CGMA Business Model Framework Flashcards
How many elements does the CGMA Business Model Framework has?
4
What are the elements of the CGMA Business Model Framework?
- Definition of Value
- Creation of Value
- Delivery of Value
- Capturing of Value
What should organizations do in defining value?
They have to determine who they are creating the value for, with and why.
Importance of defining value
It enables an organization to devise value propositions that meets the needs of high priority stakeholders such as different customer groups.
What tool can be used to define value?
Stakeholder analysis
Stakeholder analysis
It can be used to define value. It is an iterative process involving 4 steps
The iterative process of defining value
- Identify stakeholders
- Prioritize stakeholders
- Identify the needs of the stakeholders
- Formulate the value proposition
Identify stakeholders
Organizations identify the stakeholders they seek to create value for and stakeholders who will help them do so.
Relevant stakeholders include suppliers, customers, employees and shareholders.
Prioritize the stakeholders
Prioritize and rank the stakeholders. Mostly, the customer is given the highest priority. Each stakeholder is ranked on the attributes of urgency, power and legitimacy.
Power
Stakeholders have power if they can impose their will on other parties in a relationship
Legitimacy
Stakeholders are legitimate if their actions or intentions are deemed appropriate according to the values or norms of the organization or the society in which they operate.
Urgency
Urgency relates to timescale. It is the degree to which a claim that is important to a stakeholder calls for immediate action.
Which stakeholder gets the highest priority?
The stakeholder who has all the three attributes gain the highest priority followed by the one with two of the three attributes then the one with one attribute
Why are customers usually ranked the highest priority?
They have power because they provide revenue.
They are legitimate because it is accepted that business require customers to survive.
Their claims have urgency because any potential loss of revenue or market share is detrimental to the business.
Identify the needs of stakeholders
The organization identifies the needs of stakeholders who have been classified as high priority.
This involves the communication with stakeholders including customers and staff who interact with them.
Increasingly this step involves the analysis of data relating to stakeholder behavior, to uncover insight relating to what customer value.
Formulate the value proposition
A value proposition that meets the needs of high priority stakeholders is formulated.
How does an organization formulate value proposition for customers?
Organizations formulate value proposition, identify parties who can help fulfill the value propositions and then find ways of partnering with these parties to create and deliver value to customers.
Compelling Value Proposition
It is a value proposition which is economically attractive for both the seller and the customer, creates one or more advantages for the seller, can be effectively delivered to the customer and positively positions the seller’s brand image and relevance in the minds of customers, partners, investors and other stakeholders.
Value proposition statement
It explains the benefit of the product or service and why the proposition is superior to alternatives.
Creating value
To create value, organizations must convert inputs to outputs that meet the needs of their customers.
How do organizations convert input to output?
Organizations make use of infrastructure, capabilities and relationships.
How many features does value creation have?
5
What are the features of value creation?
- Partners
- Resources
- Processes
- Activities
- Outputs
Partners
Organizations have to motivate and mobilize partners they identified when defining value to work with them in value creation.
These partners include suppliers, employees, contractors and others who provide the organization with access to markets, resources and technologies.
How can organizations motivate partners?
Organizations must build relationships, earn their trust and reward them appropriately for their contribution to value creation.
Resources
Organizations use their relationships with suppliers to source and secure the right inputs to convert into products or services that satisfy their customers.
Why do scarce and critical resources require particular attention?
To ensure availability and reliability of supply.
Processes
Organizations design, develop and deploy processes that provide the infrastructure to convert resources into goods and services.
Processes include steps, sequences and dependencies to be followed to achieve desired objectives. They show how things are to be done and use technologies and fixed assets.
Importance of high quality processes
High quality processes can lead to improved cycle time, productivity, quality and costs.
How can the quality of processes be measured?
By comparing the quantity of inputs to output- a measure of efficiency.
Activities
Organizations and their partners engage in activities that use the processes to convert resources into good and services.
What brings processes to life?
Activities
Workflow
The flow of activities within a process
Importance of design of effective workflows
It enables organizations to streamline processes, drive efficiency and avoid gaps and duplication efforts.
What constitutes activities?
Know how skills, learning and culture come together within activities to make things happen.
Key metrics for activities
Effectiveness
Efficiency
Outputs
By progressing through processes and activities, resources are converted into output.
Outputs are in the form of product, service and experiences that aim to meet the customer’s value proposition through product attributes and pricing.
Product attributes
- Product Design
- Features
- Style
- Quality
Why isn’t people part of value creation in the CGMA Business Model Framework?
People are integral to all aspects of value creation
Role of people in value creation
- Outputs are produced for people and used by people
- Processes including automated processes are designed and implemented by people.
- Partner relationships are built and developed by people
- People are often said to be the most important resource in an organization. Successful value creation depends on the abilities and actions of people.
- The people element of value creation is particularly important in activities. Activities use knowledge, skills, learning and culture all of which depend on people.
Delivering value
Organizations deliver value to customers by making goods and services available to them that meet their needs.
Revenue is generated when customers receive goods and services.
Customers have become increasingly discerning and demanding. They expect to receive relevant, targeted communication and a good customer experience. How can we achieve this?
To achieve this, organizations need to understand their customer segments and the most appropriate channel or channels to reach each segment.
Delivering value is about
- Customer segments
2. Channels
Factors that determine customer segments
- Geography where customers are located
- Demographic characteristics such as age, income, gender, marital status
- Lifestyle characteristics such as cultural practices or social values
- Behavior( for eg. Previous purchase history)
- Aspects of the product or service benefits (for eg a premium product or service)
- Customer behavior and feedback (for example, how they talked about the organization or brand on social media)
Five step process of segmenting customers
- Divide the market into meaningful and measurable segments according to customers’ need, their past behaviors or their demographic profiles.
