Value capturing

Business modeling

Plan-do-act cycle

The challenge

In a nutshell

The objective of the value capture phase is to set up a revenue model that appropriately corresponds with
an integrated business model. This revenue model is based on establishing an equilibrium between
increased economic revenue and the venture’s social mission.

The value capture process is the primary means by which the venture optimizes revenue streams and
administers allowable costs efficiently and according to economies of scale. The paradox of integrated
business models is to develop a model that captures value, but that does not conflict with the
organization’s social mission. Integrated business models, just like many other sustainable business
models, often increase costs and decrease revenue to yield a particular social impact.

Risk factors

  • Internationalization of cost: is that integrated business models absorb components in their cost structures to benefit the ecosystem as a whole.  The venture is put at risk when the costs of these components rise too high.

  • Inclusive revenue models: based on principles of social inclusion, the venture decreases its rates or is forced to pay for additional costly services to improve inclusion of and services to vulnerable groups. In doing so, it undermines its profitability.

While these remain relevant risks, integrated business models developed in recent decades have new ways of raising revenue without compromising their social mission. They do this by not only capturing value from the end- user, but from other stakeholders in the ecosystem.

Enhanced Value Capture

This business model captures value from different stakeholders in the ecosystem. There are three value capture layers present in the EVC:

  1. Layer 1: Transactional approach
    A transactional approach to customer value creation and delivery is concerned with value perception, ; i.e., how the user/customer perceives the product/service. However, this point of view is interpreted by the provider. It is essentially a unidirectional perspective on value, where value is developed by the venture and imposed on customers. Integrated business models differ, in this respect, by relying on a poly-consumer model rather than a mono-consumer one. Poly-consumer models involve multiple actors who are prepared to pay (partially) for services on the end- user’s behalf.

  2. Layer 2: Relational approach
    A relational approach to customer value creation and delivery is conceptualized at the venture or industry level. It is oriented more towards companies and managers than to consumers. This is a bi-directional view of value: by creating a platform (=reintermediation) for third parties to find customers willing to purchase their services, the venture develops value. These models are often (quasi-) open business models where different providers can offer their services. The startup reaps profit by creating matches between customer needs and product-service provision.

  3. Layer 3: Systemic approach
    A systemic or networked approach is concerned with customer value creation and delivery at a social level. It’s point of departure is a holistic understanding that encompasses the role and contribution of all players in the value creation, delivery and receipt network. Each of these must be systematically assessed to arrive at customer value creation and delivery. In these models, customers are often willing to pay for services if the startup can provide evidence that a certain deliverable or impact is guaranteed (i.e. results-based financing).

integration process

Value captured from the different layers of the enhanced value capture model facilitates the development of virtuous cycles where impact has a positive effect on profit deliverables and vice versa. The primary challenge to identifying the right, scalable revenue model is identifying these virtuous cycles.

The trick to this entails developing these virtuous cycles in order to integrate levers within the business model that lead to enhanced value capture. A benchmarking of several integrated business models assisted us in identifying five levers: personalization, digitalization and automatization, evidence-based data, shared accountability and social innovation.

Virtuous cycles
  1. Personalization and precision health
    Personalization is a game changer in the healthcare sector. One-size- fits- all solutions no longer measure up to customer expectations. That’s why personalization represents a crucial social challenge for integrated venture healthcare models: individuals require ventures to develop products and services that address their specific needs. For a venture to do this effectively, the impact and deliverable (product/services) have to be monitored (health efficiency, health outcome, patient experience, etc.).

    Prevention first
    Traditionally, healthcare systems primarily focus on patients who have a pre-existing or identified condition. They don’t focus on “patients” who are well. The emerging field of precision health encourages disease prevention and earlier detection by monitoring health and disease based on an individual’s risk. Actors can be encouraged to participate actively by using continuous health-monitoring devices, which provide a high-definition image of a person’s health. Precision health brings us into the field of personalization and pro-active (=preventive) health services. By integrating prevention into care models, disruptive, high-impact models can be introduced. \

    The forward-looking role of technology
    A lot of data is needed to make these models successful and to meet the highly individualised needs of end- users. This data is required for successful personalization, from developing predictive algorithms to using big data for smart segmentation. These factors all lead to the exciting field of artificial intelligence and machine learning. Ramped- up evolutions in the area of personalization and precision health are what make it possible for integrated business models to develop improved revenue systems where impact (and not just the delivery of a high-quality product) is in the venture’s driver seat . By discovering how integrated business models can grow through personalization and precision health, the potential of these models can be maximized.

