Business Model Generation

January 3, 2011

Thought Provoking book Business Model Generation!

Business Model Generation caught my eye in a book store in December – It is rare I find myself in book stores anymore given how many books are sent to me as a blogger and my preference is reading on Kindle or iPad. I think it was the graphic design of the book that first caught my eye. When I began thumbing through it I did what most readers do according to research, looked at the cover, identified the author, looked at endorsements, scanned forward then began on the first chapter. I could see there was something new about this book and how the authors thought about business models. It was clear that Business Model Generation was a book for visionaries, game changers, and challengers.

The book is broken into 5 chapters, Canvas – which is the mental and physical model of how the authors Alexander Osterwalder and Yves Pigneur think about business. They look at 9 Building Blocks that form the business canvas. These are:

  1. Customer Segments – An organization serves one or several customer segments. (Examples of different type of Customer Segments: Mass Market, Niche Market, Segmented, Diversified, Mutli-sided platforms – or

    Business Model Canvas

    multi-sided markets)

  2. Value Propositions – It seeks to solve customer problems and satisfy customer needs with value propositions (VP creates value for the customer through a distinct mix of elements: Newness, Performance, Customization, Getting Things Done, Design, Brand/status, Price, Cost reduction, Risk reduction, Accessibility, Convenience/usability)
  3. Channels – Value propositions are delivered to customers through communication, distribution, and sales channels. (Channels have five distinct phases – each channel can cover some or all of these phases:  Indirect: 1)Own Stores, 2)Partner stores,  3)Wholesaler or Direct: 1)Sales Force, 2) Web sales and then within those which of the Channel Phases: 1 Awareness, 2 Evaluation, 3 Purchase, 4 Delivery 5 After Sales)
  4. Customer Relationships – Customer relationships are established and maintained with each customer segment ( Several Categories of customer relationships: Personal assistance, Dedicated personal assistance, Self-service, Automated services, Communities, Co-creation’s)
  5. Revenue Streams – Revenue streams result from value propositions successfully offered to customers. (There are several ways to generate Revenue Streams: Asset sale, Usage fee, Subscription fee, Lending/Renting/Leasing, Licensing, Brokerage fees, Advertising and corresponding Pricing Mechanisms)
  6. Key Resources – Key resources are the assets required to offer and deliver the previously described elements. (Key resources can be categorized as follows: Physical, Intellectual, Human, Financial)
  7. Key Activities – .. by performing a number of Key Activities. (Key activities can be categorized as: Production, Problem Solving, Platform/network)
  8. Key Partnerships – Some activities are outsourced and some resources are acquired outside the enterprise. (It is useful to distinction between three motivations for creating partnerships: Optimization and economy of scale, Reduction of risk and uncertainty, Acquisition of particular resources and activities)
  9. Cost Structure – The business model elements result in the cost structure. (It is useful to to distinguish between two broad classes of business models Cost Structures: cost cost-driven and value-driven from the following categories Cost-driven, Value-driven.  Cost Structures can have the following characteristics: Fixed costs, Variable costs, Economies of scale, Economies of scope)

Three Core Business Types

Patterns – What the authors do is integrate their thinking with that of some of the best thinkers of strategy – they show how Micheal Porters work of Strategic Advantage, Chris Anderson’s idea of the Long tail, and Tracy and Wiersema concept of The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus, Doninate Your Market, as well as Hagel and Singer’s Three Core Business Types)

In this chapter they provide examples from Telco industry, Private Banking, Toy maker Lego to Multi-sided businesses like Google, Apple. They also go down the road to explain free to not free enterprises like Skype.

The Empathy Map by XPLANE

Design: How to build a business model around customer insights. Showing you how you can shift your perspective. They introduce the concept of the Empathy Map that was created by XPLANE.  The Empathy Map looks like this:

In this chapter the authors walk you through processes to arrive a enhanced design like Customer Insights, ideation,  providing an introduction to the value of visual thinking, how to use prototyping,  story telling, and Scenario Planning.

Strategy: In this chapter they look at the business model environment: context, design drivers, and constraints. It seems that they are adapting their work from Micheal Porters 5 forces. Then delving into questions like, how should your business model evolve in light of a changing environment?

The book provides you a detailed assessment of questions in which you have to provide plus or minus based on some very insightful categories. The key categories that they look at are:

  1. Value Proposition Assessment
  2. Cost/Revenue Assessment
  3. Infrastructure Assessment
  4. Customer Interface Assessment
  5. Value Proposition Threats
  6. Cost/Revenue Threats
  7. Infrastructure Threats
  8. Customer Interface Threats

Then they will take you through a SWOT based on the Canvas and an analysis adapted from Blue Ocean Strategy.

Process: This business model design has 5 phases; Mobilize, Understand, Design, Implement and Manage. This final chapter puts it all together.

I really enjoyed this book. It may be that I use many of the strategic models that the book integrates into their process. I have already begun to adapt this methodology to some of my work with clients. It is worth taking a closer look at their work. I have included some links to online tools that they provide from their website. Additionally they will be releasing an iPad app soon. Stay tuned….

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