Book

Business Model Generation

A Handbook for Visionaries, Game Changers, and Innovative picture book on the
Challengers serious topic of business modeling

Alexander Osterwalder and Yves Pigneur

Wiley, 2010
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9
9 Applicability A different kind of business world calls for a different kind of business manual, and
9 Innovation that’s what Alex Osterwalder and Yves Pigneur have achieved in their New Age guide to
contemporary business modeling. Abetted by their “Business Model Innovation Hub” –
10 Style
with 470 online collaborators in 45 countries – Osterwalder and Pigneur practiced
what they preached when they applied their modeling concepts to the book’s
production. And the concepts are not just theories: major companies such as IBM and
Ericsson are converts to the “Business Model Canvas,” a low-tech template for
brainstorming and visualizing corporate roles and processes. The book’s breezy,
colorful format, replete with photos, drawings, charts and graphics, belies its intensely
researched and reality-grounded content. A big sheet of paper and a slew of Post-it
notes are all you need to get started; that, and the combined creativity, intellect and
persistence your team brings to the project. getAbstract heartily recommends this
comprehensive, pictorial handbook to entrepreneurs and business leaders looking to
create or redesign their business models.

In this summary, you will learn

• What the nine elements of a business model are;
• How to use the “Business Model Canvas” to create new enterprises and
reinvigorate existing companies, and
• Why proactive companies routinely reassess their business models.

Take-Aways
• Simple approaches to business modeling inspire strategic thinking and holistic
design.
• The “Business Model Canvas” is a flexible template for conceiving, completing
and assessing business models.
• Business models should focus on nine interrelated parts, covering a company’s
“customers, offer, infrastructure and financial viability.”
• “Segment” your customer base and determine what kind of client “relationships”
your company needs to develop.
• Figure out your firm’s “value proposition” and which “channels” you’ll use to
deliver your products and services.
• A company’s “key activities” determine its “revenue streams” and “cost
structures.”
• Joining up in “key partnerships” with suppliers or even competitors can add to
 your organization’s “key resources.”
• Your models must allow for outside forces such as the economy and competition.
• Even the most successful business-model designs are vulnerable to obsolescence.
• Proactive companies regularly innovate by reviewing their existing business
models.

Summary

“Design Tomorrow’s Enterprises”

Upstart technologies and lightning-fast implementation drive various new business
models that are radically altering industries and commerce. Just look at how Apple’s
“In today's climate, it's iPod has revolutionized the music industry, how Skype has turned the
best to assume that most telecommunications field upside down and how Grameen Bank has “popularized
business models, even microlending” as a new form of finance. A business model – defined as “the rationale of
successful ones, will how an organization creates, delivers and captures value” – can launch an
have a short lifespan.” entrepreneur’s new idea or readjust the thrust of an existing company.

The Swatch Group is a case in point: Previously specializing in high-end watches, the
Swiss company diversified into the production of the low-priced Swatch line of watches
in response to Asian rivals. The Swatch Group has thrived in both the upper and lower
segments of its market largely because it chose to serve these segments by using
different business models. Swatch is an example of a company that manages not just
one but a “portfolio” of business models.

“A business model can

Constructing a Business Model
best be described
through nine basic Strategizing an innovative business model, a process which sometimes can resemble
building blocks that structured chaos, demands a fresh approach to creativity. The “Business Model
show the logic of how a Canvas” delivers a framework for focused brainstorming and staff inspiration. Major
company intends to companies such as Ericsson, IBM and Deloitte have adopted it for their “business
make money.” model generation.”

The Business Model Canvas is a flexible template for capturing the nine essential parts
of a business model. The “canvas” is usually a large piece of paper with sections for
each of a model’s elements. Participants in the design process move handwritten Post-
it notes, representing proposed components of the model, around the canvas; each note
conveys an idea’s individual impact on the whole picture. A business model is a
dynamic system, not a collection of independent parts, so a change to one element is
likely to have an impact on one or more of the others. Alteration of any of the aspects of
“Customers comprise the a model-in-development is easy because of this visual, “building block” style of paper-
heart of any business
based strategizing.
model.”
This purposely simple approach maximizes broader strategic thinking while
minimizing debate about operational details. The use of Post-it notes with short bits of
text is an effective way to build each of the primary elements of a business plan in a
systematic way. The Business Model Canvas technique encourages you to think about
your whole organization, rather than as discrete, disconnected operating activities and
administrative functions.

