Strategic Partnership

Strategic Partnership Principle – The Truth about Competitive Analysis

Manager entrepreneurs use their causal reasoning skills to conduct a competitive analysis to help them define a unique niche for their business. This is demonstrated by the blue ocean strategy postulated by W. Chan Kim and Renée Mauborgne. In contrast, founder entrepreneurs use their effectual reasoning skills to build strategic partnerships with customers.

Founder entrepreneurs do not start with a pre-determined target market or niche in mind nor do they conduct a competitive analysis to see who else is offering similar solutions since they are not sure of their ultimate solution yet. Instead, they target a single customer and conduct a dive deep analysis on their very specific needs. This analysis helps them understand and then design a custom solution to meet that customer’s specific needs with a “one size fits one” solution. They pick the brain of their single target customer and do not focus on their competitors. They strive to develop a product or service that is so well aligned with the customer’s desires that it dislodges any incumbents that are operated by manager entrepreneurs with a “one size fits many” solution. Once the solution is established, the founder entrepreneur looks for ways to re-purpose the solution for other potential customers.

By engaging the customer in designing the solution, founder entrepreneurs invite their clients to be strategic partners as opposed to simply someone to sell to.

When I started Horizon Interactive, an infrastructure business, my first customer was Digital Equipment Corporation. As a former employee, I worked with their divisions to design our deliverables and processes based on their specific needs. Rather than performing any upfront competitive analysis, we engaged the client directly to help us design our service offering. We even educated the client to possibilities they were not aware were of based on our technical domain experience using the three T’s of challenging sales.

Having the client participate in the design was more effective than speculating on what a potential customer might want, building it, and then trying to sell it to them. Furthermore, our customer has ownership in the solution since they helped design it and were much less likely to switch to competitors in the future.

Moreover, founder entrepreneurs often secure development funds before even committing resources to a solution by having a strategic partnership with their client. In this way, the founder entrepreneur has a low level of capital outlay when developing their offering.

One of my business mentors, Ron Muns, used the strategic partnership principle very effectively when he started his company Bendata. With the personal desktop computer just making inroads into businesses, companies needed a way to track the location of all their computer related assets since they were no longer all located in a central computer lab. Ron developed a strategic partnership with three clients to develop a software application to track all their computer related assets across their businesses. Each strategic partner contributed technical specifications for the application and provided a portion of the capital needed to develop the the first product.

In the end, Muns owned the rights to the underlining software while the strategic partners got their application for a fraction of the cost of doing it alone. The software Bendata initially developed morphed several times as he added new features to the application for new customers and to achieve a better Product Market Fit (PMF). Ultimately, the product went on to become the wildly successful GoldMine Customer Relationship Management (CRM) application and spun off several other successful businesses, including the Help Desk Institute, along the way.

As a variant of the strategic partnership principle, some founder entrepreneurs leave their employer and develop a business based on their extensive industry knowledge and relationship with their former employer’s vendors and customers. This was the case with Sam Walton who parted ways with his former employer, Ben Franklin Five and Dime, and created Walmart. Another example is Arthur Blank and Bernie Marcus who left their former employer, Handy Dan Home Improvement Center, and started Home Depot.

All too often conventional business advice discourages founder entrepreneurs from practicing the strategic partnership principle of making the customer part of the design process, fearing that exposing them to a less than perfect product will diminish their brand. Instead, they advise new businesses to identify the most profitable customer segment, perform a detailed market and competitive analysis, and define and build a unique product where there is limited competition before ever getting any real customer feedback.

Is your product or service based on defining a unique product for an untapped customer segment through the use of a competitive analysis or is it based on working directly with a customer and getting them to not only bring real world requirements to your design, but getting them to perhaps even pay for some or all of it’s development as well?


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Note: this post originally appeared January 20, 2017 at www.SteveBizBlog.com.

 

Business Model

What goes into a business model?

In 1904, King Gillette, the founder of Gillette Razors, not only invented, through patents, the razor, the blade and the combination of the two but King Gillette invented a new business model. The business model, known today as the razor-blade model, has been taught in business schools and implemented in almost every industry worldwide. In this particular model, companies sell a one-time product at a substantial discount that is complemented by another higher margin product that requires repetitive purchases – DVR, DVD, Keurig, razors, etc. Thus, King Gillette built a business model that has acquired customers for over 100 years.

