Thursday, November 20, 2014

Reading :: Business Model Generation

Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers
By Alexander Osterwalder and Yves Pigneur

The Business Model Canvas (BMC) is a lean, rapid alternative to writing a business plan—basically a heuristic that guides the budding entrepreneur through the complex argument s/he has to make in order to develop a viable business model. Although it's been popularized by Steve Blank, the BMC is credited as originating with this "handbook for visionaries, game changers, and challengers." But the BMC is not the only heuristic in this lean, readable, and valuable handbook. If you're an entrepreneur, you'll find a lot of accessible insight in these pages.

I have called it "readable" and "accessible"; some readers, especially academics, may find the style off-puttingly simple. But push past that. The book is written so that readers can pick it up, read just part, then go do. Although it is arranged in a specific arc, I could see people picking it up at almost any point and finding it to be valuable. But let's go through the arc.

In this arc, the authors discuss the following:

  1. Canvas
  2. Patterns
  3. Design
  4. Strategy
  5. Process
  6. Outlook
Each contributes to the development of a business.

Canvas is the starting point: it provides "a shared language for describing, visualizing, assessing, and changing business models" (p.12). Essentially, the authors assume that you already have an innovation in mind, and now you will build a business around it. A business model, they say, consists of "nine building blocks that show the logic of how a company intends to make money," covering "the four main areas of a business: customers, offer, infrastructure, and financial viability" (p.15). These building blocks all interact, and putting them on a canvas—a heuristic that is meant to be collaboratively assembled—allows the entrepreneur to see their relationships and address weaknesses. These building blocks include:
  1. Customer segments: "the different groups of people or organizations an enterprise aims to reach and serve" (p.20)
  2. Value propositions: "the bundle of products and services that create value for a specific customer segment" (p.22)
  3. Channels: "how a company communicates with and reaches its Customer Segments to deliver a Value Proposition" (p.26)
  4. Customer relationships: "the types of relationships a company establishes with specific Customer Segments" (p.28)
  5. Revenue streams: "the cash a company generates from each Customer Segment" (p.30)
  6. Key resources: "the most important assets required to make a business model work" (p.34)
  7. Key activities: "the most important things a company must do to make its business model work" (p.36)
  8. Key partnerships: "the network of suppliers and partners that make the business model work" (p.38)
  9. Cost structure: "all costs incurred to operate a business model" (p.40)
By laying these out in a canvas, the authors allow us to see the relationships spatially. The left side of the canvas focuses on efficiency, while the right side focuses on value (p.49). 

In the next section, Patterns, the authors discuss three core business types (product innovation, customer relationship management, and infrastructure management) in terms of three aspects (culture, competition, and economics) (p.59). They use the BMC to parsimoniously describe different business cases and patterns, including free offerings, fremium services, and open business models. This section is lengthy, perhaps overly so; you can find a summary on pp.118-119.

In the following section, Design, the authors discuss design techniques and tools "that can help you design better and more innovative business models" (p.125). These tools include customer insights (including another heuristic, the empathy map), ideation (including SWOT analysis), visual thinking (including affinity diagrams, although they don't use the term), prototyping, storytelling, and scenarios—familiar tools to those who have been involved in UX/UI, participatory design, and related approaches. Essentially, the authors use these tools to increase customer empathy and adopt the customer's perspective. 

The Strategy section introduces another set of heuristics. The Business Model Environment describes "context, design drivers, and constraints" (p.200) by showing four categories characterizing the business environment: key trends, market forces, macroeconomic forces, and industry forces (p.201). Here, they return to the SWOT analysis to assess the business model—but this time, they overlay SWOT over the BMC, providing a set of questions (pp.217-223) to guide the SWOT. 

They then turn to blue ocean strategy, declaring that the BMC is a "perfect extension" of it (p.226) and using one example from Blue Ocean Strategy, that of Cirque du Soleil, to illustrate how BOS and the BMC can complement each other. 

In the last section, Process, the authors summarize the entire process of developing a business model. As you may have guessed, the process does not follow the order of the sections. They describe the process as 
  1. Mobilize (Setting the stage)
  2. Understand (Immersion)
  3. Design (Inquiry)
  4. Implement (Execution)
  5. Manage (Evolution)
and they helpfully provide tools and page numbers under each stage. Naturally, 1-3 make heavy use of the Design section, while the BMC is evolved throughout. 

Two more things. First, the authors also discuss "beyond-profit business models" (p.264), essentially what is elsewhere called social innovation. That is, the principles laid out here can be applied not just to businesses but also to nonprofits.

Second, the authors briefly discuss how the BMC and other heuristics are translated into a formal business plan (pp.268-269). This small section reminded me of my favorite proposal writing book, which similarly helps people work through various heuristics in order to assemble a complex argument. However, the authors don't take the next step and demonstrate the concrete steps of writing the business proposal. 

In all, I found this book intriguing and very useful. As a professor of rhetoric and writing, I'm interested in how people assemble complex arguments, and this book essentially helps budding entrepreneurs to understand that argument-building process. If you're interested in becoming an entrepreneur, or just understanding how entrepreneurs write and communicate, definitely take a look.

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