Your Value Model is Dead. Now What?
We recently wrote about the "value model," a framework for defining how four key elements of your business–employees, capabilities, customers and financial performance–interrelate in a way that creates or destroys business value.
Here’s a story of how one company redefined its value model in order to achieve its growth goals. The company is the largest player and leader in a highly fragmented B2B industry. It had secured business with some of the largest and most profitable customers in its markets for nearly four decades. Its value model was well understood throughout the company: Land a few large customers, create proprietary equipment to lock in the customers, and sell them high-margin extensions and upgrades as their business needs grew.
This model worked so well for so long that the management team began taking positive business performance for granted. Instead of long-term, strategic planning, management focused on tactical steps to meet quarterly growth goals.
Then two shifts occurred: First, some of the company’s supply partners began encroaching onto the industry leader’s space with new products. Second, customers became more price-sensitive and began shopping for and finding less expensive alternatives to the company’s products. Market demand eroded, growth slowed and margins began to contract.
Because the management team was focused on short-term financial results, it failed to grasp the implications of these shifts on its business. Leadership continued to follow its traditional up-sell model but could no longer command premium prices. The sales team compensated by cutting costs, which further eroded its competitive advantage.
Earnings flattened and the company’s stock price languished. Investors pressured management and the board for change.
The leadership team eventually realized the company was operating a value model that was no longer relevant and set out to build a new one. The team aligned around a long-term goal for value growth. It refocused its customer efforts on higher growth niches and developing markets, as well as customers who valued more comprehensive solutions instead of stand-alone products.
Management also made major investments in new shop floor systems, processes and data management to improve the quality of its products and services. The management team also invested in a comprehensive initiative to change the corporate culture, emphasizing teamwork and accountability across functions.
The new value model broke the logjam of conflicting strategies that had paralyzed the company, which allowed the business to successfully implement a transformation plan and reclaim its position as a market leader.
Share your thoughts on a value model that you’ve seen work well at your company, or send us a question. Feel free to add a comment below or send us an email at firstname.lastname@example.org.
KARL STARK AND BILL STEWART | Columnist | Co-founders, Avondale
Karl Stark and Bill Stewart are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree.