Business Model Generation

1. The Business Model Canvas: A Visual Tool for Describing, Analyzing, and Designing Business Models

"The Business Model Canvas is like a blueprint for a strategy to be implemented through organizational structures, processes, and systems."

Visualize your business model. The Business Model Canvas is a shared language for describing, visualizing, assessing, and changing business models. It's a one-page visual tool divided into nine building blocks that cover the four main areas of a business: customers, offer, infrastructure, and financial viability.

Facilitate collaborative design. The Canvas works best when printed out on a large surface so groups can jointly sketch and discuss business model elements using sticky notes or markers. This hands-on approach fosters understanding, creativity, and analysis among team members.

Example: Apple iPod/iTunes. Apple's innovative business model combined the iPod device, iTunes software, and online store to create a seamless music experience. This potent combination disrupted the music industry and gave Apple a dominant market position, demonstrating the power of a well-designed business model.

2. Nine Building Blocks: Key Components of Every Business Model

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

Essential elements. The nine building blocks of the Business Model Canvas are:

• Customer Segments: Who are we creating value for?
• Value Propositions: What value do we deliver to customers?
• Channels: How do we reach our customers?
• Customer Relationships: What type of relationship do we establish?
• Revenue Streams: How do we generate income?
• Key Resources: What assets are required?
• Key Activities: What activities do we need to perform?
• Key Partnerships: Who are our key partners and suppliers?
• Cost Structure: What are the most important costs?

Interconnected components. These building blocks form a cohesive system where changes in one area often affect others. Understanding these relationships is crucial for designing effective business models.

3. Business Model Patterns: Common Configurations That Create and Capture Value

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

Recognizable models. Business model patterns are common arrangements of building blocks with similar characteristics or behaviors. Five key patterns are:

1. Unbundling
2. The Long Tail
3. Multi-Sided Platforms
4. FREE as a Business Model
5. Open Business Models

Learn from success. Studying these patterns can help you understand business model dynamics and inspire your own innovations. For example, the "Long Tail" pattern focuses on selling a large number of niche products, each in small quantities, as exemplified by Amazon's vast product catalog.

Combine and adapt. A single business model can incorporate multiple patterns. The challenge is to adapt these patterns to your specific context and create unique value propositions.

4. Customer Insights: The Foundation of Successful Business Models

"Ultimately, business model innovation is about creating value, for companies, customers, and society."

Understand customer needs. Successful innovation requires a deep understanding of customers, including their environment, daily routines, concerns, and aspirations. This insight should inform choices regarding Value Propositions, Channels, Customer Relationships, and Revenue Streams.

Look beyond the obvious. Sometimes, tomorrow's growth segments wait at the periphery of today's core business. Avoid focusing exclusively on existing Customer Segments and set your sights on new or unreached segments.

Use empathy mapping. The Empathy Map tool helps you go beyond demographic characteristics to develop a better understanding of environment, behavior, concerns, and aspirations. This allows you to devise stronger business models that truly resonate with customers.

5. Ideation: Generating Innovative Business Model Ideas

"Business model innovation is not about looking back, because the past indicates little about what is possible in terms of future business models."

Challenge assumptions. To generate truly new ideas, it's crucial to ignore the status quo and suspend concerns over operational issues. Question industry orthodoxies and explore new mechanisms to create value and derive revenues.

Use multiple starting points. Ideas for business model innovation can come from anywhere. Consider four epicenters of business model innovation:

1. Resource-driven
2. Offer-driven
3. Customer-driven
4. Finance-driven

Embrace "What if" questions. These provocative queries help break free of constraints imposed by current models. For example: "What if furniture buyers picked up components in flat pack form from a large warehouse and assembled the products themselves in their homes?" This "what if" scenario led to IKEA's revolutionary business model.

6. Visual Thinking: Making Business Models Tangible and Understandable

"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."

Power of visualization. Visual thinking is indispensable to working with business models. Using visual tools like pictures, sketches, diagrams, and sticky notes helps construct and discuss meaning, making abstract concepts tangible and facilitating co-creation.

