Business Model Generation

In Business Model Generation the authors introduce the Business Model Canvas, a tool to visualize and discuss business models with the help of its nine building blocks.

What I really liked about this book is its design, the designer did a very good job. It also contains interesting case studies, though there could have been more of them. What I liked less is that the authors didn't go much into the details.

My notes

Business model innovation is about creating value, for companies, customers, and society. It is about replacing outdated models.

How can we systematically invent, design, and implement powerful new business models? How can we question, challenge, and transform old, outmoded ones? How can we turn visionary ideas into game-changing business models that challenge the establishment – or rejuvenate it if we ourselves are the incumbents?

Canvas

Definition of a Business Model

A business model describes the rationale of how an organization creates, delivers, and captures value.

The business model is like a blueprint for a strategy to be implemented through organizational structures, processes, and systems.

The 9 Building Blocks

1. Customer Segments: An organization serves one or several Customer Segments.
2. Value Propositions: It seeks to solve customer problems and satisfy customer needs with value propositions.
3. Channels: Value propositions are delivered to customers through communication, distribution, and sales Channels.
4. Customer Relationships: Customer relationships are established and maintained with each Customer Segment.
5. Revenue Streams: Revenue streams result from value propositions successfully offered to customers.
6. Key Resources: Key resources are the assets required to offer and deliver the previously described elements...
7. Key Activities: ... by performing a number of Key Activities.
8. Key Partnerships: Some activities are outsourced and some resources are acquired outside the enterprise.
9. Cost Structure: The business model elements result in the cost structure.

Customers comprise the heart of any business model. Without (profitable) customers, no company can survive for long. In order to better satisfy customers, a company may group them into distinct segments with common needs, common behaviors, or other attributes. An organization must make a conscious decision about which segments to serve and which segments to ignore.

Customer groups represent separate segments if:

• Their needs require and justify a distinct offer
• They are reached through different Distribution Channels
• They require different types of relationships
• They have substantially different profitabilities
• They are willing to pay for different aspects of the offer

For whom are we creating value? Who are our most important customers?

Business models focused on mass markets don't distinguish between different Customer Segments. The Value Propositions, Distribution Channels, and Customer Relationships all focus on one large group of customers with broadly similar needs and problems.

Business models targeting niche markets cater to specific, specialized Customer Segments. The Value Propositions, Distribution Channels, and Customer Relationships are all tailored to the specific requirements of a niche market.

Some business models distinguish between market segments with slightly different needs and problems (e.g. a bank dealing with customers with different wealth).

An organization with a diversified customer business model serves two unrelated Customer Segments with very different needs and problems (e.g. Amazon selling books and cloud computing).

Some organizations serve two or more interdependent Customer Segments (e.g. a credit card company, which needs merchants and card holders). Both segments are required to make the business model work.

The Value Proposition is the reason why customers turn to one company over another. It solves a customer problem or satisfies a customer need. Each Value Proposition consists of a selected bundle of products and/or services that caters to the requirements of a specific Customer Segment.

What value do we deliver to the customer? Which one of our customer's problems are we helping to solve? Which customer needs are we satisfying? What bundles of products and services are we offering to each Customer Segment?

Values may be quantitative (e.g. price, speed of service) or qualitative (e.g. design, customer experience).

Elements that can contribute to customer value creation:

• Newness
• Performance
• Customization
• "Getting the job done"
• Design
• Brand/status
• Price
• Cost reduction
• Risk reduction
• Accessibility
• Convenience/usability

Communication, distribution, and sales Channels comprise a company's interface with customers. Channels are customer touch points that play an important role in the customer experience. Channels serve several functions, including:

• Raising awareness among customers about a company's products and services
• Helping customers evaluate a company's Value Proposition
• Allowing customers to purchase specific products and services
• Delivering a Value Proposition to customers
• Providing post-purchase customer support

Through which Channels do our Customer Segments want to be reached? How are we reaching them now? How are our Channels integrated? Which ones work best? Which ones are most cost-efficient? How are we integrating them with customer routines?

