DPV Group

Those who would make a businesssucceed face crucial decisions. Most important of these, yetmost overlooked and poorly understood, is a disciplined choiceof the experiences the business will cause some intended customersto have. These are the resulting experiences a business delivers,and they are the essence of a Value Proposition.

Properly understood, businessis very much about the exploration and improvement of customers’real life experiences. The traditional concepts of “needs,requirements and benefits” share important common ground withresulting experiences. However, the differences are considerable,as the conventional concepts focus too much on what the businessdoes or on superficial, vague ideas of benefits or needs.Managers must learn to deeply understand and decisively acton specific experiences customers would most value.

Resulting Experiences in the microwave As an example, consider theexperiences that result from using a microwave oven. Userstypically cook some food in a pot in a traditional oven, thenput it in a bowl, in the refrigerator. They later might putthis food on a plate, reheat it in the microwave, and in aboutfive minutes eat it; and it probably tastes good. To cleanup, they wash the pot, bowl, and plate. Without the microwave,they would take the food from the fridge, put it in anothercooking utensil, and reheat it for about 25 minutes in a traditionaloven. The food might dry out, sticking to the utensil. Theyput the food on a plate and eat it; it may taste dried-out.

As a result of using the microwave,the user eats about 20 minutes earlier, does not wash theadditional utensil (which may be difficult), and enjoys abetter taste (not dried-out). These microwave experienceshave some consequences better than the traditional oven experiences.These come with a tradeoff – the user must shop, find space,and pay the price for this microwave. Microwaves succeededbecause the value to customers of the resulting experiences,including drawbacks and price, was in net superior to alternativeexperiences.

Peel the Onion and keep asking, “So What?”

An event can be simple, like enjoying a consistently tender chicken dinner provided by a particular brand. However, the events in an experience may be complex, with one event leading to another. Managers must learn to peel the layers of the onion until they adequately understand the true end-result consequence in that experience.

To business users in the mid-1980’s, for example, Hewlett-Packard’s laser jet printers delivered an experience consisting of a more complex series of events. Compared to dot-matrix printers, users could produce documents with darker, more contrasting blacks, and more sharply focused characters. This made users’ documents easier to read, and as a result, they communicated more effectively. If we peel the onion even further, it is reasonable to say that many users could use these more effective communications to persuade others more easily and thus could be more successful. In such a case, one must identify and describe the whole experience, including the entire series of related events as well as the end-result consequence. No one event (such as “makes blacker blacks” or “makes users more successful”) constitutes the whole experience.

Managers learning both to discover and to deliver resulting experiences to customers will find it helpful to ask the question, “so what?” If one can still ask this question about a resulting experience, the onion has probably not yet been peeled enough. There is likely a further consequence in this experience, not yet defined, which must be understood.¹

Resulting experiences to be offered and deliveredto customers are the essential core of a real Value Proposition.

To be actionable, the description of a Value Proposition must be specific and precise.So much so that this description must allow the organization to make meaningful trade-offsand set priorities throughout the functions and across all relevant resources and processes.A complete Value Proposition does not state a fuzzy aspiration; it completely and unambiguouslycommits the organization to its real delivery. It is therefore necessary to complete the choiceof a Value Proposition by specifying the context in which the organization will deliver some setof resulting experiences.

Thus, choosing a complete Value Proposition requires an organization to make a set of interrelated decisions: Who are the intended customers and time horizon for this proposition? What do we want these targeted customers to do, and what is their competing alternative (what will they do if they don’t do what we want them to do)? Against the answers to these questions, what are the ‘resulting experiences’ that these customers will derive, that is, what will happen in their business and/or life, with what value compared to the alternatives? Note that price is one of these resulting experiences.

TRADEOFFS are important elements of many winning Value Propositions. Often, Value Propositions are tradeoffs – they include some resulting experiences that are inferior to one or more competing alternatives.

The Value Delivery System,and its central element, the Value Proposition, are meantas a replacement for the central framework that still strategicthinking. That framework, first described by McKinsey &Company as “The Business System,” was widely popularized as“The Value Chain” by Michael Porter’s Competitive Advantage.”

This traditional value chain,or business system, framework sees a business, in effect,as a product-supply system. It reinforces both Internally-Drivenand Customer-Compelled thinking, as managers debate what perspectiveto use in answering the product-supply questions: “what productshould we invent, how should we make it and how should wemarket it.” The Internally-Driven schools of thought wantto answer these questions based on the organization’s resourcesand competencies. The Customer-Compelled schools want to askthe customer to answer these questions. But the faulty reasoningis in the questions themselves, not in who should answer them.