  2. Digitalization and automatization
    Digitalization and automatization are disruptive trends in our society and in our markets. It’s important for integrated business models to embrace these evolutions because they facilitate and improve developments in an area of one-stop solutions for the end user. Digitalization can resolve key transaction costs and simplify processes for the end user.

    The benefits of digitalization are: Finally, digitalization makes it possible for the end user to be informed and coached throughout the journey using digital resources, which means it can also be done at a distance. Looking at this from a different perspective, i.e. with the supply-side in mind, digitalization may also significantly reduce coordination and quality- monitoring costs. Digitalization enables companies and healthcare organizations to develop efficient and effective protocols.

    • It cuts down on registration forms.
    • It can create a one-stop client-interface platform.
    • It simplifies financial and administrative paperwork.
  3. Evidence-based data
    As in many other sectors, healthcare is also entering the era of interactive data transformation, which is spurred on by advanced analytics and big- data technology. The catalyst for this transformation involves both the transition to evidence-based healthcare and the transition to value-based and quality-based payments.

    McKinsey developed five principles to consider when working with evidence-based big data:

    1. The right living: the user can gain added value from big data by taking an active role in prevention and personal care. This information can coach, adjust and encourage him or her to make decisions about exercise, diet, medication and other lifestyle choices.
    2. The right care: big data can contribute to the right choice of a care solution for the user and improve coordination of the models facilitating that care.
    3. The right provider: big data can help the user to choose the right provider.
    4. The right value: evidence-based big data can demonstrate the added value of a bundled solution and contribute to an efficient choice.
    5. The right innovation: evidence-based big data makes it possible to identify new target group segments  that require innovative solutions. At the same time, it reveals new integrated business models able to benefit from the evidence-based evolution. This is made possible by combining economic performance with venture-savvy methods.
  4. Shared accountability
    An innovative approach to collaboration is the shared- accountability model. Companies, suppliers, healthcare actors and users are jointly responsible for improving results and reducing costs in this model. It goes beyond traditional risk shifts, such as contracts based on results by forging real partnerships with shared involvement in and responsibility for results. Shared accountability includes a smart connection between shared value and shared risk. When the benefits of all parties are aligned, shared accountability models are the most effective. The challenge related to this model is defining the measurement units that effectively measure results.

    Over the years, integrated business models have developed capacities that can be crucial to the success of these models. For example, a good understanding of all the phases that a healthcare user goes through during a project can help identify and escape pitfalls faced by healthcare and care providers, payers and users.

  5. Social innovation
    Social innovation is the development and implementation of new ideas— products, services and models — to meet social needs and create new social relationships or partnerships. There are a number of different drivers of social innovation in integrated business models:

    • Empowerment of the end-user: users are better informed and want to take greater control of their own health.
    • Socialization of care: the government cannot accept the challenge of care alone. Change requires a mix of market-based and socially-responsible solutions.
    • Prevention: the growing role of preventive services shifts the emphasis from innovative perspectives to an innovative vision of healthcare institutions where healthy living replaces caring for the ill as a central focus
    • Sharing economy: the shift towards a functional economy where ownership is no longer central, but where simplicity, accessibility and flexibility of solutions is increasingly important, accentuates the need for social innovation.
    • Technology and the last mile: the digitally connected society and the Internet of Things are important levers for efficiency and active customer relationships.
    • Behavioural change: care starts with the user and his or her attitude or behaviour towards preventive and curative solutions. Behavioural change is often required in these new models and social innovation can play an important role in this regard.
    • Collaboration between formal and informal care: renewed efforts and interest in creating  better partnerships to support and empower people with specific care-related needs has inspired formal or professional care providers to work with informal care providers such as informal caregivers, friends and family.
    • Results-driven financing: the trend to finance healthcare is increasingly results-driven,

    e.g. bundled payments and impact bonds. This pushes organizations towards innovative models such as the accountable care organization

The incorporation of these levers for enhanced value capture creates new challenges for and complexities in the business model. More notably, however, it also allows for the development of a robust and future-oriented growth strategy for your venture.

The process
The process
Integrated value capture

This exercise begins by integrating the key levers of enhanced value capture, making it possible to develop the revenue, impact and cost model. These three models reveal how value will be captured in the integrated business model.

