VALUE MAPPING YOUR WAY TO BELIEVABLE BUSINESS MODELS
By Don Creswell, SmartOrg Inc.
My guess is there must be tens of thousands of Excel® business models created every day in an effort to guide management decision-making. Many of these models are exceptionally good, created by talented business analysts.
How many of these models actually help managers make better decisions? Based on discussions with frustrated executives and equally frustrated analysts I get the feeling that this number is quite low.
Why is this? Here is what I hear from both sides:
- “We do not understand the model” (management). “Management just doesn’t get it.” (Analysts).
- “After many reworks we do not trust the answers—reworked models are frequently chock full of errors.” (Management).
- “It’s back to the drawing board again and again; we have a hard time satisfying our bosses.” (Analysts).
- “Keeping track of versions is a huge challenge.” (Management and Analysts).
- “It’s really hard to gain support for a decision when the numbers don’t have real meaning to us.” (Management and Teams).
It appears that the issue is not primarily one of developing and crunching numbers but a social problem as well—numbers do not make decisions, people do. The challenge, therefore, is to bring key stakeholders into the decision making process—but how?
Working with companies in a variety of industries my colleagues and I have found Value Maps™—graphic representations of business models—to be a great tool for bringing analysis together with the social side of decision making.
In the example below, a Value Map displays four components that lead to calculation of the Expected Net Present Value for a new product under consideration. The map was developed during a facilitated workshop made up of stakeholders from Finance, Marketing and R&D.
The green boxes represent the primary components of a new product business model:
- Technical — what are the probabilities that we can move this product through four phases (Idea, Prototype, Productize and Commercialize) and associated costs?
- Commercial — what are the characteristics of the market (size, growth rate, margins; our peak share, etc.)? What are launch costs (marketing and sales, capital and manufacturing)?
The yellow ovals represent calculated values from the Technical and Commercial portions of the business model. The calculations combine to display Expected Net Present Value (ENPV). ENPV is Net Present Value weighted for the impact of uncertainty.
Stakeholders, having been involved in developing the structure of the model during the facilitated workshop, develop a good understanding of the model structure and are more likely to buy into its results. The model is readily explainable to senior management.
Users interact with the Value Map business model via input templates that enable them to develop an unlimited number of “what if” analyses and immediately see the impact of their changes on ENPV. The template below shows a portion of the inputs for calculating the impact of New Product Market Share. Users provide Low, Medium and High values representing the range of uncertainty around each factor.
Value Maps have proven to be of significant value in developing business models that the people who make decisions can believe in, coupling analytics with social interaction. One of our customers wrapped it up nicely, “Value Maps bring my people together to discuss issues that affect value. The numbers, while important, are not as important as the conversations that follow.”
The Value Map and Input Template examples in this article are screen shots from Portfolio Navigator™, a web-based portfolio optimization system. For additional information: info@smartorg.com |
