Review pages 198-241 in the Business Model Generation text. After your review, prepare a 500-word posting discussing your review. The overarching theme for this posting is “Decision Making.” Share your findings via the discussion forum.
You’re holding a handbook for visionaries, game changers,
and challengers striving to defy outmoded business models
and design tomorrow’s enterprises. It’s a book for the . . .
written by
Alexander Osterwalder & Yves Pigneur
co-created by
An amazing crowd of 470 practitioners from 45 countries
designed by
Alan Smith, The Movement
Disruptive new business models are
emblematic of our generation.
Yet they remain poorly understood,
even as they transform competitive
landscapes across industries.
Business Model Generation offers
you powerful, simple, tested tools for
understanding, designing, reworking,
and implementing business models.
Business Model Generation is a practical,
inspiring handbook for anyone striving to improve
a business model — or craft a new one.
change the way you think about business models
Business Model Generation will teach you powerful and
practical innovation techniques used today by leading
companies worldwide. You will learn how to systematically
understand, design, and implement a new business
model — or analyze and renovate an old one.
co-created by 470 strategy practitioners
Business Model Generation practices what it preaches.
Coauthored by 470 Business Model Canvas practitioners
from forty-five countries, the book was financed and
produced independently of the traditional publishing
industry. It features a tightly integrated, visual, lie-flat
design that enables immediate hands-on use.
designed for doers
Business Model Generation is for those ready to abandon
outmoded thinking and embrace new, innovative
models of value creation: executives, consultants,
entrepreneurs — and leaders of all organizations.
$34.95 USA/$41.95 CAN
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Business
Model
Generation
bmgen_final.indd 3 6/15/10 5:31 PM
This book is printed on acid-free paper. o
Copyright © 2010 by Alexander Osterwalder. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical,
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ISBN: 978-0470-87641-1
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
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Written by
Alexander Osterwalder and Yves Pigneur
Design
Alan Smith, The Movement
Editor and Contributing Co-Author
Tim Clark
Production
Patrick van der Pijl
Co-created by an amazing crowd of
470 practitioners from 45 countries
Business
Model
Generation
A Handbook for Visionaries, Game Changers, and Challengers
John Wiley & Sons, Inc.
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bmgen_final.indd 7 6/15/10 5:31 PM
Are you an entrepreneurial spirit?
yes _______ no _______
Are you constantly thinking about how to
create value and build new businesses, or how
to improve or transform your organization?
yes _______ no _______
Are you trying to find innovative
ways of doing business to replace
old, outdated ones?
yes _______ no _______
bmgen_final.indd 2 6/15/10 5:31 PM
If you’ve answered
“yes” to any of these
questions, welcome
to our group!
You’re holding a handbook for visionaries, game
changers, and challengers striving to defy outmoded
business models and design tomorrow’s enterprises.
It’s a book for the business model generation.
bmgen_final.indd 3 6/15/10 5:31 PM
Today countless innovative business models
are emerging. Entirely new industries are
forming as old ones crumble. Upstarts are
challenging the old guard, some of whom are
struggling feverishly to reinvent themselves.
How do you imagine your organization’s
business model might look two, five, or ten
years from now? Will you be among the
dominant players? Will you face competitors
brandishing formidable new business models?
bmgen_final.indd 4 6/15/10 5:31 PM
This book will give you deep insight into the nature of business models.
It describes traditional and bleeding-edge models and their dynamics,
innovation techniques, how to position your model within an intensely
competitive landscape, and how to lead the redesign of your own organi-
zation’s business model.
Certainly you’ve noticed that this is not the typical strategy or man-
agement book. We designed it to convey the essentials of what you need
to know, quickly, simply, and in a visual format. Examples are presented
pictorially and the content is complemented with exercises and workshop
scenarios you can use immediately. Rather than writing a conventional
book about business model innovation, we’ve tried to design a practical
guide for visionaries, game changers, and challengers eager to design or
reinvent business models. We’ve also worked hard to create a beautiful
book to enhance the pleasure of your “consumption.” We hope you enjoy
using it as much as we’ve enjoyed creating it.
An online community complements this book (and was integral to
its creation, as you will discover later). Since business model innovation
is a rapidly evolving field, you may want to go beyond the essentials in
Business Model Generation and discover new tools online. Please consider
joining our worldwide community of business practitioners and research-
ers who have co-created this book. On the Hub you can participate in
discussions about business models, learn from others’ insights, and try
out new tools provided by the authors. Visit the Business Model Hub at
www.BusinessModelGeneration.com/hub.
Business model innovation is hardly new. When the founders of Diners
Club introduced the credit card in 1950, they were practicing business
model innovation. The same goes for Xerox, when it introduced photo-
copier leasing and the per-copy payment system in 1959. In fact, we might
trace business model innovation all the way back to the fifteenth century,
when Johannes Gutenberg sought applications for the mechanical printing
device he had invented.
But the scale and speed at which innovative business models are
transforming industry landscapes today is unprecedented. For entre-
preneurs, executives, consultants, and academics, it is high time to
understand the impact of this extraordinary evolution. Now is the time
to understand and to methodically address the challenge of business
model innovation.
Ultimately, business model innovation is about creating value, for
companies, customers, and society. It is about replacing outdated models.
With its iPod digital media player and iTunes.com online store, Apple
created an innovative new business model that transformed the company
into the dominant force in online music. Skype brought us dirt-cheap
global calling rates and free Skype-to-Skype calls with an innovative
business model built on so-called peer-to-peer technology. It is now the
world’s largest carrier of international voice traffic. Zipcar frees city dwell-
ers from automobile ownership by offering hourly or daily on-demand
car rentals under a fee-based membership system. It’s a business model
response to emerging user needs and pressing environmental concerns.
Grameen Bank is helping alleviate poverty through an innovative business
model that popularized microlending to the poor.
But how can we systematically invent, design, and implement
these powerful new business models? How can we question, challenge,
and transform old, outmoded ones? How can we turn visionary ideas
into game-changing business models that challenge the establishment—or
rejuvenate it if we ourselves are the incumbents? Business Model Generation
aims to give you the answers.
Since practicing is better than preaching, we adopted a new model
for writing this book. Four hundred and seventy members of the Business
Model Innovation Hub contributed cases, examples, and critical com-
ments to the manuscript—and we took their feedback to heart. Read more
about our experience in the final chapter of Business Model Generation.
bmgen_final.indd 5 6/15/10 5:31 PM
Seven Faces of
Business Model
Innovation
The Senior Executive
Jean-Pierre Cuoni,
Chairman / EFG International
Focus: Establish a new business model
in an old industry
Jean-Pierre Cuoni is chairman of
EFG International, a private bank
with what may be the industry’s most
innovative business model. With
EFG he is profoundly transforming
the traditional relationships between
bank, clients, and client relationship
managers. Envisioning, crafting, and
executing an innovative business
model in a conservative industry with
established players is an art, and
one that has placed EFG International
among the fastest growing banks
in its sector.
The Intrapreneur
Dagfi nn Myhre,
Head of R&I Business Models / Telenor
Focus: Help exploit the latest techno-
logical developments with the right
business models
Dagfi nn leads a business model unit
at Telenor, one of the world’s ten larg-
est mobile telephone operators. The
telecom sector demands continuous
innovation, and Dagfi nn’s initiatives
help Telenor identify and understand
sustainable models that exploit the
potential of the latest technological
developments. Through deep analysis
of key industry trends, and by develop-
ing and using leading-edge analytical
tools, Dagfi nn’s team explores new
business concepts and opportunities.
The Entrepreneur
Mariëlle Sijgers,
Entrepreneur / CDEF Holding BV
Focus: Address unsatisfi ed customer
needs and build new business models
around them
Marielle Sijgers is a full-fl edged
entrepreneur. Together with her
business partner, Ronald van den
Hoff, she’s shaking up the meeting,
congress, and hospitality industry
with innovative business models.
Led by unsatisfi ed customer needs,
the pair has invented new concepts
such as Seats2meet.com, which allows
on-the-fl y booking of meetings in
untraditional locations. Together,
Sijgers and van den Hoff constantly
play with new business model ideas
and launch the most promising
concepts as new ventures.
bmgen_final.indd 6 6/15/10 5:31 PM
The Investor
Gert Steens, President & Investment
Analyst / Oblonski BV
Focus: Invest in companies with the
most competitive business models
Gert makes a living by identifying the
best business models. Investing in the
wrong company with the wrong model
could cost his clients millions of euros
and him his reputation. Understanding
new and innovative business models
has become a crucial part of his work.
He goes far beyond the usual fi nancial
analytics and compares business
models to spot strategic differences
that may impart a competitive edge.
Gert is constantly seeking business
model innovations.
The Consultant
Bas van Oosterhout, Senior
Consultant / Capgemini Consulting
Focus: Help clients question their
business models, and envision and
build new ones
Bas is part of Capgemini’s Business
Innovation Team. Together with
his clients, he is passionate about
boosting performance and renewing
competitiveness through innovation.
Business Model Innovation is now a
core component of his work because
of its high relevance to client projects.
His aim is to inspire and assist clients
with new business models, from
ideation to implementation. To achieve
this, Bas draws on his understanding
of the most powerful business models,
regardless of industry.
The Designer
Trish Papadakos,
Sole Proprietor / The Institute of You
Focus: Find the right business model
to launch an innovative product
Trish is a talented young designer
who is particularly skilled at grasp-
ing an idea’s essence and weaving it
into client communications. Currently
she’s working on one of her own ideas,
a service that helps people who are
transitioning between careers. After
weeks of in-depth research, she’s now
tackling the design. Trish knows she’ll
have to fi gure out the right business
model to bring her service to market.
She understands the client-facing
part—that’s what she works on daily
as a designer. But, since she lacks for-
mal business education, she needs the
vocabulary and tools to take on the
big picture.
The Conscientious Entrepreneur
Iqbal Quadir, Social Entrepreneur /
Founder of Grameen Phone
Focus: Bring about positive social and
economic change through innovative
business models
Iqbal is constantly on the lookout
for innovative business models with
the potential for profound social
impact. His transformative model
brought telephone service to over
100 million Bangladeshis, utilizing
Grameen Bank’s microcredit network.
He is now searching for a new model
for bringing affordable electricity to the
poor. As the head of MIT’s Legatum
Center, he promotes technological
empowerment through innovative
businesses as a path to economic and
social development.
bmgen_final.indd 7 6/15/10 5:31 PM
Table of Contents
Canvas
Outlook
Afterword
Process
Design
Patterns
Strategy
The book is divided into five sections: 1 The Busi-
ness Model Canvas, a tool for describing, analyzing,
and designing business models, 2 Business Model
Patterns, based on concepts from leading business
thinkers, 3 Techniques to help you design business
models, 4 Re-interpreting strategy through the
business model lens, and 5 A generic process to
help you design innovative business models, tying
together all the concepts, techniques, and tools in
Business Model Generation. }The last section offers
an outlook on five business model topics for future
exploration. Finally, the afterword provides a peek
into “the making of” Business Model Generation.
bmgen_final.indd 8 6/15/10 5:31 PM
1 Canvas
14 Definition of a Business
Model
16 The 9 Building Blocks
44 The Business Model
Canvas
2 Patterns
56 Unbundling Business
Models
66 The Long Tail
76 Multi-Sided Platforms
88 FREE as a Business Model
108 Open Business Models
3 Design
126 Customer Insights
134 Ideation
146 Visual Thinking
160 Prototyping
170 Storytelling
180 Scenarios
4 Strategy
200 Business Model
Environment
212 Evaluating Business
Models
226 Business Model
Perspective on Blue
Ocean Strategy
232 Managing Multiple
Business Models
5 Process
244 Business Model
Design Process
} Outlook
262 Outlook
Afterword
274 Where did this book
come from?
276 References
bmgen_final.indd 9 6/15/10 5:31 PM
Canvas
bmgen_final.indd 10 6/15/10 5:31 PM
Canvas
bmgen_final.indd 11 6/15/10 5:31 PM
A shared language for describing, visualizing,
assessing, and changing business models
The Business
Model Canvas
bmgen_final.indd 12 6/15/10 5:31 PM
14 Definition of a
Business Model
16 The 9 Building Blocks
44 The Business Model
Canvas Template
bmgen_final.indd 13 6/15/10 5:31 PM
14
A business model describes
the rationale of how an
organization creates, delivers,
and captures value
Def_Business Model
bmgen_final.indd 14 6/15/10 5:31 PM
15
The starting point for any good discussion, meeting,
or workshop on business model innovation should
be a shared understanding of what a business model
actually is. We need a business model concept that
everybody understands: one that facilitates descrip-
tion and discussion. We need to start from the same
point and talk about the same thing. The challenge is
that the concept must be simple, relevant, and intui-
tively understandable, while not oversimplifying the
complexities of how enterprises function.
In the following pages we oΩer a concept that allows
you to describe and think through the business model
of your organization, your competitors, or any other
enterprise. This concept has been applied and tested
around the world and is already used in organizations
such as IBM, Ericsson, Deloitte, the Public Works and
Government Services of Canada, and many more.
This concept can become a shared language that
allows you to easily describe and manipulate business
models to create new strategic alternatives. Without
such a shared language it is diΩicult to systematically
challenge assumptions about one’s business model
and innovate successfully.
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, oΩer, infrastructure, and financial viability.
The business model is like a blueprint for a strategy
to be implemented through organizational structures,
processes, and systems.
bmgen_final.indd 15 6/15/10 5:31 PM
[
Customer
Segments
An organization serves
one or several Customer
Segments.
Value
Propositions
It seeks to solve customer
problems and satisfy
customer needs with
value propositions.
Channels
Value propositions
are delivered to customers
through communication,
distribution, and sales
Channels.
Customer
Relationships
Customer relationships
are established and
maintained with each
Customer Segment.
[ The 9 Building Blocks
CS VP CH Cr
1 2 3 4
bmgen_final.indd 16 6/15/10 5:31 PM
17
Revenue
Streams
Revenue streams result
from value propositions
successfully oΩered to
customers.
Key
Resources
Key resources are the
assets required to oΩer
and deliver the previously
described elements . . .
Key
Activities
. . . by performing a num-
ber of Key Activities.
Key
Partnerships
Some activities are
outsourced and some
resources are acquired
outside the enterprise.
Cost
Structure
The business model
elements result in the
cost structure.
r$ Kr KA KP C$
5 6 7 8 9
bmgen_final.indd 17 6/15/10 5:31 PM
18
Kr
Key Resources
KP
Key Partners
KA
Key Activities
C$
Cost Structure
bmgen_final.indd 18 6/15/10 5:31 PM
19
CS
Customer Segments
Cr
Customer Relationships
VP
Value Propositions
CH
Channels
r$
Revenue Streams
bmgen_final.indd 19 6/15/10 5:31 PM
The Customer Segments Building Block defi nes
the diΩerent groups of people or organizations an
enterprise aims to reach and serve
Customers comprise the heart of any business model. Without
(profi table) 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 behaviors,
or other attributes. A business model may defi ne one or several
large or small Customer Segments. An organization 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
specifi c customer needs.
Customer groups represent separate segments if:
• Their needs require and justify a distinct oΩer
• They are reached through diΩerent Distribution Channels
• They require diΩerent types of relationships
• They have substantially diΩerent profi tabilities
• They are willing to pay for diΩerent aspects of the oΩer
Customer Segments
CS
1
bmgen_final.indd 20 6/15/10 5:32 PM
21
There are diΩerent types of Customer Segments.
Here are some examples:
Mass market
Business models focused on mass markets don’t
distinguish between diΩerent Customer Segments.
The Value Propositions, Distribution Channels, and
Customer Relationships all focus on one large group
of customers with broadly similar needs and problems.
This type of business model is often found in the
consumer electronics sector.
Niche market
Business models targeting niche markets cater to
specific, specialized Customer Segments. The Value
Propositions, Distribution Channels, and Customer
Relationships are all tailored to the specific require-
ments of a niche market. Such business models
are often found in supplier-buyer relationships. For
example, many car part manufacturers depend heavily
on purchases from major automobile manufacturers.
Segmented
Some business models distinguish between market
segments with slightly diΩerent needs and problems.
The retail arm of a bank like Credit Suisse, for example,
may distinguish between a large group of customers,
each possessing assets of up to U.S. $100,000, and
a smaller group of aΩluent clients, each of whose net
worth exceeds U.S. $500,000. Both segments have
similar but varying needs and problems. This has
implications for the other building blocks of Credit
Suisse’s business model, such as the Value Proposi-
tion, Distribution Channels, Customer Relationships,
and Revenue streams. Consider Micro Precision
Systems, which specializes in providing outsourced
micromechanical design and manufacturing solutions.
It serves three diΩerent Customer Segments—the
watch industry, the medical industry, and the industrial
automation sector—and oΩers each slightly diΩerent
Value Propositions.
Diversified
An organization with a diversified customer business
model serves two unrelated Customer Segments
with very diΩerent needs and problems. For example,
in 2006 Amazon.com decided to diversify its retail
business by selling “cloud computing” services: online
storage space and on-demand server usage. Thus
it started catering to a totally diΩerent Customer
Segment—Web companies—with a totally diΩerent
Value Proposition. The strategic rationale behind this
diversification can be found in Amazon.com’s powerful
IT infrastructure, which can be shared by its retail sales
operations and the new cloud computing service unit.
Multi-sided platforms (or multi-sided markets)
Some organizations serve two or more interdepen-
dent 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 oΩering 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 on p. 76).
For whom are we creating value?
Who are our most important customers?
bmgen_final.indd 21 6/15/10 5:32 PM
The Value Propositions Building Block describes
the bundle of products and services that create
value for a specifi c Customer Segment
The Value Proposition is the reason why customers turn to one
company over another. It solves a customer problem or satisfi es
a customer need. Each Value Proposition consists of a selected
bundle of products and/or services that caters to the requirements
of a specifi c Customer Segment. In this sense, the Value Proposi-
tion is an aggregation, or bundle, of benefi ts that a company
oΩers customers.
Some Value Propositions may be innovative and represent a
new or disruptive oΩer. Others may be similar to existing market
oΩers, but with added features and attributes.
Value Propositions2
of a specifi c Customer Segment. In this sense, the Value Proposi-
tion is an aggregation, or bundle, of benefi ts that a company
oΩers customers.
Some Value Propositions may be innovative and represent a
new or disruptive oΩer. Others may be similar to existing market
oΩers, but with added features and attributes.
VP
bmgen_final.indd 22 6/15/10 5:32 PM
23
A Value Proposition creates value for a Customer
Segment through a distinct mix of elements cater-
ing to that segment’s needs. Values may be quan-
titative (e.g. price, speed of service) or qualitative
(e.g. design, customer experience).
Elements from the following non-exhaustive list
can contribute to customer value creation.
Newness
Some Value Propositions satisfy an entirely new set
of needs that customers previously didn’t perceive
because there was no similar oΩering. This is often,
but not always, technology related. Cell phones,
for instance, created a whole new industry around
mobile telecommunication. On the other hand,
products such as ethical investment funds have
little to do with new technology.
Performance
Improving product or service performance has
traditionally been a common way to create value.
The PC sector has traditionally relied on this factor
by bringing more powerful machines to market.
But improved performance has its limits. In recent
years, for example, faster PCs, more disk storage
space, and better graphics have failed to produce
corresponding growth in customer demand.
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 oΩering
to each Customer Segment?
Customization
Tailoring products and services to the specific
needs of individual customers or Customer
Segments creates value. In recent years, the
concepts of mass customization and customer
co-creation have gained importance. This approach
allows for customized products and services,
while still taking advantage of economies of scale.
bmgen_final.indd 23 6/15/10 5:32 PM
“Getting the job done”
Value can be created simply by helping a customer
get certain jobs done. Rolls-Royce understands this
very well: its airline customers rely entirely on Rolls-
Royce to manufacture and service their jet engines.
This arrangement allows customers to focus on
running their airlines. In return, the airlines pay
Rolls-Royce a fee for every hour an engine runs.
Design
Design is an important but diΩicult element to mea-
sure. A product may stand out because of superior
design. In the fashion and consumer electronics
industries, design can be a particularly important
part of the Value Proposition.
Brand/status
Customers may fi nd value in the simple act of using
and displaying a specifi c brand. Wearing a Rolex
watch signifi es wealth, for example. On the other end
of the spectrum, skateboarders may wear the latest
“underground” brands to show that they are “in.”
Price
OΩering similar value at a lower price is a common
way to satisfy the needs of price-sensitive Cus-
tomer Segments. But low-price Value Propositions
have important implications for the rest of a busi-
ness model. No frills airlines, such as Southwest,
easyJet, and Ryanair have designed entire business
models specifi cally to enable low cost air travel.
Another example of a price-based Value Proposi-
tion can be seen in the Nano, a new car designed
and manufactured by the Indian conglomerate Tata.
Its surprisingly low price makes the automobile
aΩordable to a whole new segment of the Indian
population. Increasingly, free oΩers are starting to
permeate various industries. Free oΩers range from
free newspapers to free e-mail, free mobile phone
services, and more (see p. 88 for more on FREE).
2
bmgen_final.indd 24 6/15/10 5:32 PM
25
Cost reduction
Helping customers reduce costs is an important
way to create value. Salesforce.com, for example,
sells a hosted Customer Relationship management
(CRM) application. This relieves buyers from the
expense and trouble of having to buy, install, and
manage CRM software themselves.
Risk reduction
Customers value reducing the risks they incur
when purchasing products or services. For a used
car buyer, a one-year service guarantee reduces
the risk of post-purchase breakdowns and repairs.
A service-level guarantee partially reduces the
risk undertaken by a purchaser of outsourced IT
services.
Accessibility
Making products and services available to custom-
ers who previously lacked access to them is another
way to create value. This can result from business
model innovation, new technologies, or a combina-
tion of both. NetJets, for instance, popularized the
concept of fractional private jet ownership. Using an
innovative business model, NetJets oΩers individu-
als and corporations access to private jets, a service
previously unaΩordable to most customers. Mutual
funds provide another example of value creation
through increased accessibility. This innovative
financial product made it possible even for those
with modest wealth to build diversified investment
portfolios.
Convenience/usability
Making things more convenient or easier to use
can create substantial value. With iPod and iTunes,
Apple oΩered customers unprecedented conve-
nience searching, buying, downloading, and listen-
ing to digital music. It now dominates the market.
bmgen_final.indd 25 6/15/10 5:32 PM
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 specifi c products and services
• Delivering a Value Proposition to customers
• Providing post-purchase customer support
Channels3
CH
bmgen_final.indd 26 6/15/10 5:32 PM
27Through 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-eΩicient? How are we
integrating them with customer routines?
Channels have five distinct phases. Each channel can
cover some or all of these phases. We can distinguish
between direct Channels and indirect ones, as well as
between owned Channels and partner Channels.
Finding the right mix of Channels to satisfy how
customers want to be reached is crucial in bringing
a Value Proposition to market. An organization can
choose between reaching its customers through its
own Channels, through partner Channels, or through
a mix of both. Owned Channels can be direct, such as
an in-house sales force or a Web site, or they can be
indirect, such as retail stores owned or operated by the
organization. Partner Channels are indirect and span a
whole range of options, such as wholesale distribution,
retail, or partner-owned Web sites.
Partner Channels lead to lower margins, but they
allow an organization to expand its reach and benefit
from partner strengths. Owned Channels and particu-
larly direct ones have higher margins, but can be costly
to put in place and to operate. The trick is to find the
right balance between the diΩerent types of Channels,
to integrate them in a way to create a great customer
experience, and to maximize revenues.
Channel Types Channel Phases
Sales force
1. Awareness
How do we raise aware-
ness about our company’s
products and services?
2. Evaluation
How do we help custom-
ers evaluate our organiza-
tion’s Value Proposition?
3. Purchase
How do we allow custom-
ers to purchase specific
products and services?
4. Delivery
How do we deliver a Value
Proposition to customers?
5. After sales
How do we provide
post-purchase customer
support?
Web sales
Own stores
Partner
stores
Wholesaler
In
d
ir
ec
t
D
ir
ec
t
O
w
n
P
ar
tn
er
bmgen_final.indd 27 6/15/10 5:32 PM
The Customer Relationships Building Block
describes the types of relationships a company
establishes with specifi c 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)
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 increas-
ing average revenue per customer.
The Customer Relationships called for by a company’s business
model deeply infl uence the overall customer experience.
Cr
4
bmgen_final.indd 28 6/15/10 5:32 PM
29
We can distinguish between several categories of
Customer Relationships, which may co-exist in a
company’s relationship with a particular
Customer Segment:
Personal assistance
This relationship is based on human interaction.
The customer can communicate with a real customer
representative to get help during the sales process or
after the purchase is complete. This may happen on-
site at the point of sale, through call centers, by e-mail,
or through other means.
Dedicated personal assistance
This relationship involves dedicating a customer
representative specifically to an individual client. It
represents the deepest and most intimate type of
relationship and normally develops over a long period
of time. In private banking services, for example, dedi-
cated bankers serve high net worth individuals. Similar
relationships can be found in other businesses in the
form of key account managers who maintain personal
relationships with important customers.
Self-service
In this type of relationship, a company maintains no
direct relationship with customers. It provides all the
necessary means for customers to help themselves.
Automated services
This type of relationship mixes a more sophisti-
cated form of customer self-service with automated
processes. For example, personal online profiles give
customers access to customized services. Automated
services can recognize individual customers and their
characteristics, and oΩer information related to orders
or transactions. At their best, automated services can
simulate a personal relationship (e.g. oΩering book or
movie recommendations).
Communities
Increasingly, companies are utilizing user communities
to become more involved with customers/prospects
and to facilitate connections between community
members. Many companies maintain online com-
munities that allow users to exchange knowledge and
solve each other’s problems. Communities can also
help companies better understand their customers.
Pharmaceutical giant GlaxoSmithKline launched a
private online community when it introduced alli, a
new prescription-free weight-loss product.
GlaxoSmithKline wanted to increase its under-
standing of the challenges faced by overweight
adults, and thereby learn to better manage customer
expectations.
Co-creation
More companies are going beyond the traditional
customer-vendor relationship to co-create value with
customers. Amazon.com invites customers to write
reviews and thus create value for other book lovers.
Some companies engage customers to assist with the
design of new and innovative products. Others, such
as YouTube.com, solicit customers to create content
for public consumption.
What type of relationship does each of our Customer
Segments expect us to establish and maintain with them?
Which ones have we established? How costly are they?
