Business Model Generation: Summary and Review
Business Model Generation: Summary and Review
Keywords: Analysis, Business model, Design, Ideation, Innovation, Platform, Process, Prototype, Strategy, Visualization
Please Note: There are links to other reviews, summaries and resources at the end of this post.
Business Model Generation looks at the challenge of building a business model through the framework of the Business Model Canvas. The Canvas provides a matrix for nine essential “building blocks.” While most managers and entrepreneurs will be familiar with these categories already, this book provides a systematic method for approaching the creation of business models. Quite a few of the exercises and methods also come from outside sources.
This is more than a patchwork of external ideas stitched together randomly. Following the steps outlined in the book can safeguard the development team against floundering chaotically from one methodology to another. The process that’s presented is organized and logical — it is useful for understanding the architecture of business models. Entrepreneurs and executives tasked with designing business models will likely find it a helpful guide.
This book is aesthetically interesting. Typesetting is used as a strong design element, and there are lots of bright, primary colors. (The publisher, John Wiley & Sons, has produced other monographs with high design standards.) But for some readers, the work might be over-designed, and form could obscure function.
A business model should include nine basic building blocks: customer segments, value propositions, channels, customer relationships, revenue streams, key resources, key activities, key partnerships and cost structure. Consider each in turn.
Customer segments are groups of people (or organizations) that a company wants to target. In some instances, groups should be separated into different segments, for example, where:
- Groups are served by different distribution channels.
- Various groups are paying for different features.
- There are different relationships with various customers.
- Customers are on different levels of profitability.
Business models aimed at the mass market don’t focus much on customer segments; rather, they treat all customers similarly. (This model is fairly common in the consumer electronics sector.) On the other hand, niche markets have very tight, focused customer segments. There are lots of different kinds of segment models, serving several related customer segments. Businesses with diversified models serve multiple unrelated customer segments. Companies with multi-sided platforms need to identify segments from each side of the platform.
Value propositions are the things that the customer values, and include products and services, as well as convenience or quality. Various features can create value for customers. Improved performance can also create value, as can customization. Just about any feature or service can be part of the value proposition, and superior designs, prestigious brands, inexpensive prices, accessibility and convenience are just some of the features that can make a customer value a product over that of its competitors.
A company reaches its customers through channels, which facilitate customer awareness of the product and customer understanding of the value proposition. Customers make purchases through the channel and access delivery and support after the transaction. Some companies reach customers through their own channels; sometimes they have partners who take care of this. There are many kinds of channels — for example, wholesalers, web sites, brick-and-mortar stores, etc.
Customer relationships define how a company interacts with the customer segment, and these relationships can strongly affect customer experience. They can be used to retain customers or to boost sales — a variety of techniques can be used to benefit the company.
The business of business is to make money, so every company needs revenue streams. There are a few different ways to monetize — for example, subscription fees, licensing fees and advertising.
Key resources are the important physical, intellectual, human and financial assets that a company needs.
Key activities are the actions that the company must undertake to make the business model work, including not only production activities, but also things like problem solving and knowledge management. (Platform companies in particular are nurtured by their networks; maintaining these presents key activities specific to this model.)
Companies don’t exist in isolation; they need suppliers and other partners to run smoothly. These crucial key partnerships can optimize business models. Partners can help to reduce risk and acquire resources.
Finally, the cost structure includes the expenses required to make the business model function. Some companies strive to keep costs down, while others are more concerned with creating value.
Together, these building blocks form the Business Model Canvas.
Business models can be organized by similar characteristics, by similarities in how they use the building blocks or by similar behaviors. Broadly, these similarities are business model patterns, and Osterwalder evaluates how traditional business concepts can be made to fit the Business Model Canvas.
Bundled businesses are those in which the different activities within a single company are so different from each other that they could just as easily be different companies. Typical roles in bundled companies include customer relationships, product innovation and infrastructure management. These functions should be unbundled — they have different economics, competition and culture. And this can create some conflicts.
