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Evolving your business as a value exchange
between stakeholders
How do you define the optimal value exchange between your stakeholders?
As intimated in the above discussion, the value proposition to each stakeholder actually needs to comprise two elements: what contribution is required from the stakeholder, and what value they will get in return. This is the essence of the value exchange between each stakeholder and the other stakeholders. Customers contribute a price and receive a solution; team members contribute skills and receive compensation; partners contribute solution and value chain components and receive payment or a share of the price; capital providers provide funding and earn a return. Each of these value exchanges needs to be negotiated with the individual stakeholders, in the context of the negotiations with all the other stakeholders.
To do this successfully, you need to make clear and tangible both the contributions expected from and the value to be received by each stakeholder. In addition, each stakeholder needs to feel that the value exchange for him or her is fair and reasonable, and that the value exchanges for all the other stakeholders are fair and reasonable. Significant problems arise when stakeholders’ understanding and expectations of contributions made and value received are misaligned, or where some stakeholders feel that other stakeholders are making a proportionately smaller contribution relative to their share of the value.
A key tool in managing these negotiations is the business’ economic model. This will be discussed in a forthcoming paper in more detail, but essentially it is typically a spreadsheet model of the business’ projected operating and financial drivers and performance. Initially this model is developed based on a number of hypotheses, and it sets the initial parameters for the value exchange to be negotiated with each stakeholder group. As negotiations proceed, these hypotheses are validated or changed as needed. For example, the price customers are willing to pay, the salaries employees will accept, the commissions channel partners require and the returns investors seek are all validated or changed.
Your task as the business model designer is ensure the overall economics of the business model continue to make sense with these adjustments, and that the negotiations with stakeholders are informed and guided by their impact on the overall economics.
How do you manage stakeholders to ensure the value exchange is implemented properly?
Once you have your stakeholders in place and the value exchange between them agreed, it is an ongoing challenge to manage them to ensure that they contribute as promised, and share in the value created by the business as agreed. Customers need to be chased for payment, team members and partners managed to ensure they are performing their roles correctly, and capital providers, particularly equity investors through the board of directors, managed in terms of expectations.
To do so, it is important to “triage” your stakeholders for purposes of ongoing management. Large customers, senior team members, strategic partners and the board should be a primary focus of the CEO and senior management. Other stakeholders should be managed through the kinds of core processes discussed above. There is a large body of knowledge around managing each of these stakeholder groups, which is not necessary to replicate or summarize here. From the perspective of business model design, it is important to ensure that the business has in place effective ways to manage each stakeholder group and individual stakeholder, to address any problems that come up and to ensure the value exchange continues to be mutually rewarding. Any lack of attention to your stakeholders’ needs will lead quickly to an unraveling of the business model.
Most importantly, you need a clear set of mechanisms for strategy and decision making that takes into account the goals and needs of all your stakeholders. These might include the board of directors, management team, user groups and partner councils, all of which play important roles in the overall direction of the business.
How do you evolve your stakeholders and business model over time?
All markets, especially for technology-based businesses, are continually changing and evolving. As a result, your business model needs to continually evolve to meet the needs of stakeholders in a dynamic system, where each stakeholder has new options becoming available to him or her all the time. New products are launched for customers, new career opportunities open up for team members, new partnership opportunities for partners and new investment opportunities for capital providers. Your value proposition to each stakeholder group needs to continually evolve to remain attractive in the face of these competitive pressures.
At the same time, the contribution your business model needs from stakeholders
also evolves. Not only is the market evolving, but also your business
migrates along the S-curve (the technology, product or business lifecycle),
from creation, through growth and then maturity. At each stage of its
lifecycle, a business typically needs different contributions from its
stakeholders, which often means its needs different stakeholders.
Changing stakeholders is challenging for many businesses. A feeling of
gratitude and loyalty has developed to the customers, team members, partners
and investors that helped the business through the previous stage. It
can be emotionally difficult to recognize that the business is now at
a different stage, and that it makes sense to replace some or many of
the stakeholders to allow the business to continue forward successfully.
There are also built in reward systems that strongly favor continued
tenure for current stakeholders.
However failure to evolve the stakeholders in a business in line with the internal business evolution and the external market evolution is one of the prime causes of business failure. Many start-ups fail to transition successfully into the growth phase. Start-up stakeholders need to be skilled in and comfortable with the uncertainly, experimentation and creativity associated with this phase. They are seldom equally skilled and comfortable with the attention to detail and systemization of the business required for successful rapid growth. Similarly, at the end of the growth phase, the stakeholders in a business are often entrenched and well respected – after all, look what they have achieved. Such stakeholders are not usually the best positioned for the continued refinement, cost and efficiency optimization and exploration of exit options associated with the maturity phase.
Which other stakeholders do you need to address?
Finally, there is a range of secondary stakeholders who can play important roles in the creation and evolution of a business. Influencers include the media, trade associations and other interest groups that can help educate your market about your business and its solutions. Government is an important stakeholder in all industries through the rule of law and regulatory authorities, and is a very prominent stakeholder in some industries such as communications, healthcare and energy. The broader community within your market, and its perception of your business and its solutions can be an important stakeholder, as can be the general public wherever you do business.
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In summary, this paper has presented an overview of the “people” component of a business model – how to attract the right stakeholders and define the right value exchange between them in order to maximize the value of the business model to each stakeholder.
- Understand that a business is essentially a value exchange between stakeholders.
- Begin by thinking about which types of stakeholders make sense for your business model, starting with customers, then team members and partners, and then capital providers.
- Then undertake a systematic effort to find the best stakeholders in each category, not just the first you come across.
- Facilitate a discussion amongst prospective customers, team members, partners and capital providers around your business model to attract your initial stakeholders.
- Develop an effective value exchange formula for each stakeholder group that makes clear what is to be contributed and how value is to be shared.
- Over time, develop effective processes to attract and manage stakeholders, with your CEO and senior executives focusing on the most important stakeholders in each category.
- Put in place clear strategy and decision making mechanisms to guide the business based on the goals and needs of all stakeholders.
- Carefully monitor your internal business and external market evolutions, and make sure you evolve your stakeholders in line with your business needs at each stage.
- Finally develop effective approaches to managing secondary stakeholders
such as influencers, government authorities and the community.
References
1.
For
an introduction to how the model was developed and how it compares to
others, see What is a business model? A new approach.
2.
For
an overview of the first three components see Selecting
and understanding markets for technology innovation, Developing
a winning product offering, and Optimizing
your core processes to execute successfully.
3.
Heller, Joseph. Catch-22. New York: Simon &
Schuster, 1961
4.
See Optimizing your core processes
to execute successfully for
a definition of the core processes and functions in a business.
About the author
Michael Lurie is the CEO and founder of the Agile Strategy Institute, a research, education and consulting organization, and the creator of its original core body of knowledge. He is also the founder of the Agile Strategy Alliance, a non-profit professional association for executives, board members and advisors interested in learning and practicing agile strategy.