Peter Drucker thought, in his theory of business, the sole purpose of a business model was to create a customer. Johan Magretta describes business models as a system that fits the pieces of the business together that tell a story of how the enterprise works. In today’s competitive environment, it’s vital that businesses know and understand their particular model and how they create customers. In a 2016 PwC survey, 74% of CEOS believed there are more threats to business growth than there were three years ago. However, 69% think there are more growth opportunities today. To capitalize on these opportunities, companies need to reevaluate their model to ensure it still fits their market. If not, then the company needs to innovate because they’re likely to be disrupted by competition.

Webster-Merriam’s definition of a business model is a design for the successful operation of a business, identifying revenue sources, customer base, products, and details financing.

If you follow Clayton Christensen and Mark Johnson, you know that they define business models as “four interlocking, interdependent elements that, taken together, create and deliver value,” The four components of a business model are the customer value proposition (CVP), profit formula, key resources, and key processes.

Customer Value Proposition

Companies that can solve a client’s problem or help them accomplish a job will be successful because it’s able to add value. A CVP comprises of a target customer, product or service offering, and the problem it solves.The CVP needs to be precise, and being precise is often the most challenging to define. Without precision, the CVP will be too broad and thus, creating too much competition. A company can focus on precision by helping to address four common barriers that keep customers from finding solutions to their needs: access, skill, insufficient wealth, or time.

Four questions to ask:

1. What is the company’s target market?

2. What solution is the business able to create?

3. Does the offering bring enough value to define its precision?

4. Does the CVP address the four customer barriers?

Profit Formula

The profit formula refers to the methodology the company uses to create value for itself while creating value for its customer. The profit formula consists of:

  • Revenue model: price x volume
  • Cost structure: economies of scale, direct costs, indirect costs
  • Margin model: understanding desired revenue volume and cost structure, the business will be able to calculate the contribution needed to meet expected profits
  • Resource velocity: how fast does fixed assets, inventory, and other assets turn over, and how well does the company utilize resources to support the margin model

Key questions to ask when determining your profit formula:

1. What is the desired revenue and desired profit?

2. Does the target market support the volume?

3. What fixed and variable cost will have the biggest impact on the company’s overall cost structure?

4. How does the company measure resource velocity?

Key Resources

The key resources for a company are the people, skills, products, technology, equipment, facilities, and brand. These resources are required to deliver the CVP to its target market.

When evaluating key resources, ask the following:

1. What are the company’s core competencies?

2. Does the company have the necessary technology, equipment, and facilities in place to align with the CVP?

3. How well is the brand position in the market?

 

Key Processes

Successful companies have managerial and operational procedures in place that will allow them to scale not only the enterprise but also the value delivered. These processes may include development, manufacturing, training, planning, sales, budgeting, delivery, and service.

 

Questions to consider:

1. What process(es) does the company do that is different from the market?

2. How does the dynamics of each process affect the relationship with one another?

3. What, if any, process is proprietary, or can be leveraged, that gives the business a competitive advantage?

A business model is simple but yet complex in its functionality due to its dependency on each element. In a synopsis, the CVP and profit formula define how the customer and company will receive value, and the key resources and key process will identify how that value will be delivered. In order to determine if the company’s business model is working or not, the enterprise will need to be patient and have an ongoing evaluation of the P&L.

Matthew Feltner

 Matthew Feltner is an accomplished businessman turned strategist, consultant, and entrepreneur.

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1.   Magretta, Johan. “Why Business Models Matter” Harvard Business Review 80, no. 5 (May 2002): 86-92

2.   PwC “2016 US CEO Survey: Top Findings,” n.d., www.pwc.com.

3.   Christensen, Clayton M., and Mark W. Johnson. “What Are Business Models, and How Are They Built?” Harvard Business School Module Note 610-019, (August 2009).

4.   Christensen, Clayton M., Johnson, Mark W., and Kagermann, Henning. “Reinventing Your Business Model.” Harvard Business Review 86, no. 12 (Dec 2008): n/a.