Ann and Derek extol the virtues of the business model in value creation as well as leadership, management, and aligning the people.
Join Derek Hudson as he explores Essential Dynamics, a framework for approaching the challenges facing people and organizations. Consider your Quest!
Welcome to the Essential Dynamics Podcast. I'm Derek Hudson. Essential Dynamics is a framework I've been developing to help us think through our most important challenges and opportunities. In the podcast, we test the concepts of essential dynamics through deep conversations with interesting people. Ann MacTaggart is back on, one of the most interesting people I know.
Derek:Ann, thanks for joining us again. How are you?
Ann:I am good. Thanks for having me, Derek.
Derek:You know, we had a great conversation last time, and I'm wondering what were some of the highlights that, that you took away from the conversation that we had about business models.
Ann:Well, I, our summary or my summary of our business model conversation was, like, what is it, and what is it not? And I would say that the top points around a business model, allow management to use be able to predict. It allows us to break down silos in organizations. And you had a funny comment about how it was funny, but it it's real, how you have an organizational chart, which is just the silo chart. And I thought that was pretty cool, but a business model is not that.
Ann:It's one one system that the business is a foundational piece to the business of how it works. And there's a lot of pros and cons to having one, and we talked about some of those. And today, I think that we wanna kind of follow on that conversation and talk a little bit about, like, what exactly do you mean when you say business model? What's in it?
Derek:Fair fair fair enough. I just wanna pick up a couple of things, from what you said. One of the one of the reasons that business models help management predict what's gonna happen is they're designed to be this feedback loop.
Ann:Mhmm.
Derek:Scientific experiment, if you will. We have a hypothesis, and we, then observe what really happens, and then we can adjust our business model based on what we learn about what really happens, which is not as common business as you might think. And the other thing is that it is it's based on a system view of an organization. And if essential dynamics is anything, it's it's trying to help us think of things as systems. As as we know in essential dynamics, we have the idea of a quest.
Derek:So there's this worthwhile purpose, and there's a group of people who have to make a journey. So the people travel on a path to accomplish the purpose. The path is the systems and processes that we would work on, work use to accomplish the purpose. And so we can take that right into a business or an organization. So one of the things I wanna start with in today, Ann, is maybe the difference between a strategic plan or a strategy and a business model.
Derek:And, I mean, these are these are subject to other people's definitions. And so I guess the way the way we think of them, they're different. Maybe you could start with what you how you would describe a traditional strategic plan that that you've been involved.
Ann:I would summarize a strategic plan by a a document that is a bunch of intentions and a bunch of approaches to intention. And it's very conceptual, but it's not oh, and therefore, not overly practical. Because if you strategic plan, you just talked about that it's kinda like a a business model is like a a scientific experiment where you can iteratively test a hypothesis. A strategic plan, you can't. It's just we strategic plan.
Ann:We set up some strategies. We have some idea what we wanna do, but we don't actually make it practical to be able to test the hypothesis that doing it that way with that strategy is actually, gonna get us the furthest down the path.
Derek:You know, I think that's I think that's a good way to put it. I did wanna share this quotation. I brought it to I brought it this is my homework. I brought it
Ann:Oh, nice.
Derek:Meeting today. Also from Richard Raumel, good strategy, bad strategy. I quoted it in the quoted that book in the last podcast. But he says, bad strategy flourishes because it floats above analysis, logic, and choice. Yes.
Derek:Held aloft by the hot hope that one can avoid dealing with these tricky fundamentals, and the difficulties of mastering them. So I would say perhaps then that a strategic plan is what you do if you don't have a business model. Mhmm. And you're asked, what are you guys gonna do? What's the plan?
Derek:And and without the understanding of how the interrelated components come together to add customer value, all you have left is, like you said, a book of intentions.
Ann:Yeah. I think it's also, the the what am I trying to say? It's also the the concepts versus the practical. And if if they never meet, it's it's not a value in time. And it's also almost like the path of least resistance.
Ann:It's easier to create a strategic plan because you don't actually have to be accountable to it, whereas it's really hard to really look at the business model that you currently have and understand it in that one system for your business, how it creates value, and then also spend even more time in understanding it so that you can look at where can I change it to go where I wanna go with the business?
Derek:Yeah. I I wanna pick up on that word change. And so a lot of times, the strategic plan in, you know, in sort of more ambitious organizations or more ambitious circumstances, the strategic plan is the list of changes that we want to make to the organization.
Ann:Mhmm.
Derek:We're not going to say anything about, you know, current modus operandi. We're going to talk about what we're going to do different in the future, which is very, very difficult to implement if you don't have a handle on how things are operating now. And I'll just use one example. We've talked a lot about in a system that's trying to produce an output, there's one limiting factor. Because everything else, by definition, one has the lowest capacity and everything else has higher capacities, and so that one limiting factor limits the output of your system.
Derek:If your strategic plan talks about improving the organization in a place that's not the limiting factor, that's not the constraint, the improvement isn't gonna flow through the system. It's gonna get jammed up at the constraint, and, you won't see the output. Yes. And that's kind of by definition. So for example, if you have a growth strategy, and as part of that growth strategy, you build a plant, but you don't get orders to fill the plant with, the plant is not gonna create more, you know, value to the customer or or to the, to the owners.