Channels have five distinct phases: awareness, evaluation, purchase, delivery, and after sales. Each channel can cover some or all of these phases. We can distinguish between direct Channels and indirect ones, as well as between owned Channels and partner Channels. Finding the right mix of Channels to satisfy how customers want to be reached is crucial in bringing a Value Proposition to market. The trick is to find the right balance between the different types of Channels, to integrate them in a way to create a great customer experience, and to maximize revenues.

A company should clarify the type of relationship it wants to establish with each Customer Segment. Relationships can range from personal to automated. Customer relationships may be driven by the following motivations:

• Customer acquisition
• Customer retention
• Boosting sales (upselling)

The Customer Relationships called for by a company's business model deeply influence the overall customer experience.

What type of relationship does each of our Customer Segments expect us to establish and maintain with them? Which ones have we established? How costly are they? How are they integrated with the rest of our business model?

We can distinguish between several categories of Customer Relationships, which may co-exist in a company's relationship with a particular Customer Segment:

• Personal assistance
• Dedicated personal assistance
• Self-service
• Automated services
• Communities
• Co-creation

If customers comprise the heart of a business model, Revenue Streams are its arteries. A company must ask itself: For what value is each Customer Segment truly willing to pay? Successfully answering that question allows the firm to generate one or more Revenue Streams from each Customer Segment. Each Revenue Streams may have different pricing mechanisms.

A business model can involve two different types of Revenue Streams:

• Transaction revenues resulting from one-time customer payments
• Recurring revenues resulting from ongoing payments to either deliver a Value Proposition to customers or provide post-purchase customer support

For what value are our customers really willing to pay? For what do they currently pay? How are they currently paying? How would they prefer to pay? How much does each Revenue Stream contribute to overall revenues?

Several ways to generate Revenue Streams:

• Asset sale
• Usage fee
• Subscription fees
• Lending/Renting/Leasing
• Licensing
• Brokerage fees
• Advertising

There are two main types of pricing mechanism: fixed and dynamic pricing.

Every business model requires Key Resources. These resources allow an enterprise to create and offer a Value Proposition, reach markets, maintain relationships with Customer Segments, and earn revenues. Different Key Resources are needed depending on the type of business model. Key resources can be physical, financial, intellectual, or human. Key resources can be owned or leased by the company or acquired from key partners.

What Key Resources do our Value Propositions require? Our Distribution Channels? Customer Relationships? Revenue Streams?

Every business model calls for a number of Key Activities. These are the most important actions a company must take to operate successfully.

What Key Activities do our Value Propositions require? Our Distribution Channels? Customer Relationships? Revenue Streams?

Key Activities can be categorized as follows:

• Production
• Problem solving
• Platform/network

Companies create alliances to optimize their business models, reduce risk, or acquire resources. We can distinguish between four different types of partnerships:

• Strategic alliances between non-competitors
• Coopetition: strategic partnerships between competitors
• Joint ventures to develop new businesses
• Buyer-supplier relationships to assure reliable supplies

Who are our Key Partners? Who are our key suppliers? Which Key Resources are we acquiring from partners? Which Key Activities do partners perform?

It can be useful to distinguish between three motivations for creating partnerships:

• Optimization and economy of scale
• Reduction of risk and uncertainty
• Acquisition of particular resources and activities

Creating and delivering value, maintaining Customer Relationships, and generating revenue all incur costs.

What are the most important costs inherent in our business model? Which Key Resources are most expensive? Which Key Activities are most expensive?

Cost-driven business models focus on minimizing costs wherever possible.

Some companies are less concerned with the cost implications of a particular business model design, and instead focus on value creation. Premium Value Propositions and a high degree of personalized service usually characterize value-driven business models.

