127 – ‘A new theory of value creation for local government’. Do we need one? Part 2 – Business Model.

Posted by Lancing Farrell                                                                              750 words

walt disney theory of value creation

Image: ‘The greatest theory ever told’ – Walt Disney’s 1957 value creation map.

This is the second post in the series intended to make the case for a new theory of value creation for local government. The first post discussed business strategy. This post looks at the link between strategy and the business model.

Once the strategy has been determined, it leads directly to the selection of a business model that can deliver that strategy. I have chosen the following description of a business model from organisational theorist and academic David Teece to set the scene.

“Whenever a business enterprise is established, it either explicitly or implicitly employs a particular business model that describes the design or architecture of the value creation, delivery, and capture mechanisms it employs.

The essence of a business model is in defining the manner by which the enterprise delivers value to customers, entices customers to pay for value, and converts those payments to profit.

It thus reflects management’s hypothesis about what customers want, how they want it, and how the enterprise can organize to best meet those needs, get paid for doing so, and make a profit.”

As with strategy decisions, the difficulties for local government are again apparent. Management must be clear about what the community wants (i.e. the public value expected) and how to deliver it by designing an organisation structure and work processes, and managing the people who work in those processes to create the required value efficiently. This is made difficult by the nature of public services in which tax payers (i.e. property owners) are not always the recipients of services (e.g. residents) and payment is not made at the time of service consumption. Choice, price and payment are not available as guides to value.

The divisions within a community often lead to ‘customer’ segmentation, even if that is not formally acknowledged in business strategy. Not everyone can receive a service if it is aimed at particular age groups or if it is means tested. Most services are universal and available to all residents, but not all. Greater use of segmentation could increase satisfaction with services and make delivery simpler and more efficient.

One solution is proposed by academics Ramon Casadesus-Masanell and Jorge Tarziján.

“Trying to operate more than one business model at a time is devilishly difficult—and frequently cited as a leading cause of strategic failure. Yet situations abound where a company may wish or need to address several customer segments, using a particular business model for each one.”

They see the opportunity for an organisation to have several business models to meet the specific requirements of different customer segments. This makes sense for a diverse service organisation like a council.

The final words on business strategy and business models comes from Todd Zenger who highlights the predicament facing a Council and the Executive in determining the appropriate strategy to create the value sought by the community.

“Value creation in all realms, from product development to strategy, involves recombining a large number of existing elements. But picking the right combinations out of a vast array is like being a blind explorer on a rugged mountain range. The strategist cannot see the topography of the surrounding landscape – the true value of various combinations. All he or she can do is try to imagine what it is like.

In other words, leaders must draw from available knowledge and prior experience to develop a cognitive, theoretical model of the landscape and then make an educated guess about where to find valuable configurations of capabilities, activities, and resources. Actually composing the configurations will put the theory to the test. If it’s good, the leader will gain a refined vision of some portion of the adjacent topography – perhaps revealing other valuable configurations and extensions.“

Effective strategy creation and development of the most appropriate business model will require close cooperation between the councillors, the CEO and senior management of the council. This is not always forthcoming. There is not always the level of trust required for the ‘exploration of mountain ranges and imagining’ together. The risks inherent in an adaptive strategy model as described by Zenger are a significant impediment to its use in local government. But it needs to happen if local government is to stay in touch with the value expectations of the community.

Zenger cites the theory of value creation developed by Walt Disney (shown at the start of the post) as an example of how vision is embodied in strategy to drive the asset and capability combinations (operations strategy) required for delivery.

More on operations strategy and operational capability in the next post.

Zenger, Todd 2013. What Is the Theory of your Firm?’, Harvard Business Review, June.

Casadesus-Masanell, Ramon and Tarziján, Jorge 2012. ‘When One Business Model Isn’t Enough’, Harvard Business Review, January–February.

Teece, David J. 2010. ‘Business Models, Business Strategy and Innovation’, Long Range Planning, 43.