Tag Archives: value creation

Reinvent Your Business Model: Think Customer, Aim Big, Move Fast– Kill the Old Business Model Before It Kills You

Share

Business models describe the rationale of how an organization creates, delivers, and captures value (e.g., economic, social, cultural, or other forms of value). Simply put, the business model describes– how a business positions itself within the value chain of its industry, and how it intends to sustain itself… The business model converts innovation to economic value, and spells-out how a company makes money by specifying how it’s positioned in the value chain… Whenever a business is established, it either explicitly or implicitly employs a particular business model that describes the architecture of the value creation, delivery, and capture mechanisms employed by the business enterprise– it reflects management’s hypothesis about what customers want, how they want it, and how an enterprise can organize to best meet those needs, and make a profit… Ultimately the success or failure of a company depends first and foremost on how well its business model design matches customers’ priorities… According to Joan Magretta; a good business model answers Peter Drucker’s age-old questions: Who is the customer? And what does the customer value? It also answers the fundamental questions every manager must ask: How do we make money in this business? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate price? The creation of a business model is much like writing a new story, which is a variation on the generic value chain underlying all businesses. This chain has two parts: First, associated with making something; second, associated with selling something. A business models need to pass two critical tests: the ‘narrative’ test (the story doesn’t make sense) or the ‘numbers’ test (the profit & loss doesn’t add up). However, a business model is not the same as strategy; it describes a system but they do not factor in competition… According to Michael Porter: Dealing with competition is a strategy’s job and doing better than your rivals, which means being different… Ultimately, both a good business model and effective strategy are required for business success…

business3

In the article What Exactly is a Business Model? by Vivek Wadhwa writes: Many people in business talk about business models. But, if you quizzed a random sample of these people, you’d find that they really don’t know what a business model is… The reality is that a business model is like the old saying about teenage sex: everyone talks about it all the time; everyone boasts about how well he or she is doing it; everyone thinks everyone else is doing it; almost no one really is; and the few who are fumbling their way through it incompetently. For almost any traditional business, the business model is so obvious that you don’t have to talk about it: Stores sell goods. Restaurants sell meals. Hotels sell lodging. Airlines and taxis sell transportation. Think of the business model as how you make money. How you get money out of your customer’s pocket and into your bank account. The new businesses, mainly Internet businesses, need to explain how they make money. Some businesses still get away with generating traffic, so-called eyeballs, but not money. The underlying assumption in these cases is that the traffic means a likelihood of being able to generate money– somehow, some day. And if you want to be really trendy, use the phrase ‘business model’…

In the article Kill Your Business Model Before It Kills You by Ron Ashkenas writes: Why do business leaders wait too long to modify or abandon their business models? The U.S. Postal Service, even with the constraints of its government mandate, has known for years that its traditional model was coming apart; Kodak realized that film was being replaced by digital media long before it changed its investment strategy; even a sophisticated G.E. waited too long to reorient its lighting business away from incandescent bulbs. From these cases, and others over the years, it seems to me that there are two keys for getting ahead of the business model curve, both of which apply to managers at all levels: First, remember that no business model lasts forever. The most dangerous trap that any manager can fall into is complacency. Peter Drucker reportedly once said; the biggest curse for any business was twenty years of success… Markets, environments, and technology can change so quickly that no amount of profit today guarantees success tomorrow. Years ago, during the ‘dot-com’ boom, Jack Welch required each of his businesses to go through an exercise that he called ‘Destroy Your Business.com’ in which he asked them how ‘dot.com’ competitors could possibly put them out of business. In other words, long-term success is more likely when we welcome the anxiety of competition, instead of avoiding it. The second key is to continually and actively be on the lookout for new business opportunities that can potentially replace the current model. If you only invest in refining today’s business model you’ll get locked into it. Testing, incubating, and investing in alternative models hedges against that possibility. Sure there will be failures, but with enough persistence and creativity, some viable alternatives will emerge. Nobody wants to be in the position of trying to defend a business model that has little runway left. So instead of assuming that it can’t happen to your business, take the lead in looking for alternatives– long before the competition leaves you in the dust…