- Determine the profit potential of each segment by analyzing the revenue and cost impacts of serving each segment.
- Target segments according to their profit potential and the company’s ability to serve them in a proprietary or distinct way.
- Invest resources to tailor product, service, marketing and distribution programs to match the need of each target segment.
- Measure performance of each segment and adjust the segmentation approach over time as market conditions change.
Highly sought after segments contain customers who;
- Purchase frequently
- Have relatively high average order values
- Make few(ideally no) returns
- Regularly leave product reviews
- Talk about their purchases on social media
- Regularly respond to special offers and promotion.
Channels
Organizations deliver value to customers through communication distribution and sales channels.
What do customers expect about channels?
They want channels to be accessible and the channels include mobile, PC, tablets and social media
Since the customer buying journey can be fluid and complex and involve multiple channels,
Those channels must be integrated.
Differences between platforms and channels
- Channel is a generic description( for example to refer to all social media) and uses the term platform to identify a specific application or technology( for eg. Meta)
- Social media can be used by an enterprise as a marketing channel, the same enterprise may choose Meta as one of its platforms to facilitate two way communication.
- Channels are one way pipes and platforms as two sided networks. Using this distinction, Netflix would be viewed as a channel, pushing content to an audience and YouTube as a platform operating as a network.
- Platforms serve different types of customers. For eg. Spotify serves individuals who wish to access music, record companies and artists who wish to sell music and businesses who have integrated Spotify into their own businesses.
Capturing value
Value is captured when the revenue earned from delivering value exceeds the costs of creating value.
Capturing value involves
- Cost model
- Revenue model
- Sharing surplus
Cost model
The cost structure or architecture of a business is established when defining value. It is influenced by the customer value proposition and the partnerships the organizations use to create and deliver value.
Actual costs depend on;
How well decisions are executed when creating value and when delivering value. For eg. The costs associated with channel creation, marketing selling and delivering goods and services to customers
Cost levels reflect the ff;
- Level of activity
- Efficiency of processes
- Price paid for resources
- Resources consumed during the period
Revenue Model
Revenue is linked to the organization’s pricing policy.
Effective pricing for different segments of customers can help ensure healthy revenue.
What determines the pace at which revenue is turned into cash?
- Terms of trade
2. Accounts receivable collection activities
What affects terms of trade and pricing?
Pricing- regulation eg. EU CAP, marketing conditions
Terms of trade- marketing conditions
Sharing and reinvesting residual value
When revenue exceeds cost, surplus is created. The surplus is typically shared between different stakeholder groups and in most cases, some is retained for reinvestment in the business.
Relevant stakeholder groups to be considered in the allocation of an organization surplus
- The government(taxes)
- Shareholders(dividends)
- Incentives for senior executives ( performance related pay)
- The organization itself( retained income for reinvestments)
Key considerations for decision making include ;
- Tax strategy
- Dividend policy
- Desired capital structure
- Investment opportunities
What should senior leaders consider when allocating relative share of surplus to stakeholder group?
The organization’s senior leaders need to ensure that the allocation does not harm the organization’s reputation or its ability to create and deliver value in the future.
Other tools and frameworks to analyze the business model
- Value chain analysis
2. The balanced scorecard
Value chain analysis
It is based on the principle that organizations exist to create value for their customers.
How can organization evaluate its capabilities?
By examining each of the primary and support activities.
Primary activities
- Inbound logistics- receiving, storing and distributing raw material used in production process.
- Operations- the stage at which the raw materials is turned into final production
- Outbound logistics- the distribution of the final product to consumers
- Marketing and sales- Advertising, promotions, sales force organization, distribution channels, pricing and managing the final product to ensure it is targeted to the appropriate customer groups
- Service- the activities needed to maintain the product’s performance after it has been produced including installation, training, maintenance, repair, warranty and other after sales activities.
Support activities
They help primary activities to function effectively.
- Procurement: how the raw materials for the product are obtained
- Technology- Used in R&D, in how new products are developed and designed and increasingly in process administration.
- Human Resource- the activities involved in hiring and retaining employees to help design build and market the product
- Firm infrastructure- An organization’s structure and its management, planning, accounting, finance and quality control mechanisms.
Why does value chain analysis have an internal focus?
It can help organizations gain better understanding of key capabilities and identify areas for improvement.
Balanced Scorecard
It enables an organization to identify and clarify its vision, and strategy and translate them into action. It provides feedback around both the internal business process and external outcomes to improve performance and results
How many perspectives does balanced scorecard have?
4
What are the perspectives of the balanced scorecard?
- Financial: financial performance is fundamental to the success of a business organization. Financial measures show what has happened but are not necessarily good indicators of future performance.
- Customer: measures included in the customer perspective relate directly to the customers and their satisfaction. Businesses recognize that customer satisfaction is key to customer attraction and retention.
- Process: it includes measures related to key business processes. For eg, the time taken to process an order
- Learning and growth: measures here focus on an organization’s development and learning ability. This includes staff development and the organization’s ability to change and adapt in response to changes in the operating environment.
Comparison of CGMA Business Model Framework to Balanced scorecard
- Financial perspective- capturing and sharing value ( shareholders)
- Customer perspective: defining and delivering value ( customers)
- Process, learning and growth perspective (creating value and processes)
