How To Create A Value Based Business Model

The other component in optimizing free cash flow is the “business model”. For our purposes the term “business model” is used to describe how the business can profitably deliver the product with its differential advantage. An effective business model has to minimize costs while at the same time remaining effective.

Designing a business model is at least a four stage process

Define what is needed

For example if you were developing hardware products that were simply “follow the leader” you would need an agile development team. At first it may seem that keeping engineering costs low by paying low salaries would be the appropriate way to increase profits but very often mistakes in development lead to delays in getting the product to market and hence to lost revenue. You might build far more value by getting the best engineers you can. Defining what you really need is a very important step in the process of designing a business model.

Design the business so that you can deliver the product profitably

Since you are offering something that no one else offers you have to be able to deliver it in a profitable manner. Offering a car that is completely safe has no differential advantage if the cost of the building the car is US$1M. This highlights a problem found with many start up companies, while the product idea is good the founders do not know how to make a profitable business from the idea.

Look for Opportunities To Innovate

Once you know what you need you can look for opportunities to innovate. Easier said than done perhaps because it means you have to be as creative about the business model as you are about the product. While we don’t have any studies on the subject it would appear that innovation in business models is very much harder than innovation in products. The reason for this assertion is that you don’t see too many new business models.

Integrate and Evolve

Strategies are not formed and then simply executed ad infinitum. What is more likely is that an initial strategy is implemented and then it evolves over time as management learn what works and what doesn’t. From a practical viewpoint you cannot separate the Marketing Strategy from the Business Model. So the expectation must be: The Marketing Strategy and the Business Model are developed in conjunction so that they are tightly integrated Both elements evolve together with time, this is part of good business navigation

Isn’t This All Obvious?

It may seem that all companies think hard about their business models and diligently try to optimize them and yet there is some evidence to suggest that is often not the case.

Why Didn’t We Do This Before?

Consider this simple case in health care. Its so simple its almost agonizing! But before we start you might ask what has healthcare got to do with value delivery? The answer depends on how much value you put on a human life.

It turns out that one of the biggest reasons that people die in hospital had nothing to do with the reason they went to the hospital in the first place. Instead they pick up a deadly infection in the hospital.

A new practice has emerged, that of attempting to control infections by the use of what we might term quality techniques. Dr Peter Pronovost wrote an interesting book on how infections could be reduced by following a simple checklist procedure - Safe Patients, Smart Hospitals: How One Doctor’s Checklist Can Help Us Change Health Care from the Inside Out When hospitals started following some basic quality practices they were able to significantly reduce incidence of deadly infections.

Now if we all wanted to play monday morning quarterbacks we might hit our heads and exclaim how the hell could management have let this situation go on for so long before they got around to implementing quality practices?

In reality though we must assume that most of the people who run hospitals are well intentioned, well educated individuals so its unlikely that this was done with malice.

Its more likely that it just never occurred to them. I suspect their “culture” didn’t encourage cross discipline investigations and curiosity.

Similarly we might ask about a company, what are they not doing about improving their business? Is it possible that there are obvious, and perhaps less than obvious, actions they could be taking that would improve the performance of their business?

As a footnote to the subject of patients picking up deadly infections in hospitals we now see innovations being applied in this field.

Business Model Innovation Examples

Business Model Innovation Examples

• Dell computer redefined distribution in a way that reduced costs but at the same time gave customers improved customer technical support and customer service thus creating a differential advantage.
• FedEx pioneered the single hub system creating a system optimized for overnight delivery. At the time of its inception the differential advantage was overnight delivery.

After note about Business models

Although we have created a distinction between the market strategy and business model the purpose is only to help create a framework to think about marketing and operations. In reality it may be hard to separate the two. A marketing strategy might rely heavily on providing high quality customer support. Faced with the high cost of providing local support in Silicon Valley a company might decide to outsource the customer service function to an offshore company. This would be a decision based on efficiency. However, if the offshore company provides a less than acceptable level of service, for instance there are language difficulties, the solution will be ineffective. There’s been evidence of companies moving technical support functions back to the US.

Clearly to compete on the dimension of customer support the company will have to innovate if they are to be efficient and effective. In this case making the marketing strategy effective relied on innovation in the business model.