Defining a Value Proposition using CATWOE

CATWOE is a conceptual tool and part of a systems approach to designing organisations/systems called Soft Systems Methodology. CATWOE is used to define a system. It is a mnemonic of customer, actors, transformation, worldview (or values), owner, and environment. I’ve used it for many years as means of defining the raison d’etre, or the core purpose of organisations and small businesses.

Business modelling, and the BMC (Alex Osterwalder’s Business Model Canvas) are not usually presented as an approach to organisation design, nevertheless, on close scrutiny, they are. For example, key activities plus key resources constitutes the structure of the organisation (the system) which is designed to realise what is referred to as the value proposition. I’ve said elsewhere here that the value proposition has two elements—exchange value (value to the business/company/organisation) and use-value (value to the customer). The most important of these is the latter, because unless a customer can conceive of a use-value, exchange (purchase) will not happen. Of course you can always promise use-value and use devious advertising to convince I prospective customer (or dupe)  that your product is the best thing since sliced bread, but you don’t really want to found your business on a fraudulent claim—do you?

I’ve used a slightly revised version of CATWOE to define businesses as systems based on conceptions of use-value. So what is use-value? It is the value derived from using a product or a service. Although the Eric Ries and Steve Blank focus on the creation of solutions to problems this is not the only foundation of a new small business. I’ve said enterprise is about doing good, and a business can be founded on the following.

  1. Creating satisfaction, delight, happiness and generally improving the life experiences of others, while doing yourself some good.
  2. Removing dissatisfaction, unhappiness, sources of frustration, and generally improving the life experiences of others, while doing yourself some good.
  3. Removing obstacles to others achieving good.
  4. Making improvements to any system by solving the problems identified with it.

At the heart of use-value then is user experience, and we are interested in the effect on the customer, or the way in which a business improves a customer’s experience of living, or their manner of living, their manner of being. This is what CATWOE, in the right hands, provides an understanding of. Putting this another way, it provides an understanding of how the influence of a business extends into the domain of the customer or end-user (they can be different), or how it extends into the living and/or working space. (Remember the importance google has attached to working space?) This is how it works.

Only after a system has been defined can the key or core activities or processes be described. To my mind, the definition of a business’s core-purpose, or its reason for being, is much less ambiguous then the idea of ‘the value proposition’. Defining your business or organisation is probably the most important and critical act you will ever do as a prospective entrepreneur or organisation manager. Doing so can improve customer orientation, lead to the discovery of new opportunities to innovate, clarify business values, lead to the construction of concise statements of core purpose as an aid to organization design (business architecture), and reveal the true context or niche of an enterprise’s operation (e.g., regulatory, geographic or cultural) from which it draws its main strengths, advantages and opportunities. Last but not least, it can improve alignment of knowledge and competencies of employees (both key resources) with customer/user expectations. Various methods have been tried for bringing businesses back in line with customer expectations, and employees with business expectations. They include mission statements, and strategic intent (from Gary Hamel and C.K. Prahalad), but arguably CATWOE  is the most effective.

Why define your business?

For many reasons, businesses and other kinds of organisations, large and small, profit and not-for-profit, drift away from the original objectives, and indeed values, of their founders, and so also drift culturally. Typically, new businesses begin with a single product aimed at a single market and grow by adding new products (or services) or by entering new markets with the original product. If, however, such drifting occurs in a series of knee jerk or reactive responses to opportunities and threats, at a pace that does not allow for adequate reflection on results and strategy, business development can soon get out of control. In the worst scenario, this can lead to a confusion of, sometimes, conflicting business objectives. Managers are pulled in different directions and consequently have difficulty prioritising, which circumstance leaves employees unsure of their own objectives and roles within the business. At the senior management level there may even be uncertainty about where to look next for customers.

Perhaps the most common cause of drifting occurs when a company begins to grow rapidly and business founders have to turn their attention away from the product or service concept on which they started the businesses to focus on managing a larger and larger administrative burden. Therefore, from time to time, it is important for founders to review their business activity to establish that business development is under control, that it is going in the right direction, is sustainable, and resources are not over stretched.   Alternatively, if one is proposing to start a new business, or adding a new activity to an existing portfolio, defining core purpose provides a reference point against which future business development can be compared.  In such circumstances defining the core-purpose of the business system will bring significant benefits. Typically these are as follows.

The most important reason for redefining or confirming an enterprise’s core purpose is that doing so could catalyse the rebirth of an ailing business leading to refreshed and invigorated employees ready to identify new opportunities to innovate.

It is a way of confirming a business has ‘stuck to the knitting’ and is not over stretching, but deepening its core competencies and knowledge.

It’s an act of establishing how far objectives and core values have drifted, and in what direction competency and knowledge has been taken or over stretched.

In either of the above cases, defining the core purpose of a business can ensure the way it is organised, and its strategy, is properly aligned with the needs, demands, or desires of the kind of customers it is best able to serve.

Used at the beginning of a new business project, defining the core purpose becomes the first step to designing a strategy and form of organisation with which an opportunity to do business can be most effectively exploited. It can also assist in identifying the resources, both human and otherwise, that will be needed and can highlight succession issues related to key technical/knowledge employees.

Last but not least, it can indicate when and how a single business operation needs to be split or when several businesses can be merged into one. Useful, therefore, when contemplating an acquisition or merger.

 Applying CATWOE

CATWOE is an approach to establishing why a system exists in the form it exists. And, of course, a business entity, a company, an enterprise, an organization, is a system.