In the article Your Business Model is Obsolete by Geoff Colvin writes: Innovation is the hottest word in business, but most of the discussion centers on products and services. The more profound challenge for most companies now is imagining a new business model, a new answer to the fundamental question: How do we make money? All business people face the challenge, sooner or later– even if business model has worked for decades, even if it’s working okay right now, odds are that it soon won’t be… Not since the Industrial Revolution have we seen a longer or broader list of companies whose business models are suddenly obsolete. Start with virtually all companies in the media business, or any company that relies on owning copyrights or selling advertising. Then look at how major retailers– Best Buy, Target, Wal-Mart… are rethinking their models in response to show-rooming (i.e., browsing in-store and buying online from eBay, Amazon…) The whole education industry needs a new model. So do banking, the post office, computer makers, big-pharma, music, and telecoms. They all need new business models, and almost all are having a hard time finding them: Business model innovation is a competency that doesn’t exist in most companies, since it never had to… For example, the newspaper business model worked great for 200 years; twenty generations of management didn’t have to change it. Why should we expect that today’s generation would know how it’s done? It’s the same in most companies. Even in today’s environment, your new business model will not last nearly as long as the old ones… The new normal is Amazon: It launched with an innovative model as an online bookstore. Then, it also became a marketplace for other booksellers. Then, it started offering other products (e.g., clothing, computers…) requiring far different distribution infrastructures; then, it began selling digital books, music, TV shows, and movies online; created its own branded devices (e.g., Kindle and Kindle Fire); added web services for companies; and is now investing hundreds of millions of dollars in original programming, and in warehouses for same-day delivery of groceries and other merchandise… The model is changing continually. Peter Drucker noted that ‘sloughing off yesterday’ is almost impossibly difficult, yet every organization must get used to doing, it regularly. The largest obstacles will be weak imaginations, threatened interests, culture… Business model innovation is the new essential competency: It’s hard, and it will separate tomorrow’s winners from the losers.

In the article How Sustainability is Reinventing the Business Model  by Eric Lowitt writes: Do you remember when business was not only uncomplicated, but dare I say, easy? You found customers with unmet needs, created a solution to those needs, and sold the product or service at a profit… Essentially you created a business model; identify customers, create a solution customers want, source the needed materials to put the solution together, and get it to the customers– that mapped out a path to growth… There are trailblazing companies that are rewriting conventional business thinking to overcome the challenge of sustainability. These companies view sustainability not as altruism, not as ‘do less bad’, but as an arrow in their competitive strategy quivers. They are marrying profitability with sustainability by seeking– partnerships with strange bedfellows, financing from unique sources, and ideas from the crowd. In short, these trailblazers are reinventing their business models. Companies used to set goals they were capable of achieving on their own, that is; be number one or number two; go global…To achieve these goals, companies have entered new markets, invested heavily in developing countries, and adapted to the realities of the Internet. As long as they applied their core capabilities correctly and swiftly, they controlled their own growth trajectory. But, not anymore: Trailblazers think not only bigger, but also broader when setting the paths for growth. Sustainability is the catalyst that is leading trailblazing companies to reinvent their business models…

We are witnessing a fundamental paradigm shift in business today; business dynamics have evolved beyond many of current business models… According to Carol Kinsey Goman; today’s business leaders are experiencing shock as their old business model are breaking down, and many business leaders remain emotionally attached to theories that have long since been disproved… We are only just beginning to understand what it means to move from a purely analytical ‘objective’ perspective to one that includes; subjective, intangible and emotional aspects of business… In 1982, John Naisbitt wrote in his classic book ‘Megatrends’ about the collapse of the ‘information float’. He defined information float as the amount of time information spends in any media channel– the amount of time between transmission and reception. Today, technologies such as; social media, smart phones, high-speed data mining, ubiquitously networked electronic devices… have precipitated the collapse of the customer feedback float– the amount of time it takes a vendor to understand whether their product suits the market’s interests. This collapse of the customer feedback float becomes part of the new psychology behind the new business models… The old business model was– market research leads to a defined problem that leads to a defined solution that leads to big scope development… Whereas, the new business model says; take a step back from any pre-defined ideas about a product and think about possible consumer pains, undiscovered needs… Allowing your perspective to shift from a big-plan-specific vision to a fluid-discovery-process… Seeing business growth as a series of discrete discoveries, instead of an over-reaching plan, that wires your brain for flexibility. This, in turn, will enhance creativity and ability to innovate… It’s a new way of thinking; a clearer, braver way to think… According to Clayton Christensen; one of the most compelling cases yet for the maxim: You can build a better mousetrap, but that doesn’t mean they will necessarily use it… Christensen’s argument goes something like this; innovations that disrupt markets nearly always start with a new, or newly applied, technology that offers a significant improvement over previous ones. But, great technology alone is not enough for success. To truly shake things up in a market, innovations also needs– new business models and value networks– new supply chains, channels to market… and, sometimes it can take a long time for new business models and value networks to evolve… However, it’s time for business models to get back to being actual business models: If you really want to grow your business, then base your business model on innovation and new value creation; most important–value what your customers really wants and are willing to pay…

