The concept of value and the business model

Welcome to E2: Managing Performance!

Hello there! Welcome to one of the most exciting parts of your CIMA journey. In this chapter, we are going to explore the concept of value and the business model. Think of this as the "DNA" of a company. We aren't just looking at how a company makes money; we are looking at why it exists, who it serves, and how it stays successful in the long run. Don't worry if these terms sound a bit corporate at first—we'll break them down using everyday examples that make sense.

1. What is "Value"?

In the world of business, value is a bit like beauty—it's in the eye of the beholder. For a long time, people thought value only meant "profit" or "money." While money is important, modern business (and the CIMA syllabus) looks at value much more broadly.

The Simple Formula for Value:
At its simplest level, value can be thought of as:
\( Value = Benefits - Cost \)

Example: Imagine you buy a coffee. The benefit is the energy boost and the nice taste. The cost is the price you paid and the time you spent queuing. If the benefit is higher than the cost, you feel you’ve received "good value."

Financial vs. Non-Financial Value

Businesses must create value for different people:

• Shareholders: They want financial value (dividends and share price growth).
• Customers: They want quality, reliability, and good service.
• Employees: They want fair pay, safety, and career growth.
• Society: They want the company to be ethical and environmentally friendly.

Quick Tip: If a company only focuses on profit (financial value) but ignores its customers or the environment, it will eventually fail. True value is sustainable over time.

Key Takeaway: Value is the difference between the benefits received and the resources sacrificed. It includes both money and non-financial benefits like reputation and happiness.

2. Defining the Business Model

If you were building a LEGO set, the business model would be the instruction manual. It describes the rationale of how an organization creates, delivers, and captures value.

Think of a business model as a "Value Transformation" process. You take inputs (like raw materials or staff talent) and turn them into something worth more than what you started with.

The Four Core Elements of a Business Model

To make this easy to remember, let’s use the "What, How, Who, and How Much" approach:

1. Value Proposition (The "What"):
This is the promise you make to your customers. Why should they buy from you instead of someone else? Are you the cheapest? The most luxurious? The fastest?
Example: Netflix’s proposition is "Unlimited movies and TV shows anywhere, anytime."

2. Value Creation (The "How"):
This involves the resources and activities used to make the product or service. This includes your staff, your technology, and your partnerships.
Example: For a bakery, this is the flour, the oven, and the skill of the baker.

3. Value Delivery (The "Who"):
This is how you get your product to the customer. It involves your distribution channels and how you talk to your customers.
Example: An online store delivers value via a website and a courier service.

4. Value Capture (The "How Much"):
This is the "show me the money" part! How does the business turn that value into profit? This involves your revenue streams (selling items, subscriptions, etc.) and managing your costs.
Example: A gym captures value through monthly membership fees.

Memory Aid: "P-C-D-C"
Proposition, Creation, Delivery, Capture.

3. The Role of "Capitals" in Value Creation

In your E2 studies, you will often hear about the International Integrated Reporting Council (IIRC) framework. They suggest that companies don't just use money; they use six different types of capital to create value. Don't be intimidated by these—they are just fancy names for resources!

• Financial Capital: The cash and funding available.
• Manufactured Capital: Physical things like buildings, machines, and roads.
• Intellectual Capital: Intangible stuff like patents, software, and "secret recipes" (brand and knowledge).
• Human Capital: The skills, experience, and motivation of the people working there.
• Social and Relationship Capital: The trust the company has with the community and its brand reputation.
• Natural Capital: Resources from nature, like water, land, and minerals.

Did you know? A company might "use up" Natural Capital (by using water) to "create" Financial Capital (by selling a drink). A good business model tries to keep all these capitals healthy in the long run.

Key Takeaway: A business model is a system that takes these 6 capitals as inputs and transforms them into outputs (products) and outcomes (value for stakeholders).

4. Why Business Models Change

Business models aren't set in stone. If the world changes, the model must change too. This is often called Business Model Innovation.

Step-by-Step: How a Model Evolves
1. Identify a shift: Customers want something new (e.g., they want to stream music instead of buying CDs).
2. Adjust the Proposition: "We will provide music as a service, not a product."
3. Reconfigure Creation: Invest in servers and digital rights instead of CD factories.
4. Change Value Capture: Charge a monthly subscription instead of a price per album.

Common Mistake to Avoid: Many students think a "Business Model" is the same as a "Strategy." They are related but different. Strategy is how you plan to beat the competition; the Business Model is the core logic of how the business functions every day.

5. Summary and Quick Review

Quick Review Box:
- Value: Not just profit; it's the total benefit minus the cost for all stakeholders.
- Business Model: The rationale of how a firm creates, delivers, and captures value.
- The 4 Pillars: Value Proposition, Value Creation, Value Delivery, Value Capture.
- The 6 Capitals: Financial, Manufactured, Intellectual, Human, Social, and Natural.

Don't worry if this seems a bit abstract! In the exam, you'll often be asked to look at a scenario and identify what a company's "Value Proposition" is or how they are "Capturing Value." Just ask yourself: "What are they promising the customer?" and "How are they actually making their profit?"

You’re doing great! Understanding how value works is the foundation for everything else you will learn in E2. Keep going!