CATWOE is used to generate a concise statement of system purpose. It is mnemonic created from the following list.

C is for customers (users, beneficiaries of the system service).

A is for actors.

T is for transformation.

W is for worldview (or values).

O is for ownership.

E is for environment.

In practice, a single statement of core business purpose is drawn together from answers to a set of questions under each category. The questions are designed to elicit the nature of the customer, the actors, and so on. For example, it helps to define the customer by asking the following questions.

Who are the customers and where are they located? What industry sector do they operate in? Who are their customers and what do they do?  How do customers use your product? How do they benefit from your product or service? What do they value that they get from your company specifically? Do you solve their problems? Do you make anything they want, to order?

Here is an example.

The founder of this company defined it as a manufacturer of coated metal parts. In two generations it had evolved to offer a large diversity of coating methods, which were captured in this CATWOE based definition. After using CATWOE, it is now defined as a service provider, and not a manufacturer.

ABC Ltd is a company based in S.Wales (E) owned by Mr Y. It aims to provide an excellent service (W), at a profit (W), to manufacturers (C) requiring the application of performance enhancing surface coatings (T) to metallic substrates (the metal parts) used in high performance and high value machinery and systems (for example aircraft parts).

The core purpose is, therefore, not to make or manufacture, but a service to increase the performance of components through the application of a surface coating.

If the business core purpose cannot be captured in a single sentence, it is indicative of the need for reorganisation, or, in extreme cases, of the need to split or divest certain parts of the company.

This example will be considered again presently, but for now let us return to the further exploration of CATWOE.

Actors are the people involved in delivering what the customer wants. Defining the actors helps to identify the main knowledge/expertise a customer relies on and also gives an indication of the sort of labour pool/talent market the company needs to draw its employees from. Deeper analysis will reveal specialist knowledge and expertise at the heart of the product/service being offered to customers and might ultimately lead to defining core-competency.

The way in which transformation is defined here is different to the usual convention. It usually refers to an internal process of turning inputs to outputs. Experience has led to a change in order to highlight where an enterprise needs to focus resources. Transformation is about results, or effects, or benefits for the customer and the manner in which they are achieved. If a company makes a diverse range of products it is usually possible to find a result from their use that acts as a common denominator for the range (see the examples of oral hygiene methods above). If one cannot be found, again it is an indication of the need to divide or divest part of a portfolio, or is otherwise an indication that the business being scrutinised is a holding company or conglomerate (usually only applies to very large businesses).

Worldview is the equivalent to the philosophy or values of the business, and tends to be closely aligned with those held by the founders or senior managers. For example, all businesses have to make a profit, but for some founders this simply supports a lifestyle choice. Profit is secondary to the lifestyle it facilitates, therefore, it is not valued above the quality of life.  Worldview or values are, again, derived from a series of questions such as: What values do you think your customers think you have? Are you fair minded, reasonable, believe in the quality of your product? Does the company care for the environment, look after its employees and ‘do good’ for its host community?

The answer to who owns the business is not quite as straightforward as you might think. In the context of CATWOE, the owner of the business is the person, or party, who can bring its existence to an end. Usually it is the founder or board of directors, or major shareholder (if different).  It is conceivable, however, for it to be the bank holding the overdraft or loan, or it could be the big customer that has not paid up. The point of asking this question is to establish where real power lies.

Finally, we turn to Environment. The term can have several interpretations, such as industry or sector, physical environment e.g. location, Wales, Hampshire. Or it might refer to the regulatory environment, especially if a business exists because of a particular regulatory regime, like health and safety. Defining the environment from different perspectives can reveal both threats and opportunities. E.g., with respect to location, opportunities come from grants to business, whereas threats to sustainability can emerge because of a shortage of suitable employees in the local labour pool.

Defining core-purpose

Please note, trying to fit all the CATWOE elements into a single sentence is not always desirable, as the statements can become very long-winded. Once the full definition has been agreed upon the trick is to capture its essence in an even more concise way. Below are some examples of full core business definitions. Note also, it is recognised that all businesses exist to make a profit. Their core-purpose, however, is related to how it is achieved.

Returning to the example above of ABC Ltd.

ABC’s business activities revolve around coating processes. The transformation is one of turning an uncoated to a coated component. The purpose of the coating, however, is key to defining the business system. In this case, the coating’s purpose is to protect, to extend the life of, in essence to enhance the performance of, certain kinds of components. In this case, many of the components were high value aerospace parts. The purpose of ABC Ltd, then, is to enhance the performance of components that would become parts of high performance and very high value machines. This is the functionality ABC Ltd provides to its customers. Stating the core-purpose covers high value parts, limits the customer base and focuses the business’s resources on high-value customers, as opposed to the young lad who came off the street requesting the company chrome plate his cycle frame. Further innovation is encouraged by the new awareness of the function of the coating and the question arises of how else could ABC Ltd. help its customers extend the life and enhance the performance of their components. For example, one of the ways was to provide a technical advisory service to assist customers design components with coating in mind (essentially an extension of the principle of design for manufacture). This service could then be extended to joint research projects that might lead to new coating compounds, new substrate materials, or a combination of both. Thus the selling of ABC’s knowledge and expertise becomes a new, but highly complementary, business. ABC Ltd. changes from a reactive  ‘manufacturer’ to a proactive high value adding service provider.

The reinvention of Colgate and other examples of using CATWOE are available at Peter Bond’s CATWOE presentations.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s