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Sales and Marketing

Getting the Business Model Right

February 26, 2016 by Dr. Jon Warner in Sales and Marketing

Getting the Business Model Right

According to business and innovation university professor, Clayton Christensen, every viable business model starts with a “value proposition” which he defines as a product or service that helps customers do more effectively, affordably and conveniently a job that they’ve been trying to do. For example, when Toyota sells its Prius electric vehicle its value proposition is to travel by car more cost effectively and sustainably. This may not appeal to all customers but will appeal to a niche of the market. The business model that Toyota then adopts is to deliver on this value proposition or promise and this will involve a number of different ways that the company chooses to structure its business.  As we will see below theirs is a value added process business model.

Although there are many business models that could be deployed to deliver a value proposition to the target customer, Christensen has long believed that most of the time it boils down to one of three alternatives – the solution shop, the value adding process and the facilitated user network. The diagram below describes these three business models using a hospital as the example of a single organization (which unusually often has all three business models in operation in different parts of the hospital). This makes the hospital a very unusual business, and many would say one that is difficult to manage because of this.

3 Types of Business Models

When a hospital (or any other business for that matter) seeks to fulfill these two or even three very different business models, this can create enormous internal incoherence, not to mention confuse the customer. Solution shops need to get paid on a fee-for-service basis. Their fees cannot be based on outcomes, because many factors beyond the accuracy of diagnosis affect the results. In contrast, value-adding process businesses can routinely sell their outputs for a fixed price, and they can guarantee their results. And finally a facilitated network relies on widespread and open participation and usually has a pay to belong model or pay for specific services in some cases. As a result, Christensen argues that it is far better to separate these 3 business models. Let’s therefore now look at each of these business models in more detail. 

Solution shops.

Solution shops are typically organizations that exist to diagnose and solve unstructured problems. Consulting firms, primary doctor offices, advertising agencies, research and development organizations, and many law firms employ this type of business model. These solution shops deliver value primarily through internal knowledge or the people they employ. In other words these people are experts who draw upon their intuition and problem-solving skills to diagnose the cause of a variety of problems (many of which are complex) and then recommend solutions. The most successful solution shops are those that can attract the best or most knowledgeable people. Solution-shop work tends to be unique for each customer, who is often quite willing to pay a relatively high price in return for the advice or customized work they get.

Value-adding process businesses.

These businesses transform the inputs of resources, such as people, equipment, raw materials, energy, and money or capital, into outputs of greater value. The business model is built to do this in mainly repetitive ways so that the organization’s capabilities are embedded more in its processes and systems than in its resources. Although some value-adding process businesses may be more efficient than others, in general they focus their attention on process excellence that can deliver high-quality services and products consistently at a lower cost or higher quality. Often, results can be guaranteed or redone without additional cost. Retailing, restaurants, automobile manufacturing, production lines, and petroleum refining are examples of this type of business model.

Facilitated user networks.

Facilitated user networks are organizations in which the people in the network buy and sell and deliver and receive things to and from each other via an ecosystem or platform. In these types of businesses, the companies that deliver value and make money are those that facilitate the effective operation of the system or network and its user transactions. Mutual insurance companies are user-network businesses—customers deposit their insurance premiums into a collective pool, and they take claims out of it. Telecommunications companies, which facilitate calls and data transfers among their customers, as well as the online auction site eBay, stock exchanges, and many activities of banks are also user-network businesses. In the last few years many specialized networks, such as Facebook or LinkedIn, eBay and Etsy, have grown up on the Internet serving very large populations of people with a common interest.

In summary, it is extremely useful to know which business model we are most interested in using and to not try to mix these in one organization, unless we have good reasons to do so and can separate the people deployed within it in sensible ways. Healthcare, Education and Financial Institutions often do this and struggle to change as a result.

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About Dr. Jon Warner

Dr. Jon Warner is a prolific author, management consultant and executive coach with over 25 years experience. He has an MBA and a PhD in Organizational Psychology. Jon can be reached at OptimalJon@gmail.com

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About the Editor and Primary Author

Jon Warner

Jon Warner is an executive coach and management consultant and in the past has been a CEO in three very different companies. Read more

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