Build Your Business Model Around Creating Value

One of my favourite things to do when I go into the Brisbane CBD is to drop by The Cloakroom to talk about business (and clothes) with Andrew and the guys. In one recent discussion, we talked about retail locations. This was just after they moved into their new space, which is fantastic.

One of the things that I learned is that there are a few retail spaces in Brisbane that have some of the highest rental rates in the country. Andrew said that a few of these places had been courting them, but that he was pretty happy with where they ended up.

He then said something very perceptive: “If your rent triples, what other parts of your business model have to change?

This is a critical question, and it raises a very important point about business models – all of the various parts of your business model are interconnected, and interdependent.

This is part of what makes changing a business model hard, but it’s also what makes business model innovation difficult to replicate.

Greg Satell pointed to this great talk by Matt Howell of Modernista! today, which makes a similar point. Howell is talking about how advertising can successfully incorporate digital channels into an overall strategy – an undertaking that requires fairly substantial business model innovation.

The whole talk is excellent, but I’m going to focus on slide 19, where he says:

A simple fact. Maintaining the same team structure + process while expecting a markedly different work outcome is, well, crazy.

In business model terms, when advertising integrates digital into the workflow, it creates a different value proposition, it requires a different network of support and alliances, and as Howell points out, this in turn requires different internal processes and structures.

If you change one part of a business model, the rest has to change too.

Which brings us back to The Cloakroom and expensive retail space in Brisbane. If your rent triples, what new value proposition for your customers does the new location enable? In most cases, probably none.

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Me wearing my suit from The Cloakroom, listening to John Seeley Brown and Roly Sussex

Just from observation, it appears to me as though all of the stores that are rushing to place themselves in the most expensive locations downtown aren’t changing their business models at all as their rents go up.

These shops are making a common error. Which of these statements is true:

I’m cool because I wear Brand X.

or:

Brand X is cool because I’m wearing it.

It’s funny how many people answer this incorrectly. Your brand isn’t what you tell people it is, your brand is the cumulative impact of your interactions with people. This means that good brands are good because of the value that they create for people, and it is the people that determine what this value is.

In the retail example, when a store chases the most expensive space, that’s a pretty good sign that their business model might be messed up. If where you are determines your brand, then your brand isn’t very strong, is it? If you are clearly creating value for people, then you can afford to pass on the spaces where the rent triples.

A good business model is built on a strong value proposition. Everything else follows from this. Focus on how you can create meaningful, lasting value for people, then build your business model around this idea. If you stay true to this idea, you can create a strong brand, even if you’re small, like The Cloakroom.

(Photo from Phil Long, under a Creative Commons License.)

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

Please note: I reserve the right to delete comments that are offensive or off-topic.

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8 thoughts on “Build Your Business Model Around Creating Value

  1. The concept of value proposition is not easy to grasp, it is often used to describe elements from the producer or manufacturer perspective: the product, the service, the pricing model…Often mixing value creation with value capture mechanisms.

    Nevertheless it is easier to get a consistent value proposition defintion from an entrepreneur and her team, than from a group of managers from the same company. As you argue, existent organizations often get confused on their value proposition or develop many of them, increasing complexity and losing strategic alignment.

    This could provide two insights: entrepreneurs need to find a value proposition (even if it changes with time) to pivot on while they experiment with the structure and content of their business model. Managers in mature organizations need to reasses their business models to check its alignment with the value proposition they aim to serve.

    Thanks for the post! Very insightful!

  2. Thanks for stopping by Ferran, and thanks for the comment!

    I agree with your two insights – they definitely add to the argument. Excellent points!

  3. Hi Tim,

    The other crucial part of the equation is understanding what users REALLY think about your brand, not what you think they think. Their view of your brand equity should fit with how (and where) you position it. You should then ensure your business model is built on this positioning.

    Kevin

  4. Hi Tim,
    I can’t help but ponder the Fosters / Southcorp debacle as an excellent local example of an acquisition where both the business model implications and the brand perception issues were poorly gauged.
    As suggested by Ferran, a potential advantage for entrepreneurs with an evolving business chasing strong organic growth, that continual focus on alignment is more critical to their survival than is the case for most large established businesses.
    It also makes me wonder how many Companies with acquisition based growth strategies really consider the impact of their targets on their existing value proposition.
    Thanks for the thought provoking post.
    Rohan

  5. Hi Rohan,

    That’s a great example. And I think you’re onto a very important point – it actually came up during last week’s innovation exec ed course. One of people in the course is in a company undergoing a merger, and he used the business model idea to frame some of the problems that they’ve been having in integration. So I think you’re not just right in theory, it looks like there is some support from practice as well.

  6. As regards Ferran’s comment: “The concept of value proposition is not easy to grasp, it is often used to describe elements from the producer or manufacturer perspective: the product, the service, the pricing model…Often mixing value creation with value capture mechanisms.”

    I wish to add the following about ‘value proposition’:

    Mohanbir Sawhney, McCormick Tribune Professor of Technology at Northwestern University’s Kellogg School of Management, organized his ideas on the nature of value into seven over-arching qualities.

    Value is customer-defined. Never forget that value is defined by those who use it and those who pay for it.

    Value is opaque. An important consequence of value being defined by customers is that it is very difficult to quantify.

    Value is multidimensional. A common myth in business is that decisions are made solely on functional value, that is, a product’s features and functionality. Value has two other dimensions as well: economic value-what these features and functions are worth to customers in terms of time and money; and psychological value-the emotional benefits that customers get from your products or your company.

    Value is a trade-off. Value is the perceived worth of something in relation to the total cost that customers pay for it. This definition underscores the fact that value is a tradeoff between costs and benefits.

    Value is contextual. You cannot divorce the value of [something] from the context in which it will be used … Unless you understand the end-usage context, you run the risk of creating value propositions and offerings that are irrelevant for customers.

    Value is relative. Customers never assess the value of an offering in isolation. They always consider value relative to alternatives. These alternatives may not be other products or systems, but other ways of accomplishing the same goals or doing nothing at all.

    Value is a mind-set. The value mind-set is grounded in the belief that the sole purpose of a company is to create value for its customers and to be compensated equitably for its efforts. Therefore, everything the company says and does should revolve around its customers, not its products. This is a radical shift in perspective, and few companies truly embrace this idea despite their claims of being customer-focused.

    Also refer this ‘pyramid of value’ on creating meaningful user experiences that build value:
    http://uxmag.com/uploads/noblecampbellinnovstrat/pyramid.png