“The Value Proposition Nine Building Blocks

is the reason why The essential elements of a business model provide a “shared language” that describes
customers turn to one how a company works. Forming an interrelated “blueprint” for innovation, these nine
company over another.” building blocks cover an organization’s “customers, offer, infrastructure and financial
viability”:

1. “Customer segments” – Target one or more types of customers in this “heart”

of your model. “Mass” markets and “niche” markets require starkly different
approaches, while “segmented” customer bases share similarities, but their needs
vary slightly. Companies with “multi-sided platforms” sell to two or more groups;
for example, a credit card company cultivates businesses to accept its card as well
 as account holders to use it.
2. “Value propositions” – These “bundle[s] of benefits” lead clients to do
business with your company rather than with your competitors. Create value by
inventing something new, improving your product’s “performance” or “tailoring”
your offering to your clients' specific needs.
“Communication,
3. “Channels” – Select the best “customer touch points” to communicate value
distribution and sales
Channels comprise a and to distribute and sell your products and services. Internet sales, retail
company's interface locations and wholesalers exemplify channels that enable customers to
with customers.” experience, assess and buy what you’re selling.
4. “Customer relationships” – Establish different ways to serve distinct market
segments: “Personal assistance” from a service representative can coexist along
with automated service or self-service. Amazon “co-create[s]” value for all its
users with customer-written product reviews.
5. “Revenue streams” – These are the “arteries” of a business model; income
flows through them from discrete sales or from ongoing payments such as
rentals, licenses or subscriptions. Each type of revenue stream may demand a
“Companies forge different “pricing mechanism,” either a “fixed” price or a “dynamic,” negotiated
partnerships for many price. For instance, a “perishable” hotel room sells for varying rates, depending
reasons, and on season and availability.
partnerships are
6. “Key resources” – These most important assets can take several forms –
becoming a cornerstone
of many business “physical, financial, intellectual or human” – depending on what a company does.
models.” They range from executive talent and intellectual property rights to physical plant
and credit lines; key resources may be “owned or leased.”
7. “Key activities” – Company personnel routinely perform critical tasks that
engage customers and turn a profit. For example, a manufacturer produces an
item, a consultancy solves problems and companies like eBay and Visa manage
“platform/network activities” that link various groups.
8. “Key partnerships” – Joining with other entities can expand or protect your
market share in a highly competitive industry: Consider supplier links, joint
“It is illogical for a ventures and “strategic alliances.” Tactical partnerships with rivals, or
company to own all “coopetition,” can lessen risk or provide savings. Companies also can reduce costs
resources or perform or gain access to vital resources by outsourcing or subcontracting.
every activity by itself.”
9. “Cost structure” – Whether yours is a “cost-driven” or “value-driven” business
–offering low-priced services like discount airline tickets or creating exceptional
value like a top hotel – determines your model’s cost structure. Outlays represent
“fixed and variable” expenses; bigger companies can pursue economies of scale
and “scope” from large-scale production and distribution.

Finding the “Patterns”

Business models tend to follow certain conceptual styles, or patterns. For instance, the
The Business Model “unbundled” business model posits that three broad functions within a company –
Canvas “is a hands-on “customer relationship, product innovation and infrastructure” – should operate
tool that fosters
separately because of their different “economic, competitive and cultural imperatives.”
understanding,
discussion, creativity For example, a private bank should focus on its core client relationships and outsource
and analysis.” its operations either to a third party or to its own transaction-processing affiliate.

The “long tail” business model provides for the sale of a wide variety of personalized
products to a mass market of small-quantity buyers. Online video provider Netflix and
e-book publisher lulu.com can offer specialized films and texts to a huge audience –
and make a profit – due to the Internet’s “democratization” of content production and
distribution. Long-tail business models overturn the traditional concept of having to
sell a single standardized “hit” product in large quantities to consumers. Lego adapted
the long-tail model when it augmented its conventional, mass-market toy sales with
customer-generated kits. While still small and not yet profitable, the user-designed toy
kits serve as a “complement” to Lego’s ongoing business.

