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About Alexander Osterwalder
Alexander Osterwalder is a Swiss business theorist, author, speaker, consultant, and entrepreneur, known for his work on business modeling. Osterwalder obtained his MA in Political Science in 2000 at the University of Lausanne, where in 2004 he also obtained his PhD in Management Information Systems. He is one of the developers of the Business Model Canvas. In 2006, he founded BusinessModelDesign.com, and in 2010 he co-founded the consultancy firm Strategyzer, which has provided over 5 million people with Osterwalder’s Business Model Canvas.
About Yves Pigneur
Yves Pigneur is a Belgian computer scientist, and Professor of Management Information Systems at the University of Lausanne since 1984. He is considered a “mastermind” among business strategists. His canvas has been used by numerous companies, including P&G, Amazon, Lockheed Martin and Tesla. Pigneur authored and co-authored a series of books and articles since the 1980s. Pigneur and Osterwalder are both considered within the world’s 50 most influential management thinkers.
Business Model Generation is a guide to the highly influential business model canvas. This canvas was co-created by 470 practitioners from 45 countries. The book features practical innovation techniques used by leading consultants and companies worldwide. It is currently used by P&G, Amazon and Tesla to improve business efficiency. The book features a highly visual, 4-color design that simplifies powerful strategic ideas and tools.
Business Model Building Blocks
A business model describes the rationale of how an organization creates, delivers, and captures value”– Alexander Osterwalder
The foundation of business models should always be what the authors call a Business Model Canvas. This canvas should provide a visual prompt for participants to focus on the crucial criteria. The aim of a business model canvas is to focus the discussion on strategic thinking rather than being distracted by small operational details. The building blocks that form this canvas make it dynamic. This means some options in certain sections will impose limits on or amplify other sections.
The authors provide nine different building blocks that every business should incorporate into their business model canvas:
- Key Partners – You can start to control more market share simply by working together with other businesses. This cooperation can lead to a superior product and better supplier links.
- Key Activities – Your company will have its own key activities that lead to profit.
- Value Propositions – These are groups of benefits which incentivize clients to work with you over your competitors. You can improve this category by innovating new products or optimizing them to fit client needs.
- Customer Relationships: Different industries and customers require different types of assistance.
- Customer Segments – Try to target specific groups of customers to gain competitive advantage in a few key areas. These groups are called customer segments.
- Key Resources – These resources can be used to gain a competitive advantage. This includes superior talent or land.
- Channels – You must develop communication channels other than advertising. Every product must be able to be scrutinized.
- Cost Structure – Your cost structure will determine your business structure. This is because your cost structure will place constraints on other parts of the business.
- Revenue Streams – The authors describe the revenue streams as the arteries of the business model. This is because they obtain income but impose certain constraints on operations.
Business Model Patterns
While reviewing your business model building blocks and the model they create you are likely to notice patterns. There will be some patterns unique to your business but there are also five patterns that are extremely common across all business sectors. The authors argue that understanding these patterns will help you to understand the synergy and tradeoffs associated with certain building blocks.
This is where an organization splits three aspects into their own discrete identities. This is most common in businesses where they are actually offering multiple different services, like telephone companies who also offer broadband. Unbundling these services will prevent decisions in one area leading to limitations for the other areas. The authors offer an example of banking to explain the importance of unbundling services:
- The bank simultaneously advises wealthy clients and sells financial instruments. The former is a long-term business.
- The bank wants to sell its financial instruments to competing banks for extra revenue. But, this could hurt their competitive position.
- There is a clash between the advisory division and the product division. The former was to offer the best advice while the latter wants to sell as much of their product as possible.
- So, to remain efficient in both arms of the business, unbundling is required.
Long tail businesses aim to diversify their products rather than focusing on one best selling. As these niche products will likely ebb and flow in popularity, it is crucial that a wide variety of products are chosen. Long tail models like this can be effective but they require these key features:
- Efficient operation
- Low inventory costs
- Access to or control of a mass market platform
An industry that has often neglected the long tail approach is book publishing. This sector would traditionally focus solely on editing, marketing, design and printing of books. They could only offer this service to a finite number of writers, so they spent lots of time and money on screening books. The authors offer the example of Lulu.com to challenge this traditional approach. They wanted to serve a large number of authors who may not have had opportunities with other book publishers. Rather than spending their resources on screening, they spent it on a platform that allowed authors to essentially do all the publishing work themselves. So, Lulu.com is not worried about finding the needle in the haystack of best sellers. They have an economy of scale whereby they have so many authors they are guaranteed some success. Lulu.com is an example of effectively combining a multi-sided platform with a long tail model.
As just explained, Lulu.com is an example of a multi-sided platform combined with a long tail model. A multi-sided platform is where two parties are brought together to deal with supply and demand on one platform. A common example of this is a marketplace. One of the limitations of a multi-sided platform is that success relies on the other sides. For example, video game consoles only will sell if they have quality games. But video game publishers will only want to design a game for that console if it has many users who will buy it.
To overcome these issues, Nintendo completely changed their approach. They stopped developing expensive systems with great graphics and aimed to meet the needs of casual players. The best example of this is the Nintendo Wii and its motion-response hardware. Although the graphics were basic, the console allowed for real world movement. Making their console cheaper also allowed them to charge royalties to game studios. This is an example of taking advantage of a multi-sided platform.
