What defines “Success” for a business?

Probably different things to different people, but financial success is perhaps the most common criterion which is reflected in the value of the company.

Where Would You Put Your Money?

Imagine that you are an investor putting money into companies to help them start and to grow. If you could rewind history and become the owner of one of these companies, which one would you pick?

A shared opportunity

Had you invested in Apple in 1995 when the stock was selling at $10 a share your shares would today be worth approximately $350 each.
Of course Apple is the stellar example and so the comparison is a little unfair, but remember that Dell had the same opportunity. It came to the market with an innovative business model but subsequently failed to maintain innovation.

Planning To Build Value

Value Comes From Cash Flow

Company value can be estimated from cash flow projections, so what is the best way to grow the cash flow? The obvious approach might seem to be to grow revenues as fast as possible and manage your costs. Strangely enough this approach can destroy value because there is a always a cost to revenue growth. You might be far better off looking for an approach that gives you an inherent advantage in the market, such as:

• Giving customers a reason to choose your product over the alternatives – Value Based Marketing Strategy
• Giving your company a competitive edge by being able to deliver products profitably – Value Based Business Model

Value Based Marketing Strategies

The strategy is based on having differential advantage, which in turn requires unique product characteristics. By definition if the characteristics are unique they do not exist in other products, even in similar form, and so the foundation of this approach is that product design must be innovative.

If you are going to avoid getting drawn into the commodity trap then
Innovation provides the means to offer unique product characteristics that have value for customers.

Value Based Business Models

If you are using the same business model as your competition it’s hard to see how you can gain a competitive advantage. Consider:

• If your competition can match your cost of goods/services, where is your advantage?
• If your competition can match your cost in terms of Sales & Marketing, R&D and G&A, then where is your advantage?
• The appeal of a product will be conditioned by the value the customer sees in a product and their budget. If the price is too high then in spite of a great appeal it’s unlikely that customers will buy it.
• If the product requires technical support and you cut the cost of the support function to save money, you might end up with less than adquate support. This can detract from the customer experience and hence reduce the value of the product in the customer’s eyes. This can become a reason for customers not to buy.
  Clearly, to compete successfully you have to create a competitive advantage in your business model.

If you are going to avoid the commodity trap then you have to innovate.

The Innovation approach

Use innovation to help you create appealing products – Value Based Marketing Strategies

Use innovation to deliver the products effectively and efficiently – Value Based Business Model

Is there a downside?

You bet!

It’s risky

It’s far safer to function in the commodity trap where you:

• Compete on price
• Use your development investment to add predictable features to your predictable next generation product.