A couple of days back, at a meeting with my partners, we were discussing two of the four M’s in No Man’s Land: Management and Business Model. I asserted if I had to choose between great management and a really strong business model, I’d take the strong business model every time. The gasp from my partners caused the room to drain of oxygen. After all, the collective management experience in the room was a little more than 200 years, and we all considered ourselves to be capable managers and leaders.
The Best Indication of Perceived Value
Let’s dig deeper into the business model concept to determine why I would make such a claim. At its core, a business model describes the rationale of how a company creates, delivers, and captures value. It says a company can produce a good or service that its customers either can’t or don’t want to produce themselves. The value created is represented by all the costs 
that go into producing and re-configuring the good or service plus the margin the customer will allow. The margin is probably the best indication of the customer’s real or perceived value of the product or service. The real or perceived value is, in turn, greatly influenced by the customer’s need and the scarcity of the product or service.
New Value in a Common Beverage
Let’s say you want to offer a common beverage in a unique setting where several individuals can enjoy it together. Any one of your potential customers is fully capable of making this beverage at home at a cost considerably less expensive than you want to provide it. Moreover, they could easily invite friends and neighbors into their home to enjoy the beverage with them.
You, however, intend to provide the beverage in various exotic concoctions that would be somewhat difficult to duplicate. You’re going to provide it in pleasant surroundings where no one has to clean up before the friends and neighbors arrive or after they leave. You recognize there are no settings like the one you contemplate, which is designed to give your target customers a sense of community. How much would someone value such a beverage in such a place?
There’s such a beverage and such a place, right? It’s called Starbucks. According to Starbucks most recent annual report, their customers value this experience so highly they are willing to pay about 73% more than the cost of all the ingredients and store occupancy costs for the experience and are happy to pay about 21% more than all of Starbuck’s cash operating expenses. That’s some impressive value creation, delivery, and capture.
On January 8, 2008 Howard Schultz, Chairman of Starbucks and the company’s founder, decided he didn’t like the direction in which the company was headed, which is a nice way of saying he thought the company wasn’t being managed properly. So he installed himself as President and CEO in addition to Chairman, a position he had held from 1985 until 2000. In a letter to employees Schultz stated, "If we take an honest look at Starbucks today, then we know that we are emerging from a period in which we invested in infrastructure ahead of the growth curve. Although necessary, it led to bureaucracy. We will now shift our emphasis back onto customer-facing initiatives, better aligning our back-end costs with our business model."
The quote is management speak for, “The guy I’m replacing really messed up.” Well just how badly did the former CEO mess up? Whatever he did, he sure didn’t destroy the business model. The annual report for the fiscal year ended September 30, 2007 showed Starbucks’ customers were willing to pay 74% more than the cost of all the ingredients and store occupancy costs for their experience and 18% more than all of Starbuck’s cash operating expenses.
In other words Starbucks created, delivered and captured just about the same value it did when it was run by the guy who messed up as it does when it’s run by its genius founder. And that’s why I’ll take a strong business model over great management every time.
