BUSINESS MODEL GENERATION (Alex Osterwalder & Yves Pigneur)

CHAPTER 3: DESIGN Game changing business models come from deep and relentless inquiry

CHAPTER 4: STRATEGY

CHAPTER 1: CANVAS

Customer Segments (CS)

For whom are we creating value?Who are our most important customers?

Mass MarketNiche Market Segmented Diversified Multi-sided Platform

Value Propositions (VP)

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

CharacteristicsNewnessPerformance Customisation “Getting the Job Done” DesignBrand/StatusPriceCost ReductionRisk Reduction Accessibility Convenience/Usability

Channels (CH)

Through which Channels do our Customer Segments want to be reached?How are we reaching them now?How are our Channels integrated?Which ones work best?Which ones are most cost-efficient?How are we integrating them with customer routines?

Channel phases:1. AwarenessHow do we raise awareness about our company’s products and services?2. EvaluationHow do we help customers evaluate our organisation’s Value Proposition?3. PurchaseHow do we allow customers to purchase specific products and services?4. DeliveryHow do we deliver a Value Proposition to customers?5. After salesHow do we provide post-purchase customer support?

Customer Relationships (CR)

What type of relationship does each of our Customer Segments expect us to establish and maintain with them? Which ones have we established?How are they integrated with the rest of our business model? How costly are they?

ExamplesPersonal assistanceDedicated Personal Assistance Self-ServiceAutomated Services CommunitiesCo-creation

Revenue Streams (R$)

For what value are our customers really willing to pay? For what do they currently pay?How are they currently paying?How would they prefer to pay?How much does each Revenue Stream contribute to overall revenues?

Dynamic pricingNegotiation( bargaining) Yield Management Real-time-Market

Fixed pricingList PriceProduct feature dependent Customer segment dependent Volume dependent

Types:Asset saleUsage feeSubscription Fees Lending/Renting/Leasing LicensingBrokerage fees Advertising

Key Resources (KR)

What Key Resources do our Value Propositions require? Our Distribution Channels? Customer Relationships? Revenue Streams?

Types of resourcesPhysicalIntellectual (brand patents, copyrights, data) HumanFinancial

Key Activities (KA)

What Key Activities do our Value Propositions require? Our Distribution Channels?Customer Relationships?Revenue streams?

CategoriesProduction Problem Solving Platform/Network

Key Partnerships (KP)

Who are our Key Partners?Who are our key suppliers?Which Key Resources are we acquiring from partners?Which Key Activities do partners perform?

Motivations for partnerships:Optimisation and economyReduction of risk and uncertaintyAcquisition of particular resources and activities

Cost Structure (C$)

What are the most important costs inherent in our business model? Which Key Resources are most expensive?Which Key Activities are most expensive?

Is your business more:Cost Driven (leanest cost structure, low price value proposition, maximum automation, extensive outsourcing) Value Driven ( focused on value creation, premium value proposition)

Sample characteristics:Fixed Costs (salaries, rents, utilities) Variable costsEconomies of scaleEconomies of scope

CHAPTER 2: PATTERNS

CHAPTER 5: PROCESS

BUSINESS MODEL GENERATION (Alex Osterwalder & Yves Pigneur)

CHAPTER 3: DESIGN Game changing business models come from deep and relentless inquiry

CHAPTER 4: STRATEGY

CHAPTER 1: CANVAS

CHAPTER 2: PATTERNS

UNBUNDLING BUSINESS MODELS

Challenge: Costs are too high. Conflicting cultures = trade offs.

Examples : Telco, Private Banks

THE LONG TAIL

Challenge: Targeting less profitable segments with specific VPs is too costly

Why does this biz mod work (for media)?

1. Democratisation of tools of production: Falling technology costs give ind'ls access to tools that were too exp a few years ago. Music, videos/movies, software (apps) etc.

2. Democratisation of distribution: the internet has made digital content distribution a commodity. With lower inventory. communication and transaction costs opening up new markets for niche products.

3. Falling search costs to connect supply with demand: The real challenge of selling niche products is finding interested potential buyers. Powerful search and recommendation engines, user ratings and communities of interest have made this easier.

Examples: Lulu.com, Amazon.com, eBay.com, netflix.com,

MULTI-SIDED PLATFORMS

Challenge: Enterprise fails to acquire potential new customers who are interested in gaining access to company's existing customer base

What are they?