Derek:On the other hand, if you have a great marketing strategy and you the orders line up, but you have no capacity to fill them, then you're also not gonna create the outputs that you want. And so you really do need to understand the value chain, how the pieces flow together to even have a any kind of a shot at, stepping it up and improving it. But but I'd say one of one of the things that I think you, highlighted in our last discussion was that business model is also a mindset.
Ann:Yes. Can
Derek:you talk a little bit more about that?
Ann:Yeah. It's the mindset or it's the boss because it allows people to, one, align and understand the purpose, but it also allows you to use it to validate your choices, which choice is the best the best choice.
Derek:Does that
Ann:answer your question?
Derek:Well yeah. So a my a mindset kind of sets up what you think is valuable, what you think is important, and that is a way of making decisions. That's a that's a way of influencing decisions that are made. And so one of the things we want to see in a business model is the ability to make good decisions. And good decisions typically are ones that are gonna improve the output of the entire system.
Ann:Yeah.
Derek:We've we've talked about breaking down the silos, and so that's a full system view of an organization. That's a that's a tremendous mind shift change for most people in most organizations, because typically you have allegiance to your little tribe, and, you just want to do your job and, you know, not be bothered. When you have a business model that everyone understands, and they understand how they contribute to the system, then there's an opportunity to make better decisions at a higher level, actually, up and down the levels of an organization because it's all about optimizing this process that creates value in an organization.
Ann:I think the other thing that I would add to that is the mindset using the business model also allows less finger pointing between the silos because success is what comes out of the one system, not me as the one department leader Yeah. Out of my system.
Derek:So this is probably jumping ahead to something we'll talk about maybe in future podcasts. But anytime you have group measures of performance Mhmm. You can suboptimize on those different groups or silos without getting any more output.
Ann:Yeah. I did my part. I'm good.
Derek:Not my problem. I would like to talk then a little bit about some of the things that we we wanna see as we start to think about, conceive of, and document the business model. And I'm going to start, and then let's just kind of like build to the list. So
Ann:Sounds good.
Derek:One of them is you have a really clear understanding of your purpose. Mhmm. And we've talked there's lots of, podcast episodes and lots of material I've put out on purpose x and purpose y. The idea that there's complimentary purposes in a balance of short term, long term, or this stakeholder, that stakeholder, whatever it is. And then we gotta jump from that to the, what the customer values.
Derek:Yes. If we're talking about a for profit business operation, you need to create value to the customer to fuel the machine and to ultimately accomplish your purpose. And so we go for purpose x, purpose y to value to the customer, and then we back that up and create the value chain of major process steps that give get value to the customer. Yep. So I would say that I haven't I don't have a list in front of me, but purpose definition and value chain would be two of the top things that we'd be considering.
Ann:Yes. But I also think the other piece that we absolutely have to have, which I'm sure you've spoken about in your, other podcasts is the people or the resources. Money, people, where they fit in that value chain.
Derek:Well, I'm and I'm gonna make a distinction between, the resources and the people. And that I think you buy the resources and then and then the people add the value.
Ann:Oh, fair. I like that. Yes.
Derek:Right? So so I can buy raw materials, and then, you know, if it's Santa's workshop or whatever, given that, we're approaching Christmas here, there's the the materials that the toys are made of, and then the elves make the toys, and it's it's the human component that really adds the value. And I agree. And so in the value chain, I I hope I hope we're thinking about that. And then in our context of, this idea that people are motivated by things that have meaning to them, having a clear purpose and a clear value chain gives people the opportunity to see themselves in the process of creating value.
Derek:One of the one of the things that, that I've had the opportunity to do a few times in organizations is to lead the part of the organization that doesn't obviously create the value.
Ann:Yes. So It's overhead people.
Derek:Corporate services, finance administration, overhead people. But when that group understands how value is created in the organization and what's needed for all the steps, then you can see the value of accounts payable, paying suppliers on time so that materials continue to flow. You can see the value of having a process to hire people so that the people can do the work as the business grows. And I think there's a a tremendous amount of value, even even sort of creation of culture
Ann:Yeah.
Derek:That can happen when people understand how value is created.
Ann:Yeah. Yeah. It also reinforces the comment we had earlier around breaking it down breaking down those silos or those departmental pieces. Because very often in organizations, you've seen it, I've seen it, that the folks that are in the services or the support services area are they don't understand it as well as others in the organization don't understand what value they bring to the overall output from the big system, which is documented in the business model.
Derek:Absolutely. So so that people element like, if your if your business model doesn't talk about how the people connect with it
Ann:Mhmm.
Derek:Or as as I as we say sometimes, how this model is actually gonna earn the hearts of the people. Not just that they're gonna understand it, but they're gonna, like, viscerally identify with the purpose of the organization and understand how they and other people can add value. Another thing I would add is that there has to be a financial component to a business model. There's there's other flows that I think about, but, you know, you and I, we we've developed, working together in the trenches, this idea of value creation management
Ann:Mhmm.
