School of Business and Management

Accounting for Business Models: Increasing the Visibility of Stakeholders

Professor Colin Haslam Queen Mary University of London

School of Business and Management Introduction

» Business model framing: Structure and Value Proposition

• Business Model Structure: Stakeholder Relations

• Business Model Value Proposition [liquidity and solvency] – from value: creation, capture and manipulation.

» Business models: Accounting disclosure

 Maintenance  Reinforcement

School of Business and Management Business Models

• The literature on business models is • Business models as mapping value grounded in economics and creating innovations [products and strategy: services] into receptive customer /household demand. • VALUE CREATION : framed in economics / resource based theory • Supplemented with appropriate and related to competences of firms policies directed at capturing value. /capacity to resist imitation –and exploitation of unique attributes • Teece still concerned about the • VALUE CAPTURE about firm’s value framing of business models chain –the ‘integrated business model’ or the ‘out-sourced’ and – The concept of a business model lacks combinations in between. theoretical grounding in economics or in business studies [Teece, 2010:5]

School of Business and Management Framing Business Models

• Structure • Our work [Haslam et al 2012] has been focused on framing business • On structure: A reporting entity’s models . (focal firm) interactions with its stakeholders broadly define the nature of the business model to which • There are two key elements to our it belongs. approach to framing • Value Proposition

• Structure • A business model should enable a reporting entity to generate cash and surplus [for liquidity] and ongoing • Value Proposition recapitalisations [for solvency] if it is to secure its value proposition

School of Business and Management Business Models: Stakeholders? • The academic literature on business models mentions stakeholders but in a limited fashion.

• Osterwalder et al (2005) in their review article Clarifying Business Models: Origins, present and future of the concept, note one article surveyed mentions ‘stakeholders’.

• The IIRC literature survey (2013) on business models also does not mention International Integrated Reporting stakeholders in the list of key business Council (IIRC)—Business Model model components /organising Background Paper http://www.theiirc.org/wp- elements. content/uploads/2013/03/Business_Model.pdf

School of Business and Management Business model: Value proposition

• A focal firms business model may enable • A reporting entities disclosed financial (or frustrate) capacity to sustain a viable numbers congeal the variable impact of value proposition (liquidity and stakeholder interventions arising out of solvency) from: its value proposition. – Value Creation • Product and process innovation and • Disclosed financial numbers reflect not renewal only contractual and transactive – Value Capture stakeholder relations (from a Coasian • expense displacement and margin perspective)…but also the impact of capture stakeholder relations that are non- – Value Manipulation contractual/transactive in nature but impact upon reported financials. • Ongoing recapitalisations and holding gains extraction

School of Business and Management Accounting for business models School of Business and Management Accounting for business models: Maintaining disclosure

• From an accounting perspective a • This functional approach to disclosure viable business model value needs to be supplemented with proposition is one which generates expenses disclosed ‘by nature’ (IAS1 cash [for liquidity] and ongoing and see also EFRAG and IASB) capitalisations [for solvency] • Disclosure of expenses by nature • However accounting disclosure formats would: tend to obscure the impact of stakeholder relations on the financial – Increase stakeholder visibility and impact statements upon financial line items

• This is because accountants generally – Facilitate an analysis of the distribution of disclose expenses by their ‘function’: income to stakeholders cost of goods sold, selling and – Reveal changes in the financial boundary of a distribution, marketing and research reporting entity. and development.

School of Business and Management Accounting for Business Models Reinforcing disclosure :

• In recent years the accounting regulatory • We believe these initiatives by the accounting bodies have sought to modify the accounting regulatory bodies are an important project. conceptual framework and disclosures for relevance. • However we would wish to add an additional

• A ‘business model’ approach would enhance dimension –that is reverse the disclosure disclosure. [ICAEW, 2010, EFRAG, 2013, IASB polarity from ‘reporting to stakeholders’ to ,2013, IIRC, 2013] ‘reporting about stakeholders’

• Specifically, it would add context about • Specifically, we have in mind how a reporting measurement and provide user’s with (more) entity’s relationships with stakeholders are relevant information. evolving and impacting upon its ‘value proposition’: in terms of cash [for liquidity] • The disclosure project is thus concerned with and balance sheet capitalisation [for how a reporting entity’s business model could act to filter out relevant information for solvency] decision makies [either a narrow / broad group of stakeholders].

School of Business and Management Summary

• Our objective is to frame business models using two key organising elements: structure and purpose, – Business models structured from focal firm-stakeholder relations

– Where a business model enables [or frustrates] value propositions from: • Value creation • Value capture • Value manipulation

• Accounting disclosures are a useful resources to elucidate as well as develop our understanding of a focal firms business model viability. But we need to: • Maintain disclosure of expenses by nature • Reinforce disclosure about how stakeholder relations impact on the value proposition.