How are they integrated with the rest of our business model?
bmgen_final.indd 29 6/15/10 5:32 PM
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 fi rm to generate one or more
Revenue Streams from each Customer Segment. Each Revenue
Stream may have diΩerent pricing mechanisms, such as fi xed list
prices, bargaining, auctioning, market dependent, volume depen-
dent, or yield management.
Revenue Streams
A business model can involve two diΩerent types of Revenue Streams:
1. Transaction revenues resulting from one-time customer payments
2. Recurring revenues resulting from ongoing payments to either
deliver a Value Proposition to customers or provide post-purchase
customer support
r$
5
bmgen_final.indd 30 6/15/10 5:32 PM
31
There are several ways to generate Revenue Streams:
Asset sale
The most widely understood Revenue Stream derives
from selling ownership rights to a physical product.
Amazon.com sells books, music, consumer electron-
ics, and more online. Fiat sells automobiles, which
buyers are free to drive, resell, or even destroy.
Usage fee
This Revenue Stream is generated by the use of a
particular service. The more a service is used, the
more the customer pays. A telecom operator may
charge customers for the number of minutes spent on
the phone. A hotel charges customers for the number
of nights rooms are used. A package delivery service
charges customers for the delivery of a parcel from
one location to another.
Subscription fees
This Revenue Stream is generated by selling continu-
ous access to a service. A gym sells its members
monthly or yearly subscriptions in exchange for
access to its exercise facilities. World of Warcraft
Online, a Web-based computer game, allows users to
play its online game in exchange for a monthly sub-
scription fee. Nokia’s Comes with Music service gives
users access to a music library for a subscription fee.
Lending/Renting/Leasing
This Revenue Stream is created by temporar-
ily granting someone the exclusive right to use a
particular asset for a fixed period in return for a
fee. For the lender this provides the advantage of
recurring revenues. Renters or lessees, on the other
hand, enjoy the benefits of incurring expenses for
only a limited time rather than bearing the full costs
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?
of ownership. Zipcar.com provides a good illustration.
The company allows customers to rent cars by the
hour in North American cities. Zipcar.com’s service
has led many people to decide to rent rather than
purchase automobiles.
Licensing
This Revenue Stream is generated by giving customers
permission to use protected intellectual property in
exchange for licensing fees. Licensing allows rights-
holders to generate revenues from their property with-
out having to manufacture a product or commercialize
a service. Licensing is common in the media industry,
where content owners retain copyright while selling
usage licenses to third parties. Similarly, in technology
sectors, patentholders grant other companies the right
to use a patented technology in return for a license fee.
bmgen_final.indd 31 6/15/10 5:32 PM
Brokerage fees
This Revenue Stream derives from intermediation
services performed on behalf of two or more parties.
Credit card providers, for example, earn revenues
by taking a percentage of the value of each sales
transaction executed between credit card merchants
and customers. Brokers and real estate agents earn
a commission each time they successfully match a
buyer and seller.
Advertising
This Revenue Stream results from fees for advertising
a particular product, service, or brand. Traditionally,
the media industry and event organizers relied heavily
on revenues from advertising. In recent years other
sectors, including software and services, have started
relying more heavily on advertising revenues.
Each Revenue Stream might have diΩerent pricing
mechanisms. The type of pricing mechanism chosen
can make a big diΩerence in terms of revenues gener-
ated. There are two main types of pricing mechanism:
fi xed and dynamic pricing.
5
bmgen_final.indd 32 6/15/10 5:32 PM
33
Fixed Menu Pricing
Predefined prices are based on static variables
Dynamic Pricing
Prices change based on market conditions
List price Fixed prices for individual products, services,
or other Value Propositions
Negotiation
(bargaining)
Price negotiated between two or more partners
depending on negotiation power and/or negotiation skills
Product feature
dependent
Price depends on the number or quality of
Value Proposition features
Yield management Price depends on inventory and time of purchase
(normally used for perishable resources such as hotel
rooms or airline seats)
Customer segment
dependent
Price depends on the type and characteristic
of a Customer Segment
Real-time-market Price is established dynamically based on supply
and demand
Volume dependent Price as a function of the quantity purchased Auctions Price determined by outcome of competitive bidding
Pricing Mechanisms
bmgen_final.indd 33 6/15/10 5:32 PM
34
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 oΩer a Value Proposition, reach
markets, maintain relationships with Customer Segments, and
earn revenues. DiΩerent 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, fi nancial, intellectual, or human.
Key resources can be owned or leased by the company or acquired
from key partners.
Key Resources
Kr
6
bmgen_final.indd 34 6/15/10 5:32 PM
35
Key Resources can be categorized as follows:
Physical
This category includes physical assets such as
manufacturing facilities, buildings, vehicles, machines,
systems, point-of-sales systems, and distribution
networks. Retailers like Wal-Mart and Amazon.com
rely heavily on physical resources, which are often
capital-intensive. The former has an enormous global
network of stores and related logistics infrastructure.
The latter has an extensive IT, warehouse, and logistics
infrastructure.
Intellectual
Intellectual resources such as brands, proprietary
knowledge, patents and copyrights, partnerships,
and customer databases are increasingly important
components of a strong business model. Intellectual
resources are diΩicult to develop but when success-
fully created may oΩer substantial value. Consumer
goods companies such as Nike and Sony rely heavily
on brand as a Key Resource. Microsoft and SAP
depend on software and related intellectual property
developed over many years. Qualcomm, a designer
and supplier of chipsets for broadband mobile
devices, built its business model around patented
microchip designs that earn the company substantial
licensing fees.
Human
Every enterprise requires human resources, but
people are particularly prominent in certain business
models. For example, human resources are crucial in
knowledge-intensive and creative industries. A phar-
maceutical company such as Novartis, for example,
relies heavily on human resources: Its business model
is predicated on an army of experienced scientists
and a large and skilled sales force.
Financial
Some business models call for financial resources
and/or financial guarantees, such as cash, lines of
credit, or a stock option pool for hiring key employ-
ees. Ericsson, the telecom manufacturer, provides
an example of financial resource leverage within a
business model. Ericsson may opt to borrow funds
from banks and capital markets, then use a portion of
the proceeds to provide vendor financing to equipment
customers, thus ensuring that orders are placed with
Ericsson rather than competitors.
What Key Resources do our Value Propositions require?
Our Distribution Channels? Customer Relationships?
Revenue Streams?
bmgen_final.indd 35 6/15/10 5:32 PM
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
oΩer a Value Proposition, reach markets, maintain Customer
Relationships, and earn revenues. And like Key Resources, Key
Activities diΩer 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 Activities
Relationships, and earn revenues. And like Key Resources, Key
Activities diΩer 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.
KA
7
bmgen_final.indd 36 6/15/10 5:32 PM
37
Key Activities can be categorized as follows:
Production
These activities relate to designing, making, and
delivering a product in substantial quantities and/or
of superior quality. Production activity dominates the
business models of manufacturing firms.
Problem solving
Key Activities of this type relate to coming up with
new solutions to individual customer problems.
The operations of consultancies, hospitals, and other
service organizations are typically dominated by
problem solving activities. Their business models call
for activities such as knowledge management and
continuous training.
Platform/network
Business models designed with a platform as a Key
Resource are dominated by platform or network-
related Key Activities. Networks, matchmaking
platforms, software, and even brands can function as
a platform. eBay’s business model requires that the
company continually develop and maintain its plat-
form: the Web site at eBay.com. Visa’s business model
requires activities related to its Visa® credit card
transaction platform for merchants, customers, and
banks. Microsoft’s business model requires managing
the interface between other vendors’ software and its
Windows® operating system platform. Key Activi-
ties in this category relate to platform management,
service provisioning, and platform promotion.
What Key Activities do our Value Propositions require?
Our Distribution Channels? Customer Relationships?
Revenue streams?
bmgen_final.indd 37 6/15/10 5:32 PM
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 diΩerent types of partnerships:
1. Strategic alliances between non-competitors
2. Coopetition: strategic partnerships between competitors
3. Joint ventures to develop new businesses
4. Buyer-supplier relationships to assure reliable supplies
Key Partnerships
1. Strategic alliances between non-competitors
2. Coopetition: strategic partnerships between competitors
3. Joint ventures to develop new businesses
4. Buyer-supplier relationships to assure reliable supplies
KP
8
bmgen_final.indd 38 6/15/10 5:32 PM
39
It can be useful to distinguish between three
motivations for creating partnerships:
Optimization and economy of scale
The most basic form of partnership or buyer-supplier
relationship is designed to optimize the allocation of
resources and activities. It is illogical for a company to
own all resources or perform every activity by itself.
Optimization and economy of scale partnerships are
usually formed to reduce costs, and often involve
outsourcing or sharing infrastructure.
Reduction of risk and uncertainty
Partnerships can help reduce risk in a competitive
environment characterized by uncertainty. It is not
unusual for competitors to form a strategic alliance
in one area while competing in another. Blu-ray, for
example, is an optical disc format jointly developed
by a group of the world’s leading consumer electron-
ics, personal computer, and media manufacturers.
The group cooperated to bring Blu-ray technology to
market, yet individual members compete in selling
their own Blu-ray products.
Acquisition of particular resources and activities
Few companies own all the resources or perform all
the activities described by their business models.
Rather, they extend their own capabilities by relying
on other firms to furnish particular resources or
perform certain activities. Such partnerships can be
motivated by needs to acquire knowledge, licenses, or
access to customers. A mobile phone manufacturer,
for example, may license an operating system for its
handsets rather than developing one in-house. An
insurer may choose to rely on independent brokers to
sell its policies rather than develop its own sales force.
Who are our Key Partners? Who are our key suppliers?
Which Key Resources are we acquiring from partners?
Which Key Activities do partners perform?
bmgen_final.indd 39 6/15/10 5:32 PM
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 de-
livering value, maintaining Customer Relationships, and generating
revenue all incur costs. Such costs can be calculated relatively easily
after defi ning 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.
Cost Structure
C$
9
bmgen_final.indd 40 6/15/10 5:32 PM
41
Naturally enough, costs should be minimized in every
business model. But low Cost Structures are more
important to some business models than to others.
Therefore it can be useful to distinguish between two
broad classes of business model Cost Structures:
cost-driven and value-driven (many business models
fall in between these two extremes):
Cost-driven
Cost-driven business models focus on minimizing
costs wherever possible. This approach aims at
creating and maintaining the leanest possible
Cost Structure, using low price Value Propositions,
maximum automation, and extensive outsourcing.
No frills airlines, such as Southwest, easyJet, and
Ryanair typify cost-driven business models.
Value-driven
Some companies are less concerned with the cost
implications of a particular business model design,
and instead focus on value creation. Premium Value
Propositions and a high degree of personalized service
usually characterize value-driven business models.
Luxury hotels, with their lavish facilities and exclusive
services, fall into this category.
Cost Structures can have the following characteristics:
Fixed costs
Costs that remain the same despite the volume of
goods or services produced. Examples include salaries,
rents, and physical manufacturing facilities. Some
businesses, such as manufacturing companies, are
characterized by a high proportion of fixed costs.
Variable costs
Costs that vary proportionally with the volume of
goods or services produced. Some businesses, such as
music festivals, are characterized by a high proportion
of variable costs.
Economies of scale
Cost advantages that a business enjoys as its output
expands. Larger companies, for instance, benefit from
lower bulk purchase rates. This and other factors
cause average cost per unit to fall as output rises.
Economies of scope
Cost advantages that a business enjoys due to a larger
scope of operations. In a large enterprise, for example,
the same marketing activities or Distribution Channels
may support multiple products.
What are the most important costs inherent in our business
model? Which Key Resources are most expensive? Which
Key Activities are most expensive?
bmgen_final.indd 41 6/15/10 5:32 PM
VP CR
CH
CSKP KA
KR
R$C$
The nine business model Building Blocks form
the basis for a handy tool, which we call the
Business Model Canvas.
This tool resembles a painter’s canvas—preformat-
ted with the nine blocks—which allows you 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 Post-it® notes or board markers.
It is a hands-on tool that fosters understanding,
discussion, creativity, and analysis.
The Business Model Canvas
bmgen_final.indd 42 6/15/10 5:32 PM
43 43}
bmgen_final.indd 43 6/15/10 5:33 PM
44
The Business Model Canvas
Cost
Structure
Key
Partners
Key
Resources
Channels
Key
Activities
Value
Proposition
Customer
Relationships
Customer
Segments
Revenue
Streams
bmgen_final.indd 44 6/15/10 5:33 PM
45
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46
VP CR
CH
CSKP KA
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46
VP CR
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CSKP KA
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47
In 2001 Apple launched its iconic iPod brand of por-
table media player. The device works in conjunction
with iTunes software that enables users to transfer
music and other content from the iPod to a computer.
The software also provides a seamless connection
to Apple’s online store so users can purchase and
download content.
This potent combination of device, software, and
online store quickly disrupted the music industry and
gave Apple a dominant market position. Yet Apple was
not the first company to bring a portable media player
to market. Competitors such as Diamond Multimedia,
with its Rio brand of portable media players, were suc-
cessful until they were outpaced by Apple.
Example: Apple iPod/iTunes Business Model
How did Apple achieve such dominance? Because it
competed with a better business model. On the one
hand, it oΩered users a seamless music experience by
combining its distinctively designed iPod devices with
iTunes software and the iTunes online store. Apple’s
Value Proposition is to allow customers to easily
search, buy, and enjoy digital music. On the other hand,
to make this Value Proposition possible, Apple had to
negotiate deals with all the major record companies to
create the world’s largest online music library.
The twist? Apple earns most of its music-related
revenues from selling iPods, while using integration
with the online music store to protect itself from
competitors.
bmgen_final.indd 47 6/15/10 5:33 PM
left brain
logic
right brain
emotion
bmgen_final.indd 48 6/15/10 5:33 PM
VP CR
CH
CSKP KA
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R$C$
VP CR
CH
CSKP KA
KR
R$C$
left canvas
effi ciency
bmgen_final.indd 49 6/15/10 5:33 PM
The public sector is often challenged
to implement private sector principles.
I have used the Canvas to help a
department view itself as a service-
oriented business,
establishing
externalized as-is
and to-be business
models.
It has created a whole new conversa-
tion around describing and innovating
the business.
Mike Lachapelle, Canada
I consult with small companies on using
the freemium business model. This
model involves giving core products
away for free, which is very counterin-
tuitive to most businesspeople. Thanks
to the Business Model Canvas, I can
easily illustrate
how it makes
financial sense.
Peter Froberg, Denmark
I help business owners plan their transi-
tion and exit from their companies.
Success depends on sustaining long-
term company viability and growth. Key
to this is a business model innovation
program. The Canvas helps us identify
and innovate their business models.
Nicholas K. Niemann, United States
I’m using the Business Model Canvas in
Brazil to help artists, cultural producers,
and game designers to envision innova-
tive business models for the Cultural
and Creative Industries. I apply it in the
Cultural Production MBA at FGV and in
the Innovation Games Lab at COPPE/
UFRJ Business Incubator.
Claudio D’Ipolitto, Brazil
When you typically think of a business
model, the conclusion is that it is a ‘for
profit’ business. However, I found that
the Canvas is also very effective in the
non-profit sector. We used it to
DESIGN
+ ALIGN
members of the leadership team during
the formation of a new non-profit
program. The Canvas was flexible
enough to take into account the goals
of this social entrepreneurial venture,
and bring clarity to the true Value
Proposition of the business and how
to make it sustainable.
Kevin Donaldson, United States
I wish I had known the Canvas years
ago! With a particular tough and
complicated print-to-digital project
within the publishing industry it would
have been so helpful to
show all project
members in this
visual way both
the big picture,
their (important)
own roles in it
and the inter-
dependencies.
Hours of explaining, arguing, and mis-
understanding could have been saved.
Jille Sol, Netherlands
A close friend was looking for a new
job. I used the Business Model
Canvas in order to assess her
personal business model.
Her core competences and Value
Proposition were outstanding but
she failed to leverage her strategic
partners and develop appropriate
Customer Relationships. This adjusted
focus opened new opportunities.
Daniel Pandza, Mexico
HOW
DO YOU
USE THE
CAnVAS?
50
bmgen_final.indd 50 6/15/10 5:33 PM
Imagine 60 first-year students, knowing
nothing about entrepreneurship. In less
than five days, thanks to the Business
Model Canvas, they were able to pitch
a viable idea with conviction and clarity.
They used it as a tool to cover all the
startup-building dimensions.
Guilhem Bertholet, France
I use the Business Model Canvas to
teach early stage entrepreneurs
across a wide range of industries as
a much better way to
translate
THEIR BUSInESS
PLANS
InTO THE BUSInESS
PROCESSES
that they (will) need to operate their
businesses and to ensure that they are
focused properly on being customer-
centric in a way that makes the business
as highly profitable as it can be.
Bob Dunn, United States
I have used the Canvas with a
co-founder to design a business plan
for a national level contest held by
The Economic Times, India. The
Canvas enabled me to think through
all the aspects of the startup and put
together a plan that VCs might find well
thought out and attractive to fund.
Praveen Singh, India
We were asked to redesign the language
service of an international nGO. The
Business Model Canvas was especially
helpful to show the links between
the needs of people’s day-to-day
work and a service that was felt
too specialized, considered only as an
afterthought, and far away from their
priorities.
Paola Valeri, Spain
As a startup coach I support teams to
create new products and design their
businesses. The Business Model Canvas
does a great job assisting me to
remind the
teams to think
holistically about
their business
and prevents
them from
getting stuck
on details. This helps to
make their new venture a success.
Christian Schüller, Germany
The Business Model
Canvas has allowed
me to establish a
common language
and framework with
colleagues.
I’ve used the Canvas to explore new
growth opportunities, assess uses
of new business models by competitors,
and to communicate across the
organization how we could
accelerate technology, market, and
business model innovations.
Bruce MacVarish, United States
The Business Model Canvas has helped
several health care organizations in the
netherlands to make the move from
a budget driven governmental
institution to an entrepreneurial
value-adding organization.
Huub Raemakers, Netherlands
I used the Canvas with senior managers
of a public company to help them
restructure their value chain due to
changes in sector regulation. The key
success factor was to understand which
new Value Propositions could be offered
to their clients and then translated into
internal operations.
Leandro Jesus, Brazil
We used 15,000
post-its and
more than
100 meters of
broWn paper
to design a future organizational struc-
ture in a global manufacturing company.
The key of all activities was, however,
the Business Model Canvas. It con-
vinced us by its practical applicability,
simplicity, and logical cause-and-effect
relationships.
Daniel Egger, Brazil
I used the Canvas to do a
reality
check
for my new startup Mupps, a platform
where artists can make their own music
apps for iPhone and Android phones
in minutes. You know what? The Canvas
made me even surer of the possible
success! So I gotta go, work to do!
Erwin Blom, Netherlands
The Business Model Canvas has proven
to be a very useful tool for capturing
ideas and solutions for e-commerce
projects. Most of my clients are SMEs
and the Canvas helps them to
clarify their current
business models and
understand and focus on the impact
of e-commerce on their organizations.
Marc Castricum, Netherlands
I applied the Canvas to help a company
align key staff in order to determine
shared goals and strategic priorities,
which were used during the planning
process and incorporated with the BSC.
It also ensured that the chosen initia-
tives were clearly driven by the new
strategic priorities.
Martin Fanghanel, Bolivia
51
bmgen_final.indd 51 6/15/10 5:33 PM
Patterns
bmgen_final.indd 52 6/15/10 5:33 PM
Patterns
bmgen_final.indd 53 6/15/10 5:33 PM
“Pattern in architecture
is the idea of capturing
architectural design ideas
as archetypal and reusable
descriptions.”
Christopher Alexander, Architect
bmgen_final.indd 54 6/15/10 5:33 PM
This section describes business models with similar characteristics,
similar arrangements of business model Building Blocks, or similar
behaviors. We call these similarities business model patterns. The
patterns described in the following pages should help you understand
business model dynamics and serve as a source of inspiration for
your own work with business models.
We’ve sketched out five business model patterns built on important
concepts in the business literature. We’ve “translated” these into
the language of the Business Model Canvas to make the concepts
comparable, easy to understand, and applicable. A single business
model can incorporate several of these patterns.
Concepts upon which our patterns are based include Unbundling,
the Long Tail, Multi-Sided Platforms, FREE, and Open Business Models.
New patterns based on other business concepts will certainly emerge
over time.
Our goal in defining and describing these business model patterns is
to recast well-known business concepts in a standardized format—the
Business Model Canvas—so that they are immediately useful in your
own work around business model design or invention.
Patterns
56 Unbundling Business
Models
66 The Long Tail
76 Multi-Sided Platforms
88 FREE as a Business Model
108 Open Business Models
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Un-
Bundling
Business
Models
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The concept of the “unbundled” corpora-
tion holds that there are three fundamentally
diΩerent types of businesses: Customer Rela-
tionship businesses, product innovation busi-
nesses, and infrastructure businesses. • Each
type has diΩerent 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-oΩs.
Def_Pattern No. 1
[ ref·er·ences ]
1 • “Unbundling the
Corporation.” Harvard
Business Review. Hagel,
John, Singer, Marc.
March–April 1999.
2 • The Discipline of Market
Leaders: Choose Your
Customers, Narrow Your
Focus, Dominate Your
Market. Treacy, Michael,
Wiersema, Fred. 1995.
[ ex·am·ples ]
mobile telecom industry,
private banking industry
bmgen_final.indd 57 6/15/10 5:33 PM
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58
John Hagel
and Marc Singer, who coined
the term “unbundled corporation,”
believe that companies are composed of three
very diΩerent types of businesses with diΩerent
economic, competitive, and cultural imperatives:
Customer Relationship businesses, product innovation
businesses, and infrastructure businesses. Similarly,
Treacy and Wiersema suggest that companies
should focus on one of three value disciplines:
operational excellence, product leader-
ship, or customer intimacy.
On the
following pages we
show how the idea of unbundling
applies to business models. In the fi rst
example, we describe the confl icts and
undesirable trade-oΩs created by a “bundled”
business model within the private banking
industry. In the second example we show
how mobile telecom operators are
unbundling and focusing on new
core businesses.
Bundled
Unbundling Unbundled!
1
3
2 Hagel and Singer
describe the role of Customer
Relationship businesses as fi nding and
acquiring customers and building relationships
with them. Similarly, the role of product innovation
businesses is to develop new and attractive products and
services, while the role of infrastructure businesses is to build
and manage platforms for high volume, repetitive tasks. Hagel
and Singer argue that companies should separate these
businesses and focus on only one of the three internally.
Because each type of business is driven by diΩerent
factors, they can confl ict with each other or
produce undesirable trade-oΩs within the
same organization.
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Product
Innovation
Customer Relationship
Management
Infrastructure
Management
E
co
no
m
ic
s Early market entry enables charging
premium prices and acquiring large
market share; speed is key
High cost of customer acquisition
makes it imperative to gain large wallet
share; economies of scope are key
High fixed costs make large volumes
essential to achieve low unit costs;
economies of scale are key
C
ul
tu
re
Battle for talent; low barriers to entry;
many small players thrive
Battle for scope; rapid consolidation;
a few big players dominate
Battle for scale; rapid consolidation;
a few big players dominate
C
om
pe
ti
ti
on
Employee centered; coddling the
creative stars
Highly service oriented; customer-
comes-first mentality
Cost focused; stresses standardization,
predictability, and eΩiciency
THREE CORE BUSINESS TYPES
Source: Hagel and Singer, 1999.
bmgen_final.indd 59 6/15/10 5:33 PM
Swiss private banking, the business of provid-
ing banking services to the very wealthy, was
long known as a sleepy, conservative industry.
Yet over the last decade the face of the Swiss
private banking industry changed consider-
ably. Traditionally, private banking institutions
were vertically integrated and performed tasks
ranging from wealth management to brokerage
to fi nancial product design. There were sound
reasons for this tight vertical integration. Out-
sourcing was costly, and private banks preferred
keeping everything in-house due to secrecy and
confi dentiality concerns.
But the environment changed. Secrecy
became less of an issue with the demise of the
mystique surrounding Swiss banking practices,
and outsourcing became attractive with the
breakup of the banking value chain due to the
emergence of specialty service providers such
as transaction banks and fi nancial product bou-
tiques. The former focus exclusively on handling
banking transactions, while the latter concen-
trate solely on designing new fi nancial products.
Zurich-based private banking institution
Maerki Baumann is an example of a bank that
has unbundled its business model. It spun oΩ its
transaction-oriented platform business into a
separate entity called Incore Bank, which oΩers
banking services to other banks and securities
dealers. Maerki Baumann now focuses solely
on building Customer Relationships and
advising clients.
On the other hand, Geneva-based Pictet,
the largest Swiss private bank, has preferred to
remain integrated. This 200-year-old institution
develops deep Customer Relationships, handles
many client transactions, and designs its own
fi nancial products. Though the bank has been
successful with this model, it has to carefully
manage trade-oΩs between three fundamentally
diΩerent types of businesses.
Private Banking:
Three Businesses in One
The fi gure opposite
depicts the traditional
private banking model,
describes trade-oΩs,
and unbundles it into
three basic businesses:
relationship management,
product innovation,
and infrastructure
management.
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61
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Trade Offs
1 The bank serves two diΩerent markets with
very diΩerent dynamics. Advising the wealthy
is a long-term, relationship-based business.
Selling fi nancial products to private banks is
a dynamic, fast-changing business.
2 The bank aims to sell its products to
competing banks in order to increase
revenues—but this creates a confl ict of interest.
3 The bank’s product division pressures advi-
sors to sell the bank’s own products to clients.
This confl icts with client interest in neutral
advice. Clients want to invest in the best
products on the market, regardless of origin.
4 The cost- and eΩiciency-focused transaction
platform business confl icts with the remuneration-
intensive advisory and fi nancial products business,
which needs to attract costly talent.
5 The transaction platform business requires
scale to drive down costs, which is diΩicult to
achieve within a single bank.
