The Business Model Generation

Some Impressionistic takes from the book of
Alexander Osterwalder & Yues Pigneur
“Business Model Generation”
by Ramki
ramaddster@gmail.com

About the Author
Alex Osterwalder is an author, speaker, and adviser on the topic of
business model innovation. His practical approach to designing
innovative business models, developed with Dr. Yves Pigneur, is
practiced in multiple industries throughout the world by companies
including 3M, Ericsson, Capgemini, Deloitte, Telenor, and many
others. Previously he helped build and sell a strategic consulting firm,
participated in the development of a Thailand-based global nonprofit
organization combatting HIV/AIDS and malaria, and did research at
the University of Lausanne, Switzerland.
Dr. Yves Pigneur has been a professor of management information
systems at the University of Lausanne since 1984 and has held
visiting professorships at Georgia State University in Atlanta and the
University of British Columbia in Vancouver. He has served as the
principal investigator for many research projects involving information
system design, requirements engineering, information technology
management, innovation, and e-business.

 A different kind of business world calls for a different kind of business
manual, and that’s what Alex Osterwalder and Yves Pigneur have
achieved in their New Age guide to contemporary business modeling.
 Abetted by their “Business Model Innovation Hub” – with 470 online
collaborators in 45 countries – Osterwalder and Pigneur practiced what
they preached when they applied their modeling concepts to the book’s
production.
 And the 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, replete with photos, drawings,
charts and graphics, belies its intensely researched and reality-
grounded content.
 A big sheet of paper and a slew of Post-it notes are all you need to get
started; that, and the combined creativity, intellect & persistence your
team brings to the project.
Prelude

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

CS VP CH CR
RS KR KA KP C$
The Business Model – Building Blocks

CUSTOMER SEGMENTS
 The Customer Segments Building Block defines the
different groups of people or organisations an enterprise
aims to reach and serve Customers comprise the heart of
any business model.
 Without (profitable) customers, no company can survive for
long.
 In order to better satisfy customers, a company may group
them into distinct segments with common needs, common
behaviours, or other attributes.
 A business model may define one or several large or small Customer
Segments.
 An organisation must make a conscious decision about which segments to
serve and which segments to ignore. Once this decision is made, a business
model can be carefully designed around a strong understanding of specific
customer needs.
 Customer groups represent separate segments if: • Their needs require and
justify a distinct offer • They are reached through different Distribution Channel •
They require different types of relationships • They have substantially different
profitability • They are willing to pay for different aspects of the offer

VALUE PROPOSITION
 The Value Propositions Building Block
describes the bundle of products and
services that create value for a specific
Customer Segment .
 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.
 Some Value Propositions may be innovative and represent a new or disruptive offer.
Others may be similar to existing market offers, but with added features and
attributes.

CHANNELS
 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. Channels serve several functions, including:
 Raising awareness among customers about a company’s products and
services
 Helping customers evaluate a company’s Value Proposition
 Allowing customers to purchase specific products and services
 Delivering a Value Proposition to customers • Providing post-purchase
customer support

CUSTOMER RELATIONSHIPS
 In the early days, for example, mobile
network operator Customer Relationships
were driven by aggressive acquisition
strategies involving free mobile phones.
 When the market became saturated,
operators switched to focusing on
customer retention and increasing
average revenue per customer.
 The Customer Relationships called for by
a company’s business model deeply
influence the overall customer experience.
 The Customer Relationships Building Block describes the types of relationships a
company establishes with specific Customer Segments.
 A company should clarify the type of relationship it wants to establish with each
Customer Segment. Relationships can range from personal to automated.
 Customer relationships may be driven by the following motivations:
 Customer acquisition
 Customer retention
 Boosting sales (upselling)

REVENUE STREAMS
 A business model can involve two
different types of Revenue Streams: •
Transaction revenues resulting from
one-time customer payments •
Recurring revenues resulting from
ongoing payments to either deliver a
Value Proposition to customers or
provide post-purchase customer
support
 The Revenue Streams Building Block represents the cash a company
generates from each Customer Segment (costs must be subtracted from
revenues to create earnings) If customers comprise the heart of a business
model, Revenue Streams are its arteries. A company must ask itself, For
what value is each Customer Segment truly willing to pay? Successfully
answering that question allows the firm to generate one or more Revenue
Streams from each Customer Segment. Each Revenue Stream may have
different pricing mechanisms, such as fixed list prices, bargaining,
auctioning, market dependent, volume dependent, or yield management

KEY RESOURCES
 The Key Resources Building Block describes the most important assets
required to make a business model work
 Every business model requires Key Resources.
 These resources allow an enterprise to create and offer a Value Proposition,
reach markets, maintain relationships with Customer Segments, and earn
revenues.
 Different Key Resources are needed depending on the type of business
model.
 A microchip manufacturer
requires capital-intensive
production facilities, whereas a
microchip designer focuses
more on human resources.
 Key resources can be physical,
financial, intellectual, or human.
Key resources can be owned or
leased by the company or
acquired from key partners.

