Business Models: Project vs. Product

I often get asked about the difference between project and product centric business models.  Both have their place in the marketplace but require different approaches in their business model to be cost and quality efficient in serving their customers.  You rarely find a successful business running both models through the same organization.

The following is a brief description of each model.

Project Model
A project management organization is oriented toward delivering “one of” products or services that are often referred to as custom solutions. All direct and indirect costs (shared resources) are charged to the project and a profit then applied either as a function of total cost or negotiated with the customer.

Each project requires unique sales, contracting, negotiation, NDA’s (nondisclosure agreements) to protect the interests of the respective parties, communication plan, agreement on specifications and acceptance and support criteria. These important “front end” operations set the tone and success potential of the project. Consequently a project based organization will invest highly competent employees in this important activity.

The customer decision process is much more dependant upon the strategic value that the project model offers in terms of the technology or skills provided, working relationship (knowledge of the customer) and confidence in the vendors delivery capability.  Price is not usually an exclusive factor in this customer decision process.

Cost and quality control are more difficult to control due to discovering the unknowns associated with doing a custom product or service. Every custom product consists of repetitive standard processes that should be completed at known cost and quality. These common processes do not always benefit from the predictability of when they are to be performed – timing, operation sequence, length or duration, etc. – which may affect the ability of the organization to assign qualified people each and every time these “common” tasks are performed.

The key secret sauce to this model is not just cost containment, quality management and delivering on time to customer specifications but managing customer expectations and the discovery of critical “unknowns” that can affect the timely and profitable completion of the project.

Scope creep is also a challenge – features, quality, delivery time frame, etc. – in a project management model to contain customer expectations within the negotiated terms of the contract. This can also be a problem with project staff as they incorporate their own approach into the process as a result of:

  • Misunderstanding the specifications,
  • Expanded conversations with customer project people. and
  • Variability between different professionals that may work in the project that they most likely did not define or quote.

After market service can be complicated if sufficient investment is not made during the project phase to the development of service related documentation, service training materials and recruitment of qualified service organizations and personnel.

In general the project model can result in higher margins if the organization has good discipline when quoting and specification development. The risk of a project loosing money is higher due to the incurred risks of doing something that may not have been done before. Managing downtime of your professional staff between projects is also a condition that this model must account for either by load balancing the work or absorbing “bench” time (idle cost) into other projects as part of the labor overhead.

Cash flow can also be interrupted by:

  • Size of the project,
  • Delays that may interrupt progress payments,
  • Disputes over performance specifications or quality that can affect project acceptance and final payment.

Product Model
A product business model typically produces one or more products at a standard cost – material and labor with overhead applied to absorb sales and marketing, general and administrative expenses plus a markup to cover distribution discount and profit. Products are normally produced in advance of orders and placed in finished goods or sent to a distributor.

An important difference in the product business model is that much more attention is applied to repetitive operations to produce the product in order to control cost, quality and timely delivery (competitive order to delivery cycle time).

The product design process is very critical to the growth and success of the business.  Unlike the project model where the customer defines what they want; the product model produces a product that anticipate what people will find of value and choose to buy.  Consequently the design process must accurately include the necessary features and benefits that can be manufactured in a cost effective way and meet high quality standards.

Price is a more significant factor in the customer decision process when a product is purchased.  Typically other products in the market are available with similar if not equal performance attributes.  How is this resolved?

  • If one vendor can establish a unique strategic value to differentiate their product in the eyes of the customer from other like products then price becomes less significant.
  • Selecting a product with strategic value will improve the return on investment by selecting this product because the customer will perceive that they will be more strategic and more successful in their markets.

The product model usually results in a one-on-one relationship with the customer but not face-to-face like the project model.  Customers are more anonymous and larger in number.  The customer experience that results in the initial order or reorder is critical particularly in price sensitive market competition.  Therefore gathering input on customer attitudes is very important in determining product direction in terms of upgrades, new design or improving the customer experience.

Summary
In either model it is important to have a good handle on what it takes to make your business successful.

You have to know your business and your organization very well in either model – what you do well and what you don’t – in order for the business to enjoy long-term success.

Comments

  1. Thanks for an idea, you sparked at thought from a angle I hadn’t given thoguht to yet. Now lets see if I can do something with it.

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