6 The product innovation business is driven
by speed and quick market entry, which is at
odds with the long-term business of advising
the wealthy.
other product
providers
advise
product r&d
marketing
platform
management custom-tailored
wealth manage-
ment services
fi nancial
products
transaction
management
intimate
personal
relationship
key account
management
wealthy
individuals
& families
private banks
private banks
independent
fi nancial
advisors
brand/trust
product ip
transaction
platform
personal
networks
sales force
transaction
platform
platform management
hr: r&d
hr: private bankers
management & advisory fees
product & performance fees
transaction fees
The Private Banking Model
• Relationship
Business
• Product Innovation
Business
• Infrastructure
Business
1
2
34
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Unbundling the
Mobile Telco
Mobile telecommunication fi rms have started
unbundling their businesses. Traditionally they
competed on network quality, but now they are
striking network sharing deals with competitors
or outsourcing network operations altogether
to equipment manufacturers. Why? Because
they realize that their key asset is no longer the
network—it is their brand and their Customer
Relationships.
telecom
equipment
suppliers
network
maintenance
services
provisioning
marketing voice
data
content
acquisition
retention
installed
customer base
network
brand
customer
base
retail
network maintenance
marketing
voice
data
service revenues
Product Innovation
Infrastructure Management
Customer Relationship
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63
Equipment Manufacturers
Telcos such as France Telecom, KPN, and Vodafone have outsourced operation
and maintenance of some of their networks to equipment manufacturers such
as Nokia Siemens Networks, Alcatel-Lucent, and Ericsson. Equipment manufac-
turers can run the networks at lower cost because they service several telcos at
a time and thus benefi t from economies of scale.
Unbundled Telco
After unbundling its infrastructure business, a telco can sharpen its focus on
branding and segmenting customers and services. Customer relationships
comprise its key asset and its core business. By concentrating on customers
and increasing share of wallet with current subscribers, it can leverage invest-
ments made over the years acquiring and retaining customers. One of the fi rst
mobile telcos to pursue strategic unbundling was Bharti Airtel, now one of
India’s leading telcos. It outsourced network operations to Ericsson and Nokia
Siemens Networks and IT infrastructure to IBM, allowing the company to focus
on its core competency: building Customer Relationships.
Content Providers
For product and service innovation, the unbundled telco can turn to smaller,
creative fi rms. Innovation requires creative talent, which smaller and more
dynamic organizations typically do a better job of attracting. Telcos work
with multiple third-parties that assure a constant supply of new technologies,
services, and media content such as mapping, games, video, and music. Two
examples are Mobilizy of Austria and Sweden’s tat. Mobilizy focuses on
location-based service solutions for smartphones (it developed a popular mobile
travel guide), and tat concentrates on creating advanced mobile user interfaces.
r&d
new
products
& services
telcos
intel-
lectual
property
licensing fees
network
operators
voice
data
content
acquisition
retention
installed
customer
base
brand
customer
base
retail
marketing service revenues
network
maintenance
services
provisioning network
infrastruc-
ture
operation &
maintenance
telcos
network
economies of scale
Customer Relationship
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64
Unbundled
Patterns
µ3
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KP
C$
VP CR
CH
CS
KP KA
KR
R$
C$
Everything in this model is
tailored to understanding
and serving customers, or
building strong Customer
Relationships
key assets and resources
are the customer base and
subscriber trust acquired
over time
Product and service innova-
tion, infrastructure acquired
from third parties
This model aims at generating
revenues with a broad scope
of products built upon customer
trust—the goal is to win a large
“share of wallet”
Customer acquisition and
retention comprise main
costs, which include brand-
ing and marketing expenses
pa
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VP CR
CH
CSKA
KR
R$
Products and services
can be brought to market
directly, but are usually
delivered through B2B
intermediaries focused on
customer relationships
High cost base due to the
battle over creative talent,
the key resource in this
model
activity is focused on lever-
aging research and develop-
ment to bring new products
and services to market
Services are usually deliv-
ered to business customers
The activities and oΩer
are focused on delivering
infrastructure services
revenues are based on low
margins and high volume
Platform is characterized by
high fi xed costs, which are
leveraged through scale and
large volume
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VP CR
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R$C$
High premium chargeable
because of novelty factor
bmgen_final.indd 65 6/15/10 5:35 PM
The
Long
Tail
bmgen_final.indd 66 6/15/10 5:35 PM
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t
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a
il
long tail business models are about selling less
of more: They focus on oΩering 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 plat-
forms to make niche content readily available
to interested buyers.
[ ref·er·ences ]
1 • The Long Tail: Why
the Future of Business
Is Selling Less of More.
Anderson, Chris. 2006.
2 • “The Long Tail.” Wired
Magazine. Anderson,
Chris. October 2004.
[ ex·am·ples ]
Netflix, eBay, YouTube,
Facebook, Lulu.com
Def_Pattern No. 2
bmgen_final.indd 67 6/15/10 5:35 PM
The
Long
Tail
concept
was coined by
Chris Anderson
to describe a shift in
the media business from
selling a small number of “hit”
items in large volumes toward
selling a very large number of niche
items, each in relatively small quantities.
Anderson described how many infrequent sales
can produce aggregate revenues equivalent to or
even exceeding revenues produced by focusing on
“hit” products.
Anderson believes three economic triggers gave
rise to this phenomenon in the media industry:
1. Democratization of tools of production: Falling
technology costs gave individuals access to tools
that were prohibitively expensive just a few years
ago. Millions of passionate amateurs can now
record music, produce short fi lms, and design
simple
software
with professional
results.
2. Democratization of distribution: The Internet
has made digital content distribution a commod-
ity, and dramatically lowered inventory, commu-
nications, 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 content
is fi nding interested potential buyers. Powerful
search and recommendation engines, user ratings,
and communities of interest have made this
much easier.
#
of
S
al
es
TOP
20%
Focus on a small
number of products,
each selling in high volume
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69
Anderson’s research focuses primarily on the media
industry. For example, he showed how online video
rental company Netfl ix moved toward licensing a
large number of niche movies. While each niche
movie is rented relatively infrequently, aggregate
revenue from Netfl ix’s vast niche fi lm catalog rivals
that from the rental of blockbuster movies.
But Anderson demonstrates that the Long Tail
concept applies outside the media industry as well.
The success of online auction site eBay is based on
a huge army of auctioneers selling and buying small
quantities of “non-hit” items.
LONG TAIL Focus on a large number of products, each selling in low volumes
# of Products
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The Transformation of the
Book Publishing Industry
Old Model
We’ve all heard about aspiring authors who carefully craft and submit
manuscripts to publishing houses in the hope of seeing their work in
print—and face constant rejection. This stereotypical image of publishers
and authors holds much truth. The traditional book publishing model
is built on a process of selection whereby publishers screen many authors
and manuscripts and select those that seem most likely to achieve mini-
mum sales targets. Less promising authors and their titles are rejected
because it would be unprofi table to copyedit, design, print, and promote
books that sell poorly. Publishers are most interested in books they can
print in quantity for sale to large audiences.
–
content
acquisition
publishing
sales broad
content
(ideally
“hits”)
–
broad
audience
publishing
knowledge
content
retail
network
publishing / marketing wholesale revenues
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71
A New Model
Lulu.com turned the traditional bestseller-centric publishing model on
its head by enabling anyone to publish. Lulu.com’s business model is
based on helping niche and amateur authors bring their work to market.
It eliminates traditional entry barriers by providing authors the tools to
craft, print, and distribute their work through an online marketplace. This
contrasts strongly with the traditional model of selecting “market-worthy”
work. In fact, the more authors Lulu.com attracts, the more it succeeds,
because authors become customers. In a nutshell, Lulu.com is a multi-
sided platform (see p. 76) that serves and connects authors and readers
with a Long Tail of user-generated niche content. Thousands of authors
use Lulu.com’s self-service tools to publish and sell their books. This
works because books are printed only in response to actual orders. The
failure of a particular title to sell is irrelevant to Lulu.com, because such
a failure incurs no costs.
–
platform
development
logistics self-publish-
ing services
marketplace
for niche
content
communities
of interest
online
profi le niche
authors
niche
audiences
platform
print-on-
demand
infrastruc-
ture
lulu.com
platform management
& development
sales commissions (low)
publishing service fees
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72
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The Danish toy company LEGO started manu-
facturing its now famous interlocking bricks
in 1949. Generations of children have played
with them, and LEGO has released thousands
of kits around a variety of themes, including
space stations, pirates, and the Middle Ages. But
over time, intensifying competition in the toy
industry forced LEGO to seek innovative new
paths to growth. It started licensing the rights
to use characters from blockbuster movies such
as Star Wars, Batman, and Indiana Jones. While
such licensing is expensive, it proved to be an
impressive revenue generator.
In 2005 LEGO started experimenting with
user-generated content. It introduced LEGO
Factory, which allows customers to assemble
their very own LEGO kits and order them
online. Using software called LEGO Digital
Designer, customers can invent and design their
own buildings, vehicles, themes, and characters,
choosing from thousands of components and
dozens of colors. Customers can even design the
box containing the customized kit. With LEGO
Factory, LEGO turned passive users into active
participants in the LEGO design experience.
This requires transforming the supply chain
infrastructure, and because of low volumes
LEGO has not yet fully adapted its support
infrastructure to the new LEGO Factory model.
Instead, it simply tweaked existing resources
and activities.
In terms of a business model, though, LEGO
took a step beyond mass customization by enter-
ing Long Tail territory. In addition to helping
users design their own LEGO sets, LEGO Fac-
tory now sells user-designed sets online. Some
sell well; some sell poorly or not at all. What’s
important for LEGO is that the user-designed
sets expand a product line previously focused
on a limited number of best-selling kits. Today
this aspect of LEGO’s business accounts for only
a small portion of total revenue, but it is a fi rst
step towards implementing a Long Tail model
as a complement—or even alternative—to a
traditional mass-market model.
LEGO®’s New Long Tail
Customers who build
new LEGO designs and
post them online become
key partners generating
content and value
LEGO has to provide
and manage the
platform and logistics
that allow packaging
and delivery of custom-
made LEGO sets
LEGO Factory substan-
tially expands the scope
of the oΩ-the-shelf
kit oΩering by giving
LEGO fans the tools to
build, showcase, and
sell their own custom-
designed kits
LEGO Factory builds a
Long Tail community
around customers who
are truly interested in
niche content and want
to go beyond oΩ-the-
shelf retail kits
Thousands of new,
customer-designed kits
perfectly complement
LEGO’s standard sets
of blocks. LEGO Factory
connects customers
who create customized
designs with other cus-
tomers, thus becoming
a customer match-
making platform and
increasing sales
LEGO has not yet fully
adapted its resources
and activities, which are
optimized primarily for
the mass market
LEGO Factory’s existence
depends heavily on the
Web channel
LEGO Factory leverages production and logistics costs already
incurred by its traditional retail model
LEGO Factory aims to generate small revenues from a large number
of customer-designed items. This represents a valuable addition to
traditional high-volume retail revenues
LEGO
+
LEGO users can make
their own designs
and order them online
=
LEGO Factory
+
LEGO allows users
to post and sell their
designs online
=
LEGO Users Catalog
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73
Customers who build
new LEGO designs and
post them online become
key partners generating
content and value
LEGO has to provide
and manage the
platform and logistics
that allow packaging
and delivery of custom-
made LEGO sets
LEGO Factory substan-
tially expands the scope
of the oΩ-the-shelf
kit oΩering by giving
LEGO fans the tools to
build, showcase, and
sell their own custom-
designed kits
LEGO Factory builds a
Long Tail community
around customers who
are truly interested in
niche content and want
to go beyond oΩ-the-
shelf retail kits
Thousands of new,
customer-designed kits
perfectly complement
LEGO’s standard sets
of blocks. LEGO Factory
connects customers
who create customized
designs with other cus-
tomers, thus becoming
a customer match-
making platform and
increasing sales
LEGO has not yet fully
adapted its resources
and activities, which are
optimized primarily for
the mass market
LEGO Factory’s existence
depends heavily on the
Web channel
LEGO Factory leverages production and logistics costs already
incurred by its traditional retail model
LEGO Factory aims to generate small revenues from a large number
of customer-designed items. This represents a valuable addition to
traditional high-volume retail revenues
VP CR
CH
CSKP KA
KR
R$C$
LEGO Factory: Customer-Designed Kits
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Long Tail
Pattern
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VP CR
CH
CSKP KA
KR
R$C$
The value proposition of
a Long Tail business model
is characterized by oΩering
a wide scope of “non-hit”
items that may co-exist
with “hit” products. Long
Tail business models may
also facilitate and build on
user-generated content.
This model is based on
aggregating small revenues
from a large number of
items. revenue streams
vary; they may come from
advertising, product sales,
or subscriptions.
The main costs incurred
cover platform development
and maintenance
The key resource is the
platform; key activities
include platform develop-
ment and maintenance and
niche content acquisition
and production.
Niche content providers
(professional and/or
user-generated) are the
key partners in this pattern.
A Long Tail business model
can serve both profes-
sional and amateur content
producers, and may create
a multi-sided platform (see
p. 76) catering to users and
producers alike.
Long Tail business models
focus on niche customers.
Long Tail business models
usually rely on the Internet
as a customer relationship
and/or transaction channel.
bmgen_final.indd 75 6/15/10 5:35 PM
Multi-
Sided
Platforms
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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 diΩerent groups. • A multi-sided platform
grows in value to the extent that it attracts
more users, a phenomenon known as the
network eΩect.
[ ref·er·ences ]
1 • “Strategies for Two-Sided
Markets.” Harvard Busi-
ness Review. Eisenmann,
Parker, Van Alstyne.
October 2006.
2 • Invisible Engines: How
Software Platforms Drive
Innovation and Transform
Industries. Evans, Hagiu,
Schmalensee. 2006.
3 • “Managing the Maze
of Multisided Markets.”
Strategy & Business.
Evans, David. Fall 2003.
[ ex·am·ples ]
Visa, Google, eBay,
Microsoft Windows,
Financial Times
Def_Pattern No. 3
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Multi-sided platforms, known by economists as multi-
sided markets, are an important business phenomenon.
They have existed for a long time, but proliferated with
the rise of information technology. The Visa credit card,
the Microsoft Windows operating system, the Financial
Times, Google, the Wii game console, and Facebook are
just a few examples of successful multi-sided platforms.
We address them here because they represent an
increasingly important business model pattern.
What exactly are multi-sided platforms? They are
platforms that bring together two or more distinct but
interdependent groups of customers. They create value
as intermediaries by connecting these groups. Credit
cards, for example, link merchants with cardholders;
computer operating systems link hardware manufac-
turers, application developers, and users; newspapers
link readers and advertisers; video gaming consoles
link game developers with players. The key is that the
platform must attract and serve all groups simultane-
ously in order to create value. The platform’s value for
a particular user group depends substantially on the
number of users on the platform’s “other sides.” A video
game console will only attract buyers if enough games
are available for the platform. On the other hand, game
developers will develop games for a new video console
only if a substantial number of gamers already use it.
Hence multi-sided platforms often face a “chicken and
egg” dilemma.
One way multi-sided platforms solve this problem is by
subsidizing a Customer Segment. Though a platform
operator incurs costs by serving all customer groups, it
often decides to lure one segment to the platform with
an inexpensive or free Value Proposition in order to
subsequently attract users of the platform’s “other side.”
One diΩiculty multi-sided platform operators face is
understanding which side to subsidize and how to price
correctly to attract customers.
Customer
Segment A
Segments ≥ 2
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One example is Metro, the free daily newspaper that
originated in Stockholm and can now be found in
many large cities worldwide. It launched in 1995 and
immediately attracted a large readership because it
was distributed free of charge to urban commuters
in train and bus stations throughout Stockholm. This
allowed it to attract advertisers and rapidly become
profi table. Another example is Microsoft, which gave
its Windows software development kit (SDK) away
for free to encourage development of new applications
for its operating system. The larger number of applica-
tions attracted more users to the Windows platform
and increased Microsoft’s revenues. Sony’s Playstation
3 game console, on the other hand, is an example of
a multi-sided platform strategy that backfi red. Sony
subsidized each console purchased in hopes of later
collecting more game royalties. This strategy performed
poorly because fewer Playstation 3 games sold than
Sony initially estimated.
Operators of multi-sided platforms must ask them-
selves several key questions: Can we attract suΩicient
numbers of customers for each side of the platform?
Which side is more price sensitive? Can that side
be enticed by a subsidized oΩer? Will the other side
of the platform generate suΩicient revenues to cover
the subsidies?
The following pages outline three examples of multi-
sided platform patterns. First, we sketch Google’s
multi-sided platform business model. Then we show
how Nintendo, Sony, and Microsoft compete with
slightly diΩerent multi-sided platform patterns. Finally,
we describe how Apple has slowly evolved into an
operator of a powerful multi-sided platform.
Segment B
FA
CILIT
ATE
FA
CILIT
ATE
FA
CILIT
ATE
FA
CILIT
ATE
FA
CILIT
ATE
FA
CILIT
ATE
FA
CILIT
ATE
FA
CILIT
ATE
FA
CILIT
ATE
FA
CILIT
ATE
FA
CILIT
ATE
FA
CILIT
ATE
INTE
RAC
TION
Segment NSegment NSegment N
etc.
etc.
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The heart of Google’s business model is its Value Proposition of providing
extremely targeted text advertising globally over the Web. Through a service
called AdWords, advertisers can publish advertisements and sponsored links
on Google’s search pages (and on an aΩiliated content network as we will
later see). The ads are displayed alongside search results when people use
the Google search engine. Google ensures that only ads relevant to the search
term are displayed. The service is attractive to advertisers because it allows
them to tailor online campaigns to specifi c searches and particular demo-
graphic targets. The model only works, though, if many people use Google’s
search engine. The more people Google reaches, the more ads it can display
and the greater the value created for advertisers.
Google’s Value Proposition to advertisers depends heavily on the number of
customers it attracts to its Web site. So Google caters to this second group
of consumer customers with a powerful search engine and a growing num-
ber of tools such as Gmail (Web based e-mail), Google maps, and Picasa (an
online photo album) among others. To extend its reach even further, Google
designed a third service that enables its ads to be displayed on other, non-
Google Web sites. This service, called AdSense, allows third parties to earn
a portion of Google’s advertising revenue by showing Google ads on their
own sites. AdSense automatically analyzes a participating Web site’s content
and displays relevant text and image ads to visitors. The Value Proposition
to these third party Web site owners, Google’s third Customer Segment, is to
enable them to earn money from their content.
Google’s Business Model
targeted
ads advertisers
targeted ads
free search
monetizing
content
advertisers
web surfers
content
creators
VP VPCR CR
CH CH
CS CSKP KPKA KA
KR KR
R$ R$C$ C$
Google oΩers distinct
Value Propositions to
three interdependent
Customer Segments
targeted ads advertiserstargeted ads advertisers
free search web surfersfree search web surfers
content creators
monetizing
content
content
creators
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platform
management,
managing
services,
expanding
reach
targeted ads
free search
monetizing
content
advertisers
web surfers
content
owners
search
platform
platform costs
keyword auctions
free
KA VP CR
CH
CSKP
KR
R$C$
targeted ads
content
owners
content
web surfers
content
advertisers
content
R$
monetizing
content
targeted ads
free search
monetizing
targeted adstargeted ads
keyword auctions
free search
monetizing
content
free search
advertisers
web surfers
content
owners
keyword auctions
advertisers
keyword auctions
As a multi-sided platform Google has a very distinct revenue model. It makes
money from one Customer Segment, advertisers, while subsidizing free
oΩers to two other segments: Web surfers and content owners. This is logi-
cal because the more ads it displays to Web surfers, the more it earns from
advertisers. Increased advertising earnings, in turn, motivates even more
content owners to become AdSense partners. Advertisers don’t directly buy
advertising space from Google. They bid on ad-related keywords associated
with either search terms or content on third party Web sites. The bidding
occurs through an AdWords auction service: the more popular a keyword,
the more an advertiser has to pay for it. The substantial revenue that Google
earns from AdWords allows it to continuously improve its free oΩers to
search engine and AdSense users.
Google’s Key Resource is its search platform, which powers three diΩerent
services: Web search (Google.com), advertising (AdWords), and third-party
content monetization (AdSense). These services are based on highly complex
proprietary search and matchmaking algorithms supported by an extensive
IT infrastructure. Google’s three Key Activities can be defi ned as follows: (1)
building and maintaining the search infrastructure, (2) managing the three
main services, and (3) promoting the platform to new users, content owners,
and advertisers.
targeted ads
free search
monetizing
content
advertisers
web surfers
content
owners
keyword auctions
free
VP CR
CH
CSKP KA
KR
R$
targeted ads
content
owners
content
web surfers
content
advertisers
content
R$
monetizing
content
targeted ads
free search
monetizing
targeted adstargeted ads
keyword auctions
free search
monetizing
content
free search
advertisers
web surfers
content
owners
keyword auctionskeyword auctions
Google has one main
Revenue Stream that
subsidizes other oΩers
(Revenue Stream is
replaced by “free”)
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Wii versus PSP/ Xbox
Same Pattern, DiΩerent Focus
PSP/Xbox Focus
Video game consoles, today a multi-billion dollar business, provide good
examples of double-sided platforms. On one hand, a console manufacturer
has to draw as many players as possible to attract game developers. On the
other hand, players only buy the hardware if there is a suΩicient number
of interesting games available for that console. In the game industry, this
has led to a fi erce battle between three main competitors and their respec-
tive devices: the Sony Playstation series, the Microsoft Xbox series, and
the Nintendo Wii. All three are based on double-sided platforms, but there
are substantial diΩerences between the Sony/Microsoft business model
and Nintendo’s approach, demonstrating that there is no “proven” solution
for a given market.
Sony and Microsoft dominated the game console market until Nin-
tendo’s Wii swept the sector with a fresh approach to technology and
an astonishingly diΩerent business model. Before launching the Wii,
Nintendo was spiraling downward, rapidly losing market share, and tee-
tering on the edge of bankruptcy. The Wii console changed all that and
catapulted the company to the market leader position.
Traditionally, video console manufacturers targeted avid gamers
and competed on console price and performance. For this audience of
“hardcore gamers” graphics and game quality and processor speed were
the main selection criteria. As a consequence, manufacturers developed
extremely sophisticated and expensive consoles and sold them at a loss
for years, subsidizing the hardware with two other revenue sources.
First, they developed and sold their own games for their own consoles.
Second, they earned royalties from third party developers who paid for
the right to create games for specifi c consoles. This is the typical pattern
of a double-sided platform business model: one side, the consumer, is
heavily subsidized to deliver as many consoles as possible to the market.
Money is then earned from the other side of the platform: game developers.
high per-
formance
console
console
audience
hardcore
gamers
game
developers
hardware
sales at a loss
royalties
VP CR
CH
CSKP KA
KR
R$C$
gamers
developers
hardware
sales at a loss
hardcore
gamersconsole
high per-
formance
console
sales at a loss
royalties
audience developers
hardware
sales at a loss
game
developers
sales at a loss
hardware
sales at a loss
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Same pattern, but
diΩerent business model:
Nintendo’s Wii
Wii Focus
Nintendo’s Wii changed all this. Like its competitors, the Wii is based on a
double-sided platform business, but with substantially diΩerent elements.
Nintendo aimed its consoles at the huge audience of casual gamers rather
than the smaller “traditional” market of avid gamers. It won the hearts
of casual gamers with relatively inexpensive machines equipped with a
special remote control device that allows players to control the action
with physical gestures. The novelty and fun of motion-controlled games
such as Wii Sports, Wii Music, and Wii Fit attracted enormous numbers
of casual gamers. This diΩerentiator is also the basis for the new type of
double-sided platform that Nintendo created.
Sony and Microsoft competed with costly, proprietary, state-of-the-art
technology aimed at avid gamers and subsidized it in order to gain market
share and keep hardware prices aΩordable. Nintendo, on the other hand,
focused on a market segment that was far less sensitive to technological
performance. Instead, it lured customers with its motion-controlled
“fun factor.” This was a much cheaper technological innovation compared
to new, more powerful chipsets. Thus, the Nintendo Wii was less costly
to produce, allowing the company to forego commercialization subsi-
dies. This is the main diΩerence between Nintendo and rivals Sony and
Microsoft: Nintendo earns money from both sides of its double-sided
Wii platform. It generates profi ts on each console sold to consumers and
pockets royalties from game developers.
To summarize, three interlinked business model factors explain the
commercial success of the Wii: (1) low-cost diΩerentiation of the prod-
uct (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.
“family”
console
access to
console
users &
cheap game
develop-
ment costs
casual
gamers
game
developers
profi table
hardware sales
royalties
VP CR
CH
CSKA
KR
R$
gamers
game
developers
casual
gamers
access to
profi table profi table
hardware sales
console
access to
develop-
ment costs
profi table
hardware sales
royalties
cheap game
develop-
profi table
hardware sales
game
developers
hardware saleshardware sales
KP
C$
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The evolution of Apple’s product line from the iPod to the iPhone high-
lights the company’s transition to a powerful platform business model
pattern. The iPod was initially a stand-alone device. The iPhone, on the
contrary, evolved into a powerful multi-sided platform for which Apple
controls third party applications through its App Store.
Apple’s Evolution into
a Platform Operator
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Apple introduced the iPod in 2001 as a stand-
alone product. Users could copy their CDs and
download music from the Internet onto the
device. The iPod represented a technology plat-
form for storing music from various sources. At
this point, though, Apple was not exploiting the
platform aspect of the iPod in its business model.
In 2003 Apple introduced the iTunes Music
Store, which was closely integrated with the
iPod. The store allowed users to buy and down-
load digital music in an extremely convenient
way. The store was Apple’s fi rst attempt at
exploiting platform effects. iTunes essentially
connected “music rightsholders” directly with
buyers. This strategy catapulted Apple to its
position today as the world’s largest online
music retailer.
In 2008 Apple consolidated its platform strat-
egy by launching its App Store for the highly
popular iPhone. The App Store allows users to
browse, buy, and download applications directly
from the iTunes Store and install them on their
iPhones. Application developers must channel
sales of all applications through the App Store,
with Apple collecting a 30 percent royalty on
each application sold.
Switch to multi-sided
platform business model
Consolidation of
platform business model
2001
ipod
2003
ipod & iTunes
2008
iphone & appstore
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Multi-Sided
Platform
Pattern
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VP CR
CH
CS
KP KA
KR
R$C$
The value proposition
usually creates value in
three main areas: First,
attracting user groups
(i.e. Customer Segments);
Second, matchmaking
between Customer Seg-
ments; Third, reducing costs
by channeling transactions
through the platform.
The main costs incurred
under this pattern relate to
maintaining and developing
the platform.
The key resource required
for this business model
pattern is the platform.
The three Key Activities are
usually platform manage-
ment, service provisioning,
and platform promotion.
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 can-
not exist without the others.
