The Business Triangle — a simple framework for understanding the engine of your business

The Business Triangle

For a business to run effectively it needs to do three things really well — create value, capture value and be efficient in doing so.

This is a simple framework for understanding how these three things make the engine of your business tick. Applying this to your business can help you discover:

• How to structure your team effectively
• What to measure to understand how well your business is performing
• How to make your business more efficient in creating and capturing value

It can even be used to help design new business models.

This framework is all about the mechanics of your business and does not tell you what type of value you should create or how you should run your business — that’s up to you. 😊

Value Creation

Let’s use the following simple formula to measure Value Created:

(Average Amount of Value Created Per Person * Number of People Who Receive Value)/Time

So the total amount of value created is measured by the amount of people reached, multiplied by the amount of value they receive, in a given timeframe.

Here are some Value Creation components that are important for your business:

• Product — what you sell.
• Communications — what you say can amplify the value of your products or create value in its own right.
• Free Products/Content — giving away free products or content is a great way to create value and reach lots of people (see below).
• Distribution — the amount of people you reach with your products, content and communications directly affects the amount of overall Value Created.

Remember that time is a factor in all of this. For example, if we wanted to understand how much value is created over, say 50 years, that’s going to give different results to how much value is created over 1 month.

As a business owner, you might have a goal to build a business up to a certain amount of value within 5 years and then sell it, or you might have a goal to build a business that generates value over your lifetime and can be left as a legacy for the next generation.

Actionable steps to create more value

• Discover how you can multiply the value you already create — for example by building a compelling brand and story around your business you can amplify the existing value in your products.
• Not all value needs to be captured directly— creating lots of free content for example might not be directly captured as revenue, but it could be an efficient way to increase the amount of people you can reach in a cost effective manner and therefore increase your customer base and revenue indirectly.
• Understand how valuable what you are creating is — speak to your potential customers, run surveys and gather metrics that help you understand how valuable the stuff you are making or the things you are doing really are. You may find that your product is not actually a good fit for the people you are making it for and decide to make something else, or you might discover that you have a brilliant product and should focus more on methods of distribution…
• Pay attention to the efficiency of your distribution! Being able to reach people in a cost effective way is critical to the amount of value you can create. How to do this will depend on a lot of factors, but having a repeatable, cost effective and scaleable way to reach people with your products, communications and content can be transformative for your business so it’s worth spending time to get this right. Sometimes, this might require you to completely rethink your business model.

Value Capture

Businesses are not just Value Creation Machines — they also need to be able to effectively capture value and this can be understood by an even simpler formula:

Value Captured = Revenue/Time

Money is the magical component that enables trade and it’s the essential ingredient your business needs to survive. It can be used to build products, create content, develop a brand personality, pay staff and find new customers, amongst many other things!

Your business needs to be able to capture the value it creates in a cost effective way and within a reasonable amount of time, so you can pay your staff, create more value and reach more people.

Here are some Value Capture components that could be important for your business:

• Communications — the way in which you communicate, via email, social media, on your website, through support or anywhere else can affect both the amount of value you create and also your ability to capture it.
• Face to face sales — some businesses, particularly ones that sell high value products, use people to help sell their products and services face to face in order to capture value.
• Website funnels — the journey a prospective customer takes on your website before they buy from you can have an effect on the amount of value you are able capture.
• Automated email campaigns — educating people about your products and services through emails and videos can help you capture more value.
• Third party re-sellers — other people can sell your product for you and capture value on your behalf! This can also help with distribution.
• Payment mechanism — the way in which you actually capture the payment itself can affect how much you capture.

Actionable steps to capture more value:

• Know where you are already creating value and what type of value you are creating. Not all value can be captured by money, so be sure to understand where the monetizeable value is.
• Research and test your pricing. Putting a number on something like ‘value’ is difficult, both for you as a company and for your customers. Understand the value you are creating and help your customers understand this too. Price can even be a factor in creating value in its own right. Us humans are highly illogical and subject to all sorts of biases — knowing more about how our mind works can help us frame our products and their value more effectively.
• Refine your sales process — whether you sell face to face or use a highly automated funnel, continuing to refine the point at which you capture value and the journey leading up to this is key to increasing the amount of value you capture per customer. Run a/b tests, reduce friction at all possible stages and understand what’s working and what’s not.

Efficiency Of Operations

There are two important components that underpin how efficient your business is at creating and capturing value:

• Cost — how much your business pays out in a given timeframe, relative to the amount of revenue it generates
• Productivity — how much value you create and capture in a given timeframe

Or, described as a formula:

Efficiency = (Total Amount of Value Created * Total Amount Of Value Captured)/(Cost +Time)

Time and money are absolutely critical to your business. If it costs you more money to create value than you are able to capture, your business will run out of money and die. If your business takes too long to capture enough value to offset expenditure, it will run out of money and die.

Creating and capturing more value, for less (relative) cost in a shorter amount of time will make your business more healthy.

One thing to consider, which can affect both the productivity and the cost of your operation — is external factors. Competition, new laws, the economy and even the weather can affect your ability to operate, so it’s important to consider both your business’ ability to adapt to new conditions and also its defensibility against threats. A business that is strong in both of these areas has more chance of maintaining operational efficiency over time.

Actionable steps to increase efficiency

• Find cost effective ways of reaching people — whether that’s utilising as many free platforms on the internet like Google or Facebook, or developing a product that relies on other people inviting their friends or colleagues to use it, reaching lots of people cost effectively is one of the hardest parts of business to do successfully.
• Build a happy, healthy team — the people who work in your company will be more productive if they are happy and healthy!
• Create ‘more’ from the effort you put in — whether that’s developing multiple pieces of smaller cross platform content from a single video you produced, or whether it’s reusing elements of products you have built to create more products more efficiently, being able to create more valuable things with less effort is good!
• Measure and understand what’s working — spending money on things that don’t work will decrease the efficiency of your company. Measure the right things so you know where to spend your money.
• Do more in less time — if you can create more valuable products, more pieces of free content, distribute them to more people and drive more sales cost effectively in less time, you have a more efficient business than one that takes longer to do the same thing. Of course, rushing things and doing them less effectively and with less understanding of what’s working might lead to a less efficient business.
• Consider how to make your business model defensible — strong brand loyalty, patented IP, being first to exploit the market on a large scale, the effort required to switch to other products and difficulty to copy a product can all help your business to defend against threats.
• Ensure your business can adapt to changing market conditions and other external factors. For example, if you spend years planning and developing a complex product, by the time you have released it the market may have changed, or you mis-interpreted the market in the first place. Releasing smaller iterations of your product might be more effective in allowing you to adapt to new information.

Summary

By focusing on these the three critical components of Value Creation, Value Capture and Efficiency of Operations, we can understand how healthy our business is and what we need to do to improve it. We could even structure our company around these components by hiring staff who’s responsibility it is to own each component and the various metrics that describe them.

This post doesn’t cover other things that are important, such as what kind of value you want to create, how to measure intrinsic value, social impact and so on — it is designed to focus purely on the mechanics of business.

There’s a big difference between running a hedge fund, a music technology company and a craft baking stall and your motivation and goals as business owners will vary. But they all operate within the framework of trade and capital and they all share the same core underlying components.

I hope you enjoyed reading this take on what makes a business tick. I am by no means an expert, I run a small music technology company and have read a few books but that’s about it. So take everything you read with a pinch of salt, hopefully there are some ideas here that resonate with you. I’d love to hear your feedback, especially if you have an ideas about how the model could be improved.

Thanks! 😊