Incorporate the levers for integrated value capture in the model

To identify virtuous cycle opportunities where revenue influences social impact and vice versa, levers for integrated value capture have to be incorporated. Based on benchmark studies, five major levers have been identified: personalization, digitalization and automatization, evidence-based data, shared accountability and social innovation.

Step 1: Identify strategies your venture can use to integrate these levers as a growth strategy.

Develop an as-is baseline of the current value creation model. This is how the process operates prior to making any changes or improvements brought on by integrating levers.

Develop to-be scenarios or future states for the integration of each lever (personalization, digitalization and automatization, evidence-based data, shared accountability and social innovation).

Step 2: Compare the to-be scenarios with the venture’s outcome statement.

Assess the to-be scenarios with the planned impact and economic performance projections. Determine whether these scenarios make any sense in terms of venture growth social challenge and identifying virtuous or self-enforcing cycles in the business model where economic performances can boost impact (and vice versa).

Step 3: Draw up an inventory that includes the required adjustments to the value creation process, assumptions list and resources list/specifications.

Identify where adjustments need to be made between the as-is and to-be scenarios, using a small gap and requirement analysis. Adapt the assumptions list and resources list/specifications accordingly.

This results in the adjustment of one or more levers for enhanced value capture, which will strengthen the income model and the venture’s growth outlook (in terms of impact and market share).

Open and closed business model design

The purpose of this stage is to assess which parts of the venture can be organized from a venture platform perspective. Closed business models are business models where the value creation, capture and delivery are exclusively determined by the venture. In this case, other companies or care organizations could be considered the venture’s suppliers. However, the main processes and activities are owned and managed exclusively by the venture. In contrast, open business models invite other organizations to participate in the value creation, capture and delivery process. Advocates of open business models believe that companies that can transform their linear business models into network models will have a competitive advantage based on new insights into:

  • pricing
  • network effects
  • supply chains
  • strategy

These principles demonstrate how dot-com companies like Airbnb, Amazon, Apple and Google managed to attract millions of clients worldwide in a relatively short time. These companies are also able to expand existing transactions into new, associated products and services. However, in many ventures and sectors the decision on whether to work based on an open or closed model isn’t a discrete one: it’s a decision between which parts remain open for tapping into the value creation of the larger value net, and which parts remain  closed to retain its unique strategic positioning.

Resource Analysis

So how do you decide which areas of the venture architecture should be developed as part of an open business model? The first step is to gain an in-depth view of the nature of the resources and competences necessary for driving the different processes and activities within the organization. That’s where a resource analysis comes in. Resource analysis is a strategic planning tool for assessing:

  1. the resources required to support strategies;
  2. the resources required for a 'competitive' advantage;
  3. the competencies required to effectively use those resources,

An organization’s resources are as important as its ability to effectively use and manage those resources.

Resource gap analysis

Step 1: Identify the venture’s core-processes and direct output
To do this, go back to the drawing board and rework the baseline of the current value creation model. This is how the process operates after changes or improvements have been made by incorporating levers for enhanced value creation. Identify the direct output of each core process.

Step 2: Identify the activities required for producing the core processes and output
For each core process, list the different sub-processes or activities that must be organized.

Step 3: Map the resources and competencies required
The purpose of this step is to map which resources are required for carrying out each activity. There are several ways to categorize resources and competencies:

  • Physical: e.g., buildings and their respective capacity, relative age and condition will determine how useful or suitable they are;
  • Financial:  e.g., funders, sufficient working capital;  
  • Human resources: including the number and type of personnel required, total amounts, demography and skill levels;
  • Intellectual capital: e.g., brand names, reputation, client databases and venture systems.  

Step 4: Distinguish threshold resources and competencies from competitive ones

Threshold resources and competencies are the inputs required to implement a core-process, but that are not unique. These competencies and resources can usually be sourced from within the ecosystem. There is no strategic advantage to ensuring their presence in the organization itself. Competitive competences and resources, in contrast, are a must. They send a clear signal as to what the organization’s Unique Selling Propositions (USPs) are and that make it a market leader. Assess the list of resources and competencies and determine whether they are thresholds or competitive assets.

Step 5: Assess the potential for working with an open business model
Analyse which sub-processes or core-processes rely on threshold resources and competencies and which are both competitive and readily available on the market. Determine whether those that rely on threshold assets can be organized from a platform or open business model. Based on the outcome statement, verify whether conforms to your overall venture strategy.

