Business Model Generation: Summary and Review
Keywords: Analysis, Business model, Design, Ideation, Innovation, Platform, Process, Prototype, Strategy, Visualization
Please Note: There are links to other reviews, summaries and resources at the end of this post.
Business Model Generation looks at the challenge of building a business model through the framework of the Business Model Canvas. The Canvas provides a matrix for nine essential “building blocks.” While most managers and entrepreneurs will be familiar with these categories already, this book provides a systematic method for approaching the creation of business models. Quite a few of the exercises and methods also come from outside sources.
This is more than a patchwork of external ideas stitched together randomly. Following the steps outlined in the book can safeguard the development team against floundering chaotically from one methodology to another. The process that’s presented is organized and logical — it is useful for understanding the architecture of business models. Entrepreneurs and executives tasked with designing business models will likely find it a helpful guide.
This book is aesthetically interesting. Typesetting is used as a strong design element, and there are lots of bright, primary colors. (The publisher, John Wiley & Sons, has produced other monographs with high design standards.) But for some readers, the work might be over-designed, and form could obscure function.
A business model should include nine basic building blocks: customer segments, value propositions, channels, customer relationships, revenue streams, key resources, key activities, key partnerships and cost structure. Consider each in turn.
Customer segments are groups of people (or organizations) that a company wants to target. In some instances, groups should be separated into different segments, for example, where:
- Groups are served by different distribution channels.
- Various groups are paying for different features.
- There are different relationships with various customers.
- Customers are on different levels of profitability.
Business models aimed at the mass market don’t focus much on customer segments; rather, they treat all customers similarly. (This model is fairly common in the consumer electronics sector.) On the other hand, niche markets have very tight, focused customer segments. There are lots of different kinds of segment models, serving several related customer segments. Businesses with diversified models serve multiple unrelated customer segments. Companies with multi-sided platforms need to identify segments from each side of the platform.
Value propositions are the things that the customer values, and include products and services, as well as convenience or quality. Various features can create value for customers. Improved performance can also create value, as can customization. Just about any feature or service can be part of the value proposition, and superior designs, prestigious brands, inexpensive prices, accessibility and convenience are just some of the features that can make a customer value a product over that of its competitors.
A company reaches its customers through channels, which facilitate customer awareness of the product and customer understanding of the value proposition. Customers make purchases through the channel and access delivery and support after the transaction. Some companies reach customers through their own channels; sometimes they have partners who take care of this. There are many kinds of channels — for example, wholesalers, web sites, brick-and-mortar stores, etc.
Customer relationships define how a company interacts with the customer segment, and these relationships can strongly affect customer experience. They can be used to retain customers or to boost sales — a variety of techniques can be used to benefit the company.
The business of business is to make money, so every company needs revenue streams. There are a few different ways to monetize — for example, subscription fees, licensing fees and advertising.
Key resources are the important physical, intellectual, human and financial assets that a company needs.
Key activities are the actions that the company must undertake to make the business model work, including not only production activities, but also things like problem solving and knowledge management. (Platform companies in particular are nurtured by their networks; maintaining these presents key activities specific to this model.)
Companies don’t exist in isolation; they need suppliers and other partners to run smoothly. These crucial key partnerships can optimize business models. Partners can help to reduce risk and acquire resources.
Finally, the cost structure includes the expenses required to make the business model function. Some companies strive to keep costs down, while others are more concerned with creating value.
Together, these building blocks form the Business Model Canvas .
Business models can be organized by similar characteristics, by similarities in how they use the building blocks or by similar behaviors. Broadly, these similarities are business model patterns, and Osterwalder evaluates how traditional business concepts can be made to fit the Business Model Canvas.
Bundled businesses are those in which the different activities within a single company are so different from each other that they could just as easily be different companies. Typical roles in bundled companies include customer relationships, product innovation and infrastructure management. These functions should be unbundled — they have different economics, competition and culture. And this can create some conflicts.
Unbundled businesses have cut the ties with irrelevant departments and outsourced their duties. They can focus on their core business without being dragged down by tangential chores. One type of unbundled business is the long-tail business model, which sells a lot of different products that don’t have huge sales individually. Long-tail businesses don’t focus on getting the big hits; instead, they cultivate the niche customers and make niche content easily available to these customers.
Multi-sided platforms are unbundled businesses that unite separate but interdependent customers. Value is achieved because multiple sides are participating. Network effects are immensely important to these businesses for bringing new users onto the platform, but sometimes these businesses have trouble bringing both sides of a market together. This “chicken and egg” problem can be overcome by subsidizing a customer segment.