Cost Structures can have the following characteristics:

• Fixed costs
• Variable costs
• Economies of scale
• Economies of scope

The Business Model Canvas

Business Model Canvas

Patterns

Pattern in architecture is the idea of capturing architectural design ideas as archetypal and reusable descriptions.

Unbundling Business Models

The concept of the "unbundled" corporation holds that there are three fundamentally different types of businesses: Customer Relationship businesses, product innovation businesses, and infrastructure businesses. Each type has different economic, competitive, and cultural imperatives. The three types may co-exist within a single corporation, but ideally they are "unbundled" into separate entities in order to avoid conflicts or undesirable trade-offs.

The Long Tail

Long tail business models are about selling less of more: They focus on offering a large number of niche products, each of which sells relatively infrequently. Aggregate sales of niche items can be as lucrative as the traditional model whereby a small number of bestsellers account for most revenues. Long tail business models require low inventory costs and strong platforms to make niche content readily available to interested buyers.

Multi-Sided Platforms

Multi-sided platforms bring together two or more distinct but interdependent groups of customers. Such platforms are of value to one group of customers only if the other groups of customers are also present. The platform creates value by facilitating interactions between the different groups. A multi-sided platform grows in value to the extent that it attracts more users, a phenomenon known as the network effect.

Multi-sided platforms often face a "chicken and egg" dilemma. One way multi-sided platforms solve this problem is by subsidizing a Customer Segment. Though a platform operator incurs costs by serving all customer groups, it often decides to lure one segment to the platform with an inexpensive or free Value Proposition in order to subsequently attract users of the platform's "other side". One difficulty multi-sided platform operators face is understanding which side to subsidize and how to price correctly to attract customers.

FREE as a Business Model

In the FREE business model at at least one substantial Customer Segment is able to continuously benefit from a free-of-charge offer. Non-paying customers are financed by another part of the business model or by another Customer Segment.

Advertising is a well-established revenue source that enables free offers. In business model terms, FREE based on advertising is a particular form of the multi-sided platform pattern. One side of the platform is designed to attract users with free content, products, or services. Another side of the platform generates revenue by selling space to advertisers.

"Freemium" stands for business models, mainly Web-based, that blend free basic services with paid premium services. The freemium model is characterized by a large user base benefiting from a free, no-strings-attached offer. Most of these users never become paying customers; only a small portion subscribe to the paid premium services. This small base of paying users subsidizes the free users. This is possible because of the low marginal cost of serving additional free users. In a freemium model, the key metrics to watch are (1) the average cost of serving a free user, and (2) the rates at which free users convert to premium (paying) customers.

The demand you get at a price of zero is many times higher than the demand you get at a very low price.

"Bait & hook" refers to a business model pattern characterized by an attractive, inexpensive, or free initial offer that encourages continuing future purchases of related products or services. This pattern is also known as the "loss leader" or "razor & blades" model.

Open Business Models

Open business models can be used by companies to create and capture value by systematically collaborating with outside partners. This may happen from the "outside-in" by exploiting external ideas within the firm, or from the "inside-out" by providing external parties with ideas or assets lying idle within the firm.

Design

Businesspeople don't just need to understand designers better; they need to become designers.

A designer's business involves relentless inquiry into the best possible way to create the new, discover the unexplored, or achieve the functional. A designer's job is to extend the boundaries of thought, to generate new options, and, ultimately, to create value for users. This requires the ability to imagine "that which does not exist".

Businesspeople unknowingly practice design every day. We design organizations, strategies, business models, processes, and projects. To do this, we must take into account a complex web of factors, such as competitors, technology, the legal environment, and more. Increasingly, we must do so in unfamiliar, uncharted territory. This is precisely what design is about.

Customer Insights

Successful innovation requires a deep understanding of customers, including environment, daily routines, concerns, and aspirations.

The challenge is to develop a sound understanding of customers on which to base business model design choices.

