Welcome to the Final Piece of the Puzzle: Capturing and Sharing Value
Hello there! You’ve already learned how businesses define and create value. But here is the big question: If a company creates amazing value but doesn't make any money or share that value with others, will it survive? Probably not! This chapter is all about how a business actually "gets paid" for the value it creates and how that value is distributed among everyone involved. Think of it as the "pay-off" stage of the business model.
1. Understanding Value Capture
Value Capture is the process by which a company retains a portion of the value it has created for its customers. While "Value Creation" is about making the pie, "Value Capture" is about making sure the business gets a big enough slice to stay profitable and sustainable.
Don't worry if this seems a bit abstract at first. Think of a streaming service like Netflix. They create value by providing thousands of movies at your fingertips (Value Creation). They capture that value by charging you a monthly subscription fee (Value Capture).
Key Terms to Remember:
• Value Proposition: What you promise the customer.
• Value Creation: How you deliver that promise.
• Value Capture: How you turn that delivery into profit.
2. The Revenue Model: How We Get Paid
The revenue model is the specific method a business uses to generate money from its value proposition. In the E2 curriculum, we look at how different models allow businesses to capture value in different ways.
Common Revenue Models include:
• Asset Sale: Selling ownership rights to a physical product (e.g., buying a car).
• Subscription Fees: Selling continuous access to a service (e.g., Gym memberships).
• Lending/Renting/Leasing: Giving temporary rights to use an asset (e.g., Car rentals).
• Licensing: Giving customers permission to use protected intellectual property (e.g., Software licenses).
• Brokerage Fees: Acting as an intermediary between two parties (e.g., Real estate agents).
Pro-tip: A company’s ability to capture value depends heavily on its bargaining power. If you are the only person selling water in a desert, your ability to capture value is very high!
Quick Review: The Profit Formula
In the simplest terms, value capture is measured by profit:
\( Profit = Total Revenue - Total Costs \)
To capture more value, a business must either increase the price (Value to Customer) or decrease the costs (Efficiency).
3. The Cost Structure: The Price of Creating Value
Capturing value isn't just about revenue; it’s also about managing what you spend. The Cost Structure describes all costs incurred to operate the business model.
There are two main types of cost-driven business models:
1. Cost-driven: Focusing on minimizing costs wherever possible (e.g., Budget airlines like Ryanair).
2. Value-driven: Focusing on value creation, often with a higher cost base and premium pricing (e.g., Luxury hotels like The Ritz-Carlton).
Memory Aid - The "Two Scales" Analogy: Imagine a pair of scales. On one side is the Cost to the business, and on the other is the Price the customer pays. Value capture is the gap in the middle. If the cost side gets too heavy, the gap disappears, and the business fails!
4. Sharing Value: It’s Not Just About the Owners
Modern business management (and the CIMA E2 syllabus) emphasizes that value shouldn't just stay with the company shareholders. To be sustainable, value must be shared with Stakeholders.
Who gets a share of the value?
• Shareholders: Receive value through dividends and share price growth.
• Employees: Receive value through wages, benefits, and career development.
• Customers: Receive "Consumer Surplus" (the feeling that they got a great deal for their money).
• Suppliers: Receive fair payment and long-term business security.
• Society/Government: Receive value through taxes paid and corporate social responsibility (CSR) initiatives.
Did you know? This is often called "Creating Shared Value" (CSV). It suggests that a company’s success and social welfare are interdependent. For example, a company that trains local workers is sharing value but also gaining a more skilled workforce.
5. Sustainable Value Capture
A major theme in E2 is the long-term view. A business might capture a lot of value today by overcharging customers, but they won't come back tomorrow. This is not sustainable.
To capture value sustainably, a firm must:
1. Innovate: Keep the value proposition fresh so customers keep paying.
2. Maintain Relationships: Ensure stakeholders feel they are getting a fair share.
3. Manage Risks: Protect the reputation and resources that allow value capture to happen.
6. Summary and Key Takeaways
Key Takeaway 1: Value Capture is the "Profit" part of the business model. It is how the business survives and reinvests.
Key Takeaway 2: Choosing the right Revenue Model (Subscription vs. Asset Sale) is vital for how value is captured.
Key Takeaway 3: Value must be shared. If employees or suppliers don't get their "slice," the whole business model might collapse.
Key Takeaway 4: Performance management systems (like KPIs) help managers track whether they are capturing and sharing value effectively.
Common Mistakes to Avoid
• Confusing Value Creation with Value Capture: Remember, you can create a lot of value (like a free app) but fail to capture any (no revenue). Both are needed!
• Ignoring Stakeholders: In exam questions, don't just focus on the profit for shareholders. Consider how the decisions affect employees and the community.
• Thinking "Price" is "Value": Price is what the customer pays; Value is what the customer gets. Value capture is the business keeping some of that price as profit.
You're doing great! Managing performance is all about balancing these different elements. Take a quick break, grab a coffee, and when you're ready, we'll dive into how we measure all of this!