(i) Brings together 2+ distinct but interdependent groups of customers. Matchmaking

(ii) Such platforms are of value only if the other group of customers are present. (Chicken & Egg dilemma)

One way multi-sided platforms solve this problem is by subsdising a customer segment (less expensive or free VP) in order to attract users.

Which side do you subsidise? How to price correctly?

(iii) The platform creates value by facilitating interactions between the different groups.

(iv) A multisided platform grows in value to the extent that it attracts more users - network effect

3 x KA

1. Platform management

2. Service provisioning

3. Platform promotion

Examples: eBay.com, Visa, Microsoft Windows, FT, Google, Apple App Store, Wii, Metro

Some variant business models

FREE as a Business Model

Generate high platform traffic and increase attractiveness to advertisers

Main costs relate to: (i) Maintaining and developing the platform. (ii) Traffic generation, distribution and retention costs Examples City A.M, Evening Std outside tube stations

Examples: Metro, Evening Standard, City AM

FREEMIUM

How does it work?Get the basics for free, Pay for more.The small base of paying users subsidise the free users

When does it work?

1. The cost of adding the free users is low. Typically automated

2. The rates at which free users convert to paying is acceptable - typically >10%

Examples: dropbox, Flickr, yousendit, Skype,

FREEMIUM WITH A TWISTOpen Source: Red Hat and Linux. Provides support + stability + cost advantage. Red Hat sell subscriptions

FREEMIUM UPSIDE DOWNRega: Swiss non-profit org'n for accident airlifting

Patrons don't pay if airlifted

BAIT & HOOK - aka "Loss Leader" or "Razor + blades" model

Examples

Telcos: free phone tied into a long contract

Razors: Gillette, give away the razor, charge for razor blades

How to make it work?

Focus on delivery of follow up products or services

Usually require a strong brandBrand / patent protection

R$ & C$: Follow up products cover subsidisation of initial product. Follow up = high margin + repeated

Lock-in of some form - high switching costs

CS: attracted by instant gratification

OPEN BUSINESS MODELS

Challenge: R&D is costly. Productivity is falling

What is it?Can be used by companies to create + capture value by systematically collaborating with outside partners

How does it work?

Outside-in, by bringing external ideas, IP, technology into a firm's devt and commercialisation process.

P&G: Connect & Develop programme. 50% of R&D with outside partners (tech entrepreneurs, internet platforms, retirees).

Focus on KR, KA, KP and C$

The Connector: Innocentive (part of P&G). Connects solvers to problems.

Inside-out by providing or licensing external parties with IP or technology, typically lying idle within the firm.

GSK Patent Pools. Open up patent pools to other researchers on a license/profit share basis. Targets less mainstream diseases etc.

Focus on VP, CR, CH, CS and R$

Principles of Innovation

CHAPTER 5: PROCESS

BUSINESS MODEL GENERATION (Alex Osterwalder & Yves Pigneur)

CHAPTER 3: DESIGN Game changing business models come from deep and relentless inquiry

Customer Insights

Successful innovation requires a deep understanding of customers - daily routine, concerns aspirations etc.

How to design- Customer Centric

What job(s) do our customers need to get done and how can we help?What are our customers aspirations and how can we help them live up to them?

What relationship do your customers expect us to establish with them? For what values are our customers WTP?

Satisfy the unmet needs of customers Don't just focus on existing customers - look at new or unreached segments

Need to know which customers to heed and which to ignore

Tomorrow's growth segments wait at the periphery of todays' cash cows.

How not to design - Organisation CentricWhat can we sell customers? How can we reach customers most efficiently? What relationships do we need to establish with customers? How can we make money from our customers?

The Empathy Map (created by XPLANE) http://www.xplane.com/company/about/

Better Value Propositions Appropriate Customer Relations True and accurate WTP

Create a customer viewpoint to continuously question your business model + assumptions

How to use the (Customer) Empathy Map

1. Brainstorm the possible Customer Segments that you might serving

2. Choose three promising candidates and select one for your first profiling exercise

3. Give the customer a name, demographic characteristics (income, marital status etc)

4. Using the Empathy Map (using a flip chart) answer the following questions:

(i) What does she see? Environment, Friends, what the market offers

(ii) What does she hear?What friends/colleagues/boss says? Who really influences her and what do they say? What media channels are influential?

(iii) What does she think and feel? What really counts? What moves her?Major preoccupations? Worries?

(iv) What does she say and do?