KEY ACTIVITIES
 The Key Activities Building Block describes the most important things a
company must do to make its business model work Every business model
calls for a number of Key Activities.
 These are the most important actions a company must take to operate
successfully.
 Like Key Resources, they are required to create and offer a Value
Proposition, reach markets, maintain Customer Relationships, and earn
revenues.
 And like Key Resources, Key Activities differ depending on business model
type..
 For software maker Microsoft,
Key Activities include software
development. For PC
manufacturer Dell, Key Activities
include supply chain
management. For consultancy
McKinsey, Key Activities include
problem solving

KEY PARTNERS
 The Key Partnerships Building Block describes the network of suppliers and
partners that make the business model work Companies forge partnerships
for many reasons, and partnerships are becoming a cornerstone of many
business models.
 Companies create alliances to optimize their business models, reduce risk,
or acquire resources.
 We can distinguish between four different types of partnerships:
 Strategic alliances between non-competitors
 Coopetition: strategic partnerships between competitors
 Joint ventures to develop new businesses
 Buyer-supplier relationships to assure reliable supplies

COST STRUCTURE
 The Cost Structure describes all costs incurred to operate a business model
This building block describes the most important costs incurred while
operating under a particular business model.
 Creating and delivering value, maintaining Customer Relationships, and
generating revenue all incur costs.
 Such costs can be calculated relatively easily after defining Key Resources,
Key Activities, and Key Partnerships. Some business models, though, are
more cost-driven than others. So-called “no frills” airlines, for instance, have
built business models entirely around low Cost Structures

This tool resembles a painter’s canvas — preformatted with the nine blocks
— which will allow us to paint pictures of new or existing business models.
The Business Model Canvas works best when printed out on a large
surface so groups of people can jointly start sketching and
discussing business model elements with Postit notes or board
markers.
It is a hands-on tool that fosters understanding, discussion, creativity, and
analysis.

Pattern in architecture is the idea
of capturing architectural design
ideas as archetypal & reusable
descriptions. Christopher Alexander

PATTERN-1- Unbundling Business Model
The Concept of the “unbundled”
corporation holds that there are
three fundamentally different types
of businesses: Customer
Relationship businesses, product
innovation businesses, and
infrastructure businesses..
Each type has different economic,
competitive, and cultural imperatives.
The three types may co-exist within a
single corporation, but ideally they are
“unbundled” into separate entities in
order to avoid conflicts or undesirable
trade-offs.

PATTERN-2- The Long Tail Business Model
THE 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.

PATTERN-3- Multi-Sided Platform
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.

PATTERN-4- Free as a Business Model
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.

PATTERN-5- Open Business Model
OPEN BUSINESS MODEL can be used by companies to create and capture
value by systematically collaborating with outside partners. This may happen
from the “outside-in” by exploiting external ideas within the firm, or from the
“inside out” by providing external parties with ideas or assets lying idle within
the firm.

Techniques to Design Business
Models

Business people don’t just need
to understand designers better;
they need to become designers.
…….Roger Martin, Dean, Rotman School of Management

 When you design your organization and its corresponding
business models and processes, you must be committed to
creating things that are new, discovering the unknown, and
ensuring functionality. A designer’s mindset is critical to achieving
those goals.
Use the following design techniques to formulate your business
model:
 Customer insights. View your business model from your
customers’ perspectives. Learn about their routines, concerns,
and aspirations, and use your understanding to innovate and
discover new opportunities.
 Ideation. Build your business model by conceptualizing a large
number of ideas and isolating the best ones for further
evaluation. This approach is most successful when you challenge
orthodoxies, ignore your competitors’ approaches, and focus on
the future.
DESIGN