The challenge of innovation is developing a deeper understanding of customers rather than just asking them what they want.

Adopting the customer perspective is a guiding principle for the entire business model design process. Customer perspectives should inform our choices regarding Value Propositions, Distribution Channels, Customer Relationships, and Revenue Streams.

Another challenge lies in knowing which customers to heed and which customers to ignore. Sometimes tomorrow's growth segments wait at the periphery of today's cash cows. Therefore business model innovators should avoid focusing exclusively on existing Customer Segments and set their sights on new or unreached segments. A number of business model innovations have succeeded precisely because they satisfied the unmet needs of new customers.

Customer-centric business model design: What job(s) do(es) our customer need to get done and how can we help? What are our customer's aspirations and how can we help him live up to them? How do our customers prefer to be addressed? How do we, as an enterprise, best fit into their routines? What relationship do our customers expect us to establish with them? For what value(s) are customers truly willing to pay?

To create a (Customer) Empathy Map, ask and answer the following six questions:

• What does she see? Describe what the customer sees in her environment. What does it look like? Who surrounds her? Who are her friends? What problems does she encounter?
• What does she hear? Describe how the environment influences the customer. What do her friends say? Her spouse? Which media Channels are influential?
• What does she really think and feel? What is really important to her (which she might not say publicly)? Try describing her dreams and aspirations.
• What does she say and do? Imagine what the customer might say, or how she might behave in public. What is her attitude?
• What is the customer's pain? What are her biggest frustrations? What obstacles stand between her and what she wants or needs to achieve? Which risks might she fear taking?
• What does the customer gain? What does she truly want or need to achieve? How does she measure success?

Ideation

Mapping an existing business model is one thing; designing a new and innovative business model is another. What's needed is a creative process for generating a large number of business model ideas and successfully isolating the best ones. This process is called ideation.

One challenge we face when trying to create new business model options is ignoring the status quo and suspending concerns over operational issues so that we can generate truly new ideas.

Business model innovation is not about looking back, because the past indicates little about what is possible in terms of future business models. Business model innovation is not about looking to competitors, since business model innovation is not about copying or benchmarking, but about creating new mechanisms to create value and derive revenues. Rather, business model innovation is about challenging orthodoxies to design original models that meet unsatisfied, new, or hidden customer needs.

Ideation has two main phases: idea generation, where quantity matters, and synthesis, in which ideas are discussed, combined, and narrowed down to a small number of viable options. Options do not necessarily have to represent disruptive business models. They may be innovations that expand the boundaries of your current business model to improve competitiveness.

Ideas for business model innovation can come from anywhere, and each of the nine business model building blocks can be a starting point. We can distinguish four epicenters of business model innovation: resource-driven, offer-driven, customer-driven, and finance-driven.

Resource-driven innovations originate from an organization's existing infrastructure or partnerships to expand or transform the business model.

Offer-driven innovations create new value propositions that affect other business model building blocks.

Customer-driven innovations are based on customer needs, facilitated access, or increased convenience.

Finance-driven innovations are driven by new revenue streams, pricing mechanisms, or reduced cost structures.

We often have trouble conceiving innovative business models because we are held back in our thinking by the status quo. The status quo stifles imagination. One way to overcome this problem is to challenge conventional assumptions with "what if" questions. With the right business model ingredients, what we think of as impossible might be just doable. "What if" questions help us break free of constraints imposed by current models.

A general approach to producing innovative business model options:

• Team composition: Is our team sufficiently diverse to generate fresh business model ideas?
• Immersion: Which elements must we study before generating business model ideas?
• Expanding: What innovations can we imagine for each business model building block?
• Criteria selection: What are the most important criteria for prioritizing our business model ideas?
• "Prototyping": What does the complete business model for each shortlisted idea look like?

A diverse business model innovation team has members...

