LLM Book Knowledgebase

Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers (The Strategyzer Series 1)

10 min read

Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers (The Strategyzer Series 1)

Metadata

Highlights & Notes

Visit the Business Model Hub at www.BusinessModelGeneration.com/hub

Ultimately, business model innovation is about creating value, for companies, customers, and society. It is about replacing outdated models.

A business model describes the rationale of how an organization creates, delivers, and captures value

We believe a business model can best be described through nine basic building blocks that show the logic of how a company intends to make money. The nine blocks cover the four main areas of a business: customers, offer, infrastructure, and financial viability. The business model is like a blueprint for a strategy to be implemented through organizational structures, processes, and systems.

The Customer Segments Building Block defines the different groups of people or organizations an enterprise aims to reach and serve

An organization must make a conscious decision about which segments to serve and which segments to ignore.

Customer groups represent separate segments if: Their needs require and justify a distinct offer They are reached through different Distribution Channels They require different types of relationships They have substantially different profitabilities They are willing to pay for different aspects of the offer

Multi-sided platforms (or multi-sided markets) Some organizations serve two or more interdependent Customer Segments. A credit card company, for example, needs a large base of credit card holders and a large base of merchants who accept those credit cards. Similarly, an enterprise offering a free news-paper needs a large reader base to attract advertisers. On the other hand, it also needs advertisers to finance production and distribution. Both segments are required to make the business model work (read more about multi-sided platforms).

The Value Proposition is the reason why customers turn to one company over another. It solves a customer problem or satisfies a customer need. Each Value Proposition consists of a selected bundle of products and/or services that caters to the requirements of a specific Customer Segment. In this sense, the Value Proposition is an aggregation, or bundle, of benefits that a company offers customers.

What value do we deliver to the customer? Which one of our customer’s problems are we helping to solve? Which customer needs are we satisfying? What bundles of products and services are we offering to each Customer Segment?

A Value Proposition creates value for a Customer Segment through a distinct mix of elements catering to that segment’s needs. Values may be quantitative (e.g. price, speed of service) or qualitative (e.g. design, customer experience).

The Channels Building Block describes how a company communicates with and reaches its Customer Segments to deliver a Value Proposition Communication, distribution, and sales Channels comprise a company’s interface with customers. Channels are customer touch points that play an important role in the customer experience.

LONG TAIL BUSINESS MODELS are about selling less of more: They focus on offering a large number of niche products, each of which sells relatively infrequently. • Aggregate sales of niche items can be as lucrative as the traditional model whereby a small number of bestsellers account for most revenues. • Long Tail business models require low inventory costs and strong platforms to make niche content readily available to interested buyers.

MULTI-SIDED PLATFORMS bring together two or more distinct but interdependent groups of customers. • Such platforms are of value to one group of customers only if the other groups of customers are also present. • The platform creates value by facilitating interactions between the different groups. • A multi-sided platform grows in value to the extent that it attracts more users, a phenomenon known as the network effect.

Times

of

To summarize, three interlinked business model factors explain the commercial success of the Wii: (1) low-cost differentiation of the product (motion control), (2) focus on a new, untapped market that cares less about technology (casual gamers), and (3) a double-sided platform pattern that generates revenues from both “sides” of the Wii. All three represent clean breaks from past game sector traditions.

CS Business models with a multi-sided platform pattern have a distinct structure. They have two or more customer segments, each of which has its own Value Proposition and associated Revenue Stream. Moreover, one Customer Segment cannot exist without the others.

R$ Each Customer Segment produces a different revenue stream. One or more segments may enjoy free offers or reduced prices subsidized by revenues from other Customer Segments. Choosing which segment to subsidize can be a crucial pricing decision that determines the success of a multi-sided platform business model.

FREE • In the FREE business model at least one substantial Customer Segment is able to continuously benefit from a free-of-charge offer. • Different patterns make the free offer possible. • Non-paying customers are financed by another part of the business model or by another Customer Segment.

“Businesspeople don’t just need to understand designers better; they need to become designers.”

Adopting the customer perspective is a guiding principle for the entire business model design process. Customer perspectives should inform our choices regarding Value Propositions, Distribution Channels, Customer Relationships, and Revenue Streams.

Another challenge lies in knowing which customers to heed and which customers to ignore. Sometimes tomorrow’s growth segments wait at the periphery of today’s cash cows. Therefore business model innovators should avoid focusing exclusively on existing Customer Segments and set their sights on new or unreached segments.

Empathy Map, a tool developed by visual thinking company XPLANE.

Here’s how it works. First, brainstorm to come up with all the possible Customer Segments that you might want to serve using your business model. Choose three promising candidates, and select one for your first profiling exercise. Start by giving this customer a name and some demographic characteristics, such as income, marital status, and so forth.

Rather, business model innovation is about challenging orthodoxies to design original models that meet unsatisfied, new, or hidden customer needs.

We can distinguish four epicenters of business model innovation: resource-driven, offer-driven, customer-driven, and finance-driven.

