George S. Day and Christine Moorman

Profits or pipedreams: Business models make the difference

Friday Oct 1, 2010

Many companies fall prey to the “pipedream” problem. Here is what happens: A company puts forth a unique and compelling value proposition that reflects what customers want. Customers sign up to purchase. However, the company fails to design effective means for delivering that promised value (what we call the value-creating system) or making profits (what we call the value-capture system). This means quality is spotty and funds being generated are insufficient to support and sustain the business over time. Pipedreams trump profits.

To make the winning value proposition a customer reality and a profit-generating machine, the firm must create a business model that is tightly synchronized to fit the value proposition. Zara is a striking example in this regard. Posting a 68% increase in first-half net profits and staying on course to open one new store a day throughout the recession, this fashion-imitating retailer built its business model to fit its value proposition par excellence. Because fashion needed to be “fast”, as in seen on a fashion model one day and on Zara’s shelves a few weeks later, the company had to invest in a deep talent pool of designers who have their ears to the fashion ground (and to feedback from store managers), in a manufacturing capability that can produce fast, and a Fedex-style logistics system that sends all products through one of three hubs in Spain. This also means prices can be low which gives Zara its powerful value proposition. Zara also captures value because its stores don’t advertise, but use central locations to attract customers who want to imitate what Princess Letizia of Spain wore on her last outing or Beyoncé showed off during her last concert. (Clothier Inditex Sports Fatter Margins, The Wall Street Journal, September 23, 2010).

Two key lessons. First, make sure that you have a business model that supports and allows you to profit from the value proposition you offer customers. Second, build the business model after you find out what customers want, not the other way around.

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