DPV changes the questions,to “what Value Proposition (that is, what combination of resultingexperiences including price) should this organization deliverand how exactly should we align all products, resources andprocesses to profitably deliver it, that is, to provide andcommunicate each resulting experience?” The value deliveryframework defines a business in different terms from the conventionalparadigm; it defines a business in the terms of value delivery.From the DPV perspective, a market-focused business is a systemintegrated around delivery of a specific Value Proposition:a “Value Delivery System” that chooses, provides and communicates a specific Value Proposition.

Choosing the Value Proposition :To genuinely choose a Value Proposition is to make the centraldecision of business strategy, for a Value Proposition definesthe precise objective of a business. If your organizationhas chosen one, then:

Most don’t Most organizations do notin fact choose a meaningful Value Proposition. In these organizations,managers in different functions, when asked, would describeentirely different Value Propositions. Some may be at a lossto describe one at all. Often, choosing the Value Propositionis justify for marketing and sales to do, once manufacturingand product development have finished with their importanttasks. In this case, a Value Proposition is nothing more thanan afterthought. In all of these instances, the Value Propositionhas not been properly chosen.

The easier path – no real choice It should be recognized that,short-term, it is politically less disruptive in most organizationsto adopt a supposed Value Proposition so innocuous as to offendno one. Also politically easy is for a small group of managersto select a specific one but not fully convey it to othersin the organization, much less enforce it as strategy. SuchValue Propositions are politically not very troublesome butalso unlikely to have a great impact.

Of course choosing as definedhere is only advisable in order to make more money. An alternativeis to trust to luck and hope for the best. A small lucky minorityof organizations does profitably enjoy customer preference,at least for a while, despite never deciding deliberatelyto pursue any real Value Proposition. Most organizations donot see themselves as randomly throwing the dice and praying.Many usually employ some Internally-Driven and/or Customer-Compelledassumptions to decide what products/services to offer andhow. This only obscures the fact, however, that they are stillnot choosing a specific Value Proposition.

Providing the Value Proposition :Once chosen, the Value Proposition must actually happen inthe life of the intended, target customer. That is, the businessmust actually provide the chosen resulting experiences tothe chosen intended customer. A word of caution: issuing copiesof the proposition to all departments (“Attention! Make thishappen. Please.”) won’t work. Rather, an organization mustexplicitly decide how it is going to provide each experience.

Example: a hospital For example, a large NorthernCalifornia hospital group articulated a proposition that focuseson obstetrics and includes among resulting experiences thenotion that the consumer should receive “superior emotionalwell-being.” This means in part that she and her family: “understandwhat’s happening, what she and they can and should do to helpthe pregnancy; and, are included in medical decisions.” Thisspecific resulting experience is provided by actions suchas:

Communicating the Value Proposition:In addition to providing each resulting experience in a chosenValue Proposition, a business must communicate these experiencesas well. The business must ensure that target customers realizeand fully appreciate the fact that doing what the businesswants them to do will allow them to actually derive theseresulting experiences. And the business must ensure that thecustomer appreciates the full value for them of those resultingexperiences. Finally, the business must give the customera reason to believe that they actually will derive those resultingexperiences. No matter how well a business provides a ValueProposition, it must communicate it to actually win customerpreference.

Of course, some businessesare more complex than others. Often, intermediaries lie betweenthe business’s organization and those customer-entities ofmost crucial importance to that business. The simplest exampleis a manufacturer selling to users through distributors, whichare thus intermediaries. Those user-entities may also themselvesbe businesses with customers as well. Somewhere at the endof such a chain may be entities who are individuals, suchas consumers. Thus, there exists a chain of interlocked entities,from the business’ suppliers through its intermediaries, itsimmediate customers and so on, to the last relevant entity.Some entities in the chain may be “off-line” in the sensethat they do not engage in buying or selling products relevantto the business but do influence players in the chain. Regulatorsor standard-setting bodies would be typical off-line entities.

Beyond supplying Products/services Up to the final entity inthe chain, the entities at all of these levels can be understoodas Value Delivery Systems. Thus, it is important to understandthese chains not simply as logistical supply chains but asValue Delivery Chains. Rather than seeing a chain as supplyingproduct from one entity to the next, managers should understandthese chains as delivering value, from one entity to the next.Often, an organization must deliver value to entities notadjacent to them on the chain and thus need other entitiesto cooperate. Every business organization needs to understandthe current and potential structures of the Value DeliveryChains in which they could compete for business.