Each Customer Segment
produces a diΩerent
revenue stream. One or
more segments may enjoy
free oΩers 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.
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FREE as a
Business
Model
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free • In the free business model at least
one substantial Customer Segment is able to
continuously benefit from a free-of-charge
offer. • DiΩerent patterns make the free offer
possible. • Non-paying customers are financed
by another part of the business model or by
another Customer Segment.
[ ref·er·ences ]
1 • “Free! Why $0.00 is
the Future of Business.”
Wired Magazine.
Anderson, Chris.
February 2008.
2 • “How about Free? The
Price Point That Is Turn-
ing Industries on Their
Heads.” Knowledge@
Wharton. March 2009.
3 • Free: The Future of a
Radical Price. Anderson,
Chris. 2008.
[ ex·am·ples ]
Metro (free paper),
Flickr, Open Source,
Skype, Google, Free
Mobile Phones
Def_Pattern No. 4
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Receiving something free of charge has always
been an attractive Value Proposition. Any marketer or
economist will confirm that the demand generated at a price of zero
is many times higher than the demand generated at one cent or any other price
point. In recent years free offers have exploded, particularly over the Internet. The ques-
tion, of course, is how can you systematically offer something for free and still earn substantial
revenues? Part of the answer is that the cost of producing certain giveaways, such as online data storage
capacity, has fallen dramatically. Yet to make a profit, an organization offering free products or services must
still generate revenues somehow.
There are several patterns that make integrating free products and services into a business model possible. Some of the tra-
ditional FREE patterns are well known, such as advertising, which is based on the previously discussed pattern of multi-sided
platforms (see p. 76). Others, such as the so-called freemium model, which provides basic services free of charge and premium
services for a fee, have become popular in step with the increasing digitization of goods and services offered via the Web.
Chris Anderson, whose Long Tail concept we discussed previously (see p. 66), has helped the concept of FREE gain widespread
recognition. Anderson shows that the rise of new free-of-charge offers is closely related to the fundamentally different econom-
ics of digital products and services. For example, creating and recording a song costs an artist time and money, but the cost of
digitally replicating and distributing the work over the Internet is close to zero. Hence, an artist can promote and deliver music
to a global audience over the Web, as long as he or she finds other Revenue Streams, such as concerts and merchandis-
ing, to cover costs. Bands and artists who have experimented successfully with free music include Radiohead and Trent
Reznor of Nine Inch Nails.
In this section we look at three different patterns that make FREE a viable business model option. Each
has different underlying economics, but all share a common trait: at least one Customer Segment
continuously benefits from the free-of-charge offer. The three patterns are (1) free offer based
on multi-sided platforms (advertising-based), (2) free basic services with optional
premium services (the so-called “freemium” model), (3) and the “bait &
hook” model whereby a free or inexpensive initial offer lures
customers into repeat purchases.
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(How) can you set it free?
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Advertising is a well-established revenue source
that enables free offers. We recognize it on
television, radio, the Web, and in one of its most
sophisticated forms, in targeted Google ads.
In business model terms, FREE based on adver-
tising is a particular form of the multi-sided
platform pattern (see p. 76). One side of the
platform is designed to attract users with free
content, products, or services. Another side of
the platform generates revenue by selling space
to advertisers.
One striking example of this pattern is Metro,
the free newspaper that started in Stockholm
and is now available in dozens of cities around
the world. The genius of Metro lies in how it
modifi ed the traditional daily newspaper model.
First, it offered the paper for free. Second, it
focused on distributing in high-traffi c com-
muter zones and public transport networks by
hand and with self-service racks. This required
Metro to develop its own distribution network,
but enabled the company to quickly achieve
broad circulation. Third, it cut editorial costs to
produce a paper just good enough to entertain
younger commuters during their short rides
to and from work. Competitors using the same
model soon followed, but Metro kept them at
bay with a couple of smart moves. For example,
it controlled many of the news racks at train and
bus stations, forcing rivals to resort to costly
hand distribution in important areas.
Advertising: A Multi-Sided
Platform Model
Metro
distribution
agreements with
public transport
networks
write & produce
a daily paper
distribution ad space in high
circulation
free paper
free city-wide
commuter paper
acquisition
retention
advertisers
commuters
brand
distribution net-
work & logistics
ad sales force
public transport,
train stations,
bus stops
content, design & print
of a daily paper
distribution
free newspaper
fees for ad space in paper
VP CR
CH
CSKP KA
KR
R$C$
Assures high circulation
through free offer and by
focusing on distributing
in high-traffi c commuter
zones and public transport
networks
Minimizes costs by cutting
editorial team to produce
a daily paper just “good
enough” for a commute
read
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93
One industry crumbling under the impact of
FREE is newspaper publishing. Sandwiched
between freely available Internet content and
free newspapers, several traditional papers
have already fi led for bankruptcy. The U.S. news
industry reached a tipping point in 2008 when
the number of people obtaining news online for
free outstripped those paying for newspapers
or news magazines, according to a study by the
Pew Research Center.
Traditionally, newspapers and
magazines relied on revenues from three
sources: newsstand sales, subscription fees,
and advertising. The fi rst two are rapidly
declining and the third is not increasing
quickly enough. Though many newspapers
have increased online readership, they’ve
failed to achieve correspondingly greater
advertising revenues. Meanwhile, the high
fi xed costs that guarantee good journal-
ism—news gathering and editorial teams—
remained unchanged.
Several newspapers have experi-
mented with paid online subscriptions,
with mixed results. It is diffi cult to charge
for articles when readers can view similar con-
tent for free on Web sites such as CNN.com or
MSNBC.com. Few newspapers have succeeded
in motivating readers to pay for access to pre-
mium content online.
On the print side, traditional newspapers
are under attack from free publications such
as Metro. Though Metro offers a completely
different format and journalistic quality and
focuses primarily on young readers who previ-
ously ignored newspapers, it is ratcheting up
the pressure on fee-for-service news providers.
Charging money for news is an increasingly
diffi cult proposition.
Some news entrepreneurs are experiment-
ing with novel formats focused on the online
space. For example, news provider True/Slant
(trueslant.com) aggregates on one site the
work of over 60 journalists, each an expert in a
specifi c fi eld. The writers are paid a share of the
advertising and sponsorship revenues gener-
ated by True/Slant. For a fee, advertisers can
publish their own material in pages paralleling
the news content.
Mass � automatic ad $
A large number of users does not automati-
cally translate into an El Dorado of advertising
revenues, as the social networking service
Facebook has demonstrated. The company
claimed over 200 million active users as of May
2009, and said more than 100 million log on
to its site daily. Those fi gures make Facebook
the world’s largest social network. Yet users are
less responsive to Facebook advertising than
to traditional Web ads, according to industry
experts. While advertising is only one of several
potential Revenue Streams for Facebook, clearly
a mass of users does not guarantee huge adver-
tising revenues. At this writing, privately held
Facebook did not disclose revenue data.
ad space on
high traffi c
social network
free social
network
mass
customized
advertisers
global web
audience
ad sales force
facebook.com
free accounts
fees for ad space on facebook
Facebook
Newspapers:
Free or Not Free?
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Free Advertising:
Pattern of
Multi-Sided
Platforms
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VP CR
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CSKP KA
KR
R$C$
With the right product or
service and high traffi c,
the platform becomes
interesting to advertisers,
which in turn allows
charging fees to subsidize
free products and services.
Main costs relate to
developing and maintaining
the platform; traffi c-
generation and retention
costs may also arise.
Free products or services
generate high platform
traffi c and increase
attractiveness to advertisers.
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The term “freemium” was coined by Jarid
Lukin and popularized by venture capitalist
Fred Wilson on his blog. It stands for business
models, mainly Web-based, that blend free
basic services with paid premium services. The
freemium model is characterized by a large user
base benefi ting from a free, no-strings-attached
offer. Most of these users never become paying
customers; only a small portion, usually less
than 10 percent of all users, subscribe to the paid
premium services. This small base of paying
users subsidizes the free users. This is possible
because of the low marginal cost of serving addi-
tional free users. In a freemium model, the key
metrics to watch are (1) the average cost of serv-
ing a free user, and (2) the rates at which free
users convert to premium (paying) customers.
Flickr, the popular photo-sharing Web site
acquired by Yahoo! in 2005, provides a good
example of a freemium business model. Flickr
users can subscribe for free to a basic account
that enables them to upload and share images.
The free service has certain constraints, such as
limited storage space and a maximum number of
uploads per month. For a small annual fee users
can purchase a “pro” account and enjoy unlim-
ited uploads and storage space, plus additional
features.
Freemium: Get the Basics
for Free, Pay for More
yahoo!
platform
management
free basic photo
sharing
premium photo
sharing
mass customized
switching costs
casual users
high-volume
users
fl ickr platform
brand
fl ickr.com
yahoo.com
platform development
storage costs
free limited basic accounts
annual subscription pro account
Flickr
free limited basic accounts
VP CR
CH
CSKP KA
KR
R$C$
Large base of basic
accounts for casual users
Small base of paying
“pro” users
Variable cost
depending on number
of photos stored
Fixed and sunk costs
related to platform
development
free limited basic accountsfree limited basic accounts
sharing
premium photo
R$
free basic photo
sharing
annual subscription pro account
high-volume
users
annual subscription pro accountannual subscription pro accountannual subscription pro account
premium photo
sharing
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97
Business models in the enterprise software
industry are usually characterized by two traits:
First, the high fi xed cost of supporting an army
of expert software developers who build the
product; Second, a revenue model based on
selling multiple per-user licenses and regular
upgrades of the software.
Red Hat, a U.S. software company, turned
this model upside down. Rather than creating
software from scratch, it builds its product on
top of so-called open source software developed
voluntarily by thousands of software engineers
around the world. Red Hat understood that
companies were interested in robust, licens-
ing fee-free open source software, but were
reluctant to adopt it due to concerns that no
single entity was legally responsible for provid-
ing and maintaining it. Red Hat fi lled this gap by
offering stable, tested, service-ready versions of
freely available open source software, particu-
larly Linux.
Each Red Hat release is supported for seven
years. Customers benefi t from this approach
because it allows them to enjoy the cost and
stability advantages of open source software,
while protecting them from the uncertainties
surrounding a product not offi cially “owned” by
anyone. Red Hat benefi ts because its software
kernel is continuously improved by the open
source community free of charge. This substan-
tially reduces Red Hat’s development costs.
Naturally, Red Hat also has to earn money.
So rather than charging clients for each major
new release—the traditional software revenue
model—it sells subscriptions. For an annual
fee, each client enjoys continuous access to
the latest Red Hat release, unlimited service
support, and the security of interacting with
the legal owner of the product. Companies are
willing to pay for these benefi ts despite the
free availability of many versions of Linux and
other open source software.
Open Source:
Freemium with a Twist
(linux) open
source
development
community
software
support services
software
versioning &
testing
free (linux) open
source based
software
continuously
upgraded,
serviced, &
guaranteed
software
self-service &
direct access to
engineers self-service
users
enterprise
clients
red hat (linux)
software
redhat.com
red hat global
branches
cost structure contains
elements of a service company
professional subscription
free software
Red Hat
software
professional subscriptionprofessional subscription
VP CR
CH
CSKP KA
KR
R$C$
clients
professional subscription
enterprise
clients
professional subscriptionprofessional subscriptionprofessional subscription
R$
professional subscriptionprofessional subscription
users
free software
self-service
users
free software
continuously
free softwarefree softwarefree software
continuously
upgraded,
serviced, &
guaranteed
software
free (linux) open
source based
software
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Skype offers an intriguing example of a free-
mium pattern that disrupted the telecommuni-
cations sector by enabling free calling services
via the Internet. Skype developed software by
the same name that, when installed on comput-
ers or smartphones, enables users to make calls
from one device to another free of charge.
Skype can offer this because its Cost Structure
is completely different from that of a telecom
carrier. Free calls are fully routed through
the Internet based on so-called peer-to-peer
technology that employs user hardware and
the Internet as communications infrastructure.
Hence, Skype does not have to manage its own
network like a telco and incurs only minor costs
to support additional users. Skype requires very
little of its own infrastructure besides backend
software and the servers hosting user accounts.
Users pay only for calling landlines and
mobile phones through a premium service called
SkypeOut, which offers very low rates. In fact,
users are charged only slightly more than the
termination costs that Skype itself incurs for
calls routed through wholesale carriers such as
iBasis and Level 3, which handle the company’s
network traffi c.
Skype claims it has over 400 million reg-
istered users who have made more than 100
billion free calls since the company was founded
in 2004. Skype reported revenues of U.S. $550
million in 2008, though the company and its
owner, eBay, do not release detailed fi nancial
data including information on profi tability. We
may soon know more as eBay has announced
plans to list Skype through an initial public
offering (IPO).
Skype
payment
providers
distribution
partners
telco partners
software
development
free internet &
video calling
cheap calls to
phones
(skypeout)
mass customized
web users
globally
people who want
to call phones
software
developers
software
skype.com
headset
partnerships
software development
complaint management
free
skypeout pre-paid or subscription
hardware sales
Skype
VP CR
CH
CSKP KA
KR
R$C$
Over 90 percent of Skype
users subscribe to the free
service
Paid SkypeOut calls
account for less than
10 percent of total usage
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99
Skype is a voice calling
services company operat-
ing under the economics
of a software company
Skype disrupted the telecommunications
industry and helped drive voice communica-
tion costs close to zero. Telecom operators
initially didn’t understand why Skype would
offer calls for free and didn’t take the company
seriously. What’s more, only a tiny fraction
of the traditional carriers’ customers used
Skype. But over time more and more customers
decided to make their international calls with
Skype, eating into one of the most lucrative
carrier revenue sources. This pattern, typical of
a disruptive business model, severely affected
the traditional voice communication business,
and today Skype is the world’s largest provider
of cross-border voice communication services,
according to telecommunications research
fi rm Telegeography.
maximum
outsourcing
software devel-
opment and no
network mainte-
nance
roughly similar
voice oΩer
automated mass
customization
global reach
without the
limitations of a
network
no
infrastructure
software
distribution 100%
low cost chan-
nels
cost structure of a software company
90% free usage
10% paying
Skype versus Telco
Giving away software
and allowing customers
to make free Skype-to-
Skype calls costs the
company little
5+ years old
400 million+ users
100 billion+ free
calls generated
2008 revenues of
U.S. $550 million
VP CR
CH
CSKP KA
KR
R$C$
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In the freemium model a small base of customers
paying for a premium service subsidizes a large
base of non-paying customers. The insurance
model is actually the opposite—it’s the freemium
model turned on its head. In the insurance
model, a large base of customers pay small regu-
lar fees to protect themselves from unlikely—
but fi nancially devastating—events. In short, a
large base of paying customers subsidizes a small
group of people with actual claims—but any
one of the paying customers could at any time
become part of the benefi ciary group.
Let’s look at REGA as an example. REGA
is a Swiss non-profi t organization that uses
helicopters and airplanes to transport medical
staff to the scene of accidents, notably in the
mountainous areas of Switzerland. Over two
million so-called “patrons” fi nance the organiza-
tion. In return, patrons are exempt from paying
any costs arising from being rescued by REGA.
Mountain rescue operations can be extremely
expensive, so REGA patrons fi nd the service
attractive in protecting them against the high
cost of accidents during skiing vacations, sum-
mer hikes, or mountain drives.
The Insurance Model:
Freemium Upside Down
insurance
companies
sponsoring
patrons
rescue
operations
rescue
“insurance”
rescue
operations
patron
membership
sponsoring
patrons
other rescue
victims
fl eet of
helicopters
and planes
web
publications
fl eet of helicopters & planes
rescuing
sponsorship fee
payments from insurance companies
free rescue operations
REGA
fl eet of helicopters & planes
VP CR
CH
CSKP KA
KR
R$C$
Many paying users
cover the costs of a
few claims
payments from insurance companies
other rescue
victims
payments from insurance companiespayments from insurance companies
R$
payments from insurance companiespayments from insurance companies
other rescue
victims
sponsorship fee
sponsoring
patrons
operations
sponsorship feeR$ sponsorship feesponsorship feesponsorship feesponsorship fee
rescue
operations
free rescue operationsfree rescue operations
“insurance”
other rescue
victims
payments from insurance companies
free rescue operations
payments from insurance companies
patrons
free rescue operationsfree rescue operations
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101
“The demand you get at a price
of zero is many times higher
than the demand you get at a
very low price.”
—— Kartik Hosanagar
Assistant Professor, Wharton
“Google’s not a real company.
It’s a house of cards.”
—— Steve Ballmer
CEO, Microsoft
“Every industry that becomes
digital eventually becomes free.”
—— Chris Anderson
Editor-in-Chief, Wired Magazine
“We can no longer stand by
and watch others walk oΩ with
our work under misguided
legal theories.”
—— Dean Singleton
Chairman, Associated Press
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Freemium
Pattern
The platform is the most
important asset in the
freemium pattern, because
it allows free basic services
to be offered at low
marginal cost.
VP CR
CH
CSKP KA
KR
R$C$
The cost structure of this
pattern is tripartite: usually with
substantial fi xed costs, very low
marginal costs for services to
free accounts, and (separate)
costs for premium accounts
customer relationship
must be automated and low
cost in order to handle large
numbers of free users.
An important metric to
follow is the rate at which
free accounts convert to
premium accounts
users
describes how many users
a company with a freemium
business model can attract
fi xed costs a company
incurs to run its business
model (e.g. systems costs)
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cost of service
indicates the average cost
the company incurs to deliver
a free or premium service to
a free or premium user.
The freemium model is
characterized by a large
base of free service users
subsidized by a small base
of paying users.
Users enjoy a free basic
service and can pay for a
premium service that offers
additional benefits.
percent of premium & free users
specifies how many of all users
are premium paying users or
free users.
growth & churn rate
specifies how many users
defect/respectively join
the user base.
price of premium service
indicates the average cost
the company incurs to
deliver a premium service
to a premium paying user.
customer acquisition costs
total expenses a company
incurs to acquire new users.
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“Bait & hook” refers to a business model pattern
characterized by an attractive, inexpensive, or
free initial offer that encourages continuing
future purchases of related products or services.
This pattern is also known as the “loss leader”
or “razor & blades” model. “Loss leader” refers
to a subsidized, even money-losing initial offer
with the intention of generating profi ts from
subsequent purchases. “Razor & blades” refers
to a business model popularized by an American
businessman, King C. Gillette, inventor of the
disposable razor blade (see p. 105). We use the
term bait & hook pattern to describe the general
idea of luring customers with an initial offering,
while earning from follow-up sales.
The mobile telecommunications industry
provides a good illustration of the bait & hook
pattern with a free offer. It is now standard
practice for mobile network operators to offer
free telephone handsets bundled with service
subscriptions. Operators initially lose money
by giving away mobile phones for free, but
they easily cover the loss through subsequent
monthly service fees. Operators provide instant
gratifi cation with a free offer that later gener-
ates recurring income.
Bait & Hook
device
manufacturers
services
free phones
subscription
contractual
lock-in
customers
network
network
phones
services
n x monthly subscription
1 x free
Bait & Hook of Free Mobile Phones
n x monthly subscriptionn x monthly subscription
VP CR
CH
CSKP KA
KR
R$C$
n x monthly subscriptionn x monthly subscriptionn x monthly subscriptionn x monthly subscription
R$
n x monthly subscriptionn x monthly subscription
customerscustomers
1 x free
free phones
subscription
1 x free1 x free1 x free
free phones
subscription
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105
The form of the bait & hook pattern known as
the razor and blades model derives from the
way the fi rst disposable razors were sold. In
1904 King C. Gillette, who commercialized the
fi rst disposable razor blade system, decided to
sell razor handles at a steep discount or even
give them away with other products in order to
create demand for his disposable blades. Today
Gillette is still the preeminent brand in shaving
products. The key to this model is the close link
between the inexpensive or free initial product
and the follow-up item—usually disposable—on
which the company earns a high margin. Con-
trolling the “lock-in” is crucial to this pattern’s
success. Through blocking patents, Gillette
ensured that competitors couldn’t offer cheaper
blades for the Gillette razor handles. In fact,
today razors are among the world’s most heavily
patented consumer products, with more than
1,000 patents covering everything from lubricat-
ing strips to cartridge-loading systems.
This pattern is popular in the business world
and has been applied in many sectors, includ-
ing inkjet printers. Manufacturers such as HP,
Epson, and Canon typically sell printers at very
low prices, but they generate healthy margins on
subsequent sales of ink cartridges.
manufacturers
retailers
marketing
r&d
logistics razor handle
blades
built-in
“lock-in”
customers
brand
patents
retail
marketing
manufacturing
logistics, r&d
1 x handle purchase
frequent blade replacements
Razor & Blades : Gillette
VP CR
CH
CSKP KA
KR
R$C$
1 x handle purchase1 x handle purchase
frequent blade replacements
customerscustomers
1 x handle purchase
frequent blade replacements
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Bait & Hook
Pattern
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CSKP KA
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R$C$
Cheap or free “bait” lures
customers—and is closely
linked to a (disposable)
follow-up item or service.
Important cost structure
elements include subsidization
of the initial product and the
costs of producing follow-up
products or services.
Bait & hook patterns usually
require a strong brand.
The initial one-time pur-
chase generates little or no
revenue, but is made up for
through repeat follow-up
purchases of high-margin
products or services.
Focuses on delivery
of follow-up products
or services.
This pattern is characterized
by a tight link or “lock-in”
between the initial product
and the follow-up products
or services.
customers are attracted by
the instant gratifi cation of a
cheap or free initial product
or service.
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Open
Business
Models
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open business models can be used by compa-
nies to create and capture value by systemati-
cally collaborating with outside partners. • This
may happen from the “outside-in” by exploit-
ing external ideas within the firm, or from the
“inside-out” by providing external parties with
ideas or assets lying idle within the firm.
[ ref·er·ences ]
1 • Open Business Models:
How to Thrive in the New
Innovation Landscape.
Chesbrough, Henry.
2006.
2 • “The Era of Open
Innovation.” MIT Sloan
Management Review.
Chesbrough, Henry.
Nº 3, 2003.
[ ex·am·ples ]
P&G, GlaxoSmithKilne,
Innocentive
Def_Pattern No. 5
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Open innovation and open business models are two
terms coined by Henry Chesbrough. They refer to open-
ing up a company’s research process to outside parties.
Chesbrough argues that in a world characterized by
distributed knowledge, organizations can create more
value and better exploit their own research by integrating
outside knowledge, intellectual property, and products
into their innovation processes. In addition, Chesbrough
shows that products, technologies, knowledge, and
intellectual property lying idle inside a company can be
monetized by making them available to outside parties
through licensing, joint ventures, or spin-oΩs. Ches-
brough distinguishes between “outside-in” innovation
and “inside-out” innovation. “Outside-in” innovation
occurs when an organization brings external ideas,
technology, or intellectual property into its development
and commercialization processes. The table opposite
illustrates how companies increasingly rely on outside
sources of technology to strengthen their business
models. “Inside-out” innovation occurs when orga-
nizations license or sell their intellectual property or
technologies, particularly unused assets. In this section
we describe the business model patterns of fi rms that
practice open innovation.
External
Technology
Base
Technology
Base
Technology
Internal
Technology
Base
Technology
Base
Technology Our CURRENT
market
Our NEW
market
Other fi rm’s
market
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Closed Open
The smart people in our field work for us. We need to work with smart people both
inside and outside our company.
To profit from research and development
(R&D), we must discover it, develop it, and
ship it ourselves.
External R&D can create significant value;
internal R&D is needed to claim some por-
tion of that value.
If we conduct most of the best
research in the industry, we will win.
We don’t have to originate the research
to benefit from it.
If we create the most or the best ideas in
the industry, we will win.
If we make the best use of internal and
external ideas, we will win.
We should control our innovation
process, so that competitors don’t
profit from our ideas.
We should profit from others’ use of our
innovations, and we should buy others’
intellectual property (IP) whenever it
advances our own interests.
Source: Adapted from Chesbrough, 2003 and Wikipedia, 2009.
PRINCIPLES OF INNOVATION
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In June of 2000, amid a continuing slide in
Procter & Gamble’s share price, longtime P&G
executive A.G. Lafl ey got the call to become the
consumer product giant’s new CEO. To rejuve-
nate P&G, Lafl ey resolved to put innovation back
at the company’s core. But instead of boosting
R&D spending, he focused on structuring a
new innovation culture: one that moved from
an internally focused R&D approach to an open
R&D process. A key element was a “Connect &
Develop” strategy aimed at exploiting internal
research through outside partnerships. Lafl ey
set an ambitious goal: create 50 percent of P&G’s
innovations with outside partners at a time when
that fi gure was closer to 15 percent. The com-
pany surpassed that goal in 2007. Meanwhile,
R&D productivity had soared 85 percent, even
though R&D spending was only modestly higher
compared to when Lafl ey took over as CEO.
In order to link its internal resources and
R&D activities with the outside world, Procter
& Gamble built three “bridges” into its busi-
ness model: technology entrepreneurs, Internet
platforms, and retirees.
Procter & Gamble:
Connect & Develop
other
company’s ip
external
scientists
retired
scientists
internal r&d
internal r&d
leveraging internal r&d
technology
entrepreneurs
internet platforms
your-encore
1 Technology entrepreneurs are senior scien-
tists from P&G business units who systemati-
cally develop relationships with researchers
at universities and other companies. They also
act as “hunters” who scan the outside world
for solutions to internal P&G challenges.
2 Through Internet platforms, P&G connects
with expert problem-solvers around the world.
Platforms such as InnoCentives (see p. 114)
allow P&G to expose some of its research prob-
lems to non-P&G scientists around the globe.
Respondents earn cash prizes for developing
successful solutions.
3 P&G solicits knowledge from retirees
through YourEncore.com, a platform the com-
pany launched specifi cally to serve as an open
innovation “bridge” to the outside world.