Unbundled businesses have cut the ties with irrelevant departments and outsourced their duties. They can focus on their core business without being dragged down by tangential chores. One type of unbundled business is the long-tail business model, which sells a lot of different products that don’t have huge sales individually. Long-tail businesses don’t focus on getting the big hits; instead, they cultivate the niche customers and make niche content easily available to these customers.
Multi-sided platforms are unbundled businesses that unite separate but interdependent customers. Value is achieved because multiple sides are participating. Network effects are immensely important to these businesses for bringing new users onto the platform, but sometimes these businesses have trouble bringing both sides of a market together. This “chicken and egg” problem can be overcome by subsidizing a customer segment.
The idea of subsidizing one side of the market is taken to its logical extreme with the free business model. At least one important customer segment gets something for free; another part of the business model pays for this subsidy. There are a few different ways businesses can offer something to certain market segments for free: taking money from advertisers and allowing other customers to participate for free or making basic services free to users, but then charging for advanced features. The bait-and-hook strategy gives customers something for free and encourages them to buy the product in the future.
Companies with open business models collaborate with outside partners, which can be accomplished from the outside in by bringing external resources into the development process or from the inside out by giving external partners access to internal assets (typically by licensing or selling its resources).
It’s important to have a deep understanding of the customer, so customer insights should inform all aspects of a business (including the business model). There are many ways to research what customers want and what they don’t want, but the most important thing is to talk to customers directly.
An empathy map is a chart depicting the customer. The main value in this chart is likely a checklist which comprehensively considers the customer’s point of view. Visual thinkers might benefit from charting information received from customers; others might just as easily use the suggested categories without drawing a chart.
Ideation involves generating a bunch of ideas for business models and picking the best. There are several epicenters, or sources, of business innovation:
- Resource-driven innovation originates from within a company’s existing infrastructure.
- Offer-driven innovations create totally new value propositions.
- Customer-driven innovations are based on customer needs.
- Finance-driven innovations are motivated by new sources of money, like new revenue streams and new cost saving.
Multiple epicenters can also drive innovations.
To come up with innovative ideas, it helps to assemble a diverse team — different kinds of people mean a wider range of outlooks. “What if” questions are useful starting points for further brainstorming.
Visual Thinking is also a valuable design technique. Being able to express ideas visually is important — it clarifies things and can make it easier to communicate with others. Post-It notes can help, here: write one idea per note, and move them around the Business Model Canvas. Draw pictures; sketch the Canvas. Tell a story, one element at a time. A business model prototype can also be helpful in envisioning the business model, and there are different ways you can create prototypes — for example, a napkin sketch that outlines and pitches a rough idea or a business case looking at the viability of the idea.
Storytelling can help communicate ideas to others. It makes ideas tangible; stories engage people. But bear in mind, stories should be told from a specific perspective, perhaps that of the employee or the customer. Stories can help people visualize the future. You can use lots of different media to tell your story, such as videos, text, comic strips, etc.
Scenarios are another technique for making abstract ideas more tangible. They can help the business model development process by making the context more detailed. Customer scenarios explain how products are used and who uses them. Future scenarios help you think about the future. Develop several scenarios (with a business model for each), and describe each scenario with a story.
To design a good business model, you need a strong understanding of the external environment in which your company exists. One way to analyze the environment is to break it into four parts and map them:
- Market forces, like demand and revenue attractiveness.
- Industry forces, including competitors and suppliers.
- Key trends, including technological and social trends.
- Macroeconomic forces, like global market conditions and economic infrastructure.
No one can predict the future, but it’s good to develop hypotheses as guidelines for the next generation of business models. Conjectures on the trajectory of market forces, key trends and macroeconomic forces are helpful in developing options for the future. Check your business model regularly. Scheduled evaluations can help you monitor the business environment and catch problems early.
There are two suggested methods for assessing existing business models: big picture and building block. These methods complement one another and should both be used for a full understanding of how well a model is functioning.