Attitude in public? What does she tell others? (Pay particular attention to the difference between what she tells others and what she may truly think and feel) Her appearance? Behaviour toward others?

(v) What is the customer's pain?Biggest frustrations? What obstacles stand between her and what she wants or needs to achieve? What risks might she fear taking?

(vi) What does the customer gain? What does she truly want or need to achieve? How does she measure success?

Ideation

The Ideation Process

1. Team composition: assemble the right diverse team (Age, seniority, experience, sector, background). Generate fresh left field ideas.

2. Immersion: Preparation/study before generation (e.g. Empathy Map, market study, competitor analysis, 6 Forces)

3. Expanding: Use each of the 9 blocks as a starting point for innovation

(A) Epicentres

1. Resource driven: originate from the company's existing infrastructure or partnerships to expand or transform the business model e.g. Amazon Cloud Services

2. Offer driven: create new VP's that affect the other 8 blocks e.g. Cemex 4 hour cement delivery vs. industry 48 hours

3. Customer driven: based on customer needs, facilitated access or convenience. e.g. 23andMe personalised DNA tests

4. Finance driven: Innovations driven by revenue streams, pricing mechanisms or reduced cost structures. e.g. Xerox (monthly charge + charge/copy)

5. Multiple epicentre driven: Innovations driven by multiple epicentres e.g. Hilti, global construction tool manufacturer moved from selling tools to renting tools (R$ + VP + CS driven).

(B) 'What If' questionsChallenge our thinking and provocative. Should disturb us as intriguing, difficult-to-execute propositions.

Brainstorming Rules

(i) Warm up: silly cow/pig/dog/cat exercise. Create an innovative business model.

(ii) Stay focused: start with a well-honed statement of the problem at hand

(Iii) Enforce Rules: via a facilitator. Rules to include defer judgement, one conversation at a time, go for quantity, be visual, etc. Facilitators

(iv) Think Visually: write down ideas or sketch them out on a surface everyone can see. (e.g. Post-it notes on wall)

(v) Prepare: with some sort of 'immersion experience' e.g. scouting field trip, discussions with customers, or any other immersion activity related to the problem at hand

4. Criteria Selection: What are the most important criteria for prioritisation? (e.g. implementation time, resources, revenue potential, impact on competitive advantage etc)

5. "Prototyping": What does the complete business model for each shortlist idea look like? Prototype shortlist of 3 - 5 models.

Elmar Mock @ Creaholic http://www.xplane.com/company/about/

Visual Thinking Visual techniques give 'life' to a bizmod and facilitates co-creation

How?

(i) Post-Its: thick marker pens, write one element per Post-it and write only one point per Post-It

(ii) Drawings: people react stronger to images than words. Even crude sketches work

(iii) Understand the essence: Visual grammar, Capturing the big picture, seeing relationships

(iv) Enhance dialogue: collective reference point, shared language, joint understanding

(v) Explore ideas: idea trigger, Play

(vi) Improve communication: create company-wide communication, selling internally, selling externally. Use to tell the story of the BMC…

Level of detail depends on one's goal - Skype vs. Sellabond

Prototyping

What is it? A tool of inquiry A thinking tool that allows us to explore different directions to take our business model - for example:

New customer segment

Remove a costly resource

Give away free and replace revenue with something more innovative

What does it look like? Can take the form of a simple sketch, a complete BMG canvas, or a financial spreadsheet.

How does it work?To understand the pros/cons of different possibilities, we need to construct multiple prototypes at different levels of refinement.

Interaction with prototypes produces ideas far more readily than 'vanilla' discussion

How do people react?

1. "Thats a nice idea, if only we had the time to explore different options…."

'Business as usual' = incremental improvements are enough to survive/maintain competitive edge

NO. Businesses risk being overtaken/sidelined by more dynamic competitors/upstarts

2. Market research would be an equally good way to come up with a new business model

Assumes that data is the most important consideration when designing new strategic options

Market Research is a single input in designing new bizmods

Design Attitude

"If you freeze an idea too quickly, you fall in love with it. If you refine it too quickly, you become attached to it and it becomes very hard to keep exploring, to keep looking for better" Jim Glymph, Gehry Partners The crudeness of early models should be very deliberate

The spirit of inquiry. A willingness to to explore crude ideas, discard, then take time to examine multiple possibilities before choosing to refine a few.

