In this post, we’ll look into how, over the last few years business frameworks focused on finding value in a firm evolved from the value chain to Porter’s 5 Forces, to the Business Model Canvas. Each model provides a different angle or insight into the process through which firms are able to develop their unique value propositions.
As a business consultant, whenever I study a new organisation, one of the biggest hurdles to overcome is actually figuring out how a business can be visualised or to some extent, simplified. This is because many times businesses can be made more efficient if one understands where the organisation creates value, and where the organisation stacks up cost.
Sometimes the difference between the two is not easy to find, as it’s somewhat nuanced. However, there are plenty of business frameworks that help us in doing that. Over the last decades, however, these models have evolved, focusing on different types of processes or assets. Traditionally, one of the first attempts to break down organisational processes was the Value Chain. Later on, as new perspectives on value creation emerged we had Porter’s 5 forces, and finally, in the first years of the 2000s we had yet another paradigm-shifting change of perspective with the Business Model Canvas.
Which ones should a company use? Should there be any preferences? In this post, we’re going to look at these frameworks and see what makes each one a little special, and, in what ways business thinking has evolved in terms of identifying value creation within a firm.
In this post, we’re going to discuss the following points:
The Value Chain model is in many ways one of the simplest ways of breaking down in-company processes. The most basic definition of a firm revolves around collecting inputs and producing outputs, and to some extent, the Value Chain is aligned with this very simple concept.
The Value Chain sees value creation as a summation of 4 different activities:
Will a firm get its competitive advantage on each of the four stages of value creation? It’s unlikely. Most firms will be able to identify in which blocks they may have assets capable of setting the organisation aside from its competition. It might be its ability to develop new products, or its ability to efficiently and timely produce them, or finding the perfect fit between a customer segment and their market offer, or finally, gaining an edge by distributing them over large markets.
Whatever the advantage, however, some argue that this model is very focused on a firm’s internal capacities, but it disregards almost completely its competitors, as the value a firm creates can be much better assessed by benchmarking it with its competitions. In this sense, Porter’s 5 Forces is capable of providing a new perspective on the value creation process of a firm, by taking into account 5 forces of competitive pressure that a firm needs to take into account. This is going to be addressed in the next section of our post.
Porter’s 5 Forces is in a way a very versatile tool, which can be generally used to look for value in many circumstances: from company management to asset allocation in finance. Porter’s forces model draws a unique insight into value creation in a firm: unless firms assets are well protected it’s really hard to maintain a competitive advantage in your industry. This is because on a 24/7 schedule all of your networks is going to pressurise you into reducing your profit margins in order to maintain competitiveness. All in all, in fact, many see Porter’s 5 Forces model as a tool which is very useful at identifying the degree of profitability whcih can be expected by a firm in a particular industry. Profitability, in fact, gets pressurised by 5 separate forces which are listed below. A more in-depth explanation can be found in the short video at the top of this section.
As discussed in this model, the value generated by a company will be such only if correctly shielded from the opportunistic behaviour of suppliers, buyers, new entrants and substitutes. In this sense, the protection of a firm’s intellectual assets, comprised of patents, copyrights, trademarks and so forth, should be regarded as an activity of primary importance. However, this model too, has its limitations, as it perceives customers, almost as a counterpart to the firm, as opposed to a co-creator of value. Value co-creation is an alternative angle on value creation, as it states that it’s the relationship which is being created by the firm with its customers that bears most value to the organisation. It’s on this line that new models like the Business Model Canvas have been able to focus much more on the role of the customer and the value it delivers by interacting with a firm. The customer-centric approach developed by the BMC will be addressed in the next section of our post.
Last but not least, let’s look into the Business Model Canvas, or BMC for short. This model has been a very popular model over the last few years. Aside from its innovative formulation, what makes it unique is that it suggests, very subtly that an entrepreneur need to fail many times before succeeding. According to the BMC, the only way real value can be created is by assessing what value can be drawn from a firm’s assets that actually transfers to its customers.
So, how does this latter model compare to the other two? The difference is only a matter of perspective, the Business Model Canvas is much more consumer-centred, as it starts from the fundamental assumption that the value you are delivering to the market is not the logical consequence of a linear process, like in the case of a manufacturing assembly line, nor something that draws from one specific business element, on the contrary, value is created through the unique relationship between all of the assets your company is able to draw together to create a unique way of conducting business and creating value.
Let’s have a look at how you can start breaking down your business model and identifying how your firm can deliver a unique value proposition to its customers.
Your first task is to start visualising your business and identifying 9 key aspects of its internal business logic.
Now let’s move to the part of your business which instead occurs in cost, rather than directly generating revenue. The left part of the model is dedicated to blocks which represent all of those processes that entail for cost, rather than revenue.
You will have certainly realized that because of the interconnected nature of the business model canvas, changing one of the blocks might entail changing the rest as well. This is the great insight provided by this model as it shows that in business a clear and aligned vision is able to create value which is greater than the sum of its parts.
What makes this tool exceptional in our opinion is the fact that the business model canvas is able to account for mistakes. The point of using this tool is not to immediately fill in every box with definitive answers, but to use it as a blueprint to conduct market research and find out information to complete all of the sections of the model.
As you start to fill in the boxes of this model, you don’t have to know much about business. To some extent, it can be argued that the less you know, the better. The whole idea of this tool is that entrepreneurs should be wary of their instincts and experiment as much as possible until they find real-life evidence of what works in the real world.
So is this, the one you should use to find value in a firm? In many cases, the BMC is considered a very current framework, especially in the analysis of digital and tech companies. However, the point of this post was not to establish a winner, as much as to show some of the patterns that define the evolution of business through over the last few decades. After so much content being discussed, let’s try to wrap things up in the conclusions.
As we’ve seen in this post, value can be found in different places, either in a firm’s processes, or in its exclusive assets, or in the unique revenue model. All in all, rather than establishing a winner, it might be better to take into account the limits that business frameworks provide. If, on the one hand, they are capable to simplify businesses which are, in many respects incredibly complex entities, on the other, they often risk narrowing down or over-simplifying them. In this sense, our advice is always taken into account your own bias. For the sake of immediate grasp and understanding, value-generating activities or assets may be downplayed. No framework will ever be all-encompassing, and many of the concepts we swear by today may become completely surpassed tomorrow. This is why in business, we should try to keep an open mind when it comes to using too much of a theoretical framework. In this sense, our advice is to take a broader look at the evolution of business theories, as they are a representation of the evolution of real life. To some extent, academia simply holds up a mirror, but not one that accurately reflects each individual firm.
All in all, let’s focus on the direction or the evolution that business frameworks are taking, so that we may preempt change while remembering that theories are not there to solve any problem a firm can possibly experience, but just to help us identify relationships of causality, so that we may act upon them.
But where does one reflect on the value of business education? If this is something you’re interested in looking into, in this article we discuss whether you should go to school or start a business.
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