundamental challenge of understanding who benefits from a transaction and why.
It’s a puzzle every owner and manager has to solve, especially during a company’s formative stages. Get it right, and you should flourish. Get it wrong, and you’re set for a difficult and very likely disastrous journey.
Squaring your firm’s activities with its income-generating model is at the heart of the issue. It can be hard to decipher exactly who’s gaining from your activities, who the decision-maker is and who’s paying you.
New technology businesses tend to find this conundrum particularly troublesome, as they’re often doing something genuinely novel. This partly explains why tech is sometimes described as “a solution looking for a problem to solve”.
Let me give you a few examples of non-alignment, including a tech-centric one from my own unhappy experience. We’ll then round off with some simple ideas about making this vital process a little less vexing.
Ripe for innovation?
I recently helped an entrepreneur who devised a new means of testing the ripeness of cocoa fruit grown on farms. His invention uses high-frequency radio waves to establish whether the crop across a whole estate is ready for harvest.
We saw it as a quick, non-destructive, tech-driven alternative to slicing open potentially precious produce. Unfortunately, we discovered farmers didn’t share out enthusiasm.
After months of trying to introduce the device to the market, we finally realised why it wasn’t catching on. Cocoa farmers aren’t accountable for the quality of their fruit – they’re paid based on total yield or weight.
In addition, their produce is usually combined in cooperatives before being weighed. As a result, crucially, the cost of unripe fruit is borne further down the line – by chocolate producers.
So, where did we go wrong? We asked farmers to change their behaviour, but they wouldn’t get any value from doing so. We instead needed to find potential customers with a vested interest in higher-quality fruit – say, integrated producers, running their own farms.
Right idea, wrong execution
Something similar occurred around 40 years ago in Italy, then the leading wine-producing country by volume. The industry saw it needed to raise quality levels and move into the premium bracket to prosper in an increasingly competitive market, but it took the wrong route.
It turned out that individual growers had no incentive to improve their produce beyond the most basic level of acceptability, as grapes were grown in cooperative groups paid by weight. In light of this harsh fact, Italy’s hopes of developing a reputation for fine vino soon withered on the vine.
A little more recently – a couple of decades ago – there was an American TV show in which contestants bowled for dollars. The higher their scores, the more cash they received.
The programme earned great audience feedback, yet it staggered from one channel to another before finally being cancelled. At the time, I was studying at Wharton, the world’s oldest collegiate business school, and my Professor of Strategic Marketing highlighted the series as a classic illustration of value proposition non-alignment.
The show aired on commercial TV and was watched mainly by bowling enthusiasts. Commercial TV makes money from advertising, so the key to success lay in identifying who would want to advertise to bowlers. The producers failed to recognise that no one wanted to advertise to bowlers, who were regarded as having low disposable incomes and therefore not worth targeting.
Your value chain and your place within it
What do these tales of woe tell us? The principal lesson is that it’s tough to align your value proposition if you don’t make an effort to appreciate the structure of the world around you.
This means it’s imperative to think very carefully about the benefits being transferred to your customers, suppliers and business partners. It would help if you focused on these at the earliest opportunity before you have a chance to lose your way.
It would help if you then tracked those benefits – and the money – through the value chain of your stakeholders. Doing so should help you discern whether your income-generating model is appropriate.
This needn’t be as complex as it might sound. Nowadays, it’s easy to obtain a Business Model Canvas or a Value Proposition Canvas. Each can offer a good template by way of a starting point, and devoting a short while to exploring one or the other – or both – should prove time well spent.
Try to figure out what motivates each entity on the map. Perhaps most importantly, determine precisely where you fit in – because if you can’t work that out, realistically, you can never be truly sure your business is sustainable.
David Falzani MBE is a Professor at Nottingham University Business School’s Haydn Green Institute for Innovation and Entrepreneurship (HGIIE) and president of the Sainsbury Management Fellowship.
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Nottingham University Business School specialises in developing leadership potential, encouraging innovation and enterprise, and developing a global outlook in its students, partners, and faculty. It is recognised as one of the world’s top business schools for integrating responsible and sustainable business issues into its undergraduate, MBA, MSc, PhD, and executive programmes and has unrivalled global reach through Nottingham’s campuses in the UK, China, and Malaysia. The School holds a Small Business Charter Award in recognition of its important role in supporting small and medium enterprises. It is accredited by both the Association of MBAs (AMBA) and the European Quality Improvement System (EQUIS) and ranks among the UK’s top ten for research power.