Distribution Distracted Frequently, however, businessesin a Value Delivery Chain take a nearsighted view of the chain.Failing to look deeply into the lives of entities furtherout on the chain, they only concentrate on the immediate-customerand supplier levels. Businesses that assume they are competingin a commodity market often succumb to this myopia.

Example: Natural Gas But a product that is difficultto differentiate (usually the case in markets considered commodities)does not spell the end of differentiation. In the early ‘90’s,Chevron’s US natural gas business unit (since merged withNGC Corp) proved this point by applying the principles ofDPV. Chevron’s immediate customers were pipelines, which mayhave fed a local distribution company, which may have in turnsupplied residential, commercial, and industrial customers.Chevron’s strategy effort focused on working directly witha large number of end-users of natural gas in an effort tounderstand their business.

Consider a paper company.Who are the paper company’s customers? What Value Propositiondoes the paper company deliver to them? How do they use energyto deliver it? What could be improved about this paper company’sValue Delivery System, especially involving the use of energy?By pursuing these questions, Chevron found a range of promisingopportunities to help gas users, who reside several linksdown on the chain, make smarter use of energy. These opportunitiescalled on Chevron to refashion its manner of doing businessin some ways that required non-trivial cultural changes. Butthey point the way to potentially much more profitable businessthan would be possible by continuing to emphasize the commoditysupply of gas to the first link in the chain.

Primary Entities Understanding the identityof the primary entities – those that will be most pivotallyimpacted by the organization and can most impact its success- is far more important than understanding the desires ofthe entities closest to the organization. The paper companyand similar industrial plants were primary entities in Chevron’schain. Intel and Microsoft understood that the corporate userof PC’s, and not IBM, was the primary entity in their ValueDelivery Chains. The organization must determine its own rolein working with the other players in the chain to deliverthe appropriate Value Proposition to the primary entity inthe chain. The organization must also determine the appropriateValue Delivery actions for the entire chain to undertake.

Supporting Entities Then, the organization mustconsider how to motivate the other entities – the intermediaries,its own suppliers, important off-line entities, and othersin the chain. To motivate these other entities, the businessmay need to choose and deliver supporting Value Propositionsto them. Any manufacturer who distributes through retailers,for example, needs to choose the right Value Proposition tothe actual user of the product. For this proposition to bedelivered, the manufacturer must play a role (e.g., designing,making, perhaps advertising the product) but so must the retailer(e.g., making the product easily available). To motivate thatretailer, the manufacturer must show the retailer the resultingexperiences they will receive for playing this role. The wholetask of managing a business thus must encompass understanding,sometimes redesigning, and delivering value across an oftencomplex Value Delivery Chain.

But how should businessesdiscover and choose the resulting experiences central to theValue Propositions they should deliver, if they are to avoidbeing either Internally-Driven or Customer-Compelled?

Example: Honda becomes the motorist A team of Honda employeesis staked out in a parking lot of a grocery store. From adistance, they videotape scores of consumers performing thesame task: loading groceries into the trunk (i.e., boot) ofa car. Different cars, different consumers, different grocerybags. Back in Tokyo, Honda engineers and other managers, designingthe next model, watch these videos. Some consumers are seenstruggling to get the bags into the trunk. Some arrange theirplastic bags to keep them from tipping over. At night, somepeer into the trunk as they try to arrange bags in the backof the trunk. A few pause, rest a bag on the edge of the trunkwall, and then have to lift the lid again after it partlycloses. For a few others, the cart slowly rolls a few feetaway from the car as they load the trunk. For some, the wholeprocess goes along without a hitch.

These motorists are not telling Honda their trunk needs or their desired benefits in a trunk.They are simply living part of their car experience. Watchingthese videos, the Honda engineers and other managers vicariouslylive that experience by putting themselves in the consumers’shoes. They can see and feel what is imperfect in the consumers’experiences. Then they can envision a far superior trunk-loadingexperience for these motorists.

Virtual Videos of Day-in-the-life of Customers A tool we have found veryuseful for thinking about resulting experiences is to imaginemaking two contrasting video tapes of a day in the life ofthe customer. In practice, one does not literally have tomake a video to understand a day in the life of the customertoday. Asking the customer questions about what they do todayis often equally effective, as long as one refrains from askingthem what they want. The first (virtual) tape would capturea typical current scenario for the customer under study. Whatare they trying to accomplish, what obstacles do they encounterand how do they cope with those obstacles? The second (virtual)videotape would show what this scenario would be like if thecustomer’s business or life were much improved. It tries toconstruct scenarios that are better for the customer and thatthe organization could conceivably help bring about.