• from various business units
• of different ages
• with different areas of expertise
• of differing levels of seniority
• with a mixture of experiences
• from different cultural backgrounds

Visual Thinking

Visual thinking is indispensable to working with business models. By visual thinking we mean using visual tools such as pictures, sketches, diagrams, and Post-it notes to construct and discuss meaning. Because business models are complex concepts composed of various building blocks and their interrelationships, it is difficult to truly understand a model without sketching it out.

By visually depicting a business model, one turns its tacit assumptions into explicit information. This makes the model tangible and allows for clearer discussions and changes.

Typically, if you aim to improve an existing business model, visually depicting it will unearth logical gaps and facilitate their discussion. Similarly, if you are designing a completely new business model, drawing it will allow you to discuss different options easily by adding, removing, or moving pictures around.

A set of Post-it notes is an indispensable tool that everyone reflecting on business models should keep handy. Post-it notes function like idea containers that can be added, removed, and easily shifted between business model building blocks. This is important because during business model discussions, people frequently do not immediately agree on which elements should appear in a Business Model Canvas or where they should be placed.

Drawings can be even more powerful than Post-it notes because people react more strongly to images than to words. Pictures deliver messages instantly. Simple drawings can express ideas that otherwise require many words.

The Business Model Canvas is a conceptual map that functions as a visual language with corresponding grammar. It tells you which pieces of information to insert in the model, and where. It provides a visual and text guide to all the information needed to sketch out a business model.

By sketching out all the elements of the Canvas you immediately give viewers the big picture of a business model. A sketch provides just the right amount of information to allow a viewer to grasp the idea, yet not too much detail to distract him.

Understanding a business model requires not only knowing the compositional elements, but also grasping the interdependencies between elements. This is easier to express visually than through words.

The Business Model Canvas is a shared visual language. It provides not only a reference point, but also a vocabulary and grammar that helps people better understand each other. Once people are familiar with the Canvas, it becomes a powerful enabler of focused discussion about business model elements and how they fit together.

I begin with an idea and then it becomes something else.

A visual business model provides opportunity for play. With the elements of a model visible on a wall in the form of individual Post-it notes, you can start discussing what happens when you remove certain elements or insert new ones.

When it comes to communicating a business model and its most important elements, a picture is truly worth a thousand words.

Prototyping

Although they use the same term, product designers, architects, and engineers all have different understandings of what constitutes a "prototype". We see prototypes representing potential future business models: as tools that serve the purpose of discussion, inquiry, or proof of concept. A business model prototype can take the form of a simple sketch, a fully thought-through concept described with the Business Model Canvas, or a spreadsheet that simulates the financial workings of a new business.

It is important to understand that a business model prototype is not necessarily a rough picture of what the actual business model will actually look like. Rather, a prototype is a thinking tool that helps us explore different directions in which we could take our business model.

Businesses that fail to take the time to develop and prototype new, ground-breaking business model ideas risk being sidelined or overtaken by more dynamic competitors – or by insurgent challengers appearing, seemingly, from nowhere.

By making a prototype of a business model we can explore particular aspects of an idea: novel Revenue Streams, for example.

Business model prototyping is about a mindset we call "design attitude". It stands for an uncompromising commitment to discovering new and better business models by sketching out many prototypes – both rough and detailed – representing many strategic options. It's not about outlining only ideas you really plan to implement. It's about exploring new and perhaps absurd, even impossible ideas by adding and removing elements of each prototype.

Storytelling

Just as the Business Model Canvas helps you sketch and analyze a new model, storytelling will help you effectively communicate what it is all about. Good stories engage listeners, so the story is the ideal tool to prepare for an in-depth discussion of a business model and its underlying logic.

A good story is a compelling way to quickly outline a broad idea before getting caught up in the details.

Explaining a new, untested business model is like explaining a painting with words alone. But telling a story of how the model creates value is like applying colors to canvas. It makes things tangible.

Telling a story that illustrates how your business model solves a customer problem is a clear way to introduce listeners to the idea. Stories give you the "buy-in" needed to subsequently explain your model in detail.