RESOURCE-DRIVEN INNOVATIONS ORIGINATE FROM AN ORGANIZATION’S EXISTING INFRASTRUCTURE OR PARTNERSHIPS TO EXPAND OR TRANSFORM THE BUSINESS MODEL

OFFER-DRIVEN INNOVATIONS CREATE NEW VALUE PROPOSITIONS THAT AFFECT OTHER BUSINESS MODEL BUILDING BLOCKS

CUSTOMER-DRIVEN INNOVATIONS ARE BASED ON CUSTOMER NEEDS, FACILITATED ACCESS, OR INCREASED CONVENIENCE. LIKE ALL INNOVATIONS EMERGING FROM A SINGLE EPICENTER, THEY AFFECT OTHER BUSINESS MODEL BUILDING BLOCKS

INNOVATIONS DRIVEN BY NEW REVENUE STREAMS, PRICING MECHANISMS, OR REDUCED COST STRUCTURES THAT AFFECT OTHER BUSINESS MODEL BUILDING BLOCKS

“What if” questions help us break free of constraints imposed by current models. They should provoke us and challenge our thinking. They should disturb us as intriguing, difficult-to-execute propositions.

A diverse business model innovation team has members … • from various business units • of different ages • with different areas of expertise • of differing levels of seniority • with a mixture of experiences • from different cultural backgrounds

A business model really is a system where one element influences the other; it only makes sense as a whole. Capturing that big picture without visualizing it is difficult. In fact, by visually depicting a business model, one turns its tacit assumptions into explicit information. This makes the model tangible and allows for clearer discussions and changes. Visual techniques give “life” to a business model and facilitate co-creation.

Understanding a business model requires not only knowing the compositional elements, but also grasping the interdependencies between elements. This is easier to express visually than through words. This is even more true when several elements and relationships are involved.

Crafting a business model is no different. Ideas placed in the Canvas trigger new ones. The Canvas becomes a tool for facilitating the idea dialogue—for individuals sketching out their ideas and for groups developing ideas together.

“We’ve shown we can do it; now we need to think of how we want to do it.”

It is important to understand that a business model prototype is not necessarily a rough picture of what the actual business model will actually look like. Rather, a prototype is a thinking tool that helps us explore different directions in which we could take our business model.

Businesses that fail to take the time to develop and prototype new, groundbreaking business model ideas risk being sidelined or overtaken by more dynamic competitors—or by insurgent challengers appearing, seemingly, from nowhere.

Design attitude demands changing one’s orientation from making decisions to creating options from which to choose.

Telling a story that illustrates how your business model solves a customer problem is a clear way to introduce listeners to the idea. Stories give you the “buy-in” needed to subsequently explain your model in detail.

People are moved more by stories than by logic. Ease listeners into the new or unknown by building the logic of your model into a compelling narrative

“There’s not a single business model … There are really a lot of opportunities and a lot of options and we just have to discover all of them.” Tim O’Reilly, CEO, O’Reilly

Understanding changes in the environment helps you adapt your model more effectively to shifting external forces.

LIKE SEEING THE DOCTOR FOR AN ANNUAL EXAM, REGULARLY ASSESSING a business model is an important management activity that allows an organization to evaluate the health of its market position and adapt accordingly.

In a nutshell, Blue Ocean Strategy is about creating completely new industries through fundamental differentiation as opposed to competing in existing industries by tweaking established models. Rather than outdoing competitors in terms of traditional performance metrics, Kim and Mauborgne advocate creating new, uncontested market space through what the authors call value innovation.

Which of the factors that the industry takes for granted should be eliminated? Which factors should be reduced well below the industry standard? Which factors should be raised well above the industry standard? Which factors should be created that the industry has never offered?

We propose that three different perspectives—the Customer Segment perspective, the Value Proposition perspective, and the cost perspective—provide ideal starting points from which to start questioning your business model using the Four Actions Framework.

An entrepreneur’s challenge is to design and successfully implement a new business model.

Business model innovation results from one of four objectives: (1) to satisfy existing but unanswered market needs, (2) to bring new technologies, products, or services to market, (3) to improve, disrupt, or transform an existing market with a better business model, or (4) to create an entirely new market.

The world is so full of ambiguity and uncertainty that the design attitude of exploring and prototyping multiple possibilities is most likely to lead to a powerful new business model.

In today’s climate, it’s best to assume that most business models, even successful ones, will have a short lifespan.

Maintaining a beginner’s mindset helps keep us from becoming victims of our own successes. We all need to constantly scan the landscape and continuously assess our own business models. Take a fresh look at your model regularly. You may need to overhaul a successful model sooner than you thought.

How can IT support the processes and workflows required by my business models? What information do I need to capture, store, share, and manage to improve my business model? How does my application portfolio leverage the specific dynamics of my business model? How will IT architecture, standards, and interface choices limit or leverage my business model? Which technology infrastructure is required and crucial to the success of my business model (e.g. server farms, communications, and so on)? Where in my business model does security play an important role and how does that influence my IT? Do I need to invest in IT training and education to leverage my business model? Could investments in IT research and development improve my business model in the future?

Backlinks