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Creating and Capturing Value in Complex Times Published: Saturday, January 28, 2006 By: Dr. Manuel Ángel Morales

In a previous article we stressed the point that a business model is the entire system for delivering value to customers and earning a profit on that activity.  It incorporates a set of assumptions about customers and economics, giving insight into how the company expects to compete.  The model must fit external market realities and be internally consistent.  As A.J. Slywotzky has instructed (Value Migration 1996, Profit Zone, 1999), a business model can be broken down into two core components: value creation and value capture.

Value creation is how the company creates value, which in turn depends on what activities in the value chain it is involved in.  It includes customer selection and how the product or service creates customer value (how it meets customer’s needs).  For some products, customer value is determined by the total life-cycle cost of the product, not just the initial purchase price.  This may provide opportunities for innovation.

Since a business model also encompasses which activities the company performs and which other perform, it may therefore involve a value network of suppliers and partners.

Value capture is how the company gets rewarded for the value it creates, and this value capture is itself dependent on competitive differentiation.  The normal way to capture value is through product and service fees, but as in the case of electronic commerce, there can be other profit models.  Automobile companies earn substantial profit not from the sale of cars but from the financing of car purchases.  American Airlines earns money not only from flying passengers, but also from fees received through its reservation system, which is used by travel agents and other airlines.  Retailers of consumer appliances may make more money from its sales of add-on-warranties than from the sale of appliances themselves, while manufactures of ink-jet printers often sell their printers at very low prices to ensure a stream of revenue from the sale of replacement ink cartridges.

The reflection point: strategic leaders and managers need to think beyond new products to new business models that meet deeper customer need in unconventional ways.  Sometimes a new model will destroy the old one.  One other occasion it captures and increasing proportion of the customers of the old model, reducing growth and profit for those companies that do not change.  It introduces more strategic variety into the competitive zone, thus changing customer behavior.  It is not a means of positioning against competitors, but of going around them, and some companies find if difficult to emulate this behavior because they lack the required skills and capabilities, but must of all because the are too slow to change.  Often companies are not prepared to cannibalize their actual business model.

Finally the characteristics of the strategic process are the following: 1) Analyze, without removing the need for judgment; 2) Assure speed in decision-making, as the costs of delay are raising (3) Focus work on problems and on opportunities, not on politics; 4) Foster creativity, for developing original solutions. 

n a previous article we stressed the point that a business model is the entire system for delivering value to customers and earning a profit on that activity.  It incorporates a set of assumptions about customers and economics, giving insight into how the company expects to compete.  The model must fit external market realities and be internally consistent.  As A.J. Slywotzky has instructed (Value Migration 1996, Profit Zone, 1999), a business model can be broken down into two core components: value creation and value capture.

Value creation is how the company creates value, which in turn depends on what activities in the value chain it is involved in.  It includes customer selection and how the product or service creates customer value (how it meets customer’s needs).  For some products, customer value is determined by the total life-cycle cost of the product, not just the initial purchase price.  This may provide opportunities for innovation.

Since a business model also encompasses which activities the company performs and which other perform, it may therefore involve a value network of suppliers and partners.

Value capture is how the company gets rewarded for the value it creates, and this value capture is itself dependent on competitive differentiation.  The normal way to capture value is through product and service fees, but as in the case of electronic commerce, there can be other profit models.  Automobile companies earn substantial profit not from the sale of cars but from the financing of car purchases.  American Airlines earns money not only from flying passengers, but also from fees received through its reservation system, which is used by travel agents and other airlines.  Retailers of consumer appliances may make more money from its sales of add-on-warranties than from the sale of appliances themselves, while manufactures of ink-jet printers often sell their printers at very low prices to ensure a stream of revenue from the sale of replacement ink cartridges.

The reflection point: strategic leaders and managers need to think beyond new products to new business models that meet deeper customer need in unconventional ways.  Sometimes a new model will destroy the old one.  One other occasion it captures and increasing proportion of the customers of the old model, reducing growth and profit for those companies that do not change.  It introduces more strategic variety into the competitive zone, thus changing customer behavior.  It is not a means of positioning against competitors, but of going around them, and some companies find if difficult to emulate this behavior because they lack the required skills and capabilities, but must of all because the are too slow to change.  Often companies are not prepared to cannibalize their actual business model.

Finally the characteristics of the strategic process are the following: 1) Analyze, without removing the need for judgment; 2) Assure speed in decision-making, as the costs of delay are raising (3) Focus work on problems and on opportunities, not on politics; 4) Foster creativity, for developing original solutions. 


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