Developing a value proposition
Michael J. Lanning coined the term value proposition in his published writings related to his work as a consultant at McKinsey & Company. His work pioneered concepts in developing corporate strategies, goals, and business capabilities to customer needs. Lanning outlined his concepts in his book Delivering Profitable Value: A Revolutionary Framework to Accelerate Growth, Generate Wealth, and Rediscover the Heart of Business (Lanning, 1998).
Lanning views value from the perspective of customer experiences and therefore defines the term value proposition as follows:
In other words, the term value proposition implies an explicit relationship where targeted customers gain experiences from the products and services delivered by an organization, though bounded within an established time frame (that is, values can and do change over time).
The term also sets expectations that the customers must purchase, use, and otherwise do something the delivery organization wants instead of selecting a competitive option. A competitive option is not limited to the customer purchasing a competitor's products or services. The customer may choose to do nothing or to create the desired experience with their internal resources.
Note also that the value proposition definition does not directly address its use as a marketing and selling communications tool, though many people view the term's relevance from this perspective. Customers value the experiences they receive or not from using an organization's products and services. Therefore, the critical issue is to ensure an organization works in concert to deliver the desired experiences and not merely promote features or functions that may or may not be relevant.
Unfortunately, the term value proposition is most commonly used in a limited context by marketing and sales professionals as a statement of how to position a commercial product or service competitively. But that type of limited focus misses the point of Lanning's primary work, which is to align the organization with its corporate strategies to deliver profitable value. From this perspective, everyone within the organization plays a role in delivering profitable value.
That statement does not mean that marketing staff should not use value propositions to properly communicate their organization's value or for sales staff to use a value proposition to make sure they're selling the right experiences to the right customers. However, metaphorically speaking, there are two questions an organization must first address, outlined here:
- Who's driving the ship?
- Did the rest of the crew get on board?
Later sections of this book introduce value stream mapping techniques to identify and eliminate all forms of waste across an organization's value stream activities. But how would the value stream teams know which outcomes they need to align their activities to from a VA perspective? That is the proper goal of building compelling value propositions, accomplished by answering five simple questions.
Aligning business strategies through five questions
Value propositions answer five critical questions about how an entity plans to deliver value. These questions are listed here:
- Who or what are the target market customers?
- What is the planning and execution life cycle horizon for the value proposition?
- What do we want these target market entities to do in exchange for the experiences we deliver?
- Which competing alternatives do these customers have to obtain the desired experiences?
- Which resulting experiences do the customers receive (including price) versus the competing alternatives, assuming the customers do as we ask?
As a further note, Lanning makes it clear that resulting experiences must be specific, actionable, and comparative. He also notes that winning value propositions are trade-offs in that some experiences are inferior to the competitive alternatives. Therefore, what matters is optimizing experiences in total (Lanning, 1998, p. 62).
Creating a vision for the organization
Value propositions serve as strategic documents that help focus and integrate an entire business to communicate its purpose. A value proposition is a choice made by leadership that aligns with their organizational strategies, objectives, and mission. Most importantly, a value proposition expresses a vision that most benefits their target market customers.
In this context of value, the executive leadership is not responsible for deciding which products and services the organization must deliver to its customers, or even deciding how to create and deliver those products and services. To do so is an example of internal-facing product strategies that revolve around what leadership wants to do.
Yet the answer isn't to turn the question around and ask customers what your organization's value proposition should be. In that scenario, chasing customer opinions can quickly become futile as there are many different niches of customers who have different experiential preferences, and chasing specific customer preferences can inappropriately send the organization in the wrong direction from adding value to the broader or more lucrative target market clients.
Later, you will learn how to identify and prioritize customer needs as actionable work items in a product backlog. For now, it's essential to understand that an organization must eventually turn its attention to developing specific value-adding features and functions, but it's also dangerous to start such efforts until after the organization establishes its vision and can express it completely via its value proposition.
Successful leaders tend to be highly creative, and often visualize and articulate a vision for their businesses long before customers understand they need them. Examples include Steve Jobs and Bill Gates, who both saw an opportunity to bring the power of computers to the masses, forming Apple and Microsoft, respectively. Jeff Bezos, the founder of Amazon.com, imagined an online retail bookstore to change the way readers review and purchase books. Ultimately, Bezos dramatically changed the customer retail experience. Once he successfully figured out the online retail model for books, he imagined expanding the model to market and sell virtually anything and, in the process, became the wealthiest person in the world.
Elon Musk is another business leader who has used his creativity and brilliance to define multiple market opportunities. For example, he established Tesla, Inc. to mass-produce electric cars, the Boring Company to build underground tunnels to improve transportation in congested areas, and SpaceX to build reusable rocket ships that can land on their tails.
What's important to note with this latter example is that Elon Musk did not try to merge all these unique value propositions into one company. Organizations with multiple value propositions should create sufficient separation between disparate product lines to avoid confusing their customers.
Organizations may choose to separate product lines across departments, divisions, or companies. The degree of product-line separation is primarily dependent on the variances between their value propositions. The principle to appropriately differentiate products by their value propositions holds for both digital and physical products.
Delivering value
You learned in the previous section that successful chief executives are creative and often visualize new product ideas before prospective customers see a need for them. However, coming up with a creative idea is just the start. The organization's leaders collectively refine the initial vision by answering the five questions identified previously.
In the process, the leaders deliberate and articulate their shared vision within the value proposition document. In the end, the value proposition defines the business the organization is in, who their prospective customers are, and the types of experiences the business must deliver to gain their custom.
The title of Michael J. Lanning's book is Delivering Profitable Value. Organizations only survive when they obtain an adequate return on investment (ROI) to justify investments. Without sufficient funds, a business is unsustainable, so the profit objective is immediately apparent. The remaining part, delivering value, is equally critical. The ability to deliver value is what enables profitability.
In the context of value propositions, Lanning provides a set of expanded definitions for value and value delivery, as follows (Lanning, 1998, p. 316):
- Value: The net desirability customers perceive in some resulting experience(s) in comparison to some alternative—what those customers should be willing to pay accordingly
- Value delivery: Choosing, providing, and communicating some resulting experiences, including price
- Value delivery chain: The entities of relevance to a business—including suppliers, intermediaries, primary entities, customers, and offline entities—understood as delivering value to each other and as one interconnected set of relationships
- Value delivery focus: Understanding the business in terms of choosing, providing, and communicating a desirable set of resulting experiences to prospective customers
- Value delivery framework: The whole set of questions and corresponding actions of the primary and supporting value delivery system (VDS), understood in the context of the value delivery chain
- Value delivery option identification: Exploring a market space to discover which primary VDS is viable in contrast to conventional market segmentation
- Value delivery system (VDS): The end-to-end (E2E) business system working in collaboration and as a community to deliver a complete value proposition
This section concludes our discussion on value propositions. Before we end this chapter, you will learn about value from Agile, Lean, VSM, and DevOps contexts. But before we get to those topics, we need to take a quick look at the traditional business concepts related to creating value. This topic is addressed in the next section.