It’s hard for established businesses to change business models, which is one reason why innovative projects are often spun off into separate departments or entities. Complete separation like this greatly reduces the potential for conflict between the two units, but it also reduces the opportunity for synergy. On the other hand, innovative projects can remain integrated within the parent company. This increases the possibility that the company will benefit from synergies, but the chances of conflict are much greater.
Between these two extremes, some companies grant the innovation team considerable autonomy, yet maintain responsibility to the head office. This compromise leaves the door open for synergy but also for conflict.
Concept Exploration: Blue Ocean Strategy is a system of finding value through adding and removing product features and benefits in such a way as to optimize costs and find new markets. This Strategy looks at four parameters to analyze business models: 1) whether there are factors that the industry takes for granted that should really just be eliminated; 2) whether there are factors that should be reduced below industry standards; 3) whether any factors need to be raised above industry standards; and 4) whether there are factors that should be created that the industry hasn’t offered before. Combining Blue Ocean with the Business Model Canvas results in comprehensive analysis, and to blend the two, examine each of the building blocks using the four parameters.
Every business is different, so the business model design process will need to be adjusted to fit the needs of your business. Consider the process in generic terms.
Innovation arises from several different objectives. For example, a new business model might be needed to bring new products to market to create a new market. There can be significant challenges on the journey to designing a new business model, including the problem of finding the right model. Once created, a new model will need to be tested before full-scale launch, and getting the market to accept the new model can be a struggle. Furthermore, once in place, there is a continuing process of adapting a new business model to adjust to market changes and to manage uncertainty.
In older companies, changing the business model is usually instigated in response to a crisis with the existing business model or to adjust to changing environmental conditions. New models might also be generated when bringing new products to market. A business may also want to occasionally test new models in preparation for future exigencies. For existing firms looking to change their business model, challenges include accepting the idea of new models, getting old and new models into alignment, dealing with vested interests and making long-term success the goal.
Designing innovative business models is a messy process. There’s a lot of ambiguity throughout most of the process. It takes time, but the temptation is to prematurely jump on whatever solutions might present themselves without fully going through the process. It’s vital to take the time to explore all the alternatives. Do the research; develop the prototypes.
The design process has five phases:
- Start by mobilizing your team, set the stage and gather what you need. Thoroughly explain the need for a new model. It’s also useful to establish a vocabulary that you can all use to discuss business model design.
- Immerse your team in learning everything they need to know about the customers, the technology, and the environment.
- To begin designing business models, your team needs to develop several prototypes and test them out. At the end of this stage, you’ll need to choose the best business model design.
- Once you have selected the best design, implement it.
- Finally, the business model will have to be managed; the environment must be monitored. Occasional tweaking is necessary to adjust to changing circumstances, so adapt and update the model as needed.
The utility of the Business Model Canvas isn’t limited to profit-making enterprises. Every organization is a business in some sense, including nonprofits and private clubs. Any organization that creates and delivers value must be able to generate the income needed to cover their costs — in short, nearly every organization needs to have a business model.
The business model can form the basis of a business plan. Start with the following elements when putting this plan together:
- Description of the management team.
- The business model.
- Financial analysis.
- Description of the external environment.
- Implementation roadmap.
- Risk analysis.
To maximize the effectiveness of the plan, make it comprehensive. Ultimately, you’ll want to turn your business model into an actual business, or if you’re an existing business with a new model, you’ll need to implement it.
There are five important areas that should be in alignment with the business model: Strategy, Structure, Processes, Rewards and People. Imagine a star, with each area represented by a point on the star and in the center lies the business model. It’s especially important to align your information systems with your business goals, and the Business Model Canvas can be an important tool for communicating with the Chief Information Officer.
The Canvas can also be paired with the Enterprise Architecture approach, which usually depicts a company as having three dimensions: the business perspective, the applications perspective and the technology perspective. The Business Model Canvas can be used to guide the business perspective, and then the applications and technology perspectives can be aligned with that.
Finally, to aid readers, the authors created an application called the Business Model Toolbox. This Toolbox has all the features needed to create models; it also makes it possible for team members in separate countries and on different continents to work together remotely.