Closed versus open business models
Enhanced value capture opportunities

Identify the enhanced value capture opportunities

After having identified and categorized the required resources, different revenue models can be identified. A revenue model is a framework for generating revenues. It identifies the following key factors:

There is nothing restricting businesses  requirement to remain limited to a single revenue model. In fact, by combining a variety of revenue models, a wider range of customers can be addressed.

Step 1: Re-actualise the value net analysis
At this stage, it’s important to revisit the value net analysis previously carried out in the value creation process. It is now possible to develop an improved version based on the changes the model has undergone as a result of incorporating levers of enhanced value capture. To accomplish this, follow the steps listed in the value creation process section.

Step 2: Map the added value streams identified in the different layers of the enhanced value capture model
Map the value streams in the EVC model’s various layers. The layers include:

  1. The transactional layer
    Here value creation is of a direct and transactional nature vis-a-vis the end- user. The end-user receives a product or service for a certain payment.
  2. The relational layer
    Value creation in this layer is indirect. It stems from the spill over created by providing the end- user with the service. For example, in an open business model, the venture can request a commission for customer leads generated for particular suppliers.
  3. The systemic or impact layer
    Here value creation is generated by the impact the product-service generates.

The exercise involves the mapping of every added-value stream into these three layers. An added-value stream entails:

  • the description of which type of actors (=roles) are involved
  • the description of the value unit (what is been traded)
  • the description how the value unit can be made transactional and tangible

This process of classification makes it possible to identify the type of revenue model with the potential to capture the value of the value-added stream.

Step 3: Match the value-added streams with the revenue model that optimizes the value capture for the venture
Line up each added value-stream with the various potential revenue models. Select revenue models that align well with the enhanced value capture layer. Check for conflicts between different business models. Scrap models that conflict with the impact model and prioritize models that benefit the impact model.  A benchmark of the current practices in the venture at this stage would be useful, followed by an assessment of acceptance levels of the different revenue models in focus groups.

Step 4. Define pricing strategy
The time has now come to estimate the potential revenue to be generated by the proposed venture. Integrated business models apply a value-based pricing perspective; they price a product based on the value the product has for the customer and not on its production costs or any other factor. This pricing strategy is frequently used where the value delivered to the customer far exceeds the cost of producing the item or service. At this stage it isn’t yet feasible to develop a correct price setting. Instead, a price range with a minimum price and a maximum price can be developed. To arrive at a reasonable estimate, a pricing logic is necessary:

  • Set your venture goals. How you make money determines all aspects of your marketing and sales. A venture goal can increase profitability, market access, larger market share, and can beat the competition.
  • Conduct a thorough market pricing analysis. While the first step is grounded in your venture goals, this step ensures that your pricing strategy analyses the context of the market in which your product or service will compete.
    • Analyse your target audience – talk with your consumers – assess which markets you will serve
    • Profile your competitive landscape – benchmark price setting in your market
  • Create a pricing strategy. At this point, enough data has been gathered to formulate a pricing strategy and you should be able to calculate a price range of a unit price for a value unit for different market segment.

Step 5. Develop an overarching revenue model
The overarching revenue model specifies at which point revenue will be generated in the business model:

  1. Targeted value unit for trade;
  2. Targeted capture value (which layer of the Enhanced Value Capture framework);
  3. Targeted income model options for use;
  4. Targeted market segment for service;
  5. The best-estimated price range of the value-unit for each market segment (minimum and maximum price).
Estimate costs

In this stage a cost model for the proposed venture based on the knowledge currently available will be developed. The cost structure defines all costs and expenses that your venture will incur while operating under your business model.

Step 1: Activity Activity-based costing

To determine what the ideal cost structure is, an activity-based costing model has been developed. Activity-based costing (ABC) is a costing method that identifies activities in an organization and links each activity’s costs to the resources from all products and services, according to the actual consumption of each one. This exercise involves the following steps:

  1. Identify the core processes and their output
    List your venture’s core-processes.
  2. Use a flow chart to illustrate the process activities.
    For each core-process, list the different sub-processes or activities that have to be organised. . Develop a process flow chart mapping the required activities.
  3. Identify the resources needed to carry out the activity
    Map which resources are needed to carry out each activity.
  4. Identify the main factors determining consumption of the resource and set the unit cost price for each resource.
    Develop an understanding of what drives consumption and set the unit cost price for each resource. For example: 1 km transport per truck.
  5. Determine the average consumption per unit of output
    Estimate how many units of the resource are needed for one unit of output (for example: 100 km truck transport).
  6. Calculate the average cost per unit of output (for example € xx per km)

This cost analysis allows the costs to be allocated to the output that the customer receives. It also makes it possible to carry out a sensitivity analysis and identify factors leading to potential cost-reducing innovations in future.