Outside-In
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113
GlaxoSmithKline’s
Patent Pools
The inside-out approach to open innova-
tion ordinarily focuses on monetizing unused
internal assets, primarily patents and technol-
ogy. In the case of GlaxoSmithKline’s “patent
pool” research strategy, though, the motivation
was slightly diΩerent. The company’s goal was
to make drugs more accessible in the world’s
poorest countries and to facilitate research
into understudied diseases. One way to achieve
this was to place intellectual property rights
relevant to developing drugs for such diseases
into a patent pool open to exploration by other
researchers. Since pharmaceutical companies
focus mainly on developing blockbuster drugs,
intellectual property related to less-studied
diseases often lies idle. Patent pools aggregate
intellectual property from diΩerent rights-
holders and makes it more accessible. This helps
prevent R&D advances from being blocked by
a single rights-holder.
ip for
underserved
diseases
acquisition
retention
outside
researchers
patent pools
license fees
Inside-Out
Unused internal ideas,
R&D, and intellectual
property related to
diseases in poor nations
have substantial value
when “pooled”
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Companies seeking insights from external
researchers incur substantial costs when trying
to attract people or organizations with knowl-
edge that could solve their problems. On the
other hand, researchers who want to apply their
knowledge outside their own organizations
also incur search costs when seeking attractive
opportunities. That is where a company called
InnoCentive saw opportunity.
InnoCentive provides connections between
organizations with research problems to solve
and researchers from around the world who are
eager to solve challenging problems. Origi-
nally part of drug maker Eli Lilly, InnoCentive
now functions as an independent intermediary
listing non-profi ts, government agencies, and
commercial organizations such as Procter &
Gamble, Solvay, and the Rockefeller Founda-
tion. Companies who post their innovation
challenges on InnoCentive’s Web site are called
“seekers.” They reward successful problem-
solvers with cash prizes that can range from
$5,000 to $1,000,000. Scientists who attempt
to fi nd solutions to listed problems are called
“solvers.” InnoCentive’s Value Proposition lies
in aggregating and connecting “seekers” and
“solvers.” You may recognize these qualities
as characteristic of the multi-sided platform
business model pattern (see p. 76). Companies
with open business model patterns often build
on such platforms to reduce search costs.
The Connector:
Innocentive
major “seekers”
platform
management
acquire solvers
& seekers
access to a
broad network
of scientist
“solvers”
connect “seek-
ers” & “solvers”
access to
scientifi c
challenges with
cash rewards
online profi les
“seekers”
(company)
“solvers”
(scientists) innocentive
platform with
base of “solvers”
& “seekers”
innocentive.com
platform management
acquisition of “solvers” & “seekers”
free access to challenges
fee to list challenges to
solve commissions on awards
free access to challenges
“solvers”
(scientists)
free access to challengesfree access to challengesfree access to challengesfree access to challenges
“seekers”
fee to list challenges to
“seekers”
(company)
fee to list challenges to
solve commissions on awards
connect “seek-
ers” & “solvers”
challenges with
cash rewards
fee to list challenges to fee to list challenges to
solve commissions on awards
fee to list challenges to
solve commissions on awards
“solvers”
access to
scientifi c
challenges with
cash rewards
access to a
broad network
of scientist
“solvers””solvers”
Innocentive
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115
“Open Innovation is fundamen-
tally about operating in a world
of abundant knowledge, where
not all the smart people work
for you, so you better go find
them, connect to them, and
build upon what they can do.”
—— Henry Chesbrough
Executive Director, Center for Open Innovation
Haas School of Business, UC Berkeley
“Long known for a preference
to do everything in-house, we
began to seek out innovation
from any and all sources,
inside, outside the company.”
—— A.G. Lafl ey
Chairman & CEO, P&G
“Nestlé clearly recognizes
that to achieve its growth
objective it must extend
its internal capabilities
to establish a large number
of strategic partnering
relationships. It has embraced
open innovation and works
aggressively with strate-
gic partners to co-create
significant new market and
product opportunities.”
—— Helmut Traitler
Head of Innovation Partnerships, Nestlé
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VP CR
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CSKP KA
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C$
Outside-In
Pattern
It costs money to acquire
innovation from outside
sources. But by building on
externally-created knowl-
edge and advanced research
programs, a company can
shorten time-to-market and
increase its internal R&D
productivity.
Building on external knowl-
edge requires dedicated
activities that connect
external entities with inter-
nal business processes and
R&D groups.
external organizations,
sometimes from completely
diΩerent industries, may
be able to oΩer valuable
insights, knowledge,
patents, or ready-made
products to internal R&D
groups.
Taking advantage of outside
innovation requires specifi c
resources to build gateways
to external networks.
Established companies with
strong brands, strong Distribution
Channels, and strong Customer
Relationships are well suited to
an outside-in open business model.
They can leverage existing Customer
Relationships by building on
outside sources of innovation.
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VP
CR
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CS
KA
KR
R$
Organizations with
substantial internal R&D
operations typically possess
much unutilized knowledge,
technology, and intellectual
property. Due to sharp focus
on core businesses, some
of these otherwise valuable
intellectual assets sit idle.
Such businesses are good
candidates for an “inside-
out” open business model.
By enabling others to exploit
unused internal ideas,
a company adds “easy”
additional revenue streams.
Inside-Out
Pattern
Some R&D outputs that are
unusable internally—for
strategic or operational
reasons—may be of high
value to organizations in
other industries.
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Patterns
Overview Unbundling Business Models The Long Tail Multi-Sided Platforms FREE as a Business Model Open Business Models
context
(before)
An integrated model combines infrastructure
management, product innovation, and
Customer Relationships under one roof.
The Value Proposition targets only the most
profi table clients.
One Value Proposition targets one
Customer Segment.
A high-value, high-cost Value Proposition
is offered to paying customers only.
R&D Resources and Key Activities are
concentrated in-house:
• Ideas are invented “inside” only
• Results are exploited “inside” only
challenge Costs are too high.
Several confl icting organizational cultures
are combined in a single entity, resulting in
undesirable trade-offs.
Targeting less profi table segments with specifi c
Value Propositions is too costly.
Enterprise fails to acquire potential new cus-
tomers who are interested in gaining access to
a company’s existing customer base (e.g. game
developers who want to reach console users)
The high price dissuades customers. R&D is costly and/or productivity is falling.
solution
(after)
The business is unbundled into three separate
but complementary models dealing with
• Infrastructure management
• Product innovation
• Customer relationships
The new or additional Value Proposition targets
a large number of historically less profi table,
niche Customer Segments—which in aggregate
are profi table.
A Value Proposition “giving access” to a com-
pany’s existing Customer Segment is added
(e.g. a game console manufacturer provides
software developers with access to its users)
Several Value Propositions are offered to
different Customer Segments with different
Revenue Streams, one of them being free-
of-charge (or very low cost).
Internal R&D Resources and Activities are
leveraged by utilizing outside partners.
Internal R&D results are transformed into a
Value Proposition and offered to interested
Customer Segments.
rationale IT and management tool improvements allow
separating and coordinating different business
models at lower cost, thus eliminating undesir-
able trade-offs.
IT and operations management improvements
allow delivering tailored Value Propositions
to a very large number of new customers at
low cost.
An intermediary operating a platform between
two or more Customer Segments adds Revenue
Streams to the initial model.
Non-paying Customer Segments are subsidized
by paying customers in order to attract the
maximum number of users.
Acquiring R&D from external sources can
be less expensive, resulting in faster time-
to-market. Unexploited innovations have
the potential to bring in more revenue when
sold outside.
examples Private Banking
Mobile Telco
Publishing Industry (Lulu.com)
LEGO
Google
Video game consoles from
Nintendo, Sony, Microsoft
Apple
iPod, iTunes, iPhone
Advertising and newspapers
Metro
Flickr
Open Source
Red Hat
Skype (versus Telco)
Gillette
Razor and blades
Procter & Gamble
GlaxoSmithKline
Innocentive
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119
Unbundling Business Models The Long Tail Multi-Sided Platforms FREE as a Business Model Open Business Models
context
(before)
An integrated model combines infrastructure
management, product innovation, and
Customer Relationships under one roof.
The Value Proposition targets only the most
profi table clients.
One Value Proposition targets one
Customer Segment.
A high-value, high-cost Value Proposition
is offered to paying customers only.
R&D Resources and Key Activities are
concentrated in-house:
• Ideas are invented “inside” only
• Results are exploited “inside” only
challenge Costs are too high.
Several confl icting organizational cultures
are combined in a single entity, resulting in
undesirable trade-offs.
Targeting less profi table segments with specifi c
Value Propositions is too costly.
Enterprise fails to acquire potential new cus-
tomers who are interested in gaining access to
a company’s existing customer base (e.g. game
developers who want to reach console users)
The high price dissuades customers. R&D is costly and/or productivity is falling.
solution
(after)
The business is unbundled into three separate
but complementary models dealing with
• Infrastructure management
• Product innovation
• Customer relationships
The new or additional Value Proposition targets
a large number of historically less profi table,
niche Customer Segments—which in aggregate
are profi table.
A Value Proposition “giving access” to a com-
pany’s existing Customer Segment is added
(e.g. a game console manufacturer provides
software developers with access to its users)
Several Value Propositions are offered to
different Customer Segments with different
Revenue Streams, one of them being free-
of-charge (or very low cost).
Internal R&D Resources and Activities are
leveraged by utilizing outside partners.
Internal R&D results are transformed into a
Value Proposition and offered to interested
Customer Segments.
rationale IT and management tool improvements allow
separating and coordinating different business
models at lower cost, thus eliminating undesir-
able trade-offs.
IT and operations management improvements
allow delivering tailored Value Propositions
to a very large number of new customers at
low cost.
An intermediary operating a platform between
two or more Customer Segments adds Revenue
Streams to the initial model.
Non-paying Customer Segments are subsidized
by paying customers in order to attract the
maximum number of users.
Acquiring R&D from external sources can
be less expensive, resulting in faster time-
to-market. Unexploited innovations have
the potential to bring in more revenue when
sold outside.
examples Private Banking
Mobile Telco
Publishing Industry (Lulu.com)
LEGO
Google
Video game consoles from
Nintendo, Sony, Microsoft
Apple
iPod, iTunes, iPhone
Advertising and newspapers
Metro
Flickr
Open Source
Red Hat
Skype (versus Telco)
Gillette
Razor and blades
Procter & Gamble
GlaxoSmithKline
Innocentive
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bmgen_final.indd 121 6/15/10 5:39 PM
Design
bmgen_final.indd 122 6/15/10 5:39 PM
Design
bmgen_final.indd 123 6/15/10 5:39 PM
“Businesspeople don’t
just need to understand
designers better; they
need to become designers.”
Roger Martin, Dean, Rotman School of Management
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This section describes a number of techniques and tools from the world
of design that can help you design better and more innovative business
models. A designer’s business involves relentless inquiry into the best pos-
sible way to create the new, discover the unexplored, or achieve the func-
tional. A designer’s job is to extend the boundaries of thought, to generate
new options, and, ultimately, to create value for users. This requires the
ability to imagine “that which does not exist.” We are convinced that the
tools and attitude of the design profession are prerequisites for success in
the business model generation.
Businesspeople unknowingly practice design every day. We design orga-
nizations, strategies, business models, processes, and projects. To do this,
we must take into account a complex web of factors, such as competitors,
technology, the legal environment, and more. Increasingly, we must do so in
unfamiliar, uncharted territory. This is precisely what design is about. What
businesspeople lack are design tools that complement their business skills.
The following pages explore six business model design techniques:
Customer Insights, Ideation, Visual Thinking, Prototyping, Storytelling, and
Scenarios. We introduce each technique with a story, then demonstrate
how the technique applies to business model design. Here and there we’ve
added exercises and suggestions for workshop activities that show you
specifically how the design technique can be applied. Book references are
provided at the end for those interested in exploring each technique in
more depth.
Design
126 Customer Insights
134 Ideation
146 Visual Thinking
160 Prototyping
170 Storytelling
180 Scenarios
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Technique_No. 1
Customer Insights
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C
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127127
Va l e n t i n e ’s D ay, 2 0 0 8
Outside an o≈ce
building on the
outskirts of Oslo, four
Norwegian teenagers
wearing American-
style “letter” jackets
and baseball caps are
engaged in a lively
discussion with
a man in his 50s . . .
Va l e n t i n e ’s D ay, 2 0 0 8
Outside an o≈ce
building on the
outskirts of Oslo, four
Norwegian teenagers
wearing American-
style “letter” jackets
and baseball caps are
engaged in a lively
discussion with
a man in his 50s . . .
. . . The teenagers are young, hip snowboarders answering
questions posed by Richard Ling, a senior sociologist working
for Telenor, the world’s seventh largest mobile operator. Ling is
interviewing the group as part of a study to gain insights into the
use of photos and photo sharing over social networks. Now that
nearly every mobile phone sports a camera, photo sharing is of
keen interest to cellular operators. Ling’s research will help Telenor
capture the “big picture” of photo sharing. He focuses not just on
existing and potential new mobile photo sharing services, but on
broader issues, such as the role photo-sharing plays with respect
to trust, secrecy, group identity, and the social fabric linking these
young men. Ultimately, his work will enable Telenor to design
and deliver better services.
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C
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Companies invest heavily in market research, yet often wind up
neglecting the customer perspective when designing products,
services—and business models. Good business model design
avoids this error. It views the business model through customers’
eyes, an approach that can lead to the discovery of completely
new opportunities. This does not mean that customer thinking
is the only place from which to start an innovation initiative, but
it does mean that we should include the customer perspective
when evaluating a business model. Successful innovation requires
a deep understanding of customers, including environment,
daily routines, concerns, and aspirations.
Apple’s iPod media player provides an example. Apple understood
that people were uninterested in digital media players per se.
The company perceived that consumers wanted a seamless way
to search, find, download, and listen to digital content, including
music, and were willing to pay for a successful solution. Apple’s
view was unique at a time when illegal downloading was rampant
and most companies argued that nobody would be willing to
pay for digital music online. Apple dismissed these views and
created a seamless music experience for customers, integrating
the iTunes music and media software, the iTunes online store, and
the iPod media player. With this Value Proposition as the kernel of
its business model, Apple went on to dominate the online digital
music market
The challenge is to develop a sound understanding of customers on
which to base business model design choices. In the field of product
and service design, several leading companies work with social
scientists to achieve this understanding. At Intel, Nokia, and Telenor,
teams of anthropologists and sociologists work to develop new and
better products and services. The same approach can lead to new
or better business models.
Many leading consumer companies organize field trips for senior
executives to meet customers, talk to sales teams, or visit outlets.
In other industries, particularly those involving heavy capital
investments, talking to customers is part of the daily routine. But
the challenge of innovation is developing a deeper understand-
ing of customers rather than just asking them what they want.
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.
Building Business Models
on Customer Insights
—
‹‹
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you
Organiza
tion-cent
ric
business
model de
sign
What can
we sell c
ustomers
?
how can
we reach
custome
rs most
e≈ciently
?
What rela
tionships
do we ne
ed to esta
blish
with cust
omers?
how can
we make
money fr
om
our custo
mers?
As pioneering automaker Henry Ford once said, “If
I had asked my customers what they wanted, they
would have told me ‘a faster horse.’”
Another challenge lies in knowing which cus-
tomers 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.
A number of business model innovations have
succeeded precisely because they satisfied the
unmet needs of new customers. For example,
Stelios Haji-Ioannou’s easyJet made air travel
available to lower- and middle-income customers
who rarely flew. And Zipcar allowed city dwellers
to eliminate the hassles of metropolitan car owner-
ship. Instead, customers who pay an annual fee can
rent automobiles by the hour. Both are examples of
new business models built on Customer Segments
located at the periphery under incumbent models:
traditional air travel and traditional car rentals.
themCustomer-centric
business model design
What job(s) do(es) our customer need to
get done and how can we help?
What are our customer’s aspirations and
how can we help him live up to them?
how do our customers prefer to be
addressed? how do we, as an enterprise,
best fit into their routines?
What relationship do our customers expect
us to establish with them?
for what value(s) are customers truly
willing to pay?
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What does she
say and
do?
attitude in public
appearance
behavior toward others
What does she
hear?
what friends say
what boss says
what infl uencers say
pain
fears
frustrations
obstacles
What does she
think and
feel?
what really counts
major preoccupations
worries & aspirations
What does she
see?
environment
friends
what the market oΩers
gain
wants/needs
measures of success
obstacles
Source : Adapted from XPLANE
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1
what does she see?
describe what the
customer sees in her
environment
• What does it look like?
• Who surrounds her?
• Who are her friends?
• What types of oΩers
is she exposed to daily
(as opposed to all
market oΩers)?
• What problems does
she encounter?
2
what does she hear?
describe how the
environment infl u-
ences the customer
• What do her friends say?
Her spouse?
• Who really infl uences her,
and how?
• Which media Channels
are infl uential?
3
what does she really
think and feel?
try to sketch out
what goes on in your
customer’s mind
• What is really important
to her (which she might
not say publicly)?
• Imagine her emotions.
What moves her?
• What might keep her up
at night?
• Try describing her dreams
and aspirations.
4
what does she
say and do?
imagine what the
customer might say,
or how she might
behave in public
• What is her attitude?
• What could she be
telling others?
• Pay particular attention
to potential confl icts
between what a customer
might say and what she
may truly think or feel.
5
what is the
customer’s pain?
• What are her biggest
frustrations?
• What obstacles stand
between her and what
she wants or needs to
achieve?
• Which risks might she
fear taking?
6
what does the
customer gain?
• What does she truly want
or need to achieve?
• How does she measure
success?
• Think of some strategies
she might use to achieve
her goals.
The Empathy Map
Few of us enjoy the services of a full team of social scientists, but anybody examining
a business model can sketch profi les of the Customer Segments addressed therein.
A good way to start is by using the Empathy Map, a tool developed by visual thinking
company XPLANE. This tool, which we also like to call the “really simple customer
profi ler,” helps you go beyond a customer’s demographic characteristics and develop
a better understanding of environment, behavior, concerns, and aspirations. Doing so
allows you to devise a stronger business model, because a customer profi le guides the
design of better Value Propositions, more convenient ways to reach customers, and
more appropriate Customer Relationships. Ultimately it allows you to better understand
what a customer is truly willing to pay for.
How to Use the (Customer) Empathy Map
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 fi rst profi ling exercise.
Start by giving this customer a name and some demographic
characteristics, such as income, marital status, and so forth.
Then, referring to the diagram on the opposite page, use a fl ipchart
or whiteboard to build a profi le for your newly-named customer
by asking and answering the following six questions:
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29
C
R
EA
T
IV
E
PR
O
B
LE
M
S
O
LV
IN
G
T
O
O
LS
29
C
R
EA
T
IV
E
PR
O
B
LE
M
S
O
LV
IN
G
T
O
O
LS
What does she
say and
do?
attitude in public
appearance
behavior toward others
What does she
hear?
what friends says
what boss says
what infl uencers
pain
fears
frustrations
obstacles
What does she
think and
feel?
what really counts
major preoccupations
worries & aspirations
What does she
see?
environment
friends
what the market oΩers
gain
“wants”/needs
measures of success
obstacles
Source : Adapted from XPLANE
What does she
say and
do?
attitude in public
appearance
behavior toward others
What does she
hear?
what friends says
what boss says
what infl uencers
pain
fears
frustrations
obstacles
What does she
think and
feel?
what really counts
major preoccupations
worries & aspirations
gain
What does she
see?
environment
friends
what the market oΩers
“wants”/needs
measures of success
obstacles
Source : Adapted from XPLANE
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In October 2008, Microsoft announced plans to provide
its entire suite of OΩice applications online. According
to the announcement, customers will eventually be able
to use Word, Excel, and all other OΩice applications
through browsers. This will require Microsoft to signifi –
cantly reengineer its business model. One starting point
for this business model renovation could be to create a
customer profi le for a key buying segment: chief informa-
tion oΩicers (CIO), who defi ne IT strategy and make
overarching purchasing decisions. What might a CIO
customer profi le look like?
The goal is to create a customer viewpoint for continu-
ously questioning your business model assumptions.
Customer profi ling enables you to generate better
answers to questions such as: Does this Value Proposition
solve real customer problems? Would she really be willing
to pay for this? How would she like to be reached?
Understanding a B2B customer
using the Empathy Map
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Technique_No. 2
Ideation
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M a r c h , 2 0 0 7
Elmar Mock is
listening carefully
as Peter elaborates
excitedly on an idea
amid a sea of Post-it™
notes smothering
the walls . . .
. . . Peter works for a pharmaceutical group that has hired Elmar’s
innovation consultancy, Creaholic, to help with a breakthrough
product. The two men are part of a six-person innovation team
holding a three-day offsite meeting.
The group is deliberately heterogeneous, a pastiche of differ-
ent experience levels and backgrounds. Though all members are
accomplished specialists, they joined the group not as technicians,
but as consumers unsatisfi ed with the current state of affairs.
Creaholic instructed them to leave their expertise at the door and
carry it with them only as a “backpack” of distant memories.
For three days the six form a consumer microcosm and
unleash their imaginations to dream up potential breakthrough
solutions to a problem, unbridled by technical or fi nancial
constraints. Ideas collide and new thinking emerges, and only
after generating a multitude of potential solutions are they asked
to recall their expertise and pin down the three most promising
candidates.
Elmar Mock boasts a long track record of breakthrough inno-
vation. He is one of two inventors of the legendary Swatch watch.
Since then, he and his team at Creaholic have helped companies
such as BMW, Nestlé, Mikron, and Givaudan innovate success-
fully.
Elmar knows how diffi cult it is for established companies to
innovate. Such fi rms require predictability, job descriptions, and
fi nancial projections. Yet real innovations emerge from something
better described as systematic chaos. Creaholic has found a
way to master that chaos. Elmar and his team are obsessed by
innovation.
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Mapping an existing business model is one thing; designing
a new and innovative business model is another. What’s needed
is a creative process for generating a large number of business
model ideas and successfully isolating the best ones. This
process is called ideation. Mastering the art of ideation is crucial
when it comes to designing viable new business models.
Traditionally, most industries were characterized by a dominant
business model. This has changed radically. Today we enjoy
many more choices when designing new business models. Today,
different business models compete in the same markets, and
boundaries between industries are blurring—or disappearing
altogether.
One challenge we face when trying to create new business model
options is ignoring the status quo and suspending concerns over
operational issues so that we can generate truly new ideas.
Business model innovation is not about looking back, because
the past indicates little about what is possible in terms of future
business models. Business model innovation is not about looking
to competitors, since business model innovation is not about
copying or benchmarking, but about creating new mechanisms
to create value and derive revenues. Rather, business model inno-
vation is about challenging orthodoxies to design original models
that meet unsatisfied, new, or hidden customer needs.
To come up with new or better options, you must dream up a
grab bag of ideas before narrowing them down to a short list of
conceivable options. Thus, ideation has two main phases: idea
generation, where quantity matters, and synthesis, in which
ideas are discussed, combined, and narrowed down to a small
number of viable options. Options do not necessarily have to
represent disruptive business models. They may be innovations
that expand the boundaries of your current business model to
improve competitiveness.
You can generate ideas for innovative business models from
several different starting points. We will look at two: epicenters
of business model innovation using the Business Model Canvas,
and “what if” questions.
Generating new
Business Model Ideas
—
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Id
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n
Igno
re th
e sta
tus
quo
Forg
et th
e pa
st
Stop
focu
sing
on c
omp
etito
rs
Cha
llen
ge o
rtho
dox
ies
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Epicenters of Business Model Innovation
resource-driven
resource-driven innovations originate from
an organization’s existing infrastructure
or partnerships to expand or transform the
business model.
Example: Amazon Web Services was built on top of
Amazon.com’s retail infrastructure to offer server
capacity and data storage space to other companies.
offer-driven
offer-driven innovations create new value
propositions that affect other business
model building blocks.
Example: When Cemex, a Mexican cement maker,
promised to deliver poured cement to job sites within
four hours rather than the 48 hour industry standard,
it had to transform its business model. This innovation
helped change Cemex from a regional Mexican player
into the world’s second largest cement producer.
Ideas for business model innovation can come from
anywhere, and each of the nine business model building
blocks can be a starting point. Transformative business
model innovations affect multiple building blocks.
We can distinguish four epicenters of business model
innovation: resource-driven, offer-driven, customer-driven,
and fi nance-driven.
Each of the four epicenters can serve as the starting point
for a major business model change, and each can have
a powerful impact on the other eight building blocks.
Sometimes, business model innovation can emerge from
several epicenters. Also, change often originates in areas
identifi ed through a SWOT analysis: an investigation of a
business model’s strengths, weaknesses, opportunities,
and threats (see p. 216).
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multiple-epicenter driven
Innovations driven by multiple epicenters
can have signifi cant impact on several
other building blocks.
Example: Hilti, the global manufacturer of professional
construction tools, moved away from selling tools out-
right and toward renting sets of tools to customers. This
was a substantial change in Hitli’s Value Proposition,
but also in its Revenue Streams, which shifted from one-
time product revenues to recurring service revenues.
Customer-driven
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.
Example: 23andMe brought personalized DNA testing
to individual clients—an offer previously available exclu-
sively to health professionals and researchers, This had
substantial implications for both the Value Proposition
and the delivery of test results, which 23andMe accom-
plishes through mass-customized Web profi les.
Finance-driven
Innovations driven by new revenue
streams, pricing mechanisms, or reduced
Cost structures that affect other
business model building blocks.
Example: When Xerox invented the Xerox 914 in 1958—
one of the fi rst plain paper copiers—it was priced too
high for the market. So Xerox developed a new business
model. It leased the machines at $95 per month, includ-
ing 2,000 free copies, plus fi ve cents per additional
copy. Clients acquired the new machines and started
making thousands of copies each month.
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We often have trouble conceiving innovative business
models because we are held back in our thinking by the
status quo. The status quo stifl es imagination. One way
to overcome this problem is to challenge conventional
assumptions with “what if” questions. With the right
business model ingredients, what we think of as impos-
sible might be just doable. “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, diffi cult-to-execute
propositions.
Managers of a daily newspaper might ask themselves:
What if we stopped our print edition and went to
entirely digital distribution, through Amazon’s Kindle
e-book reader or through the Web? This would allow the
newspaper to drastically reduce production and logistics
costs, but would require making up lost print advertising
revenues and transitioning readers to digital Channels.
“What if” questions are merely starting points. They
challenge us to discover the business model that could
make their suppositions work. Some “what if” questions
may remain unanswered because they are too provoca-
tive. Some may simply need the right business model to
become reality.
The Power of “What If” Questions
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. . . furniture buyers picked up components in fl at pack form from a large warehouse and
assembled the products themselves in their homes? What is common practice today
was unthinkable until IKEA introduced the concept in the 1960s.
. . . airlines didn’t buy engines for their airplanes, but paid for every hour an engine runs?
