Business Model Generation

This is the generation that came after the Millennials, right?

More seriously, this is a beautifully visual book on a topic that no startup or even established business can really afford to ignore. These are my notes on it, from the perspective that was relevant for me at the time of reading, and hopefully useful for me in the future when combined with the links below.

Business Model Canvas

The Business Model Canvas is similar to Lean Canvas which I was already familiar with. The Canvas acts not only as the description of the business model but also as source of shared vocabulary for people in the organization to better understand each other. A visual presentation of the Business Model Canvas can be a powerful for communicating between different departments.

At the end of the introduction of the fields of the Business Model Canvas I’m filled with curiosity and puzzlement. I wonder what percentage of established businesses have an up-to-date Canvas or traditional business plan? Does the Business Model Canvas also work as a tool for refreshing you on the essentials of your (currently successful) business?

Patterns

Time waits for no man, they say. And this shows in the examples shows for the patterns. But then again, that gives an opportunity to be on a lookout for other businesses with the same pattern.

Unbundling Pattern

The idea of Unbundling is to separate parts of the business that focus on distinctly different activities, typically Product Innovation, Customer Relationship Management and Infrastructure Management, into different entities to avoid conflicts.

The example for this is a TelCo, who unbundles activities unrelated to Customer Relationship Management into other entities, so they can have as intimate relationship as possible with their customers. Hands up if you feel your TelCo is doing a great job at customer service. This reflects my gut feeling of the Unbundling pattern: It seems to add deniability and slow things down rather than build truly excellent customer service. I am eager to be proven wrong with this, though.

The Long Tail Pattern

The Long Tail is the opposite of selling a lot of the same. In this pattern the business focuses on having a huge selection, even if each item sells very little and maybe some not at all.

The example given as LEGO with it’s Digital Designer, started in 2005. And apparently ended in 2012. According to Wikipedia, the reason was “due to its failure to meet quality expectations and for being too complex”. BrickLink started in 2010 offering a similar service and is still in business. Burda, a German clothing pattern company, did something similar with community created clothing patterns, and that bold experiment also seems ended. It’s important to remember that a business model pattern is no guarantee of success, it’s just a frequent pattern.

Multi-Sided Platforms

A Multi-Sided Platform serves multiple different customer segments, which all need to exist in sufficient quantities for the system to work. Subsidizing one segment for growth is rather typical for this pattern.

Free

People just love to get something for free, even if they don’t need it. Models following this pattern still make their money somehow, e.g. through premium users (‘freemium’), or by being simultaneously a multi-sided platform where only some of the sides are free.

Open Business Models

These are mostly Outside-In and Inside-Out models where the company either relies on external innovation or sells it’s innovation outside to be further used.

Design

Choosing a business model is a design task and requires empathy. A business is way less likely to succeed if they design the business model based on what they want to do. One needs to talk to the customers, and potential customers, to figure out what the actual needs are.

Empathy Map

Empathy Map is a technique where one builds a simple but rather comprehensive image of the customer. It consists of six areas: Think&Feel, See, Hear, Say&Do, Pain and Gain. Looking at it from the point of view of our startup, I was reminded that sometimes the customer and end-user are not the same person. Yet if the end-user hates the solution, the customer is unlikely to keep on paying for it either.

Ideation

Ideation simply means generating ideas. This is not copying ideas from the competitors but generating new business ideas. “What if…?” is a frequent question in this process. The question can directly involve a section of the existing business model or even multiple.

Ideation happens ideally in a team that is diverse in many ways, to make it more likely creative ideas are found and often work best in an immersive setting.

Visual Thinking

Capturing the big picture of a business model is difficult without visualization. Post-it notes are a classic choice of a tool from visual thinking for groups, as they work also with text, but sometimes it’s helpful to actually visualize with drawings

Ideas placed on the Canvas, especially when done visually, trigger other ones. Done with Post-its, one can play with ideas of moving some element between sections or eliminating them temporarily to facilitate discussion.

The Business Model Canvas and it’s visual elements can be turned into a story to describe the business or sell the idea. One can experiment with different starting points and different order or sections, and turn the end result into a slideshow.

Prototyping

Prototype is not necessarily a rough picture of what the actual business model will be like, but rather a thinking tool that helps to explore different directions it could be taken to. The crudeness of early business model prototypes helps exploring other options.

Just like in a prototype of a physical product, Business Model Canvas prototype can, and should be, done at different scales, from a napkin sketch all the way to a field-tested model. The number of prototypes goes down as the prototypes get more detailed and tested. To be able to compare the models, annotating the pros and cons in helpful.

Storytelling

Stories force the listener to open their mind to new possibilities. Story can help to make an idea tangible in a way that even numbers alone would fail at.

It’s best to keep the story simple and only with one protagonist. However, nothing is stopping you from having different stories for different audiences, each with different protagonist. Very often stories are told from the customer perspective, but for gaining employee buy-in taking an employee perspective can help.

Stories can be told with different medium: Talk&Image, Video Clip, Role Play, Text&Image and Comic Strip are all possible formats, with different suitability for different situations.

