“Are you an entrepreneurial spirit?”
“Are you constantly thinking about how to create value and build new businesses, or how to improve or transform your organization?”
“Are you trying to find innovative ways of doing business to replace old, outdated ones?”
If you answer “yes” to any of these questions, the authors of Business Model Generation, welcome you to their tribe. (And thank you for picking up their book.)
Business Model Generation is an uncommonly useful and thoughtful handbook centered entirely on—you guessed it—business model design. The book gives readers deep insight into various business models—traditional and cutting-edge—in a highly visual, guidebook format. In short, it’s a great tool to keep handy for easy, frequent access.
Nine elements make up the backbone of a business model—or how an organization creates, delivers and captures value. The authors open the book with a good grounding on each of the 9 building blocks:
1. Customer Segments
2. Value Propositions
4. Customer Relationships
5. Revenue Streams
6. Key Resources
7. Key Activities
8. Key Partnerships
9. Cost Structure
The beauty of the nine elements is not what they are but how they come together. In fact, it is this framework, called “The Business Model Canvas” that is the star of the book and the foundation for creating compelling business models:
The canvas is a framework for sketching out your business model—or pressure-testing multiple business models. And it is thoughtfully designed. The left-side of the model addresses ‘left brain’ issues or logic (EFFICIENCY) and the right-side addresses ‘right brain’ issues or emotions (VALUE.) Consideration of both are needed to yield a winning business model.
Not all business models are the same but, according to the authors, they can be grouped based on similar characteristics and how they “behave” in the world. The book outlines 5 core Business Model Patterns:
PATTERN #1: UNBUNDLING BUSINESS MODELS
The concept of the “unbundled” corporation is that there are three fundamentally different types of businesses: Customer relationship businesses, product innovation businesses, and infrastructure businesses. The three types can and often do co-exist within a single corporation, but they are often better served “unbundled” into standalone entities.
A classic example is the unbundling of mobile telecommunications businesses. Originally, telecoms competed on network quality. However, now they are forging network sharing deals because they realize that their key asset is no longer their network—it is their brand and customer relationships.
PATTERN #2: 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. Contrast this approach with the traditional model where a small number of best sellers account for most revenues. The Long Tail concept was coined by Chris Anderson in his book, The Long Tail: Why the Future of Business is Selling Less of More, to describe a shift in the media business from selling a small number of hit items in large volumes (mass media) toward selling a very large number of niche items, each in relatively small quantities.
The transformation of the book publishing industry from a few, powerful publishing houses that focus on massive, best sellers to millions of self-published offerings made possible by lulu.com and others is an example of a long tail business. Amazon is another great example that transformed the retail industry:
PATTERN #3: MULTI-SIDED PLATFORM
These platforms bring together distinct but interdependent groups of customers. The platform creates value by connecting the groups together—groups that benefit ONLY if the other groups are there. Think of online marketplaces like eBay or Craig’s List. The market works only if there are buyers and sellers. As the market grows in number, it also grows in value. This is the concept known as the network effect. Another example of a multi-sided platform is LinkedIn:
PATTERN #4: FREE AS A BUSINESS MODEL
In this model, as least one large customer segment benefits continuously from a FREE offer. These non-paying customers are often funded by another part of the biz model or another customer segment that pays. Chris Anderson of Long Tail fame also wrote about this concept in his book, Free: The Future of a Radical Price (2008.)
Flickr, the photo-sharing website is an example of a “freemium” business model. Users can subscribe for free to a basic account or they can upgrade for a small annual fee that provides more comprehensive benefits and features. LinkedIn also offers a FREE/Pay for option.
PATTERN #5: OPEN BUSIENSS MODELS
In this model, companies create and capture value by collaborating with outside partners—either “outside-in” by exploiting external ideas within the firm, or “inside-out” by providing external parties with ideas or assets that are not being used internally.
Underscoring this model are the concepts of “closed” and “open” innovation:
Source: Columbia Business School
Procter & Gamble was an early user of the “Outside-In” approach to revitalize the business at the beginning of this century. A key element of their approach was a “Connect and Develop” strategy designed to exploit internal research through external partnerships.