The idea of subsidizing one side of the market is taken to its logical extreme with the free business model. At least one important customer segment gets something for free; another part of the business model pays for this subsidy. There are a few different ways businesses can offer something to certain market segments for free: taking money from advertisers and allowing other customers to participate for free or making basic services free to users, but then charging for advanced features. The bait-and-hook strategy gives customers something for free and encourages them to buy the product in the future.
Companies with open business models collaborate with outside partners, which can be accomplished from the outside in by bringing external resources into the development process or from the inside out by giving external partners access to internal assets (typically by licensing or selling its resources).
It’s important to have a deep understanding of the customer, so customer insights should inform all aspects of a business (including the business model). There are many ways to research what customers want and what they don’t want, but the most important thing is to talk to customers directly.
An empathy map is a chart depicting the customer. The main value in this chart is likely a checklist which comprehensively considers the customer’s point of view. Visual thinkers might benefit from charting information received from customers; others might just as easily use the suggested categories without drawing a chart.
Ideation involves generating a bunch of ideas for business models and picking the best. There are several epicenters, or sources, of business innovation:
- Resource-driven innovation originates from within a company’s existing infrastructure.
- Offer-driven innovations create totally new value propositions.
- Customer-driven innovations are based on customer needs.
- Finance-driven innovations are motivated by new sources of money, like new revenue streams and new cost saving.
Multiple epicenters can also drive innovations.
To come up with innovative ideas, it helps to assemble a diverse team — different kinds of people mean a wider range of outlooks. “What if” questions are useful starting points for further brainstorming.
Visual Thinking is also a valuable design technique. Being able to express ideas visually is important — it clarifies things and can make it easier to communicate with others. Post-It notes can help, here: write one idea per note, and move them around the Business Model Canvas. Draw pictures; sketch the Canvas. Tell a story, one element at a time. A business model prototype can also be helpful in envisioning the business model, and there are different ways you can create prototypes — for example, a napkin sketch that outlines and pitches a rough idea or a business case looking at the viability of the idea.
Storytelling can help communicate ideas to others. It makes ideas tangible; stories engage people. But bear in mind, stories should be told from a specific perspective, perhaps that of the employee or the customer. Stories can help people visualize the future. You can use lots of different media to tell your story, such as videos, text, comic strips, etc.
Scenarios are another technique for making abstract ideas more tangible. They can help the business model development process by making the context more detailed. Customer scenarios explain how products are used and who uses them. Future scenarios help you think about the future. Develop several scenarios (with a business model for each), and describe each scenario with a story.
To design a good business model, you need a strong understanding of the external environment in which your company exists. One way to analyze the environment is to break it into four parts and map them:
- Market forces, like demand and revenue attractiveness.
- Industry forces, including competitors and suppliers.
- Key trends, including technological and social trends.
- Macroeconomic forces, like global market conditions and economic infrastructure.
No one can predict the future, but it’s good to develop hypotheses as guidelines for the next generation of business models. Conjectures on the trajectory of market forces, key trends and macroeconomic forces are helpful in developing options for the future. Check your business model regularly. Scheduled evaluations can help you monitor the business environment and catch problems early.
There are two suggested methods for assessing existing business models: big picture and building block. These methods complement one another and should both be used for a full understanding of how well a model is functioning.
It’s hard for established businesses to change business models, which is one reason why innovative projects are often spun off into separate departments or entities. Complete separation like this greatly reduces the potential for conflict between the two units, but it also reduces the opportunity for synergy. On the other hand, innovative projects can remain integrated within the parent company. This increases the possibility that the company will benefit from synergies, but the chances of conflict are much greater.
Between these two extremes, some companies grant the innovation team considerable autonomy, yet maintain responsibility to the head office. This compromise leaves the door open for synergy but also for conflict.
Concept Exploration : Blue Ocean Strategy is a system of finding value through adding and removing product features and benefits in such a way as to optimize costs and find new markets. This Strategy looks at four parameters to analyze business models: 1) whether there are factors that the industry takes for granted that should really just be eliminated; 2) whether there are factors that should be reduced below industry standards; 3) whether any factors need to be raised above industry standards; and 4) whether there are factors that should be created that the industry hasn’t offered before. Combining Blue Ocean with the Business Model Canvas results in comprehensive analysis, and to blend the two, examine each of the building blocks using the four parameters.
Every business is different, so the business model design process will need to be adjusted to fit the needs of your business. Consider the process in generic terms.
Innovation arises from several different objectives. For example, a new business model might be needed to bring new products to market to create a new market. There can be significant challenges on the journey to designing a new business model, including the problem of finding the right model. Once created, a new model will need to be tested before full-scale launch, and getting the market to accept the new model can be a struggle. Furthermore, once in place, there is a continuing process of adapting a new business model to adjust to market changes and to manage uncertainty.