Share

Leadership is Value Creation — Value Creation is Leadership: Connecting; Ideas, People, Passion, Results– Maker vs. Taker

Share

The role of leadership in business is value creation for all stakeholders– customers, employees, investors… as well as, recognizing that the interests of these groups are inextricably linked…

Leadership is value creation and value creation is leadership– they are inseparable, they are one and the same… they are the objective in an enterprise. According to ‘Economist’; value creation is raison d’être of any business entity. Many analysts use a broad definition of value creation, and they include; financial factors (e.g. financial statement analysis, cash flow, profit…), internal capabilities (e.g. innovation, leadership, people, brand reputation, customer base…), future potential of the company (e.g. growth, revenue forecasts, risk assessment…)… According to Paul O’Malley; there are three measures of value creation; customer, employees, and investors. Creating value in a firm is an enormously complex endeavor. Yet, despite its complexity, value creation is the objective of every enterprise, every worker, and every leader. All employees should be judged by their ability to create value. Traditionally, value creation is defined in terms of financial measures– profitability, revenue increases, cost savings… However, by considering only the financial part of value creation, it’s similar to the simplicity of the novice. It’s accurate but incomplete. Business  leadership knows that value creation is more complex than just a few financial indicators…

In the article Creating Real Value by ‘Inam Ul Haq’ writes: For decades, businesses have been involved in value creation; and many think of value as maximizing profits and minimizing costs. But, there is a limit to how much a business can maximize profit and minimize cost…  Focusing just on profits and costs is unsustainable value creation, purely because of its limitations. Too many managers have a myopic and self-centered view of value, and this is where the problem of sustainability arises. Creating only shareholder value is not sustainable. Shareholder value is not real value; it’s only a part of real value. Real value is about going beyond trade-offs, it’s about creating shared value. Shared value is composed of a set of different values bundled together, and shareholder value is just one of them. Shared value has four arms; employee value, customer value, shareholder value, social value. The current depressed global economic climate is evidence that there is too much focus on just shareholder value… this must change; we must build tomorrow on all four arms of value, and by creating shared value; it’s the best way to ensure shareholder   value.

In the article Creating Shared Value by Michael Porter and Mark R. Kramer: Companies are trapped in an outdated approach to value creation, which has emerged over the past few decades. Companies continue to view value creation narrowly; optimizing short-term financial performance while missing the most important customer needs and ignoring the broader influences that determine their longer-term success. How else could companies overlook the well-being of their customers, depletion of natural resources vital to their businesses, viability of key suppliers, or the economic distress of the communities in which they produce and sell? How else could they think that simply shifting business activities to locations with ever lower wages is sustainable solution to competition? Governments have often exacerbated the problem by attempting to address social weaknesses at the expense of business. Companies must exercise leadership to bring business and society together. The solution lies in principle of shared value, and that involves creating economic value that also creates value for society… Businesses must connect company success with social progress. Shared value is not just social responsibility, philanthropy, or sustainability, but a new way to achieve economic success. It’s not on the margin of what companies do, but at the center. We believe that it can give rise to the next major transformation of business thinking. The concept of shared value can be defined as policies and operating practices that enhance the competitiveness of a company while simultaneously advancing economic and social conditions in communities… The concept rests on premise that both economic and social progress must be addressed using value principles. Value creation is an idea that has long been recognized in business… However, businesses have rarely approached societal issues from a value perspective, but have treated them more as peripheral matters. This has obscured connections between business and social concerns. In the social sector, thinking in value terms is even less common. Social organizations and government entities often see success solely in terms of the benefits achieved or money expended. However, a growing number of companies are embarking on important efforts to create shared value… Yet the recognition of the transformative power of shared value is still in its genesis: All stakeholders must begin to realize it requires; leadership, new skills, deep appreciation of societal needs, greater understanding of the true basis of company productivity, and the ability to collaborate across profit and nonprofit boundaries

