Leadership, focus, and the confusion of business models

As technological and scientific progress enabled standardized processes and treatments for precisely diagnosed disorders, hospitals commingled value-adding processes and solution shop activities within the same institution—resulting in some of the most managerially intractable institutions in the annals of capitalism…”We will do everything for everybody” has never been a viable value proposition for any successful business model that we know of—and yet that’s the value proposition managers and directors of general hospitals feel they are obligated to put forth.

Christensen, The Innovator’s Prescription, p. 75

As I continue to make my way through Clayton Christensen’s The Innovator’s Prescription and deepen my understanding of his take on U.S. health care, I keep stumbling across concepts and analysis that have applicability outside of health care to leadership more generally.

In this post, I want to look at the concept of mixed business models, i.e., “doing everything for everybody”, which Christensen sees as central to how hospitals and doctors can improve the delivery of their services. Here, however, I want to move the discussion beyond health care to consider how mixed business models present a challenge for leaders in any industry.

What’s a business model?

For Christensen, “every viable business model starts with a value proposition,” that is, “a product or service that helps customers do more effectively, affordably, and conveniently a job that they’ve been trying to do” (p. 75). Once you know what job you’re trying to help customers do, then you can decide which of the following three business models is right for your product or service:

  1. Solution Shop – structured to diagnose and recommend solutions to unstructured problems, e.g., consulting firms like McKinsey, ad agencies, R&D organizations, and many law practices.
  2. Value-adding Process (VAP) Business – structured to transform inputs of resources into outputs of higher value, e.g., retailing, restaurants, automobile manufacturing, petroleum refining, and many educational institutions.
  3. Facilitated Network Business – structured to operate systems in which customers buy and sell, and deliver and receive things from other participants, e.g., casinos, SecondLife, WebMD, and eBay.

Anyone interested in a deeper consideration of business models should definitely check out Christensen’s “Typology of Business Models” (pp. 20-25). For our purposes, however, what’s important to note about his analysis is that each business model operates in a very different way from the others to deliver value to customers and drives very different approaches to resources, process, and profit formulas.

Mixing business models

Given Christensen’s understanding of business models, you can easily see why mixing them would make it difficult for an organization to succeed.

To give a simple example, solution shops tend to charge on a fee-for-service basis, and “[b]ecause diagnosing the cause of complex problems and devising workable solutions have such high subsequent leverage, customers typically are quite willing to pay very high prices for the services of solution shops” (p. 21). VAP businesses, in contrast, tend to charge their customers based on predictable outcomes and tangible results: “the product or outcome is priced in advance, and because costs and outcomes are relatively predictable, most value-adding process organizations can guarantee their products” (p. 23).

Designing and running a solution shop versus a VAP business requires completely different approaches to pricing, staffing, forecasting, customer service, sales—basically everything an organization does to deliver their product or service to customers and support it.

Designing and running a solution shop and a VAP business within a single organization, in contrast, would require the coexistence and cooperation of both these approaches across all functional areas…a tall order for any leader to manage well.

The final word

For me, the take away from all this for leadership in general has to do with clarity: of customer, of value proposition, of delivery method(s), of product and service. As a leader, you need first to be able to look at your organization and discern what value proposition(s) you’re trying to provide your customers and what business model(s) you’re using to do so. Next you need to be able to determine whether your organization is trying to do everything for everyone and mixing business models in the process. Finally, you need to be able to lead the organization toward clarity of value proposition and business model, all while keeping the lights on day-to-day.

More to come on Christensen, of course (I still have another 370 pages or so to get through), but in the meantime, would love to hear from folks on his concept of business model: does it make sense? Or do you think he simplifies the issues too much to have them apply to the real world of 21st-century organizations? Have you had experiences that touch on these concepts? Whatever it is, bring it here, and let’s get the conversation started…

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