People are moved more by stories than by logic. Ease listeners into the new or unknown by building the logic of your model into a compelling narrative.

The goal of telling a story is to introduce a new business model in an engaging, tangible way. Keep the story simple and use only one protagonist. Depending on the audience, you can use a different protagonist with a different perspective.

Stories offer a wonderful technique for blurring the lines separating reality and fiction. Thus stories provide a powerful tool for imparting tangibility to different versions of the future. This can help you challenge the status quo or justify adopting a new business model.

Scenarios

Customer scenarios help us address issues such as which Channels are most appropriate, which relationships would be best to establish, and which problem solutions customers would be most willing to pay for. Once we've generated scenarios for different Customer Segments, we can ask ourselves whether a single business model is sufficient to serve them all – or if we need to adapt the model to each segment.

The scenario is another thinking tool that helps us reflect on business models of the future. Scenarios kick-start our creativity by providing concrete future contexts for which we can invent appropriate business models.

Everyone loves innovation until it affects them. The biggest obstacle to business model innovation is not technology: it is we humans and the institutions we live in. Both are stubbornly resistant to experimentation and change.

Current success prevents companies from asking themselves how their business model could be innovated.

Strategy

There's not a single business model... There are really a lot of opportunities and a lot of options and we just have to discover all of them.

Business Model Environment

Business models are designed and executed in specific environments. Developing a good understanding of your organization's environment helps you conceive stronger, more competitive business models.

Continuous environmental scanning is more important than ever because of the growing complexity of the economic landscape, greater uncertainty and severe market disruptions. Understanding changes in the environment helps you adapt your model more effectively to shifting external forces.

You may find it helpful to conceive of the external environment as a sort of "design space". By this we mean thinking of it as a context in which to conceive or adapt your business model, taking into account a number of design drivers and design constraints. This environment should in no way limit your creativity or predefine your business model. It should, however, influence your design choices and help you make more informed decisions.

To get a better grasp on your business model "design space", we suggest roughly mapping four main areas of your environment. These are (1) market forces, (2) industry forces, (3) key trends, and (4) macroeconomic forces.

Market forces:

• Market issues: What are the crucial issues affecting the customer landscape? Which shifts are underway? Where is the market heading?
• Market segments: What are the most important Customer Segments? Where is the biggest growth potential? Which segments are declining?
• Needs and demands: What do customers need? Where are the biggest unsatisfied customer needs? What do customers really want to get done? Where is demand increasing? Declining?
• Switching costs: What binds customers to a company and its offer? What switching costs prevent customers from defecting to competitors? Is it easy for customers to find and purchase similar offers? How important is brand?
• Revenue attractiveness: What are customers really willing to pay for? Where can the largest margins be achieved? Can customers easily find and purchase cheaper products and services?

Industry forces:

• Competitors (incumbents): Who are our competitors? Who are the dominant players in our particular sector? What are their competitive advantages or disadvantages? Which Customer Segments are they focusing on? What is their Cost Structure? How much influence do they exert on our Customer Segments, Revenue Streams, and margins?
• New entrants (insurgents): Who are the new entrants in your market? How are they different? What competitive advantages or disadvantages do they have? Which barriers must they overcome? What are their Value Propositions? Which Customer Segments are they focused on? What is their Cost Structure? To what extend do they influence your Customer Segments, Revenue Streams, and margins?
• Substitute products and services: Which products or services could replace ours? How much do they cost compared to ours? How easy is it for customers to switch to these substitutes?
• Supplier and other value chain actors: Who are the key players in your industry value chain? To what extent does your business model depend on other players?
• Stakeholders: Which stakeholders might influence your business model? How influential are shareholders? Workers? The government? Lobbyists?