Scenarios

Scenarios explore different customer settings or different future environments in which a business model might compete. A scenario offers a way to consider possibilities and risks of possible futures.

The work can start with developing a set of future scenarios based on one or two main criteria. Those scenarios are then turned into stories to make them feel more concrete. Only in the end a business model is developed for the relevant stories.

Strategy

Business Model Environments

Business models are designed and executed in specific environments. There are always context to the business model. However, a model needs not to be limited by the environment: A revolutionary business idea can shape and transform it’s environment. Still, arrogance does not help. Instead, map out the environment of your business model and consider the ongoing changes in your environment mean for the future of your enterprise. The environment consists of multiple forces, roughly listed below.

Industry Forces

  • Suppliers and other value chain actors
  • Stakeholders
  • Competitors (incumbents)
  • New entrants (insurgents)
  • Substitute products and services

Key Trends

  • Regulatory trends
  • Technology trends
  • Societal and cultural trends
  • Socioeconomic trends

Market Forces

  • Market segments
  • Needs and demands
  • Market issues
  • Switching costs
  • Revenue attractiveness

Macroeconomic Forces

  • Global market conditions
  • Capital markets
  • Economic infrastructure
  • Commodities and other resources

Evaluating Business Models

The book offers an extensive checklist for evaluating business models through the lens of SWOT analysis. The checklist seems best geared for existing business and would help them figure out how to improve their business. Amazon starting to offer AWS is a great example of turning weaknesses of a business model into opportunities.

Four Actions Framework

The Four Actions Framework originates from the book Blue Ocean Strategy by Kim and Mauborgne and consists of the following questions:

  1. Which of the factors that the industry takes on granted should be eliminated?
  2. Which factors should be reduced well below the industry standard?
  3. Which factors should be raised well above the industry standard?
  4. Which factors should be created that the industry has never offered?

The technique is similar to the way artists amplify or minimize or eliminate elements, in addition to creating totally new things.

Cirque du Soleil is an excellent example of using this approach. They eliminated animals from their repertoire and replaced it by making the show an artistic experience unlike what traditional circus offered.

Managing Multiple Business Models

Integration, autonomy and separation are all possible way to manage multiple business models. This is illustrated by examples of SMH/Swatch, Nestle/Nespresso and Daimer/Car2Go.

Business Model Design Process

Business model innovation doesn’t happen by accident but the process still messy and unpredictable and requires the ability to deal with ambiguity and uncertainty. In short, it requires design attitude, which is very different from traditional business decision attitude.

The process of designing a business model proposed here consists of five phases: Mobilize, Understand, Design, Implement and Manage

Mobilize

In this first state the main activities are framing the project objectives, testing preliminary ideas, planning the project and assembling the team.

It’s very important to avoid overestimating the potential of the initial ideas as that limits the exploration of other possibilities. Brainstorm ideas first and then spend time exploring why they might fail (‘kill’) or succeed (‘thrill’).

Understanding

The second phase is all about developing a good understanding of the context in which the business model will evolve. The danger here lies in bias from precommitment to an early business model and on the other hand over-researching. It’s critical to gain deep understanding of potential target markets and to look beyond the traditional boundaries when defining the target market.

Seek input from varied sources during the Understanding phase. Bear in mind that breakthrough ideas can also encounter resistance.

Design

Brainstorm, prototype and test business models, and eventually select which one is the one to start with. Try to see past status quo and do not suppress bold ideas. On the other hand, it’s critically important to take the time to explore multiple business model ideas instead of falling in love with ideas too early.

Implement

After choosing a business model design, its time to start translating it into an implementation. This includes defining all the required projects, milestones, organizing any legal structures, preparing budgets and other things needed in the operational context. Pay attention to how risk/reward expectations play out in the reality, so you can also adjust the business model when needed.

Manage

Manage phase is all about taking care about your business model or models staying up-to-date and successful. This requires scanning the business environment for upcoming changes that would affect your business, or that your business can benefit from. Don’t let yourself become complacent due to you current success. Consider managing a portfolio of business models, so that changing them will go smoother if needed.

Business Models In Non-Profits

Also non-profits need, and have, a business model. This chapter looked at some possibilities in that front.

Third-Party Funded Models

Typical non-profit might be a charity where products and services are paid by a third party, such as a donor or the public sector. Schools are also usually an example of this: Education services are funded by the government.

The third parties usually expect no economic benefit from their contribution, but they often expect something, like recognition. There is a risk that incentives become misaligned and the recipients passive and not listened to.

Triple Bottom Line Business Models

Triple Bottom Line businesses have an explicit goal to give back to the society. In order to keep that in perspective in the Business Model Canvas, the cost segment should be expanded with the social and environmental costs and the revenue expanded with the social and environmental benefits. Personally I find it chilling that most companies pay no consideration to these things in their business model.

Business Models and Business Plans

A well done Business Model Canvas works well as the basis for a strong business plan. The book suggests giving the business plan a five-section structure: The Team, The Business Model, Financial Analysis, External Environment, Implementation Roadmap, and Risk Analysis. The book gives a list of things to include in each of those sections.

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