That is how Rolls-Royce transformed itself from a money-losing British manufacturer
into a service fi rm that today is the world’s second biggest provider of large jet engines.
. . . voice calls were free worldwide? In 2003 Skype launched a service that allowed free
voice calling via the Internet. After fi ve years Skype had acquired 400 million registered
users who collectively had made 100 billion free calls.
. . . car manufacturers didn’t sell cars, but provided mobility services? In 2008 Daimler
launched car2go, an experimental business in the German city of Ulm. Car2go’s fl eet
of vehicles allows users to pick up and drop off cars anywhere in the city, paying by-
the-minute fees for mobility services.
. . . individuals could lend money to each other rather than borrowing from banks?
In 2005, U.K.-based Zopa launched a peer-to-peer lending platform on the Internet.
. . . every villager in Bangladesh had access to a telephone? That is what Grameenphone
set out to achieve under a partnership with micro-fi nance institution Grameen Bank.
At the time, Bangladesh still had the world’s lowest tele-density. Today Grameenphone
is Bangladesh’s largest taxpayer.
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The Ideation Process
The ideation process can take several forms. Here we outline a general approach
to producing innovative business model options:
1. team composition
Key question: Is our team suffi ciently diverse to generate fresh
business model ideas?
Assembling the right team is essential to generating effective new business model
ideas. Members should be diverse in terms of seniority, age, experience level, business
unit represented, customer knowledge, and professional expertise.
2. immersion
Key question: Which elements must we study before generating
business model ideas?
Ideally the team should go through an immersion phase. which could include general
research, studying customers or prospects, scrutinizing new technologies, or assessing
existing business models. Immersion could last several weeks or could be as short as a
couple of workshop exercises (e.g. the Empathy Map).
3. expanding
Key question: What innovations can we imagine for each business
model building block?
During this phase the team expands the range of possible solutions, aiming to generate
as many ideas as possible. Each of the nine business model building blocks can serve as
a starting point. The goal of this phase is quantity, not quality. Enforcing brainstorming
rules will keep people focused on generating ideas rather than on critiquing too early in
the process (see p. 144).
4. criteria selection
Key question: What are the most important criteria for prioritizing
our business model ideas?
After expanding the range of possible solutions, the team should defi ne criteria for
reducing the number of ideas to a manageable few. The criteria will be specifi c to the
context of your business, but could include things such as estimated implementa-
tion time, revenue potential, possible customer resistance, and impact on competitive
advantage.
5. “prototyping”
Key question: What does the complete business model for each
shortlisted idea look like?
With criteria defi ned, the team should be able to reduce the number of ideas to a
prioritized shortlist of three to fi ve potential business model innovations. Use the
Business Model Canvas to sketch out and discuss each idea as a business model
prototype (see p. 160).
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The task of generating new ideas should not be left exclusively to those typically con-
sidered to be “creative types.” Ideation is a team exercise. In fact, by its very nature
business model innovation requires the participation of people from across the entire
organization. Business model innovation is about seeking to create value by exploring
new business model building blocks and forging innovative links between blocks. This
can involve all nine blocks of the canvas, whether Distribution Channels, Revenue
Streams, or Key Resources. Thus it requires input and ideas from people representing
multiple areas.
That’s why assembling the right task force is a critical prerequisite for generating
new business model ideas. Thinking about business model innovation should not be
confi ned to the R&D unit or the strategic planning offi ce. Business model innova-
tion teams should have a diverse membership. The diversity will help you generate,
discuss, and select new ideas. Consider adding outsiders, or even children. Diversity
works. But make sure to teach people how to listen actively, and consider engaging
a neutral facilitator for key meetings.
The task of generating new ideas should not be left exclusively to those typically con-
sidered to be “creative types.” Ideation is a team exercise. In fact, by its very nature
business model innovation requires the participation of people from across the entire
organization. Business model innovation is about seeking to create value by exploring
Assemble a Diverse Team
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
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Brainstorming Rules
Stay focused
Start with a well-honed statement of the problem at hand. Ideally, this
should be articulated around a customer need. Don’t let the discussion
stray too far; always bring it back to the problem statement.
Enforce rules
Clarify the brainstorming rules upfront and enforce them. The most
important rules are “defer judgment,” “one conversation at a time,”
“go for quantity,” “be visual,” and “encourage wild ideas.” Facilitators
should enforce the rules.
Think visually
Write ideas down or sketch them out on a surface everyone can see. A
good way to collect ideas is to jot them down on Post-it™ notes and stick
these to a wall. This allows you to move ideas around and regroup them.
Prepare
Prepare for brainstorming with some sort of immersion experience
related to the problem at hand. This could be a fi eld trip, discussions with
customers, or any other means of immersing the team in issues related
to your problem statement.
Adapted from an interview with Tom Kelley of IDEO in Fast
Company magazine: “Seven Secrets to Good Brainstorming”
Successful brainstorming requires
following a set of rules. Enforcing
these rules will help you maximize the
number of useful ideas generated.
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Warm-Up:
The Silly Cow Exercise
To get your team’s creative juices fl owing, it can be helpful to start an ideation ses-
sion with a warm-up such as the Silly Cow exercise. Here’s how it works: Instruct
participants to sketch out three different business models using a cow. Ask them
to fi rst defi ne some characteristics of a cow (produces milk, eats all day, makes a
mooing sound, etc.). Tell them to use those characteristics to come up with an
innovative business model based on a cow. Give them three minutes.
Keep in mind that this exercise can backfi re, as it is indeed quite silly.
But it has been tested with senior executives, accountants, risk
managers, and entrepreneurs, and usually is a great success.
The goal is to take people out of their day-to-day business
routines and show them how readily they can generate ideas
by disconnecting from orthodoxies and
letting their creativity fl ow.
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145to fi rst defi ne some characteristics of a cow (produces milk, eats all day, makes a
mooing sound, etc.). Tell them to use those characteristics to come up with an
innovative business model based on a cow. Give them three minutes.
Keep in mind that this exercise can backfi re, as it is indeed quite silly.
But it has been tested with senior executives, accountants, risk
managers, and entrepreneurs, and usually is a great success.
The goal is to take people out of their day-to-day business
routines and show them how readily they can generate ideas
by disconnecting from orthodoxies and
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Technique_No. 3
Visual Thinking
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O c t o b e r , 2 0 0 6
The meeting room walls
are plastered with large
posters on which a
group of 14 people are
assiduously sketching
drawings and pasting
Post-it™ notes. Though
the scene almost has the
atmosphere of an art
class, it’s taking place
at the headquarters of
Hewlett-Packard, the
technology products
and services giant . . .
O c t o b e r , 2 0 0 6
The meeting room walls
are plastered with large
posters on which a
group of 14 people are
assiduously sketching
drawings and pasting
Post-it™ notes. Though
the scene almost has the
atmosphere of an art
class, it’s taking place
at the headquarters of
Hewlett-Packard, the
technology products
and services giant . . .
. . . The 14 participants hail from throughout HP, but all are
involved in information management. They’ve gathered here for
a one-day workshop to literally draw a picture of how a global
enterprise should manage information fl ows.
Dave Gray, founder and chairman of consultancy XPLANE,
is facilitating the meeting. XPLANE uses visual thinking tools
to help clients clarify problems involving everything from
corporate strategy to operational implementations. Together
with an XPLANE artist, Dave helps the 14 HP specialists gain
a better understanding of the big picture of information sharing
in a global enterprise. The group uses the posted sketches
to discuss information sharing, to identify relationships
between elements, to fi ll in missing pieces, and to develop a
joint understanding of multiple issues.
With a knowing smile, Dave talks about a common miscon-
ception: that one shouldn’t draw something until one under-
stands it. On the contrary, he explains, sketches—however
rudimentary or amateurish—help people better describe, discuss,
and understand issues, particularly those of a complex nature.
For the 14 Hewlett-Packard collaborators, XPLANE’s visualization
approach has worked beautifully. They gathered as 14 specialists
with deeply individual understandings, but parted with a simple
one-page image of how a global enterprise should manage infor-
mation. XPLANE’s client roster, which reads like a who’s who of
the world’s most successful companies, testifi es to the growing
number of organizations that understand the value of this type of
visual thinking.
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Visual thinking is indispensable to working with business models.
By visual thinking we mean using visual tools such as pictures,
sketches, diagrams, and Post-it™ notes to construct and discuss
meaning. Because business models are complex concepts
composed of various building blocks and their interrelationships,
it is diffi cult to truly understand a model without sketching it out.
A business model really is a system where one element infl uences
the other; it only makes sense as a whole. Capturing that big
picture without visualizing it is diffi cult. In fact, by visually depict-
ing 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.
Sketching a model transforms it into a persistent object and a
conceptual anchor to which discussions can always return. This
is critical because it shifts discourse from the abstract toward the
concrete and greatly improves the quality of debate. Typically, if
you aim to improve an existing business model, visually depicting
it will unearth logical gaps and facilitate their discussion. Similarly,
if you are designing a completely new business model, drawing
it will allow you to discuss different options easily by adding,
removing, or moving pictures around.
Businesses already make frequent use of visual techniques such
as diagrams and charts. Such elements are used extensively to
clarify messages within reports and plans. But visual techniques
are used less frequently to discuss, explore, and defi ne business
issues. When was the last time you attended a meeting where
executives were drawing on the walls? Yet it is in the strategic
process where visual thinking can add tremendous value. Visual
thinking enhances strategic inquiries by making the abstract
concrete, by illuminating relationships between elements, and
by simplifying the complex. In this section we describe how
visual thinking can help you throughout the process of defi ning,
discussing, and changing business models.
We refer to two techniques: the use of Post-it™ notes and the
use of sketches in combination with the Business Model Canvas.
We also discuss four processes improved by visual thinking:
understanding, dialogue, exploration, and communication.
The Value of
Visual Thinking
—
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A set of Post-it™ notes is an indispensable tool that everyone refl ecting on business
models should keep handy. Post-it™ notes function like idea containers that can be added,
removed, and easily shifted between business model building blocks. This is important
because during business model discussions, people frequently do not immediately agree
on which elements should appear in a Business Model Canvas or where they should be
placed. During exploratory discussions, some elements might be removed and replaced
multiple times to explore new ideas.
Here are three simple guidelines: (1) use thick marking pens, (2) write only one element
per Post-it™ note, and (3) write only a few words per note to capture the essential point.
Using thick markers is more than a detail: it prevents you from putting too much informa-
tion on a single Post-it™, and makes for easier reading and overview.
Keep in mind, too, that the discussion leading to the fi nal business model picture created
by all the Post-it™ notes is just as important as the outcome. Discussion around which
notes to place on or remove from the Canvas and debate over how one element infl uences
others give participants a deep understanding of the business model and its dynamics.
Consequently, a Post-it™ note becomes more than just a piece of sticky paper represent-
ing a business model building block; it becomes a vector for strategic discussion.
Visualizing with Post-it™ notes
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Visualizing with Drawings
Drawings can be even more powerful than Post-it™ notes because people
react more strongly to images than to words. Pictures deliver messages
instantly. Simple drawings can express ideas that otherwise require many
words.
It’s easier than we think. A stick fi gure with a smiling face conveys emo-
tion. A big bag of money and a small bag of money convey proportions.
The problem is that most of us think we can’t draw. We’re embarrassed
lest our sketches appear unsophisticated or childish. The truth is that even
crude drawings, sincerely rendered, make things tangible and understand-
able. People interpret simple stick fi gures far more easily than abstract
concepts expressed in text.
Sketches and drawings can make a difference in several ways. The most
obvious one is explaining and communicating your business model based
on simple drawings, something we explain how to do at the end of this
chapter. Another is sketching out a typical client and her environment to
illustrate one of your Customer Segments. This will trigger a more con-
crete, intensive discussion compared to outlining that person’s character-
istics in writing. Finally, sketching out a Customer Segment’s needs and
jobs-to-get-done is a powerful way to exploit visual techniques.
Such drawings will likely trigger constructive discussion from which new
business model ideas will emerge. Now let’s examine four processes
improved by visual thinking.
Visualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with Drawings
Drawings can be even more powerful than Post-it™ notes because people
react more strongly to images than to words. Pictures deliver messages
instantly. Simple drawings can express ideas that otherwise require many
Sketches and drawings can make a difference in several ways. The most
obvious one is explaining and communicating your business model based
on simple drawings, something we explain how to do at the end of this
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visual grammar
The Business Model Canvas poster is a concep-
tual map that functions as a visual language with
corresponding grammar. It tells you which pieces
of information to insert in the model, and where. It
provides a visual and text guide to all the informa-
tion needed to sketch out a business model.
capturing the big picture
By sketching out all the elements of the Canvas you
immediately give viewers the big picture of a busi-
ness model. A sketch provides just the right amount
of information to allow a viewer to grasp the idea,
yet not too much detail to distract him. The Business
Model Canvas visually simplifi es the reality of an
enterprise with all its processes, structures, and sys-
tems. In a business model like Rolls-Royce’s, where
jet engine units are leased by the hour rather than
sold, it is the big picture, rather than the individual
pieces, that is compelling.
seeing relationships
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. In describing the business
model of a low-cost airline, for example, drawings
can effectively show why a homogenous fl eet of
airplanes is crucial to keeping maintenance and
training costs low.
Understand the Essence
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joint understanding
Visualizing business models as a group is the most
effective way to achieve shared understanding.
People from different parts of an organization may
deeply understand parts of a business model but
lack a solid grasp of the whole. When experts jointly
draw a business model, everybody involved gains
an understanding of the individual components and
develops a shared understanding of the relation-
ships between these components.
collective reference point
We all hold tacit assumptions in our heads, and
posting an image that turns those implicit assump-
tions into explicit information is a powerful way to
improve dialogue. It makes a business model into a
tangible and persistent object, and provides a refer-
ence point to which participants can always return.
Given that people can hold only a limited number
of ideas in short-term memory, visually portraying
business models is essential to good discussion.
Even the simplest models are composed of several
building blocks and interrelationships.
shared language
The Business Model Canvas is a shared visual
language. It provides not only a reference point, but
also a vocabulary and grammar that helps people
better understand each other. Once people are
familiar with the Canvas, it becomes a powerful
enabler of focused discussion about business model
elements and how they fi t together. This is particu-
larly valuable in organizations with matrix reporting
structures where individuals in a working group
or task force may know little about each other’s
functional areas. A shared visual business model
language powerfully supports idea exchange and
increases team cohesiveness.
Enhance Dialogue
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Explore Ideas
play
A visual business model also provides opportunity
for play. With the elements of a model visible on
a wall in the form of individual Post-it™ notes,
you can start discussing what happens when
you remove certain elements or insert new ones.
For example, what would happen to your busi-
ness model if you eliminated the least profi table
Customer Segment? Could you do that? Or do you
need the unprofi table segment to attract profi table
customers? Would eliminating unprofi table cus-
tomers enable you to reduce resources and costs
and improve services to profi table customers? A
visual model helps you think through the systemic
impact of modifying one element or another.
idea trigger
The Business Model Canvas is a bit like an artist’s
canvas. When an artist starts painting, he often
has a vague idea—not an exact image—in mind.
Rather than starting in one corner of a canvas and
executing sequentially, he starts wherever his muse
dictates and builds the painting organically. As
Pablo Picasso said, “I begin with an idea and then
it becomes something else.” Picasso saw ideas as
nothing more than points of departure. He knew
they would evolve into something new during their
explication.
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.
Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas
play
A visual business model also provides opportunity
for play. With the elements of a model visible on
idea trigger
The Business Model Canvas is a bit like an artist’s
canvas. When an artist starts painting, he often
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selling externally
Just as employees must “sell” ideas internally,
entrepreneurs with plans based on new business
models must sell them to other parties, such as
investors or potential collaborators. Strong visuals
substantially increase chances of success.
create company-wide understanding
When it comes to communicating a business
model and its most important elements, a picture
is truly worth a thousand words. Everybody in an
organization needs to understand its business
model, because everybody can potentially contrib-
ute to its improvement. At the very least, employees
need a shared understanding of the model so they
can move in the same strategic direction. Visual
depiction is the best way to create such a shared
understanding.
selling internally
In organizations, ideas and plans often must be
“sold” internally at various levels to garner support
or obtain funding. A powerful visual story reinforc-
ing your pitch can increase your chances of winning
understanding and backing for your idea. Using
images rather than just words to tell the story makes
your case even stronger, because people identify
immediately with images. Good imagery readily
communicates your organization’s current status,
what needs doing, how it can be done, and what
the future might look like.
Improve CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove Communication
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Different Types of Visualization for Different needs
• From day one, Skype was
a global voice carrier
because its service is deliv-
ered through the Internet,
unrestricted by traditional
telecommunications net-
works. Its business is highly
scalable.
Visual representations of business models call for differ-
ent levels of detail depending on one’s goal. The sketch
of Skype’s business model on the right drives home the
key differences between its business model and that
of a traditional telecommunications carrier. The goal is
to point out the striking differences between Skype’s
business model building blocks and those of a traditional
carrier, even though both offer similar services.
The right-hand page sketch depicting the young Dutch
company Sellaband has a different goal and is there-
fore more detailed. It aims to paint the big picture of a
completely new music industry business model: that
of a platform enabling crowd-funding of independent
musical artists. Sellaband uses the drawing to explain
its innovative business model to investors, partners, and
employees. Sellaband’s combination of images and text
has proven to be far more effective than words alone at
accomplishing this task. • Though it provides a
telecommunications service,
Skype’s business model
features the economics of
a software company rather
than a telecommunications
network operator.
• Ninety percent of Skype users never pay. Only an
estimated 10 percent of users are paying customers.
Unlike traditional telecommunication carriers, Skype’s
Channels and Relationships are highly automated. They
require almost no human intervention and are therefore
relatively inexpensive.
• Skype’s Key Resources and Activities resemble those
of a software company, because its service is based on
software that uses the Internet to carry calls. Given its
400 million+ user base, the company enjoys very low
infrastructure costs. In fact, it does not own or operate
a telecommunications network at all.
156
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A powerful way to explain a business model is to tell a story one image at a time.
Presenting a full description within the Business Model Canvas can overwhelm an
audience. It’s better to introduce the model piece by piece. You could do this by drawing
one piece after another, or by using PowerPoint. An appealing alternative is to pre-draw
all the elements of a business model on Post-it™ notes, then put them up one after
another as you explain the model. It allows the audience to follow the build-up of the
model, and the visuals complement your explanation.
Telling a Visual Story
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Visual Storytelling Activity
1
map your business model
• Begin by mapping out a simple, text-
based version of your business model.
• Write each business model element
on an individual Post-it™ note.
• Mapping can be done individually
or with a group.
2
draw each business
model element
• One at a time, take each Post-it™
note and replace it with a drawing
representing the content.
• Keep the images simple: omit detail.
• Drawing quality is unimportant as
long as the message is conveyed.
3
defi ne the storyline
• Decide which Post-it™ notes you will
put up fi rst when telling your story.
• Try different paths. You might start
with Customer Segments, or maybe
the Value Proposition.
• Basically, any starting point is possible
if it effectively supports your story.
4
tell the story
• Tell your business model story one
drawn Post-it™ picture at a time.
Note: Depending on the context and
your personal preferences, you may
want to use PowerPoint or Keynote.
Slideware, though, is unlikely to
produce the positive surprise effect
of the Post-it™ approach.
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Technique_No. 4
Prototyping
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161161
S u m m e r , 2 0 0 0
With a look bordering
on panic, Weatherhead
School of Management
Professor Richard
Boland Jr. watched as
Matt Fineout, an
architect with Gehry
& Associates, casually
tore up plans for a new
school building . . .
. . . Boland and Fineout had been struggling for two full days to
remove some 5,500 square feet from the fl oor plan designed by
star architect Frank Gehry, while leaving room needed for meeting
spaces and offi ce equipment.
At the end of the marathon planning session, Boland had
breathed a sigh of relief. “It’s fi nally done,” he thought. But at that
very moment, Fineout rose from his chair, ripped the document
apart, and tossed the scraps into a trash bin, not bothering to
retain a single trace of the pair’s hard labor. He responded to
Professor Boland’s shocked expression with a gentle shrug and a
soft remark. “We’ve shown we can do it; now we need to think
of how we want to do it.”
Looking back, Boland describes the incident as an extreme
example of the relentless approach to inquiry he experienced
while working with the Gehry group on the new Weatherhead
building. During the design phase, Gehry and his team made hun-
dreds of models with different materials and of varying sizes, sim-
ply to explore new directions. Boland explains that the goal of this
prototyping activity was far more than the mere testing or proving
of ideas. It was a methodology for exploring different possibilities
until a truly good one emerged. He points out that prototyping, as
practiced by the Gehry group, is a central part of an inquiry pro-
cess that helps participants gain a better sense of what is missing
in the initial understanding of a situation. This leads to completely
new possibilities, among which the right one can be identifi ed.
For Professor Boland, the experience with Gehry & Associates
was transformative. He now understands how design techniques,
including prototyping, contribute to fi nding better solutions for
the entire spectrum of business problems. Together with fellow
professor Fred Collopy and other colleagues, Boland is now spear-
heading the concept of Manage by Designing: the integration of
design thinking, skills, and experiences into Weatherhead’s MBA
curriculum. Here, students use tools of design to sketch alterna-
tives, follow through on problem situations, transcend traditional
boundaries, and prototype ideas.
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Prototyping is a powerful tool for developing new, innovative
business models. Like visual thinking, it makes abstract concepts
tangible and facilitates the exploration of new ideas. Prototyp-
ing comes from the design and engineering disciplines, where it
is widely used for product design, architecture, and interaction
design. It is less common in business management because of
the less tangible nature of organizational behavior and strategy.
While prototyping has long played a role at the intersection of
business and design, for example in manufactured product design,
in recent years it has gained traction in areas such as process
design, service design, and even organization and strategy design.
Here we show how prototyping can make an important contribu-
tion to business model design.
Although they use the same term, product designers, architects,
and engineers all have different understandings of what consti-
tutes a “prototype.” We see prototypes representing potential
future business models: as tools that serve the purpose of discus-
sion, inquiry, or proof of concept. A business model prototype can
take the form of a simple sketch, a fully thought-through concept
described with the Business Model Canvas, or a spreadsheet that
simulates the financial workings of a new business.
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. What does it mean for the model if
we add another client segment? What are the consequences of
removing a costly resource? What if we gave away something
for free and replaced that Revenue Stream with something more
innovative? Making and manipulating a business model prototype
forces us to address issues of structure, relationship, and logic in
ways unavailable through mere thought and discussion. To truly
understand the pros and cons of different possibilities, and to
further our inquiry, we need to construct multiple prototypes of
our business model at different levels of refinement. Interaction
with prototypes produces ideas far more readily than discussion.
Prototype business models may be thought-provoking—even
a bit crazy—and thus help push our thinking. When this hap-
pens, they become signposts pointing us in as-yet unimagined
directions rather than serving as mere representations of
to-be-implemented business models. “Inquiry” should signify a
relentless search for the best solution. Only after deep inquiry can
we effectively pick a prototype to refine and execute—after our
design has matured.
Prototyping’s Value
—
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Businesspeople are likely to display one of two reactions to this
process of business model inquiry. Some might say, “Well, that
is a nice idea, if we only had the time to explore different options.”
Others might say that a market research study would be an
equally good way to come up with new business models. Both
reactions are based on dangerous preconceptions.
The fi rst supposes that “business as usual” or incremental
improvements are suffi cient to survive in today’s competitive
environment. We believe this path leads to mediocrity. Businesses
that fail to take the time to develop and prototype new, ground-
breaking business model ideas risk being sidelined or overtaken
by more dynamic competitors—or by insurgent challengers
appearing, seemingly, from nowhere.
The second reaction assumes that data is the most important
consideration when designing new strategic options. It is not.
Market research is a single input in the long and laborious process
of prototyping powerful new business models with the potential
to outperform competitors or develop entirely new markets.
Where do you want to be? At the top of the game, because you’ve
taken the time to prototype powerful new business models?
Or on the sidelines, because you were too busy sustaining your
existing model? We’re convinced that new, game-changing
business models emerge from deep and relentless inquiry.
old
thinking
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dominate an industry
outside-in: industry defi nes
business models
linear thinking
early choice of business
model
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effi ciency-focused
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multiple business models
in and across industries
inside-out: business models
transform industries
opportunistic thinking
exploratory search for
business model
design-focused
Value- and effi ciency-focused
old old old
thinking
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outside-in: industry defi nes
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outside-in: industry defi nes
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outside-in: industry defi nes
linear thinkinglinear thinkinglinear thinkinglinear thinkinglinear thinking
early choice of business early choice of business
model
implementation-focusedimplementation-focusedimplementation-focusedimplementation-focusedimplementation-focused
effi ciency-focusedeffi ciency-focusedeffi ciency-focusedeffi ciency-focusedeffi ciency-focused
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Design Attitude
As businesspeople, when we see a prototype we tend to focus on its
physical form or its representation, viewing it as something that models,
or encapsulates the essence of, what we eventually intend to do. We
perceive a prototype as something that simply needs to be refi ned. In
the design profession, prototypes do play a role in pre-implementation
visualization and testing. But they also play another very important
role: that of a tool of inquiry. In this sense they serve as thinking aids for
exploring new possibilities. They help us develop a better understanding
of what could be.
This same design attitude can be applied to business model innovation.
By making a prototype of a business model we can explore particular
aspects of an idea: novel Revenue Streams, for example. Participants
learn about the elements of a prototype as they construct and discuss
it. As previously discussed , business model prototypes vary in terms of
scale and level of refi nement. We believe it is important to think through
a number of basic business model possibilities before developing a
business case for a specifi c model. This spirit of inquiry is called design
attitude, because it is so central to the design professions, as Professor
Boland discovered. The attributes of design attitude include a willingness
to explore crude ideas, rapidly discard them, then take the time to exam-
ine multiple possibilities before choosing to refi ne a few—and accepting
uncertainty until a design direction matures. These things don’t come
naturally to businesspeople, but they are requirements for generating
new business models. Design attitude demands changing one’s orienta-
tion from making decisions to creating options from which to choose.
“If you freeze an idea too quickly, you fall in love with it.
If you refi ne it too quickly, you become attached to it
and it becomes very hard to keep exploring, to keep
looking for better. The crudeness of the early models
in particular is very deliberate.”
Jim Glymph, Gehry Partners
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napkin sketch
outline and pitch
a rough idea
draw a simple business
model canvas. describe
the idea using only key
elements.