Key trends:

• Technology trends: What are the major technology trends both inside and outside your market? Which technologies represent important opportunities or disruptive threats? Which emerging technologies are peripheral customers adopting?
• Regulatory trends: Which regulatory trends influence your market? What rules may affect your business model? Which regulations and taxes affect customer demand?
• Societal and cultural trends: Which shifts in cultural or societal values affect your business model? Which trends might influence buyer behavior?
• Socioeconomic trends: What are the key demographic trends? How would you characterize income and wealth distribution in your market? How high are disposable incomes?

Macroeconomic forces:

• Global market conditions: Is the economy in a boom or bust phase? What is the GDP growth rate? How high is the unemployment rate?
• Capital markets: What is the state of the capital markets? How easy is it to obtain funding in your particular market? Is seed capital, venture capital, public funding, market capital, or credit readily available? How costly is it to procure funds?
• Commodities and other resources: How easy is it to obtain the resources needed to execute your business model? How costly are they? Where are prices headed?
• Economic infrastructure: How good is the (public) infrastructure in your market? How would you characterize transportation, trade, school quality, and access to suppliers and customers? How high are individual and corporate taxes? How good are public services for organizations? How would you rate the quality of life?

A competitive business model that makes sense in today's environment might be outdated or even obsolete tomorrow. We all have to improve our understanding of a model's environment and how it might evolve.

Evaluating Business Models

Regularly assessing a business model is an important management activity that allows an organization to evaluate the health of its market position and adapt accordingly. This checkup may become the basis for incremental business model improvements, or it might trigger a serious intervention in the form of a business model innovation initiative. Failing to conduct regular checkups may prevent early detection of business model problems, and may even lead to a company's demise.

SWOT analysis is used to analyze an organization's strengths and weaknesses and identify potential opportunities and threats.

SWOT asks four big, simple questions. The first two – what are your organization's strength and weaknesses? – assess your organization internally. The second two – what opportunities does your organization have and what potential threats does it face? – assess your organization's position within its environment. Of these four questions, two look at helpful areas (strengths and opportunities) and two address harmful areas. It is useful to ask these four questions with respect to both the overall business model and each of its nine Building Blocks.

Business Model Perspective on Blue Ocean Strategy

In a nutshell, Blue Ocean Strategy is about creating completely new industries through fundamental differentiation as opposed to competing in existing industries by tweaking established models.

These four key questions challenge an industry's strategic logic and established business model:

• Which of the factors that the industry takes for granted should be eliminated?
• Which factors should be reduced well below the industry standard?
• Which factors should be raised well above the industry standard?
• Which factors should be created that the industry has never offered?

Managing Multiple Business Models

An entrepreneur's challenge is to design and successfully implement a new business model. Established organizations, though, face an equally daunting task: how to implement and manage new models while maintaining existing ones.

Implementing a new business model in a longstanding enterprise can be extraordinarily difficult because the new model may challenge or even compete with established models. The new model might require a different organizational culture, or it might target prospective customers formerly ignored by the enterprise. This begs the question: How do we implement innovative business models within long-established organizations?

Process

Business Model Design Process

Business model innovation results from one of four objectives: (1) to satisfy existing but unanswered market needs, (2) to bring new technologies, products, or services to market, (3) to improve, disrupt, or transform an existing market with a better business model, or (4) to create an entirely new market.

In longstanding enterprises, business model innovation efforts typically reflect the existing model and organizational structure. The effort usually has one of four motivations: (1) a crisis with the existing business model, (2) adjusting, improving, or defending the existing model to adapt to a changing environment, (3) bringing new technologies, products, or services to market, or (4) preparing for the future by exploring and testing completely new business models that might eventually replace existing ones.

The business model design process we propose has five phases:

• Mobilize: Prepare for a successful business model design project.
• Understand: Research and analyze elements needed for the business model design effort.
• Design: Generate and test viable business model options, and select the best.
• Implement: Implement the business model prototype in the field.
• Manage: Adapt and modify the business model in response to market reaction.