Enhance communication. Visual representations of business models can:

• Create company-wide understanding
• Improve internal "selling" of ideas
• Enhance external pitches to investors or partners

Techniques to try:

• Use sticky notes for flexibility in arranging ideas
• Sketch simple drawings to convey concepts quickly
• Create a visual story to explain your business model step-by-step

7. Prototyping: Exploring and Testing Business Model Possibilities

"Prototyping is a powerful tool for developing new, innovative business models."

Beyond physical products. In business model design, prototypes can take various forms:

• A simple sketch
• A fully thought-through concept described with the Business Model Canvas
• A spreadsheet simulating the financial workings of a new business

Tool for inquiry. Prototypes serve as thinking aids for exploring new possibilities, not just representations of to-be-implemented models. Making and manipulating prototypes forces us to address issues of structure, relationship, and logic in ways unavailable through mere thought and discussion.

Embrace iteration. Develop multiple prototypes at different levels of refinement. This process of exploration and refinement is most likely to yield the best alternatives. Avoid falling in love with ideas too early; take time to explore multiple options before selecting one to implement.

8. Storytelling: Communicating the Essence of a Business Model

"Storytelling is an undervalued and underused art in the world of business."

Power of narrative. Stories engage listeners and help overcome resistance to unfamiliar or innovative business models. A good story can win attention and make abstract concepts tangible and relatable.

Multiple applications. Storytelling can be effective for:

• Introducing new business model ideas within an organization
• Pitching to investors or potential shareholders
• Engaging employees during business model transitions
• Clarifying complex ideas and facilitating in-depth discussions

Techniques for effective storytelling:

• Use a single protagonist (e.g., a customer or employee)
• Focus on how your business model solves real problems
• Incorporate emotion and drama to make the story memorable
• Consider using visual aids like drawings or storyboards

9. Strategy Through the Business Model Lens: Evaluating and Adapting to the Environment

"A competitive business model that makes sense in today's environment might be outdated or even obsolete tomorrow."

Continuous assessment. Regularly evaluating your business model is crucial in today's rapidly changing business environment. This helps detect potential problems early and identify opportunities for innovation or adaptation.

External forces to consider:

• Market forces (e.g., customer needs, market segments)
• Industry forces (e.g., competitors, new entrants, substitutes)
• Key trends (e.g., technology, regulatory, societal)
• Macroeconomic forces (e.g., global market conditions, economic infrastructure)

SWOT analysis. Combine classic strengths, weaknesses, opportunities, and threats (SWOT) analysis with the Business Model Canvas to assess each building block in detail. This structured approach can reveal paths to innovation and renewal.

10. Managing Multiple Business Models: Balancing Innovation and Existing Operations

"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."

Ambidextrous organizations. Successful companies must often manage new business models while maintaining existing ones. This requires balancing innovation with current operations, a challenge known as organizational ambidexterity.

Integration vs. separation. When implementing a new business model, consider:

• Severity of conflict between old and new models
• Strategic similarity
• Risk of negative impact on the established model

Options for implementation:

1. Full integration into existing organization
2. Partial integration (e.g., shared resources)
3. Complete separation as a standalone entity
4. Phased approach (e.g., initial separation followed by later integration)

11. The Business Model Design Process: From Concept to Implementation

"Business model innovation rarely happens by coincidence. But neither is it the exclusive domain of the creative business genius. It is something that can be managed, structured into processes, and used to leverage the creative potential of an entire organization."

Five phases of business model design:

1. Mobilize: Prepare for a successful project

   • Frame objectives, assemble team, plan initial activities

2. Understand: Research and analyze necessary elements

   • Scan environment, study customers, interview experts

3. Design: Generate and test viable options

   • Brainstorm, prototype, select best model

4. Implement: Execute the chosen model

   • Communicate, manage projects, adapt quickly

5. Manage: Continuously assess and evolve

   • Monitor environment, rejuvenate or rethink model as needed

Design attitude. Embrace a mindset that values exploration and prototyping over immediate decision-making. This approach, while messier and less linear than traditional business planning, is more likely to yield powerful new business models.

Established company considerations:

• Build project legitimacy and manage vested interests
• Create cross-functional teams for diverse perspectives
• Balance bold ideas with organizational realities
• Maintain a long-term focus when evaluating new models

Last updated: August 9, 2024