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Evolving your business as a value exchange between stakeholders
A business model comprises five primary components: markets, products, processes, people and economics1. In this paper, we explore the fourth component – people2. By “people”, we mean the stakeholders in the business, including customers, employees, partners and investors.
A business can be thought of as a value exchange between its primary stakeholders. The goals of the “people” component of the business model are to: (a) assemble the optimal group of stakeholders for that business (b) design the value exchange between them so that the total value created by the business is maximized and (c) deliver more value to each stakeholder than competing business models.
Who are the stakeholders in a business and how do they participate in the value exchange?
The primary stakeholders in a very simple business are a buyer and a seller. Here, the value exchange consists of the seller providing a product or service (a “solution”) for which the buyer pays a price. This exchange creates mutual value where the solution is worth more to the buyer than the price, and the seller can provide the solution at a lower cost than the price and thus make profit.
In a more complex business, the “seller” expands to include three primary groups of stakeholders – team, partners and capital providers. The “team” consists of the core group creating, marketing and delivering the solution - management, employees and contractors. “Partners” are external firms, and include vendor partners, channel partners and strategic partners. “Capital providers” include both equity investors and debt providers.
Here the value exchange is more complex. Buyers still pay a price for the solution, but this price is not just received by a single seller, but is effectively shared between these three stakeholder groups. The team provides their services in return for their share, earned as compensation and benefits. Partners provide components of the solution or the value chain in return for their share in the form of payment from the seller or a share of the price paid by the buyer. Capital providers provide funding to the team and partners in return for their share in the form of interest, dividends and / or equity value appreciation.
Yet another layer of complexity is added when there are multiple buyers, as found in so-called “two-sided” or network markets. Examples of these include advertising-based businesses like the media, insurance-based businesses like healthcare, or secondary-market businesses like renewable energy certificates. In these businesses, there are more stakeholders and the value exchanges get even more complex.
Who are the right stakeholders for your business?
The first question to address in thinking about the stakeholder or “people” component of your business model is who are the right stakeholders for this business? You need to think about this question at two levels: (a) who are the right types of stakeholders for the business, and (b) who specifically should be approached to participate in the business?
Who are the right types of stakeholders for the business?
Many businesses put insufficient thought into which types of stakeholders make sense for a particular business. Firstly, as discussed in our paper on markets2, having a clear market focus is a key component of a business model. As such, the pool of potential stakeholders should be identified from within the target market. Secondly, even within a specific market there are typically many different types of potential customers, team members, partners and capital providers.
The starting point is to identify the customer/s and the solution to be provided to the customer/s that will lay the foundation for maximum value creation. In our framework, these are done within the markets and products components of the business model. With these in place, you need to identify the types of team members and partners who will be best at creating, marketing and delivering the solution to the target customer/s. For team members, you need to define the specific roles, skills and experience needed, and for partners, the types of vendor, channel and strategic partners that will fit best. Finally, you need to identify the types of capital providers in the market that are the best fit for the nature and stage of your business.
Who specifically should be approached to participate?
Once you have identified the right types of stakeholders that will maximize value for the business, you need to identify and approach individual prospective stakeholders and gain their agreement to participate. Many businesses reach out to those people they happen to know, rather than undertaking a systematic search within each category of target stakeholder for the best participants for a specific business. While it is more time-consuming and difficult, it is more than worthwhile to put in the effort to find the best possible stakeholders for a business. In many respects, the difference between unsuccessful and successful businesses is a reflection of the difference between mediocre and exceptional customers, team members, partners and capital providers. As any savvy investor knows, ultimately it is the people in the business that are the key to success.
How do you attract the right stakeholders to your business?
Develop a superior value proposition for each type of stakeholder
In free markets, all prospective stakeholders – customers, team members, partners and capital providers – typically have many options from which to choose. Each individual strives to participate in those businesses that create the most value for him or her. As a result, to attract prospective stakeholders you need to clearly define a value proposition for each type of stakeholder. Given that the foundation for a business is laid by defining the customer and the solution to be provided, this forms the foundational value proposition of the business. In addition, you need to craft value propositions to each of your other stakeholder groups, including team members, partners and capital providers.
Your value proposition must define and articulate how the business model will deliver value to each stakeholder, and how this value will be superior to the other options available to the stakeholder. For customers, this means how your solution addresses their needs better than other solutions. For team members, this means offering better compensation and career prospects. For partners, this means providing equal or better income opportunities. And for capital providers, this means providing a better risk-adjusted return than other investment options.
Your ability to offer these superior value propositions to each of your stakeholders is a function of the design and execution of each component of your business model. It depends on the market you select, the solution you offer, the value chain or processes needed to provide the solution, the stakeholders you attract, and the economic model you design to effect the value exchange.
Focus initially on a small group of early adopters and key influencers
These latter two components explain the “Catch-22”3 facing early stage businesses – you need to offer superior value propositions to attract stakeholders, but those value propositions in turn partly depend on having the right stakeholders. This is a well known problem for start-up entrepreneurs – you need investors to enable you to hire team members and find partners, who will then build the solutions and win the customers – but the investors want to see your customers, team members and partners before they invest. Even within stakeholder groups there is this “chicken and egg” problem - prospective customers want to know which other customers have bought, prospective team members want to know who else is part of the team, and the same with partners and investors.
So what do you do?
The answer is to focus on a small group of prospective stakeholders in each of your target categories in parallel, and to facilitate dialogue amongst them around your business model. Through such a group conversation amongst prospective customers, team members, partners and investors, each can get tangible evidence that the other stakeholders are interested and will derive value from participating in the business model.
In doing so, ensure each of the prospective stakeholders you include in this dialogue meets two important criteria: they are intrinsically early adopters, interested in and comfortable with new ideas, products and businesses, and they are also key influencers in their respective fields, able to set the trend and attract other stakeholders.
Then build stakeholder attraction into core processes
Once a business is up and running, it must design into its core processes the ability to continually attract stakeholders. Attracting customers becomes the responsibility of sales and marketing; attracting team members and partners is a responsibility shared amongst the primary functions and support groups; and attracting capital providers is a responsibility of general management and finance4.
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