• Outline the idea
• Include the Value
Proposition
• Include the main
Revenue Streams
elaborated canvas
explore what it
would take to make
the idea work
develop a more elabo-
rate canvas to explore
all the elements
needed to make the
business model work.
• Develop a full Canvas
• Think through your
business logic
• Estimate the market
potential
• Understand the
relationships between
Building Blocks
• Do some basic
fact-checking
business case
examine the viability
of the idea
turn the detailed
canvas into a spread-
sheet to estimate
your model’s earning
potential.
• Create a full Canvas
• Include key data
• Calculate costs and
revenues
• Estimate profi t potential
• Run fi nancial scenarios
based on different
assumptions
fi eld-test
investigate customer
acceptance and
feasibility
you’ve decided on
a potential new
business model, and
now want to fi eld-
test some aspects.
• Prepare a well-justifi ed
business case for the
new model
• Include prospective
or actual customers
in the fi eld test
• Test the Value Proposi-
tion, Channels, pricing
mechanism, and/or
other elements in the
marketplace
In architecture or product design, it is easy to understand
what is meant by prototyping at different scales, because
we are talking about physical artifacts. Architect Frank
Gehry and product designer Philippe Starck construct
countless prototypes during a project, ranging from
sketches and rough models to elaborate, full-featured
prototypes. We can apply the same scale and size varia-
tions when prototyping business models, but in a more
conceptual way. A business model prototype can be
anything from a rough sketch of an idea on a napkin to a
detailed Business Model Canvas to a fi eld-testable busi-
ness model. You may wonder how all of this is any differ-
ent from simply sketching out business ideas, something
any businessperson or entrepreneur does. Why do we
need to call it “prototyping”?
There are two answers. First, the mindset is different.
Second, the Business Model Canvas provides structure
to facilitate exploration.
Business model prototyping is about a mindset we
call “design attitude.” It stands for an uncompromising
commitment to discovering new and better business
models by sketching out many prototypes —both rough
and detailed—representing many strategic options. It’s
not about outlining only ideas you really plan to imple-
ment. It’s about exploring new and perhaps absurd, even
impossible ideas by adding and removing elements of
each prototype. You can experiment with prototypes at
different levels.
Prototypes at Different Scales
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Eight Business Model Prototypes
for Publishing a Book
Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes
for Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Book
Here are eight different business model prototypes
outlining possible ways to publish a book. Each
prototype highlights different elements of its model.
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167167
A prototype rarely describes all the elements of a “real”
business model. It focuses instead on illuminating
particular aspects of the model and thus indicating
new directions for exploration.
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design
decide executeinquiry
provoke
prototype
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John, 55
Founder & CEO
Strategy Consultancy
210 employees
1
outline big issues
• Think of a typical strategy-
consulting client.
• Pick the Customer Segment
and industry of your choice.
• Describe fi ve of the biggest
issues related to strategy
consulting. Refer to the
Empathy Map (see p. 131).
2
generate possibilities
• Take another close look at the
fi ve customer issues you selected.
• Generate as many consulting
business model ideas as you can.
• Pick the fi ve ideas you think are
best (not necessarily the most
realistic). Refer to the Ideation
Process (see p. 134).
3
prototype the business model
• Choose the three most diverse
ideas of the fi ve generated.
• Develop three conceptual business
model prototypes by sketching the
elements of each idea on different
Business Model Canvases.
• Annotate the pros and cons of
each prototype.
Wanted: A new Consulting
Business Model
John Sutherland needs your help. John is the founder and CEO of a midsized global
consulting fi rm that focuses on advising companies on strategy and organizational
issues. He is looking for a fresh, outside perspective on his company because he
believes that his business needs to be re-envisioned.
John built his company over two decades and now employs 210 people worldwide.
The focus of his consultancy is helping executives develop effective strategies, improve
their strategic management, and realign their organizations. He competes directly
with McKinsey, Bain, and Roland Berger. One problem he faces is being smaller than
his top-tier competitors, yet much larger than the typical niche-focused strategy con-
sultancy. But John is not preoccupied with this issue, since his company is still doing
reasonably well. What really troubles him is the strategic consulting profession’s poor
reputation in the marketplace, and growing client perception that the prevalent hourly
and project-based billing model is outdated. Though his own fi rm’s reputation remains
good, he has heard from several clients that they think consultants overcharge, under-
deliver, and show little genuine commitment to client projects.
Such comments alarm John, because he
believes his industry employs some of the brightest
minds in business. After much thought, he has con-
cluded that this reputation results from an outdated
business model, and he now wants to transform his
own company’s approach. John aims to make hourly
and project billing a thing of the past, but isn’t quite
sure how to do so.
Help John by providing him with some fresh per-
spectives on innovative consulting business models.
John built his company over two decades and now employs 210 people worldwide.
The focus of his consultancy is helping executives develop effective strategies, improve
their strategic management, and realign their organizations. He competes directly
with McKinsey, Bain, and Roland Berger. One problem he faces is being smaller than
sultancy. But John is not preoccupied with this issue, since his company is still doing
and project-based billing model is outdated. Though his own fi rm’s reputation remains
good, he has heard from several clients that they think consultants overcharge, under-
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Technique_No. 5
Storytelling
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171171
S p r i n g , 2 0 0 7
It is already far past
midnight as Anab Jain
watches the latest
video footage she shot
during the day . . .
S p r i n g , 2 0 0 7
It is already far past
midnight as Anab Jain
watches the latest
video footage she shot
during the day . . .
. . . She’s working on a series of small fi lms for
Colebrook Bosson Saunders, a designer and
manufacturer of award-winning oΩice furniture
accessories. Anab is a storyteller and designer,
and the fi lms she is working on are part of a
project to help Colebrook Bosson Saunders make
sense of how the future of work and the work-
place could look. To make this future tangible, she
invented three protagonists and projected them
into 2012. She gave them new jobs based on
research into new and emerging technologies and
the impact of demographics and environmental
risks on our future lives. The fi lms then show
this near future. But rather than describing 2012,
Anab takes the role of the storyteller, visiting this
future environment and interviewing the three
protagonists. They each explain their work and
show objects they use. The fi lms are real enough
to cause viewers to suspend their disbelief and
become intrigued by the diΩerent environment.
That is exactly what companies that hire Anab
Jain, like Microsoft and Nokia, are looking for:
stories to make potential futures tangible.
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As parents, we read stories to our kids, sometimes the same ones
we heard as children ourselves. As colleagues, we share the latest
organizational gossip. And as friends, we tell one another stories
of our personal lives. Somehow, it is only in our roles as business-
people that we avoid using stories. This is unfortunate. When was
the last time you heard a story used to introduce and discuss a
business issue? Storytelling is an undervalued and underused art
in the world of business. Let’s examine how storytelling can serve
as a powerful tool to make new business models more tangible.
By their very nature, new or innovative business models can be
diffi cult to describe and understand. They challenge the status
quo by arranging things in unfamiliar ways. They force listeners
to open their minds to new possibilities. Resistance is one likely
reaction to an unfamiliar model. Therefore, describing new busi-
ness models in a way that overcomes resistance is crucial.
Just as the Business Model Canvas helps you sketch and analyze
a new model, storytelling will help you effectively communicate
what it is all about. Good stories engage listeners, so the story is
the ideal tool to prepare for an in-depth discussion of a business
model and its underlying logic. Storytelling takes advantage of the
explanatory power of the Business Model Canvas by suspending
disbelief in the unfamiliar.
Storytelling’s Value
—
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Why Storytelling?
Introducing the New
New business model ideas can pop up anywhere in an
organization. Some ideas may be good, some may be
mediocre, and some may be, well, completely useless.
But even outstanding business model ideas can have a
tough time getting past layers of management and fi nding
their way into an organization’s strategy. So effectively
pitching your business model ideas to management is
crucial. This is where stories can help. Ultimately, manag-
ers are interested in numbers and facts, but having the
right story can win their attention. A good story is a com-
pelling way to quickly outline a broad idea before getting
caught up in the details.
Engaging Employees
When an organization transitions from an existing busi-
ness model to a new business model, it must convince
collaborators to follow. People need a crystal clear under-
standing of the new model and what it means for them.
In short, the organization needs to powerfully engage its
employees. That is where traditional text-based Power-
Point presentations usually fail. Introducing a new business
model through an engaging story-based presentation
(delivered with PowerPoint, drawings, or other techniques)
is far more likely to connect with listeners. Capturing
people’s attention and curiosity paves the way for in-depth
presentations and discussions of the unfamiliar.
Pitching to Investors
If you are an entrepreneur, chances are you will pitch your
idea or business model to investors or other potential
shareholders (and you already know that investors stop
listening the instant you tell them how you will become the
next Google). What investors and other shareholders want
to know is: How will you create value for customers? How
will you make money doing so? That’s the perfect setting
for a story. It’s the ideal way to introduce your venture and
business model before getting into the full business plan.
Engaging People
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.
Clarifi cation
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.
Make the New Tangible
Explaining a new, untested business model is like
explaining a painting with words alone. But telling a
story of how the model creates value is like applying
bright colors to canvas. It makes things tangible.
173
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Making Business Models Tangible?
The goal of telling a story is to introduce a new business model in an engaging,
tangible way. Keep the story simple and use only one protagonist. Depending on
the audience, you can use a different protagonist with a different perspective.
Here are two possible starting points.
Employee Observer
Explain the business model in the form of a story told
from an employee’s perspective. Use the employee as the
protagonist who demonstrates why the new model makes
sense. This may be because the employee frequently
observes customer problems that the new business model
solves. Or it may be that the new model makes better or
different use of resources, activities, or partnerships com-
pared to the old model (e.g. cost reduction, productivity
improvement, new revenue sources, etc.). In such a story,
the employee embodies the inner workings of an organiza-
tion and its business model and shows the reasons for
transitioning to a new model.
Customer Jobs
The customer perspective provides a powerful starting
point for a story. Cast a customer as the protagonist and
tell the tale from her point of view. Show the challenges
she faces and which jobs she must get done. Then outline
how your organization creates value for her. The story can
describe what she receives, how it fi ts into her life, and
what she is willing to pay for. Add some drama and emotion
to the story, and describe how your organization is making
her life easier. Ideally, weave in how your organization gets
these jobs done for the customer, with which resources and
through which activities. The biggest challenge with stories
told from a customer perspective is keeping them authentic
and avoiding a facile or patronizing tone.
customer
perspective
company
perspective
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Making the Future Tangible
Stories offer a wonderful technique for blurring the lines
separating reality and fi ction. Thus stories provide a
powerful tool for imparting tangibility to different versions
of the future. This can help you challenge the status quo
or justify adopting a new business model.
what future business model?
current business model
planned future business model
Provoke Ideas
Sometimes a story’s sole purpose is to challenge the
organizational status quo. Such a story must bring vividly
to life a future competitive environment in which the
current business model is severely challenged or even
obsolete. Telling a story like this blurs the lines between
reality and fi ction and catapults listeners into the future.
This suspends disbelief, instills a sense of urgency, and
opens the audience’s eyes to the need to generate new
business models. Such a story can be told from either an
organization or a customer perspective.
Justify Change
Sometimes an organization has strong ideas about how
its competitive landscape will evolve. In this context,
a story’s purpose is to show how a new business model
is ideally suited to help an organization compete in the
new landscape. Stories temporarily suspend disbelief
and help people imagine how the current business model
should evolve to remain effective in the future. The
story’s protagonist could be a customer, an employee,
or a top manager.
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Developing the Story
The goal of telling a story is to introduce a new business model in an engaging, tangible way.
Keep the story simple and use only one protagonist. Depending on the audience, you can use
a different protagonist with a different perspective. Here are two possible starting points.
Company Perspective
Ajit, 32, Senior IT Manager, Amazon.com
Ajit has worked for Amazon.com as an IT
manager for the past nine years. He and his
colleagues have pulled countless all-nighters
over the years to deliver the world-class IT
infrastructure that serves and maintains the
company’s e-commerce business.
Ajit is proud of his work. Along with its fulfi llment
excellence (1, 6), Amazon.com’s powerful IT infrastruc-
ture and software development capabilities (2, 3) form
the heart of its success at selling everything from books
to furniture online (7). Amazon.com (8) delivered over
half a billion page impressions to online shoppers (9) in
2008, and spent over a billion dollars for technology and
content (5), notably to run its e-commerce operations.
But now Ajit is even more excited, because Amazon.
com is traveling far beyond its traditional retail offers. It’s
in the process of becoming one of the most important
infrastructure providers in e-commerce.
With a service called Amazon Simple Storage
Systems (Amazon S3) (11) the company is now using its
own IT infrastructure to provide online storage to other
companies at rock-bottom prices. This means that an
online video hosting service can store all customer vid-
eos on Amazon’s infrastructure rather than buying and
maintaining its own servers. Similarly, Amazon Elastic
Computing Cloud (Amazon EC2) (11) offers Amazon.
com’s own computing capability to outside clients.
Ajit knows that outsiders might view such services
as distracting Amazon.com from its core retail opera-
tions. From the inside, though, the diversifi cation makes
perfect sense.
Ajit remembers that four years ago, his group spent
much time coordinating the efforts of the network engi-
neering groups, which managed IT infrastructure, and
the applications programming groups, which managed
Amazon.com’s many Web sites. So they decided to build
so-called application programming interfaces (APIs)
(12) between these two layers, which would allow the
latter to easily build on the former. Ajit also remembers
exactly when they started to realize that this would be
useful to external as well as internal customers. So under
Jeff Bezos’s leadership, Amazon.com decided to create a
new business with the potential to generate a signifi cant
revenue source for the company. Amazon.com opened
up its infrastructure APIs to provide what it calls Amazon
Web Services to outside parties on a fee-for-service basis
(14). Since Amazon.com had to design, create, imple-
ment, and maintain this infrastructure anyway, offering
it to third parties was hardly a distraction.
amazon web services: s3, ec2, sqs, other web services
companies and developers
aPIs
utility computing fees
fulfi llment
it infrastruc-
ture & software
development &
maintenance
it infrastruc-
ture & software
fulfi llment
infrastructure
technology & content
fulfi llment
(marketing)
online retail
shop
consumer
market
amazon.com
sales margin
s
1
2
3
4
5
6
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Customer Perspective
Randy, 41, Web Entrepreneur
Randy is a passionate Web entrepreneur.
After 18 years in the software industry he is
now running his second startup, providing
enterprise software through the Web. He
spent 10 years of his career in large software
companies and eight years in start-ups.
Throughout his career, one constant struggle has
been getting infrastructure investments right. To him,
running servers to provide services was basically a
commodity business, but a tricky one due to the enor-
mous costs involved. Tight management was crucial;
when you’re running a start-up you can’t invest millions
in a server farm.
But when serving the enterprise market, you’d better
have a robust IT infrastructure in place. That’s why Randy
was intrigued when a friend at Amazon.com told him
about the new IT infrastructure services his company
was launching. That was the answer to one of Randy’s
most important in-house jobs: running his services on a
world-class IT infrastructure, being able to scale quickly,
and all the while paying only for what his company was
actually using. That was exactly what Amazon’s Web
Services (11) promised. With Amazon Simple Storage
Systems (Amazon S3), Randy could plug into Amazon’s
infrastructure through a so-called application program-
ming interface (API)(12) and store all the data and appli-
cations for his own services on Amazon.com’s servers.
The same went for Amazon’s Elastic Computing Cloud
(Amazon EC2). Randy didn’t have to build and maintain
his own infrastructure to crunch the numbers for his
enterprise application service. He could simply plug into
Amazon and use its computing power in return for hourly
usage fees (14).
He immediately understood why the value was
coming from the giant e-tailer rather than from IBM or
Accenture. Amazon.com was providing and maintaining
IT infrastructure (2, 3, 5) to serve its online retail busi-
ness (7) every day on a global scale. This was its core
competency. Taking the step to offer the same infrastruc-
ture services to other companies (9) was not much of a
stretch. And since Amazon.com was in retail, a business
with low margins (11), it had to be extremely cost-
effi cient (5), which explained the rock-bottom prices of
its new Web Services.
amazon web services: s3, ec2, sqs, other web services
companies and developers
aPIs
utility computing fees
fulfi llment
it infrastruc-
ture & software
development &
maintenance
it infrastruc-
ture & software
fulfi llment
infrastructure
technology & content
fulfi llment
(marketing)
online retail
shop
consumer
market
amazon.com
sales margin
s
7
8
9
10
11
12
14
13
E-commerce
Infrastructure
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Talk & Image Video Clip Role Play Text & Image Comic Strip
description Tell the story of a protago-
nist and his environment
using one or several images
Tell the story of a protago-
nist and his environment
using video to blur lines
between reality and fi ction
Have people play the roles
of a story’s protagonists
to make the scenario real
and tangible
Tell the story of a protago-
nist and his environment
using text and one or
several images
Use a series of cartoon
images to tell the story
of a protagonist in a tan-
gible way
when? Group or conference
presentation
Broadcast to large audi-
ences or in-house use for
decisions with important
fi nancial implications
Workshops where par-
ticipants present newly
developed business model
ideas to each other
Reports or broadcasts
to large audiences
Reports or broadcasts
to large audiences
time & cost Low Medium to high Low Low Low to medium
Techniques
Telling an engaging story can be done in different ways. Each technique has
advantages and disadvantages and is better suited for certain situations
and audiences. Choose a suitable technique after you understand who your
audience will be and the context in which you will present.
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Talk & Image Video Clip Role Play Text & Image Comic Strip
description Tell the story of a protago-
nist and his environment
using one or several images
Tell the story of a protago-
nist and his environment
using video to blur lines
between reality and fi ction
Have people play the roles
of a story’s protagonists
to make the scenario real
and tangible
Tell the story of a protago-
nist and his environment
using text and one or
several images
Use a series of cartoon
images to tell the story
of a protagonist in a tan-
gible way
when? Group or conference
presentation
Broadcast to large audi-
ences or in-house use for
decisions with important
fi nancial implications
Workshops where par-
ticipants present newly
developed business model
ideas to each other
Reports or broadcasts
to large audiences
Reports or broadcasts
to large audiences
time & cost Low Medium to high Low Low Low to medium
SuperToast, Inc.
Business Model
Start practicing your business model storytelling skills with
this simple, slightly silly exercise: The business model of
SuperToast, Inc. outlined in the Canvas below. You can start
anywhere you like: with Customers, the Value Proposition,
Key Resources, or elsewhere. Invent your own story. The only
constraints are the nine images that outline SuperToast Inc.’s
business model. Try telling the story several times, starting
from different Building Blocks. Each starting point will give the
story a slightly different twist and emphasize different aspects
of the model.
By the way, this is a wonderful approach to introducing the
Business Model Canvas to the “uninitiated” in a simple and
engaging way—with a story.
©XPLANE 2008
constraints are the nine images that outline SuperToast Inc.’s
business model. Try telling the story several times, starting
from different Building Blocks. Each starting point will give the
story a slightly different twist and emphasize different aspects
By the way, this is a wonderful approach to introducing the
Business Model Canvas to the “uninitiated” in a simple and
constraints are the nine images that outline SuperToast Inc.’s
business model. Try telling the story several times, starting
from different Building Blocks. Each starting point will give the
story a slightly different twist and emphasize different aspects
By the way, this is a wonderful approach to introducing the
Business Model Canvas to the “uninitiated” in a simple and
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Technique_No. 6
Scenarios
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181181
F e b r u a r y, 2 0 0 0
Professor JeΩrey
Huang and Muriel
Waldvogel seem lost
in thought as they
ponder scale models
of the Swisshouse,
the new Swiss
consulate facility
to be built in Boston,
Massachusetts . . .
. . . Huang and Waldvogel were brought in to
conceive the architectural design of the building,
which, rather than issuing visas, will serve as a
networking and knowledge exchange hub. The
two are studying several scenarios of how people
will use the Swisshouse, and have constructed
both physical models and screenplay-like texts
designed to make tangible the purpose of this
unprecedented government facility.
One scenario describes Nicolas, a brain
surgeon who has just moved to Boston from
Switzerland. He visits the Swisshouse to meet
likeminded scientists and other members of the
Swiss-American community. A second scenario
tells the story of a Professor Smith, who uses
the Swisshouse to present his MIT Media Lab
research to Boston’s Swiss community and to
academics at two Swiss universities, using a
high-speed Internet connection.
These scenarios, while simple, are the result
of intensive research into roles the new type of
consulate might play. The stories illustrate the
Swiss government’s intentions and serve as think-
ing tools to guide the building’s design. Ultimately,
the new facility effectively accommodated the
applications imagined and fulfi lled its objectives.
Today, almost a decade after its conception,
the Swisshouse enjoys an outstanding reputa-
tion for helping build stronger international
ties in greater Boston’s science and technology
communities. Under the banner of the Swiss
Knowledge Network, or swissnex, the Swisshouse
has inspired “colleague” facilities in Bangalore,
San Francisco, Shanghai, and Singapore.
F e b r u a r y, 2 0 0 0
Professor JeΩrey
Huang and Muriel
Waldvogel seem lost
in thought as they
ponder scale models
of the Swisshouse,
the new Swiss
consulate facility
to be built in Boston,
Massachusetts . . .
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Scenarios can be useful in guiding the design of new business
models or innovating around existing models. Like visual thinking
(p. 146), prototyping (p. 160), and storytelling (p. 170), scenarios
render the abstract tangible. For our purposes, their primary
function is to inform the business model development process
by making the design context specifi c and detailed.
Here we discuss two types of scenarios. The fi rst describes differ-
ent customer settings: how products or services are used, what
kinds of customers use them, or customer concerns, desires, and
objectives. Such scenarios build on customer insights (p. 126),
but go a step further by incorporating knowledge about custom-
ers into a set of distinct, concrete images. By describing a specifi c
situation, a customer scenario makes customer insights tangible.
A second type of scenario describes future environments
in which a business model might compete. The goal here is
not to predict the future, but rather to imagine possible
futures in concrete detail. This exercise helps innova-
tors refl ect on the most appropriate business
model for each of several future environ-
ments. The strategy literature discusses this practice in detail
under the topic of “scenario planning.” Applying scenario
planning techniques to business model innovation forces
refl ection 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.
Scenario-Guided
Business Model Design
—
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informed
design
make tangible
Directions
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Explore Ideas
the wine farmer
Alexander inherited vineyards from his father, who in
turn inherited them from Alexander’s grandfather, who
emigrated from Switzerland to California to grow wine.
Carrying on this family history is hard work, but Alexan-
der enjoys adding small innovations to his family’s long
wine-growing tradition.
His latest discovery is a simple land management
application that now resides on his mobile phone.
Though not aimed at vintners, it was designed in such a
way that Alexander was easily able to customize it for his
own particular needs. The application integrates with his
task list, which means he now has a GPS-based to-do list
that reminds him when and where to check soil or grape
quality. Now he’s pondering how to share the application
with all of his managers. After all, the tool makes sense
only if everyone on the management team updates the
soil and grape quality database.
the tourists
Dale and Rose are traveling to Paris for an extended
weekend. They are excited because they haven’t visited
Europe since their honeymoon 25 years ago. The couple
organized this mini-escape from everyday work and
family life just two weeks before departure, leaving their
three kids with parents back in Portland. Lacking time
and energy to plan the trip in detail, they decided to
“wing it.” As a consequence, they were intrigued to read
an article in the infl ight magazine about a new GPS-
based tourist service that uses mobile phones. Dale and
Rose, both technology fans, rented the recommended
handset upon arrival at Charles de Gaulle airport. Now
they’re happily strolling around Paris on a customized
tour proposed by the compact device—all without having
consulted a single traditional tourist guide. They par-
ticularly appreciate the built-in audio guide that suggests
various story and background information options as they
approach particular sites. On the return fl ight, Dale and
Rose muse about relocating to Paris after retiring. Laugh-
ing to themselves, they wonder whether the handy device
would be enough to help them adapt to French culture.
Customer scenarios guide us during business model
design. They help us address issues such as which
Channels are most appropriate, which relationships
would be best to establish, and which problem solutions
customers would be most willing to pay for. Once we’ve
generated scenarios for different Customer Segments,
we can ask ourselves whether a single business model is
suffi cient to serve them all—or if we need to adapt the
model to each segment.
Here are three different scenarios describing loca-
tion-based services that make use of Global Positioning
Systems (GPS). They inform the business model design,
but are deliberately left open to allow for specifi c ques-
tions around the Value Proposition, Distribution Chan-
nels, Customer Relationships, and Revenue Streams. The
scenarios are written from the standpoint of a mobile
telephone service operator working to develop innovative
new business models.
the home delivery service
Tom has always dreamed of running his own small busi-
ness. He knew it would be diffi cult, but earning a living
by living his passion was defi nitely worth working more
and earning less.
Tom is a fi lm buff whose knowledge of movies is
encyclopedic, and that’s what customers of his home-
delivery DVD movie service appreciate. They can query
him about actors, production techniques, and just about
anything else fi lm-related before ordering movies for
delivery to their doorsteps.
Given the formidable online competition, it’s hardly
an easy business. But Tom’s been able to boost his
productivity and improve customer service with a new
GPS-based delivery planner acquired from his mobile
phone operator. For a small fee he equipped his phone
with software that easily integrated with his Customer
Relationship management program. This software won
back much of Tom’s time by helping him better plan
delivery routes and avoid traffi c. It even integrated with
the cell phones used by two aides who help out on week-
ends when demand for his service peaks. Tom knows
his little business will never make him rich, but wouldn’t
trade his situation for any corporate job.
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VP CR
CH
CSKP KA
KR
R$C$
the tourists
• Should the service be based on a proprietary device
or on an application that can be downloaded to
customer handsets?
• Could airlines serve as Channel partners to distribute
the service/device?
• Which prospective content partners would be
interested in being part of the service?
• Which Value Propositions would customers
be most willing to pay for?
the home delivery service
• Is the value added suffi cient to motivate
delivery services to pay monthly fees?
• Through which Channels could such Customer
Segments most easily be reached?
• With what other devices and/or software
would this service need to be integrated?
the wine farmer
• Is the value added suffi cient to motivate a
landowner to pay a monthly service fee?
• Through which Channels could such Customer
Segments most easily be reached?
• With what other devices and/or software would
this service need to be integrated?
Could we create resource,
activity, or Channel synergies
by simultaneously serving all
three Customer Segments?
questions regarding the business model
Could one model serve all
three Customer Segments?
Does each segment need
a separate, specifi c Value
Proposition?