In the article How Leaders’ Values Shape Value Creation by Scott Lichtenstein writes: We’ve been practicing leadership for over 6,000 years: The Pharaohs managing the work teams that built the pyramids understood leadership. The Imperial Emperors knew how to lead the Chinese civil service that held China together for thousands of years. The Moguls of India and their administrators understood how to lead. The Roman Empire needed no leadership books or journal articles. More recently, the rise of professional management in Western economies has perpetuated a plethora of lessons in leadership. From Al Dunlop to Jack Welch; they all knew about leadership and they all had same basic approach to leadership. Their sentiment can be summed-up by stating: It’s my way or the highway.  By any measure of success this system has worked, and in so doing has created the basis of our modern world… If the ‘my way or the highway’ school of leadership has worked for thousands of years, why is the subject of leadership under such scrutiny?  A major reason is due to changing employees’ values, and in aggregate, societal values… Leadership is not solely about making people feel good, profit and loss responsibility… it’s also about the recognition that primary task of leadership is value creation. And, stakeholders are much more active today, and questioning: Value creation for whose benefit? Leadership must recognize that their values shape and influence the business culture, as well as; shaping the goals and strategies that motivate employees… By understanding the forces of values, leadership can implement their value creation strategies… further-faster throughout their organizations…

In blog Be Seed Planter not Bean Counter by Ron Eccles writes: I have met only 3 types of people: First, there are those who spend their lives, taking inventory of what others get in comparison to what they get in life: They keep score. In their mines it’s all about them, getting their fair share. For the most part they are moving through life passively, always coming up short and letting the world around them know it. This group, I call the ‘bean counter’. Second, there is the ‘seed planter’. They are by far the minority and they have discovered that to be truly rich, you learn to create value and to sow richness; wherever you go or whatever you do. When you plant enough seeds, over time, you reap a bountiful harvest… Third, there are those in the middle and they spend a lot of their time as ‘bean counter’; but they also ‘plant seed’, occasionally. Once they make the connection that being a victim (‘bean counter’) is wasted energy, then they rapidly focus their energy on being a ‘seed planter’... OK, it’s time to choose… power of choice is yours. Choose wisely, either you are; ‘seed planter–value maker’ or ‘bean counter–value taker’.

One of the best ways to understand leadership is by connecting it to value creation. For example, leaders who comprehend value take into consideration the needs and values of all stakeholders. They balance the interests of each stakeholder when making a decision– what’s best for maximizing value for everyone. This tends to contrast sharply with non-value based leaders who are overly bottom-line driven, who focus on a select group of stakeholders and fail to recognize– how decisions can have positive impact on one group at the expense of another. According to ‘exinfm.com’; leadership creates value through the ability to bring about change. Perhaps the best definition of leadership is: The capacity to make change in order to create value. One important challenge confronting leadership is bridging gaps between strategy and getting people to execute. When leadership bridges the gap, then they are able to create real value. When leadership fails to engage people in strategic execution, then value creation is difficult… As well as, recognition that without leadership, nothing changes. However, there are new emerging philosophies of leadership and value creation that are based on shared value and community… The assumption is that most people have leadership qualities that can be pooled and drawn upon for creating value… The traditional system of company-centric value creation is being replaced with a new frame of reference for value creation. This is centered on personalized co-creation of value, resulting in value that is truly unique to each individual. This new frontier in value creation is emerging because of changing role of customers and employees– from isolated to connected, from unaware to informed, from passive to active. The emerging reality of value creation is value co-creation, which is the new mandate for leadership…

Share

Business Value Creation Must be Inclusive and Aligned Around the ‘Triad’: Customers, Employees, Investors

Share

Business value: Being good enough, is not good enough give customers, employees, and investors a reason to be faithful.  ~ Graham Roberts-Phelps