Google offers an alternative approach by combining the free model, which we will talk about next, with the multi-sided platform. Google allows users to make unlimited searches for free. Then, they make money because they produce so much user activity. This activity invites advertisers to get involved, which means Google can easily make the user searches free.
As just spoken about, the benefit of free business models is that you can create large user bases. These free products are subsidized by having other parties pay to gain access to this large user base. An alternative to this cost structure is one which is sometimes described as freemium. A company may choose to offer a wide audience through a free version of a service and then allow users to pay to receive a premium service. This small group of individuals who are willing to pay for the additional features are able to subsidize the free users.
Bait & Hook
Another business model pattern is called the bait and hook. This model uses a cheap upfront price that then provides you with consistent income generation over time. The authors use the example of Gillette’s disposable razor blades. The first razor is actually sold for a slight loss but this then entices customers to continue to purchase the razor blades which have a high margin. These margins are made high enough that they account for the initial loss and also provide profit on top of this.
The authors also outline the open business model pattern. The open approach involves openly collaborating with other organizations. For example, you might use crowdsourcing or connect with a small team of specialists. The authors offer the example of Procter & Gamble. They spend considerable amounts to connect their internal research and development teams with external collaboration groups. These groups consisted of third party researchers, tech entrepreneurs and its own retired employees.
Multiple business models (portfolio)
The final business model pattern that emerges is adopting many or all of the business models spoken about. Different business will work within different industries. So, if you have several different markets the multiple business models approach might work best for you. The authors use the example of the Swatch Group. This Swiss manufacturer of watches was previously renowned for producing luxury watches. They were pushed to move into other markets when the Japanese started creating watches at an affordable price. So, Swatch now offers luxury watches which use one business model and they use another business model to supply their budget watches.
Developing New Business Models
Choosing the business model that is best for you will rely on your ability to evaluate. You should start by putting yourself in the shoes of potential customers. Doing this is far more important than customer research, which businesses spend millions of dollars on. It is essential that you pay attention to the customer’s perspective in the product and business model design phase. An example of a company which has effectively done this is Apple. The iPod was created because Apple realized customers wanted a low-friction way of acquiring all the music they wanted. Market research may have highlighted digital media players as being popular, but it wouldn’t have helped them understand the potential for easily downloadable digital music.
The authors offer an alternative to market research with their empathy map. This map requires your business team to visually draw a large cross on a chart, which separates the page into four sections. The bottom should include what customers say and do. The right hand side should include what the customer obtains from their environment, friends and the market. The top should include what you believe your potential customers really think and feel. Finally, the left hand side should include what your potential customers are likely hearing from their peers, superiors and influencers. Each section should also be considered within the context of what the authors call pain points and desired gains. A pain point decreases your product’s likelihood of being chosen while a desired gain does the opposite. Developing this map will help you better understand who your target customers are and what motivates them.
Epicenters of Business Model Innovation
It is always important to keep in mind the factors that kickstart a transition towards a new business model. Often this factor will fall within one of four patterns that the authors call epicenters of creating model change. The four patterns and an example for each are:
- Resource-driven – Amazon web services used its existing retail infrastructure to allow cloud storage to other companies who lacked that infrastructure.
- Offer-driven – Cement maker Cemex promised to deliver poured cement within four hours of ordering instead of the industry-standard 48.
- Customer-driven – 23andMe personalized DNA testing to the mass market, when it had been previously available to only health professionals.
- Finance-driven – Xerox couldn’t sell its copying machines at a price high enough to make a profit. So it leased the machines at $95/month, with 2,000 free copies, and charged 5 cents for each extra copy over that limit.
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.”– Alexander Osterwalder
You want your business team to be focused on the business-side but also have the mentality of a designer. If your team is merely following a process your business will never impact the market. One way to easily start adopting a creative mindset is to use what-if questions. These questions challenge the status quo and force you and your team to think about alternatives. A similar approach would be to use fictional storytelling to highlight potential scenarios.
One key part of adopting a creative process is encouraging team members to keep an open mind. High commitment to new ideas is like freezing the product design before it is ready. Creativity is an iterative process that relies on open minds. This is why the authors recommend introducing crude models rather than elaborate and concise ideas that will win people over instantly. These models can be sketched out on the business model canvas.
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.”– Alexander Osterwalder
Business models can easily become obsolete. So, you must always be on your toes. Adopt a proactive approach where you are generating new business models all the time. This also means reviewing the existing business model should become a habit. Reviewing will help you spot potential problems before they arise and it will also improve your team’s evaluation skills. The authors suggest planning reviewing sessions to look over the business model. They recommend using the SWOT approach to systematically review the current model. SWOT stands for:
Each of the four parts of SWOT analysis should be applied to each of the nine business model blocks. One example of a company that used SWOT analysis effectively is Nestle. It improved its overall business model by focusing on channel expansion. Although they were successful through sales of Nespresso coffee and coffee machines, their model prevented them from selling to offices and restaurants. They managed to review the model and shift into this market by switching the coffee machines’ target customer base to high-income households. They then sold capsules via mail to these customers. In the 2000s, Nespresso saw an average growth rate of over 35% annually.
Final Review and Analysis
Business Model Generation highlights the importance of establishing a strong business model based on several options. To choose the right one you must be willing to step into your potential customer’s shoes rather than relying on market research. Once you have found the perfect model for your business you must be willing to adapt. This model won’t work forever and requires constant reviews to ensure it is future-proof. You can also combine multiple models to help different arms of your business work independently.
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