For additional help with this, please refer to the exercise in the resource analysis.

Step 2: Look for economies of scale

Based on this first framework of activity-based costing, decide which  funds the venture can deploy to reduce its pricing through investments and creating economies of scale. Economies of scale refer to the cost advantage experienced by a venture when it increases its level of output. The greater the quantity of output produced, the lower the per-unit fixed cost. Economies of scale also result in a decrease in average variable costs (average non-fixed costs), and an increase in output.

At this stage it’s also important to identify the tipping point or sales level (=volume of output units) at which investments made to create economies of scale result in a decrease in the average cost of the resource.

Based on this analysis an investment roadmap can be created for different market growth scenarios.

Step 3: Develop the overall cost model

The overall cost model clarifies the allowed allowed to produce and deliver value to the customer.

Create the overall impact model

Step 1: Re-actualize the identified impact value chain model

At this stage it should be possible to re-actualize the Impact Value Chain of how the venture’s activities will lead to the venture’s final deliverable and impact. The Impact Value Chain is the intervention logic articulating the relationship between the venture’s inputs, activities, outputs, deliverables, and impact.

Impact value chain
  • Inputs: all resources, whether capital or human, invested in the organization’s activities.
  • Activities: the specific actions, tasks and work carried out by the organization to create its outputs and deliverables and achieve its objectives.
  • Outputs: the tangible products and services that result from the organization’s activities.
  • Deliverables: the changes, benefits, lessons learnt or other effects (both long- and short- term) that result from the organization’s activities.
  • Social Impact: the attribution of an organization’s activities to broader and long-term deliverables.

Step 2: Identify the methods used to measure selected deliverables.

There are four characteristics of a good indicator:

  • In most cases, indicators should align with the organization’s purpose.. An exception to this rule is where a potential unintended deliverable has been identified. In this case, the relevant indicators for this deliverable may not align with the organization’s purpose.
  • Indicators must be “SMART”.
  • Indicators should be clearly defined so they can be measured reliably. Ideally it should be possible to compare these with indicators used by other parties.
  • More than one indicator should be used. Two or three are recommended to ensure reliability, but to cut down on potential confusion that could result from the use of too many indicators.

Step 3: Define ways to measure and monitor the indicators

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Create your deliverable model

Based on the revenue and cost model we can develop a more substantiated financial projection of the profits of the venture.  The impact model enables you to project the social deliverable of your activities. Check whether the projected profit/loss and deliverable are in line with your ambitions set-out in the deliverable statement.

Deliverables

Revenue, impact and costs are the key elements in the value capture phase. The deliverable of this exercise is a revenue model explaining how the venture intends to make profit and realise social impact at the same time.

The deliverable of the value capture stage is a clear strategy on how the venture aims to make sustainable profit, realise impact and administer its value creation processes. At this stage (based on the information we have) we can develop the venture concept statement. Such statements are often used as part of a venture plan or when proposing an idea to an investor or potential partner. The entirety of the venture or product is summed up in just a few sentences, yet enough details are provided to give audiences a comprehensive understanding of the idea. A well-written concept statement allows the listener to have a clear visualization of the venture.  An idea for a venture includes basic information such as the service or product, the target demographic, a unique selling proposition that gives a venture an advantage over competitors and the value capture model that spells out how the venture will create profit and impact.

Do not forget to re-actualise the working documents:

  • The reverse deliverable statement, which can be replaced now by the developed revenue- cost- and impact model.
  • Pro forma operations specifications, which lay out the operations needed to run the venture (see deliverable of product option analysis); those activities comprise the venture’s allowable costs. This can be re-actualised based on the resource analysis and the identification of cost-drivers and economies of scale.

The key assumptions checklist, which is used to ensure that assumptions are checked. Recompile the assumption checklist to ensure that each assumption is flagged, discussed, and checked as the venture unfolds.