Profitable - Sustainable - Responsible, simultaneously.
Four Arms Of Value® Business Model
For decades, businesses have been involved in creating value; and many think of value as maximising profits and minimising costs. There are all sorts of models and matrices to help organisations create this sort of value. But, there is a limit to which a business can maximise profit and minimise cost, and that leads to the question: what do we do next?
Focusing just on profits and costs is unsustainable value creation, purely because of its limitations. It’s not enough to create long-term value. Let’s take pharmaceutical companies as an example. These companies spend months in closed rooms working on probabilities that mostly come down to, based on estimates of future sales, which projects to continue, which to shelve, and so on. These discussions are usually also surrounded by the notion of building a patent that creates maximum value in terms of profit. The Four Arms of Value business model comprises:
1. Employee value - Key to consumer value
We firmly believe that shareholder value is not enough to become sustainable. Employee value is critical to organizational success.
Most of us know this as human resources. Instead, we like to call it human assets because we think employees are not resources; they are assets. Some company leaders care about this arm because they understand its importance; others do not because they either do not understand its value or discount it so heavily that the human factor in their business becomes marginal (at least, in their minds). In yet other cases, there is an inattentional blindness; but human assets are central to any business model within any industry or sector, anywhere. While technology has changed a lot of things, there is still a tremendous need for human assets.
Achieving employee value requires that companies create value for their employees in material terms — competitive salaries, bonuses, perks and the like. While material value is a key value in this sense, it is important to bear in mind the gaps between these salaries and bonuses. In other words, the structure for compensation should not have a large variation in an organisation. And, beyond material compensation, employee value also includes intangible factors: the corporate culture as well as such things as work/ life balance, promotion, recognition, career development and so on.
And, when it comes to establishing employee value, we would urge you to add one more important ingredient: PURPOSE. Companies must tell their employees why they are in the business they are in and what sort of value that creates for the other three arms of value.
2. Consumer value - Key to shareholder value
This arm is concerned with creating value for consumers through the products and services they buy. From a management viewpoint, there is more to it than just manufacturing products and offering services. Look around: there are millions of products and services available that create no real tangible value whatsoever, and yet they exist.
Let’s take an example of a fresh juice-producing company. The real value that company offers to the consumer lies in producing a beverage that isn’t full of unnatural stuff, that contains all the healthful ingredients so marked on the box, that doesn’t make the consumer fall ill and is reasonably priced. If, in this case, the juice product does not have one of those qualities, it doesn’t create real consumer value. Thus, while companies may sell products that help others increase their material wealth (say, computers that enable people to write business plans or novels), any product or service that has a positive impact on the lives of those paying for it should be considered as demonstrating that the company is committed to consumer value.
Apple is another great example of an organisation that creates high value products for its consumers and their customers are crazy enough to sleep outside Apple stores to buy a product. How often do you see a product with such an appeal from other companies? You don't!
3. Shareholder value - Key to Social Value
While we insist that maximising profits and minimising cost is not all that is required to sustain and grow a company, it is a part of the story that cannot be left out. No matter how you want to define shareholder value, it entirely links to the material side of an organisation and is largely dependent on a good set of top-line and bottom-line numbers. Such numerical performance, being highly dependent on market and economic conditions, naturally becomes highly uncertain and less sustainable.
Consider, for example, the recent ups and downs of Amazon.com. When the company reported its numbers early in 2012, its profits missed expectations, causing the stock — despite enormous sales numbers — to drop 10 per cent or more. Profits and costs, surely, are topics of daily discussion at Amazon, which realises that it must improve those numbers if it is to prevail in its desire to be considered a company that delivers reliable shareholder value. There is a huge body of literature and research available on this particular arm of value. Every business school teaches this, and quite well; yet, as noted, there is so much more that must be taken into account for a company to thrive year after year.
Ultimately there is nothing wrong in maximizing this value as long as you are creating consumer value, employee value, social value simultaneously. Which leads us to the arm that deals with contributing to society.
4. Social value - Key to Employee, Consumer & Shareholder Value
Though many talk about this value and discuss it at the highest levels of the company, the real implementation of this arm is still absent from the majority of companies. Why? Because businesses are supposed to create shareholder value, and social value is too often deemed an unnecessary cost, top managers pay the concept lip service while keeping the corporate wallet tightly shut.
Let us emphasise: thinking about social value as a cost is a mistake. It is, rather, a critical arm of value as it includes, among other things, whether a company is living up to its Corporate Social Responsibility (CSR). This is an enormous field of study, but Wikipedia’s definition that ties CSR to the adherence to a ‘corporate conscience’ and to the demonstration of ‘corporate citizenship’ carries, to our mind, a great deal of what it means to provide social value.
Yet, social value goes beyond CSR. It is also about creating value for society through good products and services; being ethical; creating jobs and opportunities; making lives better; cooperating, sharing, and uplifting society — and caring about all the elements of society that are required to sustain any business. For example, those still easy-to-find news stories about companies dumping toxic wastes into rivers are sad not only because of the inherent dangers involved when a company wrecks the environment in which its customers must live. It’s also sad because it reveals a corporate leadership so nearsighted (in terms of social value) that it seems all too willing to undercut the likelihood that it will be able to be profitable in the years ahead. A company with low social value has, in every case we can think of, low strategic value as well.
Think of real value and its four arms as a diagram. The organisation is in the centre, with employee value to the north, consumer value to the east, social value to the south and shareholder value to the west. All the values are interconnected and share value among each other as well.
Don't you think it is time to change your business model to become truly profitable, sustainable and responsible?