The fundamental principle of business value is to ‘create value’ for all stakeholders, primarily; ‘customers’, ‘employees’ and ‘investors’. The most successful organizations understand that ‘sustainable value’ cannot be created for one group unless it is created for all. Initially, focus should be on ‘creating value’ for ‘customers’ but, this cannot be achieved unless ‘employees’ are carefully selected, developed and rewarded, however, unless ‘investors’ receive consistently attractive financial returns, resources and support won’t be available: These are symbiotic relationships. Increasingly, businesses view their fundamental purpose as innovators and creators of a continuous stream of added-value; for customers, employees and investors, in ways that integrate the interests of all three groups. Not the traditional maximize short-term earnings or beat the competition. The ultimate goal is long-term growth and consistent profitability, and ‘value creation’ is the optimal business strategy.

In the article “A Model of Corporate Value Creation” by Cengiz Haksever, Radha Chaganti, and Ronald G. Cook write: ‘Value’ is a central concept in economic theory; theories of different schools of thought have been developed around different definitions of ‘value’. However, unlike ethicists, economists are interested in the value of ‘things’. Adam Smith in his book ‘Wealth of Nations’ formalized the concept of ‘value’. More recently, in addition to economists, scholars in various fields of management and engineering paid increased attention to the concept and measurement of value and inevitably have come up with different definitions. These range from ‘value’ being simply equal to ‘price’ to more elaborate definitions. For example, Michael Porter defines value as “what buyers are willing to pay” and “superior value results when a firm offers lower prices than competitors for equivalent benefits or when it provides unique benefits that more than offset a higher price”. Most economists, however, make a clear distinction between ‘value’ and ‘price’ for goods/services. Then, our definition of value: “Value is the capacity of a good, service, or an activity, or activities of an organization to satisfy a need, or provide a benefit to a person or legal entity”. This definition of value is clearly broader than the traditional definition used in economics. It includes any type of good, service, or act that satisfies a need or provides a benefit, tangible or intangible, including those that positively contribute to; the quality of life, knowledge, prestige, safety, physical and financial security, as well as providing nutrition, shelter, transportation, income…

In an article by Paul O’Malley he says; the most successful organizations understand that the purpose of any business is to create value for customers, employees, and investors and that all their interests are inextricably linked. In today’s economy, value creation is based typically on innovation and on understanding unique customer needs. But companies can innovate and deliver outstanding service only if they tap the commitment, energy, and imagination of their employees. ‘Value’ must therefore be created for ‘employees’ in order to motivate and enable them. Employees value meaningful work, excellent compensation opportunities, and continued training and development. ‘Real’ value creation– and long-term growth and profitability– occur when companies develop a continuous stream of ‘innovation’ that offer unique and compelling benefits to a set of target customers. This means that to maintain industry leadership, a company must establish a sustainable process of ‘value creation’…

In the article “Build a Culture of Value Creation–Value-based Management” by Steve Chopp and John K. Paglia write: ‘Value-based management’(VBM) is the alignment of key organizational processes; such as, strategic planning, budgeting, compensation, performance measurement, training, and communication  centered around ‘value creation’. The organization needs this alignment and consistency to develop a culture whereby individuals, at all levels, will make decisions focused on sustainable long-term ‘value creation’. A study by ‘Haspeslagh, Noda, and Boulos’ reports that the difference between successful and unsuccessful companies is that successful companies realize that VBM is not simply about the numbers; it is about building a culture around ‘value creation’. In other words, VBM has to become a way of life, and anything less will lead to the creation of another tombstone in your company’s junkyard of failed initiatives. A Harvard Business Review (HBR) Study highlights this importance: 62% of the successful VBM companies reported training more than 75% of their managers in VBM concepts, whereas only 27% of the unsuccessful companies trained their management staffs. Realizing that VBM is a cultural change is the key to lasting change that will create sustainable improvements in shareholder value. As a company implements VBM, it will need to accomplish three steps: gain senior team commitment; customize the VBM framework; make VBM a way of life in the organization. VBM provides an organization the opportunity to significantly improve performance by aligning the entire organization around ‘value creation’…

