Your Company Is Like An Animal. Maybe Just Not The Way You Thought...

What is the purpose of any organization?

• Earn money? If it was so, many startups that are considered by everybody as very successful should be seen as failures.
• Deliver value? It may be the case for some NGOs, but it is very seldom the case of for-profit businesses.

So, we are stuck in a strange situation: most definitions of Business Models consider that a business is about delivering value and capturing value. This is reflected in many Strategy frameworks: businesses are about delivering products & services and getting cash in return… the difference being the holly “margin”. But as we just saw, those functions do not seem to be what actually matters most!

In the realm of my Bm² Framework, I call those two functions the Market Function and the Capture Function. The truth is that there is a third Business Function. It is often neglected, or at best not considered as a fundamental function of an organization. I call it the Industry Function.

The Industry Function is about one thing: managing the resources of the organization. It is what will make the company thrive inside its industry, and actually gain value.

So, what are we talking about, with the Industry Function?

It can make sense to compare a company with a living organism. Let’s say an elephant. As a system living in an environment (including other living organisms), and exchanging with it, the elephant has to behave in certain ways, provide services to other elephants, take care of the young ones, eat food etc. In a sense, it is delivering and capturing value.

But the most important is elsewhere: it is about growing, strengthening and sustaining its own body, mostly through internal processes.

In the same way, any business needs to focus on its body: its set of resources.

There are only 3 modes available to take care of your business’ resources:

• Building mode: having new resources to be used during the current or future phase,
• Improving mode: having better resources available for business operations,
• Preserving mode: securing resources against risks and ensuring they last in time.

  

The comparison with living organisms goes further. The Industry Function is fundamental for the life and evolution of a company in several ways:

• as an "autopoiesis" function, aiming at producing or reproducing the very elements it is made of,
• as a "growth" function, aiming at providing the necessary infrastructure to increase its activity,
• as a "mutation" function, aiming at preparing or supporting internal changes,
• as a "defense" function, against internal or external threats,
• as an "adaptation" function, aiming at reacting to external changes,
• as an "exploration" function, aiming at testing new patterns.

So let’s just illustrate that with a few examples:

• Starbucks, when opening new shops, builds the main resource that constitute its business;
• Google, when developing a new Android OS, builds resources it will then exploit;
• Microsoft, by designing its mobile-targeting Windows 8, prepared a mutation of its activity;
• Samsung launches countless patents per year to protect its technological assets;
• Salesforce developed a mobile version of its site to adapt to the adoption of smartphones;
• Facebook continuously tests new features on its website to explore new business possibilities.

Takeaways

Think about the valuable resources that constitute the infrastructure of your business. They may be:

• Tangible, such as machines, stores, products to rent etc.,
• Intangible, such as brand, intellectual property, knowledge or skills.

Identify or design the processes that should take care of those resources. Then make sure the 3 modes of the Industry Function are properly fulfilled:

• The Building mode, to always have new valuable resources to rely on,
• The Improving mode, to always exploit better and better resources,
• The Preserving mode, to ensure sustainability of resources.

Exchanging Is The New Business Paradigm

One of the 3 Business Functions of any organization consists in capturing value through transactions. It is the Capture Function.

We’ve been used to consider two separate processes: Sales and Purchasing. On the one side, we think about the sales process as a way to capture money from customers in exchange of products (goods & services). On the other side, we think about the purchasing process as a way to acquire with cash the necessary supplies for the various operations of the company. Period.

But times have changed, and reality is now a bit different. The sales and purchasing processes are just 2 different “modes” for capturing value: they are part of a single Capture Function. There is, moreover, a third capturing mode: Exchanging. And it is getting big, especially with new technologies like Cloud, Web 2.0 and mobile applications.

To sum up, here are the 3 modes for the Capture Function:

• Buying mode: capturing cash in exchange of goods or services,
• Selling mode: capturing supplies in exchange of cash,
• Exchanging mode: acquiring goods or services in exchange to other goods or services.

Why is it important?

1- Capturing value works on both sides (with customers and suppliers)

We usually don’t recognize enough the fact that purchasing is potentially as much about capturing value as the sales process is. It just happens that most businesses focus on creating value through their capacity to generate good enough products and to sell them at a good enough price. But some companies can focus on other ways to do business, and capture most of the value through their buying process:

• Gold4Cash makes its money by buying gold for a very low price.
• Walmart is famous for bringing its suppliers prices down as well.

Exchanging is actually the way to play on both sides at the same time. Customers become "beneficiaries" and suppliers become "contributors"... and with exchanges, the same actor plays both roles

2-     There is a single Capture Function, and different mixable modes

We can usually see businesses as systems that strive to increase their internal value. For this, they just:

• run processes (to generate products and build resources),
• make transactions (interact with the external world).

There are thus two ways to increase the internal value: having effective internal processes and achieving a positive balance with regard to transactions. With this logic, the Capture Function is just the ruler of the “transaction equation”. It should be seen as an integrated function that has:

• products and cash to provide on the one hand,
• cash and supplies to receive on the other hand.