Accepting uncertainty until a design direction matures

Prototypes at different scales

1. Napkin sketch: draw a basic BMG canvas

2. Elaborated Canvas: Develop a full detailed BMG canvas. Estimate mkt potential. Think through connections between blocks

3. Business case: Spreadsheet including key data. Sensitivity analysis.

4. Field Test: Test on actual customers. Test VP, CH, pricing mechanism (R$), etc.

Storytelling

Why use storytelling?By their very nature, new business models can be difficult to describe and understand. They challenge the status quo by arranging things in unfamiliar ways.

Engaging storytelling suspends disbelief in the unfamiliar. Overcomes resistance.

When to use storytelling

1. Introducing the new: Making the new tangible. A good story is a compelling way to quickly outline a broad idea before getting caught up in the details.

Make Business Models tangible. Keep the story simple. Depending on your your audience you can use different protagonists with different perspectives.

Employee tells the story from the company perspective

What the problem is and how it is solved?

Impact/changes to/difference in KA, KR, KP, C$

Customer tells the story from her perspective

Challenges faced. Jobs that need to get done.

How the new biz mod solves her problems/gets the job done. And the WTP

Impact/changes to/difference in CR, CH, CS, R$

2. Pitching to investors: How will you create value for customers? How will you make money doing so? Telling a story illustrates how your business model solves a customer problem and makes money.

Get 'buy-in' before explaining your model in detailMaking the future tangible: stories offer a strong technique for blurring the lines between reality and fiction. A powerful tool for providing tangibility to future dilemma.

What future business model? dilemma

Planned future business modelJustify change: When you have a strong idea of what the future competitive landscape will look like. Helps people imagine where the current biz mod should evolve to.

3. Engaging employees: Your team need a crystal clear understanding of the new business model and what it means for them.

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

Techniques

Scenarios

Why use scenarios? dilemma

Two main methods

1. Customer scenarios

How products or services are used? What kinds of customers use them? Customers' concerns? Customers' desires and objectives?

Guide us through the Customer Segments:

Which channels are most appropriate? Which rel'ships would be best to establish? Which problem solutions would customers be most WTP? Is there a single biz mod that serves them all? Or do we need to adapt the model for each segment?

2. Future scenarios

Imagine future possible environments - what is the most appropriate business model for each of the future environments

Scenario planning: forces reflection on how a model might have to evolve under certain conditions. This sharpens understanding of the model and of potentially necessary adaptations. Most important it helps us prepare for the future.

Discussing bizmods around scenarios of concrete future contexts are more productive than free brainstorming

CHAPTER 4: STRATEGY

CHAPTER 1: CANVAS

CHAPTER 2: PATTERNS

CHAPTER 5: PROCESS

BUSINESS MODEL GENERATION (Alex Osterwalder & Yves Pigneur)

CHAPTER 3: DESIGN Game changing business models come from deep and relentless inquiry

CHAPTER 4: STRATEGY

Business Model Environment

Market forces

Market IssuesCrucial issues affecting customers and landscape

Which shifts are underway? Where is the mkt heading?

Market Segments

Most important customer segments?

Biggest growth potential?

Declining customer segments?

Peripheral segments that need addressing?

Needs and DemandsCustomer needs? Biggest unmet needs?

Demand increasing? Decreasing?

Switching costs

What binds customer to a company?

What are the switching costs for a customer?

Importance of brand in this market?

Revenue attractivenessWhat are customers WTP?

Where are the largest margins?

Industry Forces Use Yoffie's 6 Forces

Macro-Economics Forces

Key Trends

Evaluating Business Models1. Big Picture assessment

Example: amazon.com 2005IT infrastructure

Order fulfilment on behalf of companies and individuals

BM Canvas high level S + W

2. SWOT Of each of the 9 canvas building blocks See BMG book pg. 217 - 223 for sample questions

Business Model Perspectives on Blue Ocean Strategy

What is it?

Book by Kim & Mauborgne

Is about creating a completely new industry through fundamental differentiation as opposed to competing in existing industries by tweaking established business models.

Creating new uncontested market space through value innovation.

Simultaneously increasing value while reducing costs

First Goal: Lower costs by cutting less valuable features or services.