In the article “Introducing the New Value Creation Index” by Geoff Baum, Chris Ittner, David Larcker, Jonathan Low, Tony Siesfeld, and Michael S. Malone write:  No one has yet developed a systematic means to tell us how much; say, ‘Amazon.com’ is really worth; we have no accounting system that captures all the hidden values– brand, human capital, partnerships, intellectual property– embedded within the total market valuation of a company in the new economy. When intangible assets make-up a huge portion of a company’s value, and when that value is re-measured every business day by stock market analysts and traders, the current system of financial measurement has become increasingly disconnected from what appears to be, truly valuable in the new economy. In the current economy, not only do intangible assets make up nearly all of the value of the hottest companies but they now may represent as much as half the value of the entire U.S. economy. What are the key non-financial factors in creating value for the modern corporation? The answers ranged from ‘employees’ to ‘products’ to ‘company image’.  Historically, most intangible asset measurements have been top-down: Investors theorize a contributing factor and then try to figure out how to measure it. Our approach was different. What we found was surprising. Some perceived value drivers translate into market value; others do not. Our research found that the important drives for corporate value (in rank order) were: (1) Innovation; (2) ability to attract talented employees; (3) alliances; (4) quality of major processes and products; (5) environmental performance; (6) brand investment; (7) technology; (8) customer satisfaction.  Surprisingly, for all the blather over the past 10 years about the importance of customer satisfaction, it apparently has no major effect on corporate value. Why? It may be that real customer satisfaction is now inextricably tied to innovation. If your product line is at the cutting edge of technology, your customers probably are happy; if your products aren’t state-of-the-art, then no amount of call centers and training videos is going to help.  For Internet companies, the value drivers were different (in rank order of importance): (1) alliances, (2) innovation, (3) eyeballs (usage traffic), (4) brand investment, (5) stickiness (minutes spent on Web pages). Here, the most important value driver was the number of ‘alliances and alliance partners’ and ranked close behind was investments in ‘innovation’…

In the article “Put Value Creation First” by Ken Favaro writes:  Understanding where, how, and why ‘value is created’ within your company and your markets is the best, most objective way to identify which of your activities and assets are distinctive enough to provide a platform for sustainable and profitable growth. Putting ‘value creation’ first gives companies two advantages over their competitors in driving for profitable and sustainable growth: First is ‘capital’, second is ‘talent’. In a world where nearly everyone faces abundant choices, the challenge for all businesses is to develop and sustain a uniquely attractive proposition for both customers and employees. To consistently put ‘value creation; first requires leadership skills, discipline, and perseverance. If you put ‘value creation’ first in the right way, your managers will know where and how to grow, they will deploy capital better than your competitors, and they will develop more talent than your competition. This will give an enormous advantage in building the company’s ability to achieve profitable and long-lasting growth…

In financial terms, ‘creating value’ means earning a return-on-capital that exceeds the cost-of-capital over time; or alternatively, it means earning a positive economic profit. The term ‘value creation’ can be a misnomer, but it’s simply: delivering additional value to the bottom line. However, the difficulty lies in identifying the particular ‘value(s)’ out of the plethora of intangible drivers that you have to deal with. Non-financial factors like; innovation, people and ideas are difficult to quantify, and rarely acknowledged in accounting methods— and not adequately measured, managed or reported by organisations.  According to ‘Juergen Daum and Karl Gruber’, traditionally it was sufficient to bring the ‘right product’ onto the ‘right market’ at the ‘right time’; however, the pace of technological development and the hyper-competition brought on by globalization have changed the very foundation of the formula for business success. It’s not really, what a company produces and offers on the market that determines success anymore, but rather how it goes about it. That is, how creative the company is in shaping its value-added offering, value creation model and profit model in a way that will result in an effective business model. Enabling the company to stay ahead of the competition by continually ‘creating-added-value’ for customers, employees, and shareholders… In other words, instead of placing the ‘right product’ on the ‘right market’; it is essential for a company to have the ‘right business model’ for the ‘right target group’ at the ‘right time’. A business model is the ‘right’ one as long as its; value-added offering, value creation model, and profit model fit-in with the target market conditions and provides a unique competitive advantage and relevance to its core target groups; customers, employees, investors..

 “Price is what you pay, value is what you get” ~Warren Buffett

Share