A business model is defined in this book as the rationale of how an organization creates, delivers and captures value. This, ‘business model’ has to be a simple and relevant document that details how your business plan to create value.
The business canvas is a design tool (sometimes even a drawing) that represents the shared language used to describe, assess and even change an existing business model. According to this book, there are 9 building blocks that essentially build the business model canvas. These 9 blocks are;
1.) Customer Segments – who is your target market? – do you understand the different needs of the segments that exist within your market and the different channels available to reach out to them, or, is there a specific segment you are targeting?
2.) Value Proposition- what value are you providing to your customers? Are you offering your customers, design value, customization value, ‘getting the job done’ value, brand value, performance value, price value (lower pricing points), risk reduction value, or accessibility?
3.) Channels- what channels do you need to use to reach out to your customers?- how will you market your product/service/platform?
4.) Customer Relationships- the method of communication between you and your customer will depend on the stage your business is in. You need to ask yourself whether you are in the customer acquisition stage, the customer retention stage or the up-sell stage.
5.) Revenue Streams- how will you make money?- Are you selling a physical product, are you offering a service for a subscription, are you offering something for free (freemium) and offering additional features /premium features for a fee (or are you solely relying on advertising revenues- if you have a web-based business this will depend largely on the amount of traffic you have, the engagement rate of your user base and how much time they spend on your site), brokerage fees, leasing fees, or licensing fees?
6.) Key Resources- these are important things that you will need for your business to work.
7.) Key Activities- these are the important things that must be one to make your business to work.
8.) Key partnerships- there are the alliances you need to make for your business to work (suppliers, competitors, joint ventures or strategic alliances).
9.) Cost Structure- these are the important costs you will incur in order to make your business work.
This book lists 5 examples of traditional and, ‘new economy’ business model canvas patterns followed by businesses;
- Unbundling Model- According to this model, there are 3 types of businesses; customer relations businesses (businesses focused on the acquisition of customers and building customer relations- for example, Ebay), product innovative businesses (businesses focused on developing new and attractive products- for example, Apple) and Infrastructure businesses (businesses focused on building and managing platforms for high volume repetitive tasks- for example, General Motor). These 3 can exist within one organization, but it is advisable that such companies separate them into 3 entities.
- Long Tail- Under this model, the business offers a large number of niche products that do not sell much on their own, but collectively amount to a large amount of sales. Examples of this model include Lulu.com and Youtube.
- Multi-sided Platform- Under this model, the business has 2 distinct, but interdependent groups of customers. The business grows in value through what is known as the, ‘network effect’- the more users the platform gains, the more valuable it becomes (examples include; Amazon, Google, Wii, Playstation and Xbox).
- Freemium- Under the freemium model, the business offers its services free of charge. Nonpaying customers are financed either by another part of the business model (upselling certain services), by advertising revenues, or by another, paying customer segment (examples include Flickr, Twitter and Facebook).
- Open Business Model- Under this model, the business collaborates with outside partners by opening up its platform (examples include Tor and RedHat).
Under this section, the book delves into the techniques available to design a business canvas. According to this book, there are six techniques, these are;
- Customer Insights- businesses need to understand that customer insight goes beyond asking customers what they want. Apple had a deep understanding of its customer’s behavior and understood that people where not interested in digital media players per se, Apple believed people wanted a seamless way to search, find, download and listen to music (this was against the prevailing trend- illegal downloading), this is how Apple came up with the Ipod.
- Ideation- It is difficult for established businesses to innovate because the systems designed to make an established business more effective (financial projections, job descriptions and anything promoting predictability) work against the innovative process (that requires systematic chaos). According to the ideation process there must be a brainstorming of business ideas (with people from all sectors of the business), the best ideas must then be isolated, elaborated and developed further.
- Visual Thinking- according to this process pictures deliver messages more effectively than words and pictures often need to be used to communicate ideas and concept (post it notes, power-point presentations and anything that is visually stimulating).
- Prototyping- According to this process you have to avoid falling in love with any one idea you have, the idea must be prototyped, tested and there has to be an exploration of different directions in which the business model could go.
- Storytelling- You must be able to use real life stories that people can relate to, describe your business model and your value proposition. This storytelling will help you communicate your business to possible investors, your customers and your employees. You have to ask yourself what your business narrative is.
- Scenario- Scenario planning helps businesses better understand that the business model might have to evolve under certain, future conditions. Imagining future scenarios helps develop business models in more innovative ways by understanding future conditions that may exist within your market you will better understand how to draft your business model in a manner that allows it to be more adaptive.
Business model strategy involves understanding the environment the business operates within (the key trends- regulatory, technological, societal and socio-economic, the industry forces, the market forces and the macro-economic forces- global market conditions and economic infrastructure), the design drivers underlying the business model and the constraints the business is likely to face.
You have to understand that today’s market conditions may very well be outdated tomorrow and you must be able to improve on your business model to suit changing conditions (ask yourself what measures you have in place to ensure your business model remains competitive). Amazon for example, retains its competitive edge by keeping its profit margins very low ensuring that no competitor could price its products lower. Jeff Bezos also understood that these low margins (at one point Amazon posted a 4.2% net margin) where Amazon’s financial weakness, to address this issue Jeff Bezos broadened Amazon’s business model by offering other web services.
One strategy that deserves a little extra attention mentioned in this book is the Blue Ocean Strategy. According to this strategy businesses must focus on creating new, uncontested market spaces. An example of a business that pursued the, ‘blue ocean strategy’ would be Wii, instead of focusing on developing a console with state of the art performance (which was what Playstation and Xbox brought to the market), Nintendo choose to develop a more, ‘social’ game console designed for the casual gamer.
There are 5 stages in the business process stage; mobilization, understanding, design, implementation and managing. The mobilization step involves preparing the business model for success, this includes setting up all the elements that are needed to ensure the business model is successful and describing the motivation and value proposition underlying a business. The understanding phase is a stage where research and analysis is carried out. This involves immersing yourself in industry relevant knowledge. The designing phase is where the business model is generated and tested (by questioning the validity of the business models and the underlying axioms). The Implementation phase is where the business prototypes are tested in real life situations and the Management phase is where the business model is adapted and modified to suit current and future, foreseeable market conditions.