The main activities of this first phase are framing the project objectives, testing preliminary ideas, planning the project, and assembling the team.

One clear danger in the Mobilization phase is that people tend to overestimate the potential of initial business model ideas. This can lead to a closed mindset and limited exploration of other possibilities. Try to mitigate this risk by continuously testing the new ideas with people from varied backgrounds. You may also want to consider organizing a so-called kill/thrill session in which all participants are tasked first with brainstorming for 20 minutes on reasons why the idea won't work, then spend 20 minutes brainstorming exclusively on why the idea will fly.

The second phase consists of developing a good understanding of the context in which the business model will evolve. Scanning the business model environment is a mix of activities, including market research, studying and involving customers, interviewing domain experts, and sketching out competitor business models.

A critical success factor in this phase is questioning industry assumptions and established business model patterns.

It is particularly challenging to see beyond the current business model and business model patterns, because the status quo is usually the result of a successful past, and is deeply embedded in the organizational culture.

Searching beyond your existing client base is critical when seeking lucrative new business models. Tomorrow's profit potential may well lie elsewhere.

The key challenge during the Design phase is to generate and stick with bold new models. Expansive thinking is the critical success factor here. In order to generate breakthrough ideas, team members must develop the ability to abandon the status quo during ideation. An inquiry-focused design attitude is also crucial. Teams must take the time to explore multiple ideas, because the process of exploring different paths is most likely to yield the best alternatives.

Once you've arrived at a final business model design, you will start translating this into an implementation design. This included defining all related projects, specifying milestones, organizing any legal structures, preparing a detailed budget and project roadmap. The implementation phase is often outlined in a business plan and itemized in a project management document.

The Manage phase includes continuously assessing the model and scanning the environment to understand how it might be affected by external factors over the long term.

Successful, established companies should proactively manage a "portfolio" of business models whereby cash-generating businesses finance business model experiments for the future.

A business model is the "core content" or the "short story" of the company (actual or prospective). A business plan is the "guideline for the action" or the "full story".

Outlook

The application of the Canvas is in no way limited to for-profit corporations. You can easily apply the technique to non-profit organizations, charities, public sector entities, and for-profit social ventures. Every organization has a business model, even if the word "business" is not used as a descriptor. To survive, every organization that creates and delivers value must generate enough revenue to cover its expenses. Hence it has a business model.

We distinguish between two categories of beyond-profit models: third-party funded enterprise models (e.g. philanthropy, charities, government) and so-called triple bottom line business models with a strong ecological and/or social mission.

In the third-party funded enterprise model, the product or service recipient is not the payer. Products and services are paid for by a third party, which might be a donor or the public sector. The third party pays the organization to fulfill a mission, which may be of a social, ecological, or public service nature.

One risk of the third-party enterprise model is that value creation incentives can become misaligned. The third-party financer becomes the main "customer", so to speak, while the recipient becomes a mere receiver. Since the very existence of the enterprise depends on contributions, the incentive to create value for donors may be stronger than the incentive to create value for recipients.

To accommodate triple bottom line business models, we can extend the Canvas with Blocks illustrating two outcomes: (1) the social and environmental costs of a business model (i.e. its negative impact), and (2) the social and environmental benefits of a business model (i.e. its positive impact). Just as earnings are increased by minimizing financial costs and maximizing income, the triple bottom line model seeks to minimize negative social and environmental impacts and maximize the positive.

The purpose of a business plan is to describe and communicate a for-profit or non-profit project and how it can be implemented, either inside or outside an organization. The motivation behind the business plan may be to "sell" a project, either to potential investors or internal organizational stakeholders. A business plan may also serve as an implementation guide.

The work you may have done designing and thinking through your own business model is the perfect basis for writing a strong business plan. We suggest giving business plans a six-section structure:

• The Team
• The Business Model
• Financial Analysis
• External Environment
• Implementation Roadmap
• Risk Analysis