Good business models show innovative ways to play with the components of this equation (see this Amazon example from a previous post). They often do that by mixing the Selling and Buying modes with the Exchanging mode::

 

3-     Exchanging is the new way to go

Exchanging is just making a transaction without involving cash. Although it may seem rare (and often forbidden for physical products), it is actually everywhere (either in a pure form, or mixed with another Capturing mode). Most new business models (and some old ones) include some exchanges in one way or another:

• Facebook provides a service to its users, who upload personal data in the same process.
• TV channels provide programs and viewers give their attention.
• Waze provides a navigation service and users report information such as position, speed and events.
• Most web sites provide information, entertainment or services, and users provide (sometimes without knowing) their IP address, location, cookies etc.

And in a way, advertising in general is pretty much about exchanging: the company provides information or entertainment, and receives (hopefully) some awareness or propensity to buy in return.

Takeaways

Ask yourself how you can achieve a better balance of your transaction equation. For this:

• evaluate the value you can provide, and what supplies (or valuable inputs) you actually need.
• consider who your transaction counterparts are (and consider potential "benefiaries" and "contributors").

Then ask yourself if you could make the following moves:

• Moving from “Buying” to “Exchanging”: are there valuable inputs I can get without paying? What value can I provide in exchange?
• Moving from “Buying” to “Giving & Buying”: Is there a way to pay less for my supplies? Is there any value I can provide that will allow me to get a lower price?
• Moving from “Selling” to “Selling & Receive”: Is there a way to be more competitive with lower prices, and get additional valuable inputs in exchange?
• Moving from “Selling” to “Exchanging”: Should I stop charging for some products and get valuable inputs in exchange?

Supplies, in the broad sense of “valuable inputs”, are more diverse than we think, and they can allow such moves. Think about customer awareness, customer preference, customer commitment, customer loyalty, customer profile, customer data, knowledge, information etc.

For more insights and more examples: http://www.bm2business.com/capture-function/

There Are Only 3 Ways to Provide Value to Your Customers: Which One Will You Choose?

Maybe the most obvious Business Function that every startup founder, but also CEO, VC or strategy consultant, has to clarify is what I call the Market Function: how will the company provide value to its customers?

The answer is not always obvious. Think about it: imagine you want to launch a business to answer the need of companies to manage their online marketing campaigns. The way to provide a solution to those customers depends on many things:

• Your organization: If you are a startup, options may be quite open. If you’re a BU in a corporation, you may have to follow the internal business policy.
• Your internal resources: If you have in-house technical talents, you may develop a system. If not, you may rely on external actors.
• Your core businesses: If your main activity is IT consulting, you may propose customized solutions. If you’re a software editor, you may develop a new product.
• Your relations with customers: If you already provide solutions to the targeted customers, you may propose an add-on of the same kind. If not, your options may be more open.
• The existing ecosystem: If solutions already exist on the market, you may provide related services to existing users. Or you may be a value-added reseller.

How can we categorize the different ways to provide value to customers?

There are actually different modes for generating and delivering value. Each one has its own characteristics and its own advantages. There is no better mode: it all depends on business conditions. But basically, there are only 3 modes: Producing, Trading and Operating.

What defines those 3 modes for value provision is where that value is generated.

• Producing mode: most of the delivered value is generated through the organization's processes (ex: Ernst & Young, Toyota).
• Trading mode: most of the delivered value is already included in the organizations' supplies (ex: Barnes & Noble, Tesco)
• Operating mode: most of the delivered value consists in the usage of the organization's resources by its customers (ex: Avis, Verizon).

 

The choice of the Market Function mode is not just an operational choice: it may also impact the choice of the targeted customer segment. It is a fundamental strategic choice for the business: it will drive future results, and probably determine the outcome of the project.

So let’s go back to our example above. What possible options could you adopt?

• The “Producing mode” solution: developing customized systems for fortune 500 companies.
• The “Trading mode” solution: reselling existing software solutions to your current customers.
• The “Operating mode” solution: operating a SaaS (Software as a Service) platform used by your customers.

The diversity of options is not only for the IT business world. We can adopt exactly the same approach with more standard businesses. Imagine the options for a pizzeria business. Here are some possible options:

• The “Producing mode” solution: a standard pizzeria, where pizzas are prepared on-site by the cook.
• The “Trading mode” solution: a fast-food style pizzeria where frozen pizzas (bought from a specialized factory) are just heated.
• The “Operating mode” solution: a do-it-yourself pizza place where customers experience the preparation and cooking of their own pizzas.

In many cases though, the actual way companies generate and deliver value to their customers is by mixing the 3 modes above. To take a simple example: movie theaters mix the Trading mode (they somehow “resell” movies to their customers) with the Operating mode (customers benefit from the theater’s infrastructure).

Takeaways

Deciding which Market Function mode to adopt is a fundamental move for any new business. It has to be done carefully.

So here are the different steps to make the right choice:

• Identify your business conditions (organization, resources, core businesses, customer relations, ecosystem…)
• Evaluate the “Producing mode” solutions. Important: what are the key internal processes to generate value?
• Evaluate the “Trading mode” solutions. Important: what are the key inputs and their associated suppliers?
• Evaluate the “Operating mode” solutions. Important: what are the key resources that customers will use?
• For each mode, evaluate the impact on the choice of the customer segment.
• Choose the best solution!

So: what Market Function modes do you think were actually chosen by McDonald’s? Disney? Uber? Salesforce? Apple?

For more insights and more examples: http://www.bm2business.com/market-function/