 Visual thinking- Use sketches, diagrams, and sticky notes to
illustrate complex ideas and interrelationships within your model.
Illustrations of your model can help make it tangible and foster a
greater understanding that can fuel discussions and change.
 Prototyping- Build a model of your future business by sketching
out the concept so you can analyze possible directions and
address issues in your structures, interdependencies, and logic.
 Storytelling- Craft a compelling story that will help you introduce
your venture, attract attention, and engage collaborators before
discussing the details of your approach.
 Scenarios- Think about how your product or service may be used
and the type of environment in which your model may compete.
Use these scenarios to make customer insights tangible and
prepare your model for future environments.
DESIGN

After designing your business model, you must examine the environment
in which your organization will operate and evaluate the four forces that
influence it:
 Market forces-Assess the market’s issues and drivers, growth
potential among market segments, market needs and demands,
switching costs for customers, and revenue attractiveness when
examining external forces.
 Industry forces-Conduct a competitive analysis that examines your
market’s incumbent competitors, market entrants, substitute products
and services, value chain incumbents, and influential stakeholders.
 Key trends-Look into trends in technology, regulation, society, culture,
and demographics to make projections about customer demand and
buyer behaviors.
 Macroeconomic forces-Study global market conditions, capital
market conditions, price trends for your required resources, and the
economic infrastructure of your market to assess the general market
sentiment and the costs that will influence your ability to profit.
STRATEGY

 After evaluating these external forces, consider the forces through the
lens of your business. Assess your organization’s strengths,
weaknesses, opportunities, and threats relative to those external
factors.
 Next, you should question the incumbent business models of your
market and explore the customer segments that are available to
understand how you can add value. You may follow the Blue Ocean
Strategy approach of creating uncontested market space by offering
new and valuable benefits and services. Through this approach, you
may be able to reduce your costs by eliminating services or features
that aren’t as valuable to your business.
 If you’re implementing an innovative business model in a well-
established organization, you may consider setting up new entities for
your new approach, or you might develop separate business units
within the larger organization. Determine the right approach for your
business by considering the strategic similarities, risks, and severity of
conflict that will exist between your organization’s new and traditional
models.
STRATEGY

 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.
PROCESS

 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.
PROCESS

Pull your business model together and tailor your approach using five
steps:
 Mobilize- Set the stage for a successful business model design project.
Develop your business model canvas and engage in storytelling to
communicate the need for a new model and the motivation behind it.
 Understand-Research and analyze the elements you need for your
business model design. Build your knowledge of your customers,
technologies, and the environment by gathering information,
interviewing experts, studying prospective customer segments, and
evaluating their needs.
 Design-Develop and test a series of viable business model prototypes.
Select the business model design that best suits your objectives.
 Implement-Consider the milestones, legal structures, budget, and
roadmap as you implement the business model design in your
organization
 Manage-Monitor, evaluate, and adapt your business model as your
gauge your market’s response to it.
PROCESS

 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.
STRATEGY

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.

Five additional elements are critical to your business model’s
success:
 Strategy- Use your overarching strategy to drive your business
model and define your desired customer segments, channels,
and key activities.
 Structure- Develop an organizational structure that will support
the execution of your business model. Consider whether a
centralized or decentralized approach will be more effective.
 Processes- Design the critical information flows, processes, and
workflows that your model needs to succeed.
 Rewards- Implement an incentive program that will encourage
your workers to do the right things and reflect your commitments.
 People- Identify the kinds of people you need to bring on board
to make your approach a success. Consider skills and mindsets
as you begin to fill roles.
STRATEGY

 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.
STRATEGY

 Simple approaches to business modeling inspire
strategic thinking and holistic design.
 The “Business Model Canvas” is a flexible template for
conceiving, completing & assessing business models.
 Business models should focus on nine interrelated parts,
covering a company’s “customers, offer, infrastructure
and financial viability.”
 “Segment” your customer base and determine what kind
of client “relationships” your company needs to develop.
 Figure out your firm’s “value proposition” and which
“channels” you’ll use to deliver your products and
services.

 A company’s “key activities” determine its “revenue
streams” and “cost structures.”
 Joining up in “key partnerships” with suppliers or
even competitors can add to your organization’s
“key resources.”
 Your models must allow for outside forces such as
the economy and competition.
 Even the most successful business-model designs
are vulnerable to obsolescence.
 Proactive companies regularly innovate by
reviewing their existing business models.

 Every family business should have an independent
board of advisers or directors.
 The leader should begin succession planning while
still active in the business.
 Prepare a contingency plan in case the company
loses its leader suddenly.
 Seek a successor who is independent, competent,
personable and free of entitlement.

The Business Model Generation

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