Tuesday, January 4, 2011

Value Chain Modeling, Part 3: Value Propositions

This is a continuation of a series of articles on value chain modeling that started with “Value Chain Modeling: Part 1, Capability Analysis.”  These posts reflect current thinking in on-going work.
The primary focus of a value chain model is the delivery of value to a customer.  This identification of value is then the basis for managing and improving business operations to sustain or enhance customer value.  We have defined a value proposition as representing the collection of values offered to a customer.  We also expect to apply the same general concept to delivery of value to other stakeholders such as the business owners.
A model will link the values in a value proposition to the sources (or potential sources) of value from activities in the value chain.  Figure 1 illustrates the structure of the model linking the value proposition to contributing activities.  

Figure 1, Value Proposition Linkage to Contributing Activities
A value is something of interest to a customer that is provided to the customer as a result of a business transaction.  The value ratings expressed in the value proposition are the customer’s perception (or the enterprise estimate of the customer’s perception) of value.  This includes such things as competitive price, aesthetics, warranty, provider reputation and on-time delivery.
A value, such as on-time delivery, may be affected by multiple activities.  A value aggregation element captures the contributions of multiple activities (rows in the value element) expressed as a relevant metric, such as activity duration.  The value aggregation element computes a value chain result for the value measure.  In the case of on-time delivery, this is the sum of the durations of activities along a critical path representing time to deliver.  This metric is input to the value proposition for the associated value (a row in the value proposition element).
The value proposition applies a customer satisfaction formula for each value to each value measure.  This calculation produces a subjective customer satisfaction rating for the associated value with possible ratings of Excellent, Good, Fair, Poor or Unacceptable.  These ratings reflect the interests of the particular customer or market segment.  For on-time delivery, the rating would be based on the customer expectation for on-time delivery (a specific time to deliver) and an evaluation of the level of satisfaction achieved with the performance represented by the value chain model.
The value proposition then provides for computation of an overall satisfaction rating.  Each of the values is assigned a weight to support computation of a weighted average.
A value chain model may have multiple value propositions representing the values and ratings of different customers or market segments.  Value propositions are also represented in commercial exchanges, to be discussed in a later post.

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