In older companies, changing the business model is usually instigated in response to a crisis with the existing business model or to adjust to changing environmental conditions. New models might also be generated when bringing new products to market. A business may also want to occasionally test new models in preparation for future exigencies. For existing firms looking to change their business model, challenges include accepting the idea of new models, getting old and new models into alignment, dealing with vested interests and making long-term success the goal.
Designing innovative business models is a messy process. There’s a lot of ambiguity throughout most of the process. It takes time, but the temptation is to prematurely jump on whatever solutions might present themselves without fully going through the process. It’s vital to take the time to explore all the alternatives. Do the research; develop the prototypes.
The design process has five phases:
- Start by mobilizing your team, set the stage and gather what you need. Thoroughly explain the need for a new model. It’s also useful to establish a vocabulary that you can all use to discuss business model design.
- Immerse your team in learning everything they need to know about the customers, the technology, and the environment.
- To begin designing business models, your team needs to develop several prototypes and test them out. At the end of this stage, you’ll need to choose the best business model design.
- Once you have selected the best design, implement it.
- Finally, the business model will have to be managed; the environment must be monitored. Occasional tweaking is necessary to adjust to changing circumstances, so adapt and update the model as needed.
The utility of the Business Model Canvas isn’t limited to profit-making enterprises. Every organization is a business in some sense, including nonprofits and private clubs. Any organization that creates and delivers value must be able to generate the income needed to cover their costs — in short, nearly every organization needs to have a business model.
The business model can form the basis of a business plan. Start with the following elements when putting this plan together:
- Description of the management team.
- The business model.
- Financial analysis.
- Description of the external environment.
- Implementation roadmap.
- Risk analysis.
To maximize the effectiveness of the plan, make it comprehensive. Ultimately, you’ll want to turn your business model into an actual business, or if you’re an existing business with a new model, you’ll need to implement it.
There are five important areas that should be in alignment with the business model: Strategy, Structure, Processes, Rewards and People. Imagine a star, with each area represented by a point on the star and in the center lies the business model. It’s especially important to align your information systems with your business goals, and the Business Model Canvas can be an important tool for communicating with the Chief Information Officer.
The Canvas can also be paired with the Enterprise Architecture approach, which usually depicts a company as having three dimensions: the business perspective, the applications perspective and the technology perspective. The Business Model Canvas can be used to guide the business perspective, and then the applications and technology perspectives can be aligned with that.
Finally, to aid readers, the authors created an application called the Business Model Toolbox. This Toolbox has all the features needed to create models; it also makes it possible for team members in separate countries and on different continents to work together remotely.
A prototype of this software is available for free at www.businessmodeltoolbox.com , now https://strategyzer.com/app .
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Alex Osterwalder and Yves Pigneur
Business model generation, a handbook for visionaries, game changers, and challengers.
Wiley , 2010
Innovative picture book on the serious topic of business modeling.
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A different kind of business world calls for a different kind of business manual, and that’s what Alex Osterwalder and Yves Pigneur achieve in their New Age guide to contemporary business modeling. Abetted by their “Business Model Innovation Hub” – with 470 online collaborators in 45 countries – the authors practiced what they preached by applying their modeling concepts to the book’s production. Their 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, filled with photos, drawings, charts and graphics, belies its intensely researched, reality-grounded content. A big sheet of paper and a slew of Post-it notes are all you need to get started; that, and your team's combined creativity, intellect and persistence. Entrepreneurs and business leaders looking to create or redesign their business models will appreciate this comprehensive, pictorial handbook.
“Design Tomorrow’s Enterprises”
Upstart technologies and lightning-fast implementation drive various new business models that radically alter industries and commerce. Just look at how Apple’s iPod revolutionized the music industry, how Skype turned the telecommunications field upside down and how Grameen Bank “popularized microlending” as a new form of finance. A business model – defined as “the rationale of how an organization creates, delivers and captures value” – can launch an 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 producing 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 business model but a “portfolio” of business models.
Constructing a Business Model
Strategizing an innovative business model, a process which sometimes can resemble structured...
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.
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Business Model Generation: Book Review
This article is an excerpt from the Shortform book guide to "Business Model Generation" by Alexander Osterwalder and Yves Pigneur. Shortform has the world's best summaries and analyses of books you should be reading.
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What is Osterwalder and Pigneur’s book Business Model Generation about? What are the nine elements that make up a business model?
In their book Business Model Generation , innovation experts Alexander Osterwalder and Yves Pigneur propose a framework for designing a successful, holistic business model. Co-created by 470 practitioners from across 45 countries, the template consists of nine elements, which can be combined in different ways to tailor-design a business model for any venture.