Derek:Where where you have to see where the value's created in an organization that can be sold to the customer, and we have to compare that to the cost of creating that value.
Ann:Yes. Yes.
Derek:And and I think it's a different way of looking at financial information than than, we're used to in terms of, like, a department budget or something like that.
Ann:Definitely. And it, we have a colleague, Dominico, who would, agree with us. He's a physicist, and he's not really the biggest, supporter of accountants in the true sense of accountants. And accountants and accounting standards do not it's not, a tool that is heavily it's the we try to heavily use it to manage our business or manage the business model or the system, but management accounting and through more what you're talking about is throughput accounting is not used as nearly as much as you would think. And until you actually look at a value creation management system or try to create a financial statement that articulates the work that's getting done and the inputs that are it takes to to get that work done, the human component, and come up with a measure to compare choices and and projects and track progress towards a goal, I I think that the value creation statement, if you wanna call it that, melds both the activities as well as the financials to that activities and the progress on the past.
Derek:I I'm gonna pause here for a commercial break. We're I don't think we can go any further in explaining this on a audio only audio only format, but if you feel like you would like to have, assistance developing an accounting system where you can actually track value creation in your organization, just go to getunconstrained.com and track track down Anne and I. We'd be happy to help. I'm just gonna bounce off of that to, just one more. I think that's all we have time for.
Derek:One more component of, of the value chain, and that is the flow. Absolutely. We talked about value creation, but we talked about the flow of work, and the idea that there is a constraint somewhere that limits the flow. And I am convinced that that's a phenomenon that every organization faces and most don't understand. And so you talked, earlier, I think it was maybe was last episode about levers.
Derek:Mhmm. If you can understand where your production is limited by the part of your business that has the least capacity, then you found a leverage point. And if you can organize your business around that, then small changes can produce significant results. If you don't understand it, you can do all kinds of work that's not gonna produce any more results because it's limited by the capacity of the one factor that, that controls your total output. And I and I think that, the value chain approach and this idea that we have of a business model, that really highlights that.
Derek:And that part of that understanding actually creates the mindset change that we've been talking about.
Ann:Yes. Or the hunt for those those constraints points.
Derek:And and and then the management of them when you find them. Yeah. And, it also reveals the dilemmas that an organization faces when they they naturally get to a constrained point because it's hard to do two things they wanna do. Otherwise, they would be easy. The easy problems have been fixed.
Derek:Yeah. It's the dilemmas where you you can see a solution to a problem, but if you implement the solution, you're going to cause another problem. Yeah. Things kind of tend to tend to stall out. And I would say that that particular, problem to focus on, that, you know, that stuck point is really what we talk about when we talk about getting unconstrained.
Derek:Is is that we're we're at a point where we we want to stop doing something or start doing something we can't because the action will create another negative thing in our minds. And we need to think it through, and the idea of a value chain in a business model reveals that, and that creates the the mindset change that we're looking for. That is so different than, wordsmithing a mission statement, color coding your priorities by department, and, and doing the graphic design on the PowerPoint presentation for your strategic plan for the board. And I don't mean to be critical of, of that work, but I would like to talk about effective use of everyone's time, and that would be to get more output for what we're putting in.
Ann:Totally agree. I think that the business model and the time and investment by the organization should be in the business model because that's the foundational piece. The strategic plan can be the communication piece or part of the communication piece to the community or the stakeholders, of your intentions knowing full well that you've got this system view of your business model that's gonna make it happen.
Derek:So you can you can make it happen because you understand the pieces and you've designed a system. We also said that if you don't get the output that you want, you've got something to start with, which is a model that could be tweaked and improved over time and may need to be with environmental changes or whatever. So if I go back to something we said earlier, if you're not actively predicting and making decisions to accomplish a goal, you're not managing. Yep. And so a business model is a fundamental management tool.
Derek:It's also a fundamental leadership tool in the sense that it's based on a chosen direction, a purpose that you want, and it's tightly integrated with the purpose. Absolutely. So for those reasons, I think that every organization, and many other and there are many other applications for just doing the work, to put a business model in front of you and then working off of that. Because like, like my my client says, business model is the boss. Yeah.
Derek:So, Anne, thanks for the thanks for, for all this. I keep every time we we talk about this, I learn more. And we are we feel a real need to share because we think this can help a lot of organizations. So I appreciate the time that you have. You can find Anne and I both at GetUnconstrained.com.
Derek:And we'd certainly be willing to walk people through the delightful course of study that might be a a value creation management system, which is just the coolest thing an accountant could ever work on. So thanks, sir. Or the
Ann:business model. Be fair.
Derek:Oh, yeah. That's the whole thing
Ann:is the
Derek:whole thing is
Ann:The base system.
Derek:It's fantastic because all accountants wanna do is they just wanna help.
Ann:Yes.
Derek:And everyone wants to be wants to see their place in the creation of value in an organization. So, you know, I I rest my case, and I would just like to say thanks, Bryn. Thanks, Anne. And I'm Derek. Until next time, consider your quest.