Second Goal: Increasing value for customers by creating new benefits & services. Without significantly increasing cost base

4 Actions Framework

1. Eliminate: Which factors can you eliminate that your has long competed on?

2. Reduce: Which factors should be reduced below industry standard?

3. Raise: Which factors should be raised above industry standard?

4. Create: Which factors should be created that the industry has never offered?

Blue Ocean + BM Canvas =

Ask the 4 Action Framework questions about each building block of the BM Canvas

1. Cost Impact exploration: LHS epicentre on BM Canvas

2. Value proposition impact: central epicentre on BM canvas

3. Customer impact: RHS epicentre on BM Canvas

Examples: Cirque du Soleil, Wii

Managing Multiple Business Models

Examples: Nespresso, SMH (Swatch) and Car2go (Daimler)

Look at 3 factors:

(i) Similarity across the 9 building blocks

(ii) Potential for synergies

(iii) Potential for conflicts

Options:

Integrated within group

Autonomy within the group

Separation (outside the group)

CHAPTER 1: CANVAS

CHAPTER 2: PATTERNS

CHAPTER 5: PROCESS

BUSINESS MODEL GENERATION (Alex Osterwalder & Yves Pigneur)

CHAPTER 3: DESIGN Game changing business models come from deep and relentless inquiry

CHAPTER 4: STRATEGY

CHAPTER 1: CANVAS

CHAPTER 2: PATTERNS

CHAPTER 5: PROCESS

Business Model Design + Innovation

Satisfy Market: Tata car, NetJets, GrameenBank, Lulu.com

Bring to Market: Xerox 914, Swatch, Nespresso, Red Hat

Improve market: Dell, EFG bank, Wii, IKEA, Bharti Airtel, Skype, Ryanair, amazon.com

Create market: Diners Club, Google

Challenges:

Finding the right model

Testing the model before full-scalp launch

Inducing the market to adopt the model

Continuously adapting the model in response to feedback

Factors specific to Established companies

Reactive: IBM 90s, Wii, Rolls Royce Jet Engines

Adaptive: Nokia, P&G open innovation, Hilti

Expansive: Nespresso, Xerox 914, iPod-iTunes

Pro-active/explorative: Car2go, Amazon Web Services

Challenges:

Developing an appetite for new models

Aligning old and new models

Managing vested interests

Focusing on the long term

Business Model Design Process

1. Mobilise

Activities: frame project objectives, Test prelim ideas, Plan, Assemble team.

Established company activities: Build project legitimacy, Manage vested interests, recruit a cross-functional team, get buy-in from decision makers

CSF's: Appropriate people, experience and knowledge

Key dangers: Overestimating value of initial ideas 20 mins of kill/thrill on all ideas. (Devil's advocate)

2. Understand

Activities: Scan environment, study potential customers (detailed) , interview experts, research what has already been tried (understand causes of failures), Collect opinions and ideas.

Established company activities: Mapping and assessing existing business models, looking beyond the status quo, searching beyond the existing client base, demonstrate progress

CSF's: deep understanding of potential target markets, looking beyond the boundaries defining target markets

Key dangers: over-researching (disconnect between research and objectives), biased research because of pre-commitment to a certain business idea

3. Design

Activities: Brainstorm, prototype, test, selectEstablished company activities: prevent taming of bold ideas, participatory design, old vs. new, avoid short term focus

CSF's: co-create with people across the company, ability to see beyond the status quo, taking time to explore multiple business models

Key dangers: watering down or suppressing bold ideas, falling in love with ideas too quickly

4. Implement

Activities: communicate and involve, execute Established company activities: Proactively managing roadblocks, getting key project sponsorship, old vs. new business model, communication campaign announcing the new business model

CSF's: best practice project mgmt, ability and willingness to rapidly adapt the business model (quick growth + customer feedback + resolution of issues), align 'old' and 'new' business models

Key dangers: weak or fading momentum

5. Manage

Activities: scan the environment, continuously assess your business model, rejuvenate and rethink your business model, align business models throughout the enterprise, manage synergies or conflicts between models

Established company activities: Business model governance, manage synergies and conflicts, business model portfolio, keep the beginner's mindset (constant inquiry + reflection)

CSF's: long term perspective, pro-activeness, governance of business models

Key dangers: becoming a victim of your won success, failing to adapt (Dell)

Design Attitude

It is difficult to design an alternative biz mod, but once you have the decision to select one becomes trivial.

Participants must be willing to invest a significant amount of time and effort.

Must explore many possible solutions without jumping to adopt one solution

Design Squiggle - uncertain at the outset (messy + opportunistic) before it focuses on a single point of clarity once the design has matured. (Damien Newman, Central - design agency)