Welcome to E2: Defining Value!
Hello there! Welcome to your study of Section A: Business models and value creation. In CIMA E2, a business model describes how an organisation defines, creates, delivers, and captures value for its customers, investors, stakeholders, and itself. Before an organisation can create or deliver anything of worth, it must first establish what value actually means to the parties involved.
In this chapter, we will break down the concept of value and examine the essential four-step process for defining value in an organisation.
1. What is Value in a Business Model?
In everyday language, value often means getting a bargain. In performance management, value is defined from the perspective of an organisation's stakeholders. Value represents the benefits received relative to the costs, risks, and resources expended to obtain them.
The Value Perspective
A simple way to express this relationship is:
\( Value = \frac{\text{Benefits}}{\text{Cost / Resources Expended}} \)
Example: A customer buying an electric delivery vehicle looks at operating range, reliability, and after-sales support (benefits) against purchase price and charging downtime (costs). If perceived benefits exceed the total cost of ownership, value is generated.
Core Characteristics of Value
- Value is Subjective: What constitutes value differs across stakeholder groups. Shareholders evaluate financial return, customers look at functionality and service, and employees seek career development and fair remuneration.
- Value is Dynamic: Value perceptions evolve over time due to technological advances, societal expectations, and competitive pressures.
2. The Four Steps in Defining Value
According to the E2 framework, an organisation cannot define value in a vacuum. It must undertake a structured four-step process:
Step 1: Identifying Stakeholders
An organisation must first identify every group or individual who affects or is affected by its operations. This includes external parties (such as customers, suppliers, regulators, debt providers, and the wider community) and internal parties (such as employees, management, and shareholders).
Step 2: Ranking Stakeholders
Not all stakeholders carry equal influence or importance. Organisations must prioritise and rank stakeholders based on their power, legitimacy, and the extent to which strategic success depends upon them. While customer and shareholder needs are often primary, neglecting key secondary stakeholders (such as critical suppliers or statutory regulators) can derail the business model.
Step 3: Establishing the Needs of the Most Important Stakeholders
Once key stakeholders are ranked, the organisation must systematically identify what each prioritized group genuinely wants and expects. For example:
- Priority Customers: High product quality, responsiveness, ethical sourcing, and seamless digital access.
- Key Investors: Predictable cash flows, sustainable capital growth, and transparent governance.
- Key Employees: Fair compensation, psychological safety, skill acquisition, and career mobility.
- Regulators: Legal compliance, consumer protection, and operational resilience.
Step 4: Formulating Value Propositions for Each
A value proposition is an explicit promise of value delivered to a stakeholder group. The organisation formulates tailored value propositions showing how it intends to satisfy their specific needs better or more sustainably than alternative options.
Example: A customer value proposition may promise guaranteed zero-emission next-day delivery, while the employee value proposition promises structured technical upskilling and flexible hybrid working.
3. Defining Value Across the Business Model
Defining value sits at the start of the organisation's overall business model architecture:
1. Defining Value: Identifying and ranking key stakeholders, uncovering their needs, and shaping specific value propositions.
2. Creating Value: Aligning internal resources, assets, partners, and competencies to build those value propositions.
3. Delivering Value: Executing customer journeys, distribution channels, and operating processes to bring the value to market.
4. Capturing Value: Designing the revenue model, managing the cost model, and distributing the economic surplus appropriately among stakeholders and back into the business.
4. Common Pitfalls to Avoid
- Conflating Value with Profit: Profit is purely a financial metric of value captured by the firm and its shareholders. A firm can post short-term profits while destroying value for customers through declining service, or for society through environmental neglect.
- Treating All Stakeholders as Homogeneous: Failing to rank stakeholders leads to conflicting strategic priorities and diluted value propositions.
- Static Assumptions: Assuming stakeholder expectations remain fixed. Value propositions must be continually reviewed as market ecosystems change.
Summary: Key Takeaways
- Value is stakeholder-dependent, subjective, and dynamic.
- The 4-Step Process: (1) Identify stakeholders, (2) Rank stakeholders, (3) Establish their key needs, and (4) Formulate tailored value propositions.
- Business Model Integration: Defining value informs how the organisation subsequently creates, delivers, and captures value.