This Business Model Generation book review takes a look at the book’s impact, authors’ backgrounds, and critical reception.
About the Authors
Dr. Alexander Osterwalder is an entrepreneur and highly respected strategy and innovations expert. Osterwalder has co-authored a number of books on the subject of business strategy and innovation:
- High-Impact Tools for Teams: 5 Tools to Align Team Members, Build Trust, and Get Results Fast , co-authored with Stefano Mastrogiacomo
- Testing Business Ideas: A Field Guide for Rapid Experimentation , co-authored with David J. Bland
Connect with Alexander Osterwalder:
Dr. Yves Pigneur is a professor at the University of Lausanne. He has co-authored several books with Alexander Osterwalder, and he is renowned for his expertise in business strategy and innovation.
Connect with Yves Pigneur:
The Book’s Impact
Dr. Alexander Osterwalder and Dr. Yves Pigneur originally worked together on a Ph.D. dissertation on the topic of business model innovation. After Osterwalder documented their approach in his business blog , businesses around the world, including Ericsson and Deloitte, began applying their method.
Osterwalder and Pigneur recognized that there was a demand for their book. However, they also recognized that the market was already saturated with strategy and management books with which they would need to compete. Therefore, they decided to implement their own business model process to come up with a way to finance, produce, and competitively position the book.
Instead of seeking a traditional publisher, they launched a subscription-based online platform to share their research. This platform not only financed the production of the book but facilitated co-creation with 470 global practitioners to create the book.
The authors did not have the support of a publishing house nor a marketing budget. Despite this, Business Model Generation quickly gained traction, is now required reading on many management courses, and has since sold over a million copies in 40 languages.
The book was eventually published by Wiley in 2010. Osterwalder and Pigneur have since co-authored a number of books together including:
- Business Model You: A One-Page Method For Reinventing Your Career , co-authored with Timothy Clark
- The Invincible Company: How to Constantly Reinvent Your Organization with Inspiration From the World’s Best Business Models , co-authored with Alan Smith, and Frederic Etiemble
- Value Proposition Design: How to Create Products and Services Customers Want , co-authored with Gregory Bernarda, and Alan Smith
Osterwalder and Pigneur have continued to develop their successful collaborations. Strategyzer, the consultancy firm they co-founded in 2010, provides online courses, applications, and services to help organizations build “invincible companies.” Millions of business practitioners and leading global companies including Microsoft, Coca-Cola, Nestlé, MasterCard, Sony, and Fujitsu, rely upon the practical tools that they’ve developed.
Strategyzer provides a downloadable template for the Business Model Canvas , as well as other useful tools to accompany the book.
The Book’s Critical Reception
Many reviewers comment that the book is practical and engaging. They find the process of evaluating or designing a business model based on the Canvas easy to follow, and they find the tools and strategies covered in the book very useful.
However, some reviewers have commented that the book suffers from “style over substance” because it lacks the necessary depth to execute a business plan. These reviewers suggest that the book is more suited to beginners rather than professionals. Other reviewers have commented that the layout of the book is too disjointed, and they feel that the authors’ attempt to cover too many different methodologies diminishes the overall effectiveness of the book. Finally, some reviewers have commented that the book is overly repetitive with many of the tools, processes, and case studies overlapping.
Commentary on the Book’s Approach
In their book Business Model Generation , Osterwalder and Pigneur provide a template for brainstorming and visualizing the overarching elements that make up a successful, holistic business model. It then demonstrates how to use this template to analyze or adapt existing business models, or design new models. In addition, it weaves in case studies and strategies to illustrate practical ways that businesses can use the template to successfully position their own business models.
Commentary on the Book’s Organization
There are six chapters: Canvas, Patterns, Design, Strategy, Process, and Outlook. The first two chapters explain what makes a successful business model and then describes different business models and how businesses can apply them. The authors provide supporting arguments from academics and strategists, as well as illustrations of existing business models to demonstrate each point.
However, from the third chapter onwards, the presentation of the concepts becomes less focused. The authors attempt to present a multitude of existing techniques and processes to use in conjunction with their business model template. However, these techniques originate from multiple sources and many of the tools and processes overlap. As a result, the last four chapters of the book suffer heavily from repetition.
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Darya’s love for reading started with fantasy novels (The LOTR trilogy is still her all-time-favorite). Growing up, however, she found herself transitioning to non-fiction, psychological, and self-help books. She has a degree in Psychology and a deep passion for the subject. She likes reading research-informed books that distill the workings of the human brain/mind/consciousness and thinking of ways to apply the insights to her own life. Some of her favorites include Thinking, Fast and Slow, How We Decide, and The Wisdom of the Enneagram.
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