Source: eCommerce Digest
SIDE NOTE: BUSINESS MODEL VARIATIONS
While the author’s recap a few core business model patterns, one thing is clear: there are myriad ways for businesses to create and deliver value. And tons of resources online to inspire entrepreneurs, like this neat grid by Peter Fisk, extracted from his book, Gamechangers:
The first half of Business Model Design is devoted to business model PATTERNS. At the mid-point, the authors shift gears to focus on business model DESIGN, STRATEGY, and PROCESS.
BECOMING A DESIGNER
“Business people don’t just need to understand designers better, they need to become designers” is the premise of the design section of the book. There are 6 components of design addressed by the authors: 1) Customer Insights, 2) Ideation, 3) Visual Thinking, 4) Prototyping, 5) Storytelling, and 6) Scenarios.
Each of the six components is worthy of deep exploration—above and beyond what the book content offers—however, authors Osterwalder and Pigneur include a couple high-impact visual frameworks that standout from the pack:
I. The Empathy Map
When it comes to building businesses, nothing good gets built wit ut insight into buyers—their needs, wants, attitudes and perceptions. The empathy map or “customer profiler” helps you get beyond a customer’s demographic characteristics (e.g., gender, income) to develop an understanding of their environment, concerns, and aspirations—precisely the kind of deep insight that’s needed to deliver compelling value.
Prototyping is a powerful tool for developing fresh, innovative business models. Prototyping got its origin in design and engineering—e.g., product design, architecture—but it works well in business model design to stimulate new thinking and bust boundaries. Take, for example, this prototyping summary from the book publishing industry. There are eight business models captured—seven more than the traditional publishing model Simon & Schuster and other big houses leveraged for over a century.
What’s so potent about this visual is that it demonstrates that, despite a longstanding history of doing things one-way, there are always options to explore—options that disrupt industries and create new, breakthrough value.
An exceptionally useful tool in the strategy section of the book is the “Detailed SWOT Assessment of each (of the business model) Building Blocks.” The author’s SWOT is like a traditional SWOT analysis—i.e., requiring the user to identify Strengths, Weaknesses, Opportunities, and Threats. However, the lens of the business model SWOT is more granular than that of a traditional SWOT used to evaluate a company or a business. Specifically, the Business Model Generation SWOT calls for the reader to assess each of the nine business model building blocks against several criteria that are detailed out in the book in the form of questions.
What are your business model’s…?
To conduct a Value Proposition Assessment or a Cost/Revenue Assessment, for example, you would rank your model from 1 to 5 in terms of “Importance to my Business Model” against each of the (positive and negative) variables below:
Source: Business Model Generation page 217
This SWOT questions are perhaps one of the meatiest, distinctively valuable eight pages in the book. It certainly takes a traditional SWOT to a new level with the inclusion of pre-defined questions to help bust through existing mental frames that can limit thinking.
I’m also a fan of the framework the authors propose for evaluating an organization’s environment. I’m a long-time user of Porter’s 5-Forces Model combined with a PESTLE analysis or macro-environmental scan. What I like about the author’s business model environment framework is that it combines foresight, macroeconomics, market and competitive analysis into one. It also can be summed up on one page. I love a one-pager.
As with their version of the SWOT, that author’s help the reader understand and apply the framework by including detailed questions to evaluate each force or trend. Priceless—especially for new users to these type of frameworks and analyses.
The book closes with the author’s 5-phased business model design process. It’s the perfect capstone to the book because it aligns each of the author’s concepts and supporting tools to one of the five steps in the design process. Although the author’s do go into detail about each process, I love the summary page because it’s handy and it lets the reader know exactly what concepts and tools apply when:
Source: Business Model Generation page 249
The 9 years of research, 470 authors, 77 forum discussions and more that went into the creation of Business Model Generation have clearly yielded a first-rate guide. There’s a lot of fresh content included but what’s most compelling about the book is that it builds upon proven-effective business best practices and tools and applies them to the distinctive goal of creating a business model. For example, SWOT analyses, Blue Ocean Strategy, Empathy Maps and more are all concepts and frameworks that have been around for a while. Instead of reinventing the wheel, the authors repurpose these valuable tools, giving them new meaning and a new application. With this book, the buyer doesn’t just get the author’s model—the canvas—they get years of best practices and thought leadership vetted and applied to one of the key entrepreneurial challenges of the day: business model design.