Yet, uncovering and fullyunderstanding the resulting experiences desirable to potentialor current users is not nearly as simple as one would like.Directly asking customers what they want often does not revealthe resulting experiences they would most value but ratheronly elicits their description of the attributes, featuresand price they think should be offered by a product or service.It is far more powerful to “become the customer,” that is,to study intensively how the customer lives, asking: “Whatwould it be like to ‘be’ this customer and what would I want,as an end-result scenario, if I were that customer? What doesthis imply our business ideally should do to improve the lotof this customer? Could we do that profitably and better thancompetition?”

Identifying Value Delivery Options and Market Space - Using the DPV perspective,the first step in formulating strategy is to identify andassess the value delivery options the organization may have.These value-delivery options are the possible, potential businesses– Value Delivery Systems – that the organization could pursue.Ultimately, the design and choice of the VDS’s the firm willimplement constitute the essential task of corporate strategy,as understood in terms of the principles of DPV. The firm’sValue Delivery Systems should be understood in the contextof other possible businesses, which may be related. A setof related possible businesses constitutes what we call amarket-space, which includes customers, interacting with eachother in Value Delivery Chains, and the related Value DeliverySystems possible among them.

An organization consideringone or more market-spaces should identify the value deliveryoptions in each. For a given market-space, what would theorganization have to do in order to profitably win the businessof the customers in it? There typically will be several different,though related, possible businesses in a market-space; strategyformulation should start with identifying and evaluating theseoptions. In this way, DPV advocates replacing traditionalmarket- and industry- segmentation with identifying valuedelivery options in a market-space, which is a far more usefuland focused method for developing strategy than traditionalsegmentation is.

A group of customers belongs to a value-delivery option if the business would need to deliverone particular Value Proposition, in essentially the sameway, to them. After identifying the value-delivery options(perhaps some obvious, some latent) in a market-space, anorganization can decide in which options (if any) it can profitablyexecute the required VDS better than competition.

Avoid Imitation-Inspired thinking Many organizations are overlydistracted by competitors, in the effort to “win.” They frequentlymeasure what competitors do and worry greatly if they don’tmatch or exceed these competitors’ actions. This game is easyto play without any reference to the experiences most desirablefor customers. Competitive analysis in the DPV context firstdefines the resulting experiences some set of customers wouldmost value. Then DPV asks, “Who among the possible competitorsis able to deliver the most valuable combination of theseresulting experiences to these customers?” A business winsby delivering a superior Value Proposition, not by being superiorto competitors in some other respect.

A Value-Delivery-Driven view of Capabilities The organization must thendetermine, for each value-delivery option, what key capabilitieswould be required by the VDS, what new capabilities the organizationwill have to build, at what cost and with what probabilityof success, in order to deliver a proposition superior tocompeting alternatives. This evaluation is not the same asasking, “What are our business’s core competencies today?”In some cases, more dramatic profitable growth can be attainedby building a new set of competencies, or capabilities. Sometimes,because of discontinuities in the marketplace, one has littlerealistic choice. Understanding current competencies may helpone decide what market-spaces to evaluate in the first place;but learning how to build new competencies is unavoidablein a rapidly changing world, as IBM, Kodak, GM, and countlessother companies have painfully discovered.

Different Approach than Conventional Segmentation Based on this evaluation,the organization selects the businesses it will conduct, thusdetermining the organization’s strategy in that market. Thisapproach of identifying value-delivery options differs fromthe Internally-Driven methods of segmentation commonly employed.Segmentation is frequently treated as a marketing technique,useful mainly to find ways to better sell what an organizationhas already decided to make. Value-delivery option identificationis conducted to discover what products and servicesshould be made.

Don’t Segment Backwards – Think Value Delivery First Conventional segmentationapproaches also divide customers based on variables such asdemographics, or product usage, that may or may not have anythingto do with the actual requirements of profitable value deliveryto those customers. The conventional approach to clusteringcustomers by market segmentation is thus backwards. It dividescustomers by numerous variables without knowing how they varyby the one variable that matters strategically – what VDSis appropriate to them. The DPV approach first divides customersaccording to the VDS that would be most appropriate to winningtheir business, regardless of their demographics or othervariables that may describe them. DPV then determines whatdemographic or other variables, if any, may describe the customersin each value-delivery option, as this information may behelpful to understand and reach the customers in each option.