“FREE” business models center on giving products and services to certain customers in
order to attract others. In this multisided platform model, Google displays advertising
to users of its popular search engine based on their search terms: Google’s ability to
 generate advertising revenue depends on the mass-market appeal of its online search
“The challenge of engine. Similarly, publishers distribute free but advertiser-supported newspapers to
innovation is developing readers. A variation, the “freemium” model, offers a basic service or product gratis, but
a deeper understanding sells a premium version of the giveaway.
of customers rather than
just asking them what “Open” business models demonstrate how partnerships can expand productivity and
they want.” reduce costs. For example, Procter & Gamble dramatically increased the productivity of
its internal research and development by collaborating with external research
organizations and with its own retired scientists and professionals.

Catalysts, Controls and Constraints

Any one of four catalysts – or a combination of them – can trigger a new business
model:

1. A decision to make greater use of underutilized assets.

“Today, different
business models compete 2. A new offer to customers.
in the same markets, 3. A change in customer service.
and boundaries between
industries are blurring – 4. A finance-related innovation.
or disappearing
altogether.” Online retailer Amazon drew on its underexploited technology platform by going into
commercial sales of excess data-storage and computer-server capacity. Mexico-based
cement manufacturer Cemex grew rapidly after cutting its delivery time to four hours
from the industry-standard two days. Copier manufacturer Xerox overcame resistance
to its machines’ purchase price by leasing rather than selling them.

Designers use a variety of tools and techniques that can help you shape your business
model:

“New, game-changing • Employ “customer insights” to see the world from your clients’ perspectives.
business models emerge • Use “ideation” by asking “what if?” to raise new visions.
from deep and relentless
• Make concepts real and compelling by “storytelling.”
inquiry.”
To manage the business-modeling process, follow these “brainstorming rules”:

• Prepare in advance and remain focused on the problem or opportunity at hand.

• “Think visually” by capturing ideas in a few words or sketching them, keeping the
attention on abstract design and off operational detail.
• Using the Business Model Canvas and Post-it notes gives everyone involved in
the design process a common idiom with which to communicate.
“Business model Properly built models account for existing constraints imposed by the company’s
innovation rarely
“design space,” its external environment. Analyze and assess four external forces:
happens by coincidence.
But neither is it the competitive pressures, customer demands, industry trends and macroeconomic
exclusive domain of the conditions. Careful analysis of industry trends, for example, will clarify the nature and
creative business genius. number of competitors that your firm faces.
”
Reviewing and Rebuilding Business Models
Like an individual who gets an annual checkup, a company can stay healthy by
regularly reassessing its business models’ current viability and future promise.
Consider using a SWOT analysis to examine your company’s “Strengths, Weaknesses,
Opportunities and Threats” within each of the nine elements of its business model. A
SWOT study can reveal the current condition of a business model, as reflected in its
strengths and weaknesses, and can help you predict possible changes in the future as
opportunities and threats arise.

Each of a business model’s nine elements is subject to repair or renewal. For example,
Nestlé greatly improved one of its business models via channel expansion: One of the
largest food companies in the world, Nestlé struggled to sell its Nespresso coffee and
machines to commercial buyers such as restaurants and offices. But when it switched
Nespresso’s sales channel to direct mail and redirected its marketing toward high-
income households, the line took off.
 Persistence pays in business modeling, but you need patience to counter the pitfalls in
“Take a fresh look your each phase of the design process. Avoid committing to a particular design too soon, and
model regularly. You make sure your team members feel secure enough to express bold ideas. Companies
may need to overhaul a improve the outcomes of their modeling process to the extent that top management
successful model sooner
supports an honest, exhaustive vetting of ideas, not just once but on a recurring basis.
than you thought.”
Virtually all business models eventually become obsolete, so proactive companies
actively conceive and pursue new models. One side benefit of continual business-model
design and redesign is a healthy lack of respect for long-held assumptions.

About the Authors

Alex Osterwalder is an author, speaker and adviser on business-model innovation. Yves Pigneur is a professor of
management information systems at the University of Lausanne in Switzerland.

This document is restricted to the personal use of Sadegh Ramzanpour ([email protected])