In an environment in which long-term partnerships and joint ventures must be built on mutual trust, value creation is increasingly understood in terms of the shared value derived from its business activities and captured by the organisation, and the value that is created for and captured by others.
In ‘Creating Shared Value’, Michael Porter and Mark Kramer define shared value as “creating economic value in a way that also creates value for society by addressing its needs and challenges”.
They describe shared value as “a concept that focuses on the connections between societal and economic progress… and that expands the total pool of economic and social value”.
Shared value is based on the premise that having environmental or social issues that are not addressed creates internal costs for companies (e.g., wasted energy, remedial training to compensate for inadequate education systems), which constrain the extent of value creation, destroy value or, over the longer term, make the business model unsustainable.
As well as being created for and captured by a wide range of stakeholders, value is increasingly created in collaboration with others, including consumers who “armed with new digital tools and dissatisfied with available choices… want to interact with firms and thereby co-create value.
Professor Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, believes we are experiencing the fourth industrial revolution; a revolution of networks, platforms, people, and digital technology that is “blurring the lines between physical, digital and biological spheres.”
He calls for leaders and citizens to “together shape a future that works for all by putting people first, empowering them and constantly reminding ourselves that all of these new technologies are first and foremost tools made by people for people.”
In an article on Today.com, CEO of Airbnb Brian Chesky pointed out the need to acknowledge the fact that people no longer simply want to buy a product, but an experience and a relationship with other people.
“The stuff that matters in life is no longer stuff,” he said. “It’s other people. It’s relationships. It’s experience.”
The Network Imperative
In their book ‘The Network Imperative: How to Survive and Grow in the Age of Digital Business Models.’ the authors contest that digital networks enable new forms of sharing, distributed intelligence and value creation.
New forms of assets (intangibles) and new ways of doing business (networks) mean that the formal frameworks used to measure and value organisations by investors, leaders, regulators, economists and accountants are increasingly inadequate and misleading, leading to the misallocation of human and financial resources.
Different business models – each with its own value proposition – based on different types of assets and technologies, create different economic outcomes. We identified four business models:
- Asset builders deliver value through the use of physical goods (physical capital). These companies make, market, distribute, sell and lease physical things.
- Service providers deliver value through skilled people (human capital). These companies hire and develop workers who provide services to customers for which they charge.
- Technology creators deliver value through ideas (intellectual capital). These companies develop and sell intellectual property, such as software, analytics, pharmaceuticals and biotechnology.
- Network orchestrators deliver value through relationships (network capital). These companies create a platform that participants use to interact or transact with the many other members of the network. They may sell products, build relationships, share advice, give reviews, collaborate and more.
Comparing the different business models, Network orchestrators, on average, grew revenues faster, generated higher profit margins, and used assets more efficiently than companies using the other three business models. These advantages resulted in remarkably higher enterprise values when compared with revenues.
The reasons being that physical things –as opposed to ideas, intellectual capital – do not scale quickly, easily or cost effectively. When you add the network effect, where each additional participant (or node) in the network increases the value for every other participant, the network drives its own growth.
Every organisation has the assets — people and data — to create powerful network-based business models, however, few organisations have adjusted their business model in light of the new possibilities — probably because changing an organisation’s business model is difficult.
Each business model is the outcome of capital investments in one of the four asset types — physical, human, intellectual or relationship capital.
Leaders must reallocate funds to create business model change, but most leaders are held captive by outdated business models.
According to John Sviokla, head of Global Thought Leadership at PwC, in his article ‘Four Business Models for the Digital Age’, opportunities for companies in every industry are occurring on two critical dimensions: knowledge of the end customer and breadth of product and service offerings. These dimensions combine to form four business models for creating value: Suppliers, Multichannel Businesses, Modular Producers, and Ecosystem Drivers.
The companies that have truly built network-orchestrating organisations don’t just do one thing differently; they do everything differently — from leadership to recruiting to production to advertising.
Network-vs. Firm-Centric Thinking
Each of these principles is a lever that organisations can use, and are using, to transform their business models and their industries around them.
And networks have evolved differently in different industries — from transaction platforms like Apple Pay and Paypal to marketplaces like Etsy and Ebay to social platforms like Facebook and LinkedIn. Even further, networks are crossing traditional industry and geographic bounds, making our traditional ways of looking at the market obsolete.
Overall, networked business models unlock greater growth, revenue, profit, and value, but achieving them requires existing leaders to adapt not only what they do, but also how they think, in order to adapt their people, processes, products and technologies to the network world.
But to be successful in the sharing economy, you have to build trust among users as well as convey authenticity and transparency in letting the users shape the platform, for enriching experiences.
As well as being a preoccupation for individual businesses, business model innovation is also an issue for national economies.
Finally, it is also important to further develop the shared value concept and acknowledge the importance of value creation and business sustainability by investing into systems that help transform the value chain.
Learn more: The Network Imperative: How to Survive and Grow in the Age of Digital Business Models