Having evaluated an organization’svalue delivery options in a given market-space and havingchosen the estimated most profitable combination of thoseoptions, it is time to formally commit to this choice. Alldecision making devices, including business plans, budgets,asset allocations, product, human resource and marketing plans,should be explicitly, rigorously determined by the VDS’s towhich they belong or must support.

Organization Structure Implications This often also means restructuring.Though many people rightly want to avoid pointless restructurings,the simple fact is that a great many organizations are notstructured as VDS’s. Typical is to be organized by productsas business units when in fact the right Value Propositionsrequire bundles of products to be delivered in an integratedfashion. Even more primitive versions of the problem showup as functionally structured organizations where manufacturing,marketing and engineering act in no more integrated fashionthan a set of loosely related business units. Restructuringto clarify accountability and to integrate functions aroundthe appropriate Value Propositions is often unavoidably crucial.

Organizations must evaluatewhether the designed Value Delivery System constitutes a winningbusiness. The checklist below suggests questions by whichto determine whether a Value Delivery System will generatewealth for a firm and thus whether it should be implemented.

CHECKLIST FOR A WINNING BUSINESS/VDS

	WOULD THIS VDS DELIVER A SUPERIOR VALUE PROPOSITION? If delivered as designed, do we believeintended customers would conclude that the Value Propositionis superior to their competing alternatives?
	HOW MUCH REVENUE would we expect?
	DO WE BELIEVE WE CAN BUILD THE CAPABILITIESNEEDED to implement this VDS? This includes improvingexisting, and creating new, capabilities to provide andcommunicate the proposition.
	WHAT TOTAL COST would we incur? Thisincludes on-going operating costs plus those of buildingnew capabilities, and the cost of capital.
	HOW MUCH PROFIT would this business/VDSgenerate, ignoring other businesses or later timeframes?
	WHAT IMPACT ON OUR OTHER BUSINESSES,if any, would this VDS have? To what extent would conflictsor synergies from this VDS reduce/increase profitabilityof our other businesses?
	WHAT IMPACT ON LATER TIMEFRAMES wouldthis VDS have? Does it facilitate a longer-term, moreprofitable VDS, or compromise later ones?
	WHAT DISCONTINUITIES may impact itssuccess and sustainability? What changes in the environmentcould change the outcome of this VDS?
	HOW DOES THIS VDS COMPARE TO OUR OTHEROPTIONS?
	IN NET: IS THIS A GOOD VDS? Do webelieve it will, long term, generate more wealth for thefirm than not implementing it?

Far less traveledthan the Internally-Driven and Customer-Compelled paths, thevalue delivery path is for those committed to finding breakthroughprofitable growth opportunities. But one must be willing tochange, not just repeat platitudes about value. DPV callsfor fundamentally changing how organizations:

	Define their businesses;
	Adopt success-criteria;
	Structure their organizations;
	Identify, explore, assess and choosestrategic options
	Study and understand customers;
	Analyze competition;
	Develop and manage all resources,processes, and functions.

Getting Started To begin the journey, senior leadershipshould assess the extent to which their organizations understandthese concepts of value delivery, versus relying on Internally-Drivenand Customer-Compelled thinking. Leaders can begin by answering:

	Does the organization, including seniormanagement and all functional managers, know what oneor more Value Propositions the organization delivers today?Does it know the extent to which these propositions aresustainably superior and profitable?
	Has the organization deeply studied,not superficially surveyed, the business/life of importantentities in the relevant Value Delivery Chain? Does managementhave quantitatively solid insights into how these variouscustomers’ current experiences could be greatly improvedin ways the organization may be able to make happen?
	Has the organization chosen the oneor more propositions which will make up its strategy inthe near and longer term future?
	If so, is there more than lip servicerendered to these propositions? Is there a Value DeliverySystem for each proposition – a detailed description ofwhat each function, resource, and process must do to provideand communicate the proposition?
	Are the organization’s efforts toinvest in and build its future capabilities entirely focusedon these designed Value Delivery Systems?

DPV is realistic To truly understand customersand thus formulate and execute business strategy that canaccelerate profitable growth, managers must design each oftheir businesses around a disciplined choice of a winningValue Proposition. DPV offers managers guidance, in detailedpractical terms, for making it happen.