Should we serve one or
more Customer Segments
at low or no cost in order
to attract other, high-value
customers?
KR CH
KA CSCR CSCS
R$
(
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tion is driven in part by pharmacogenomics, in part by
advances in diagnostics, and in part by renewed cost-
consciousness amid growing awareness that prevention
is less expensive than hospitalization and treatment.
These two drivers suggest trends that may or may not
materialize and thus provide four scenarios illustrated
in the fi gure opposite. These are:
• business as usual: Personal medicine fails to
materialize despite its technological feasibility (e.g.
for privacy reasons, etc.) and treatment remains
the core revenue generator.
• my.medicine: Personal medicine materializes, but
treatment remains the core revenue generator.
• the healthy patient: The shift toward preventive
medicine continues, but personal medicine remains
a fad despite technological feasibility.
• reinventing pharma: Personal and preventive
medicine comprise the new growth areas of the
drug industry.
Future Scenarios
The scenario is another thinking tool that helps us refl ect
on business models of the future. Scenarios kick-start
our creativity by providing concrete future contexts for
which we can invent appropriate business models. This
is usually easier and more productive than free brain-
storming about possible future business models. It does
require, however, developing several scenarios, which
can be costly depending on their depth and realism.
One sector under strong pressure to devise innovative
new business models is the pharmaceutical industry.
There are a number of reasons for this. Major player
research productivity has declined in recent years, and
these companies face enormous challenges discovering
and marketing new blockbuster drugs—traditionally the
core of their businesses. At the same time, patents on
many of their cash cow drugs are expiring. This means
revenues from those drugs are likely to be lost to generic
drug manufacturers. This combination of empty product
pipelines and evaporating revenue are just two head-
aches plaguing incumbent pharmaceutical makers.
In this turbulent context, combining business model
brainstorming with the development of a set of future
scenarios can be a powerful exercise. The scenarios
help trigger out-of-the-box thinking, which is not always
easy when trying to develop innovative business models.
Here’s an overview of how such an exercise might be
conducted.
First, we must devise a set of scenarios that paint
pictures of the future of the pharmaceutical industry.
This is best left to scenario planning specialists equipped
with the right tools and methodology. To illustrate, we
developed four bare bones scenarios based on two crite-
ria that may shape the evolution of the pharma industry
over the next decade. There are, of course, several other
drivers and many different scenarios that could be
crafted based on deeper research into the industry.
The two drivers we’ve selected are (1) the emergence of
personalized medicine and (2) the shift from treatment
toward prevention. The former is based on advances in
pharmacogenomics, the science of identifying underlying
causes of diseases based on a person’s DNA structure.
Someday, this may result in completely personalized
treatment, using customized drugs based on a person’s
genetic structure. The shift from treatment to preven-
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Pharma Business Models
of the Future
A) Business as Usual
• How will our business model look in the future if
these two drivers don’t change?
B) My.medicine
• What kinds of relationships will we have to establish
with patients?
• Which Distribution Channels are most appropriate
for personalized medicine?
• Which resources and activities, such as bioinformatics
and gene sequencing, do we need to develop?
C) The Healthy Patient:
• What kind of Customer Relationship does effective
preventive medicine require?
• Who are the main partners we should involve in
developing our business model for preventive medicine?
• What does the shift toward preventive medicine
imply about the relationship between doctors and
our salespeople?
D) Reinventing pharma:
• What does our Value Proposition look like in this
new landscape?
• What roles will Customer Segments play under our
new business model?
• Should we develop relevant activities, such as
bioinformatics and gene sequencing, in-house or
through partnerships?
prevention becomes the main
revenue generator
treatment remains the main
revenune generator
personalized medicine becomes
a market mainstay
personalized medicine
remains a fad
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Scenario D:
Reinventing Pharma
VP CR
CH
CSKP KA
KR
R$C$
CR
CH
KA
KR
CS
The landscape of the pharmaceutical industry has
completely changed. Pharmacogenomic research has
fulfi lled its promise and is now a core part of the indus-
try. Personalized drugs tailored to individual genetic
profi les account for a large portion of industry revenues.
All this has increased the importance of prevention—and
is partially replacing treatment, thanks to substantially
improved diagnostic tools and a better understanding of
the links between diseases and individual genetic profi les.
These two trends—the rise of personalized drugs
and the increasing importance of prevention—have
completely transformed the traditional pharmaceutical
manufacturing business model. The twin trends have
had a dramatic impact on pharma’s Key Resources and
Activities. They’ve transformed the way drug makers
approach customers and provoked substantial changes
in how revenue is generated.
The new pharma landscape has taken a heavy toll on
incumbents. A number were unable to adapt quickly
enough and disappeared or were acquired by more agile
players. At the same time, upstarts with innovative
business models were able to acquire signifi cant market
share. Some were themselves acquired and integrated
into the operations of larger but less nimble companies.
What are the attributes
of a competitive Value
Proposition under the
new landscape?
What new Key Resources
and Key Activities will pro-
vide a competitive advan-
tage when personalized
drugs and prevention are
the industry’s main focus?
How will revenues be
generated when the focus
is on personalized drugs
and prevention?
How will the Cost Structure
of a pharmaceutical compa-
ny’s business model change
under this new landscape?
Which partnerships will
maximize the effectiveness
of a drug company’s new
business model?
What roles will Customers
and Customer Relation-
ships play when personal-
ized drugs are an industry
mainstay?
KP VP
R$
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Future Scenarios and new
Business Models
1
develop a set of future scenarios based
on two or more main criteria.
2
describe each scenario with a story that
outlines the main elements of the scenario
3 workshop
develop one or more appropriate
business models for each scenario
The goal of combining scenarios with business model innovation efforts is to
help your organization prepare for the future. This process engenders meaning-
ful discussion about a diffi cult topic, because it forces participants to project
themselves into concrete “futures” underpinned by hard (though assumed) facts.
When participants describe their business models they must be able to make a
clear case for their choices within the context of the specifi c scenario.
Scenarios should be developed before the business model workshop begins. The
sophistication of the “screenplays” will vary depending on your budget. Keep in
mind that once you develop scenarios, they may be usable for other purposes as
well. Even simple scenarios help jumpstart creativity and project participants into
the future.
Ideally you should develop between two and four different scenarios based on
two or more criteria in order to run a good business model scenario workshop.
Each scenario should be titled and described with a short, specifi c narrative
outlining the main elements.
Begin the workshop by asking participants to review the scenarios, then develop
an appropriate business model for each. If your objective is to maximize a group’s
understanding of all the potential futures, you might want everyone to participate
in a single group and let them collectively develop different business models for
each scenario. If you are more interested in generating a set of very diverse future
business models, you might decide to organize participants into different groups
that work in parallel on separate solutions for the various scenarios.
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Fu
r
t
h
e
r
r
e
a
d
In
g
s
Design Attitude
Managing as Designing
by Richard Boland Jr. and Fred Collopy
(Stanford Business Books, 2004)
A Whole New Mind: Why Right-Brainers
Will Rule the Future
by Daniel H. Pink (Riverhead Trade, 2006)
The Ten Faces of Innovation: Strategies
for Heightening Creativity
by Tom Kelley (Profi le Business, 2008)
Customer Insights
Sketching User Experiences: Getting
the Design Right and the Right Design
by Bill Buxton (Elsevier, 2007)
Designing for the Digital Age: How to Create
Human-Centered Products and Services
by Kim Goodwin (John Wiley & Sons, Inc. 2009)
Ideation
The Art of Innovation: Lessons in Creativity
from IDEO, America’s Leading Design Firm
by Tom Kelley, Jonathan Littman, and
Tom Peters (Broadway Business, 2001)
IdeaSpotting: How to Find Your Next
Great Idea
by Sam Harrison (How Books, 2006)
Visual Thinking
The Back of the Napkin: Solving Problems
and Selling Ideas with Pictures
by Dan Roam (Portfolio Hardcover, 2008)
Brain Rules: 12 Principles for Surviving
and Thriving at Work, Home, and School
by John Medina (Pear Press, 2009)
(pp. 221–240)
Prototyping
Serious Play: How the World’s Best
Companies Simulate to Innovate
by Michael Schrage (Harvard Business
Press, 1999)
Designing Interactions
by Bill Moggridge (MIT Press, 2007) (ch. 10)
Storytelling
The Leader’s Guide to Storytelling: Mastering
the Art and Discipline of Business Narrative
by Stephen Denning (Jossey-Bass, 2005)
Made to Stick: Why Some Ideas Survive
and Others Die
by Chip Heath and Dan Heath
(Random House, 2007)
Scenarios
The Art of the Long View: Planning for
the Future in an Uncertain World
by Peter Schwartz (Currency Doubleday, 1996)
Using Trends and Scenarios as Tools for
Strategy Development
by Ulf Pillkahn (Publicis Corporate
Publishing, 2008)
Further Reading on
Design and Business
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Do you have the guts to start from scratch?
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In my work with non-profit organiza-
tions, the biggest obstacles to business
model innovation are 1. inability
to understand the existing business
model, 2. lack of a language to talk
about business model innovation,
and 3. counterproductive constraints
on imagining the design of new
business models.
Jeff De Cagna, United States
The management of an SME (wood
manufacturing industry-WMI) did not
begin changing its business model
until the bank no longer wanted to give
them credit. The biggest obstacle to
business model innovation (in the WMI
case and likely every case) is the people
who resist any changes until problems
appear and need corrective actions.
Danilo Tic, Slovenia
EvEryoNE
LovES
INNovAtIoN
uNtIL It AffEctS
thEm.
The biggest obstacle to business
model innovation is not technology:
it is we humans and the institutions
we live in. Both are stubbornly resistant
to experimentation and change.
Saul Kaplan, United States
I have found that the management
and key employees in many SME
companies lack a common framework
and language for discussing business
model innovation. They do not have the
theoretical background, but they are
essential to the process because they
are the ones who know the business.
Michael N. Wilkens, Denmark
METRICS
OF SUCCESS:
They can direct the scope and ambition
of behavior. At best they can allow
for the agility that brings truly disruptive
innovation; at worst they reduce vision
to near term iterative cycles of
evolution that fail to take opportunity
from changing environments.
Nicky Smyth, U.K.
Fear to take risks. As a CEO you need
courage to take a business model
innovation decision. In 2005, Dutch
telecom provider KPn decided to
migrate proactively to IP and thus to
cannibalize its traditional business. KPn
is now internationally recognized as an
outperformer in the telco industry.
Kees Groeneveld, Netherlands
In my experience with a large archive,
the biggest hurdle was to make them
understand that even an archive has a
business model. We overcame this by
starting a small project and showed
them this would affect their current
model.
Harry Verwayen, Netherlands
GET EVERYBODY
inVolVed
and keep up the speed of change. For
our disruptive meeting concept Seats-
2meet.com we trained the staff almost
daily for a period of four months just
on communicating this new business
model to all stakeholders.
Ronald van Den Hoff, Netherlands
1. Organizational antibodies that attack
a project as resources drawn from
their area conflict with their business
objectives. 2. Project management
processes that can’t deal with risks/
uncertainties associated with bold
ideas so leaders decline or claw ideas
back to existing comfort zones.
John Sutherland, Canada
The biggest obstacle is a belief that
models must contain every detail—
experience shows that clients ask for
a lot but settle for simplicity once they
have insight into their business.
David Edwards, Canada
WHAT
STAnDS
In YOUR
WAY?
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1. not knowing: What is a business
model? What is business model innova-
tion? 2. not able: How to innovate a
business model? 3. not willing: Why
should I innovate my business model?
Is there a sense of urgency?
4. Combinations of the above.
Ray Lai, Malaysia
In my experience,
the biggest obstacle
is failure to change
the thinking process
from the traditional
linear way to holistic
and systemic.
Entrepreneurs need to make a concerted
effort to develop the capability to envi-
sion the model as a system whose parts
interact with each other and affect each
other in a holistic and non-linear manner.
Jeaninne Horowitz Gassol, Spain
As an Internet marketer for 15 years I’ve
seen new business models live and die.
The key for the
winners was
that the major
stakeholders
completely
understood
and advanced
the model.
Stephanie Diamond, United States
THE MENTAL
MODELS
of executives and the board.
The lack of candor and fear of deviating
from the status quo sets in groupthink.
Executives are comfortable with exploit
phase and not ‘explore’ phase, which is
unknown and hence risky.
Cheenu Srinivasan, Australia
In my experience as an Internet
entrepreneur and investor, the biggest
obstacles are lack of vision and bad
governance. Without good vision and
governance a company will miss the
emerging industry paradigm and avoid
reinventing the business model in time.
Nicolas De Santis, U.K.
Within large multinationals it is key to
create cross-functional understanding
and synergies. Business model innova-
tion does not hold itself to the organiza-
tional constraints that the people in
it experience. For successful execution
it is key to have all disciplines on board
and interconnected!
Bas van Oosterhout, Netherlands
FUG:
FEAr,
uNCErTAINTy
& grEED
of the people vested in the current
business model. . .
Frontier Service Design, LLC,
United States
A lack of
entrepreneurship
in the organization.
Innovation is about taking risks, wisely.
If there is no room for creative insights
or if people can’t think and act outside
the boundaries of the existing model,
don’t even try to innovate: you will fail.
Ralf de Graaf, Netherlands
On an organizational level, the biggest
obstacle for a large, successful company
is a reluctance to risk doing anything
that may jeopardize their current model.
On a leader/personal level, their very
success was likely a product of the
current business model…
Jeffrey Murphy, United States
“If it ain’t broke,
don’t fix it”
thinking. Established companies stick
to current ways of doing business until
it is obvious that the customers want
something else.
Ola Dagberg, Sweden
StrENGth
OF LEADERSHIP
can be an obstacle. Risk management
and due diligence color the perceived
purpose of many boards. Where innova-
tion is assessed as a risk issue it’s easy
to relegate it to tokenism, especially
within cultural institutions that tend
not to have championing cultures. Here
innovation often dies the death of a
thousand cuts inflicted by entrenched
critical business processes, instead of
being placed front and center as the fuel
for future strategy.
Anne McCrossan, U.K.
Oftentimes, companies design an
innovative business model, but do a
poor job of constructing a compensation
structure that is properly aligned with
the model and its objectives.
Andrew Jenkins, Canada
CurrENT
SUCCESS
prevents companies from asking them-
selves how their business model could
be innovated. Organizational structures
are not typically designed for new busi-
ness models to emerge.
Howard Brown, United States
The companies that are the most
successful in continuously improving
the efficiency of their current business
model often get blinded by
“this is the
way things
are done in
our business”
and fail to see the emergence of
innovative business models.
Wouter van der Burg, Netherlands
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Strategy
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Strategy
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“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
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In previous sections we taught you a language for describing, discussing,
and designing business models, described business model patterns,
and explained techniques that facilitate the design and invention of new
business models. This next section is about re-interpreting strategy
through the lens of the Business Model Canvas. This will help you
constructively question established business models and strategically
examine the environment in which your own business model functions.
The following pages explore four strategic areas: the Business Model
Environment, Evaluating Business Models, a Business Model Perspective
on Blue Ocean Strategies, and how to Manage Multiple Business Models
within an enterprise.
Strategy
200 Business Model
Environment
212 Evaluating Business
Models
226 Business Model
Perspective on Blue
Ocean Strategy
232 Managing Multiple
Business Models
bmgen_final.indd 199 6/15/10 5:44 PM
200
business model environment:
context, design drivers, and constraints
Business models are designed and executed in specific environments.
Developing a good understanding of your organization’s environment helps
you conceive stronger, more competitive business models.
Continuous environmental scanning is more important than ever
because of the growing complexity of the economic landscape (e.g. net-
worked business models), greater uncertainty (e.g. technology innovations)
and severe market disruptions (e.g. economic turmoil, disruptive new Value
Propositions). Understanding changes in the environment helps you adapt
your model more effectively to shifting external forces.
You may fi nd it helpful to conceive of the external environment as a
sort of “design space.” By this we mean thinking of it as a context in which
to conceive or adapt your business model, taking into account a number
of design drivers (e.g. new customer needs, new technologies, etc.) and
design constraints (e.g. regulatory trends, dominant competitors, etc.). This
environment should in no way limit your creativity or predefi ne your business
model. It should, however, infl uence your design choices and help you make
more informed decisions. With a breakthrough business model, you may
even become a shaper and transformer of this environment, and set new
standards for your industry.
To get a better grasp on your business model “design space,” we suggest
roughly mapping four main areas of your environment. These are (1) market
forces, (2) industry forces, (3) key trends, and (4) macroeconomic forces.
If you’d like to deepen your analysis of the landscape beyond the simple
mapping we propose, each of these four areas is backed by a large body of
literature and specifi c analytical tools.
In the following pages, we describe the key external forces that infl uence
business models and categorize them using the four areas just mentioned.
The pharmaceutical industry, introduced in the previous chapter, is used to
illustrate each external force. The pharma sector is likely to undergo substan-
tial transformation in coming years, though it is unclear how the changes
will play out. Will biotechnology companies, which are currently copying the
pharmaceutical sector’s blockbuster drug model, come up with new, disrup-
tive business models? Will technological change lead to transformation?
Will consumers and market demand force changes?
We strongly advocate mapping your own business model environment
and refl ecting on what trends mean for the future of your enterprise. A good
understanding of the environment will allow you to better evaluate the differ-
ent directions in which your business model might evolve. You may also want
to consider creating scenarios of future business model environments (see p.
186). This can be a valuable tool for jumpstarting business model innovation
work or simply preparing your organization for the future.
bmgen_final.indd 200 6/15/10 5:44 PM
201
technology trends socioeconomic trends
regulatory trends societal and cultural trends
market issues
market segments
switching costs
revenue attractiveness
needs and demands
technology trends socioeconomic trends
regulatory trends societal and cultural trends
market issues
market segments
switching costs
revenue attractiveness
needs and demands
VP CR
CH
CSKP KA
KR
R$C$
stakeholders
suppliers and other value
chain actors
competitors
(incumbents)
new entrants
(insurgents)
substitute products
and services
key
trends
global market conditions economic infrastructure
capital markets commodities and other resources
market
forces
industry
forces
macro-
economic
forces
— macroeconomics —
—foresight —
—
c
o
m
pe
ti
ti
v
e
a
n
a
ly
si
s
— —
m
a
rket a
n
a
lysis —
global market conditionsglobal market conditionsglobal market conditions
capital marketscapital marketscapital marketscapital markets
economic infrastructureeconomic infrastructure
commodities and other resourcescommodities and other resourcescommodities and other resourcescommodities and other resources
regulatory trendsregulatory trends
technology trendstechnology trends
KPKP
societal and cultural trendssocietal and cultural trendssocietal and cultural trendssocietal and cultural trends
socioeconomic trendssocioeconomic trends
suppliers and other value suppliers and other value suppliers and other value suppliers and other value
chain actorschain actors
stakeholdersstakeholdersstakeholdersstakeholders
competitors competitors
(incumbents)(incumbents)
new entrants new entrants new entrants new entrants new entrants
(insurgents)(insurgents)
substitute products substitute products
KRKR
CSCS
switching costsswitching costsswitching costsswitching costs
revenue attractivenessrevenue attractiveness
market segmentsmarket segmentsmarket segmentsmarket segments
needs and demandsneeds and demands
market issuesmarket issues
bmgen_final.indd 201 6/15/10 5:44 PM
202
Main Qs Pharmaceutical Industry Landscape
market issues Identifi es key issues driving and transforming your
market from Customer and Offer perspectives
What are the crucial issues affecting the customer
landscape? Which shifts are underway? Where is
the market heading?
• Skyrocketing healthcare costs
• Emphasis shifting from treatment to prevention
• Treatments, diagnostics, devices, and support services
are converging
• Emerging markets becoming more important
market segments Identifi es the major market segments, describes their
attractiveness, and seeks to spot new segments
What are the most important Customer Segments?
Where is the biggest growth potential? Which segments
are declining? Which peripheral segments deserve
attention?
• Doctors and healthcare providers
• Governments/regulators
• Distributors
• Patients
• Strong potential in emerging markets
• U.S. remains the predominant global market
needs and demands Outlines market needs and analyzes how well
they are served
What do customers need? Where are the biggest
unsatisfi ed customer needs? What do customers really
want to get done? Where is demand increasing?
Declining?
• Strong, with dispersed need for niche treatments
• Need to manage exploding cost of health care
• Large, unsatisfi ed health care needs in emerging markets
and developing countries
• Consumers are better informed
switching costs Describes elements related to customers switching
business to competitors
What binds customers to a company and its offer?
What switching costs prevent customers from defecting
to competitors? Is it easy for customers to fi nd
and purchase similar offers? How important is brand?
• Monopoly on patent-protected drugs
• Low switching costs for patent-expired drugs replaceable
by generic versions
• Growing amount of quality information available online
• Deals with governments, large-scale healthcare providers
increase switching costs
revenue
attractiveness
Identifi es elements related to revenue attractiveness
and pricing power
What are customers really willing to pay for? Where can
the largest margins be achieved? Can customers easily
fi nd and purchase cheaper products and services?
• High margins on patent-protected drugs
• Low margins on generic drugs
• Healthcare providers, governments enjoy growing infl uence
over prices
• Patients continue to have little infl uence over prices
202
market issues Identifi es key issues driving and transforming your
market from Customer and Offer perspectives
needs and demands Outlines market needs and analyzes how well
they are served
switching costs Describes elements related to customers switching
business to competitors
revenue
attractiveness
Outlines market needs and analyzes how well Outlines market needs and analyzes how well Outlines market needs and analyzes how well
they are servedthey are served
Describes elements related to customers switching Describes elements related to customers switching Describes elements related to customers switching Describes elements related to customers switching Describes elements related to customers switching
business to competitorsbusiness to competitors
attractivenessattractivenessattractivenessattractiveness
Identifi es key issues driving and transforming your Identifi es key issues driving and transforming your Identifi es key issues driving and transforming your Identifi es key issues driving and transforming your
market from Customer and Offer perspectivesmarket from Customer and Offer perspectivesmarket from Customer and Offer perspectivesmarket from Customer and Offer perspectives
— market analysis —
market
forces
Identifi es the major market segments, describes their
attractiveness, and seeks to spot new segments
What are the most important Customer Segments?
Where is the biggest growth potential? Which segments
are declining? Which peripheral segments deserve
attention?
market segments Identifi es the major market segments, describes their
attractiveness, and seeks to spot new segments
Identifi es the major market segments, describes their Identifi es the major market segments, describes their
attractiveness, and seeks to spot new segmentsattractiveness, and seeks to spot new segmentsattractiveness, and seeks to spot new segmentsattractiveness, and seeks to spot new segments
bmgen_final.indd 202 6/15/10 5:44 PM
203
Main Qs Pharmaceutical Industry Landscape
market issues Identifi es key issues driving and transforming your
market from Customer and Offer perspectives
What are the crucial issues affecting the customer
landscape? Which shifts are underway? Where is
the market heading?
• Skyrocketing healthcare costs
• Emphasis shifting from treatment to prevention
• Treatments, diagnostics, devices, and support services
are converging
• Emerging markets becoming more important
market segments Identifi es the major market segments, describes their
attractiveness, and seeks to spot new segments
What are the most important Customer Segments?
Where is the biggest growth potential? Which segments
are declining? Which peripheral segments deserve
attention?
• Doctors and healthcare providers
• Governments/regulators
• Distributors
• Patients
• Strong potential in emerging markets
• U.S. remains the predominant global market
needs and demands Outlines market needs and analyzes how well
they are served
What do customers need? Where are the biggest
unsatisfi ed customer needs? What do customers really
want to get done? Where is demand increasing?
Declining?
• Strong, with dispersed need for niche treatments
• Need to manage exploding cost of health care
• Large, unsatisfi ed health care needs in emerging markets
and developing countries
• Consumers are better informed
switching costs Describes elements related to customers switching
business to competitors
What binds customers to a company and its offer?
What switching costs prevent customers from defecting
to competitors? Is it easy for customers to fi nd
and purchase similar offers? How important is brand?
• Monopoly on patent-protected drugs
• Low switching costs for patent-expired drugs replaceable
by generic versions
• Growing amount of quality information available online
• Deals with governments, large-scale healthcare providers
increase switching costs
revenue
attractiveness
Identifi es elements related to revenue attractiveness
and pricing power
What are customers really willing to pay for? Where can
the largest margins be achieved? Can customers easily
fi nd and purchase cheaper products and services?
• High margins on patent-protected drugs
• Low margins on generic drugs
• Healthcare providers, governments enjoy growing infl uence
over prices
• Patients continue to have little infl uence over prices
what new key
resources do we need
to develop or acquire
in light of the ongoing
shift from treatment
to prevention?
how can our value
proposition address
the issue of exploding
health costs?
what would a greater
focus on emerging
markets mean for the
other building blocks
in our model?
what kind of new
revenue opportunities
might be created by
the shift in emphasis
from treatment to
prevention?
how can we main-
tain earnings while
addressing the public
struggle to cope with
skyrocketing health-
care costs?
what does the conver-
gence of treatment,
diagnostics, devices,
and support services
mean for our
key resources and
activities?
VP CR
CH
CSKP KA
KR
R$C$
• Doctors and healthcare providers
• Governments/regulators
• Distributors
• Patients
• Strong potential in emerging markets
• U.S. remains the predominant global market
bmgen_final.indd 203 6/15/10 5:44 PM
204
Main Qs Pharmaceutical Industry Landscape
competitors
(incumbents)
Identifi es incumbent competitors and their
relative strengths
Who are our competitors? Who are the dominant
players in our particular sector? What are their
competitive advantages or disadvantages? Describe
their main offers. Which Customer Segments are they
focusing on? What is their Cost Structure? How much
infl uence do they exert on our Customer Segments,
Revenue Streams, and margins?
• Several large and medium size players compete in pharma
• Most players are struggling with empty product
pipelines and low R&D productivity
• Growing trend toward consolidation through mergers
and acquisitions
• Major players acquire biotech, specialty drug developers
to fi ll product pipeline
• Several players starting to build on open innovation processes
new entrants
(insurgents)
Identifi es new, insurgent players and determines whether
they compete with a business model different from yours
Who are the new entrants in your market? How
are they different? What competitive advantages or
disadvantages do they have? Which barriers must they
overcome? What are their Value Propositions? Which
Customer Segments are they focused on? What is their
Cost Structure? To what extent do they infl uence your
Customer Segments, Revenue Streams, and margins?
• Little disruption of the pharmaceutical industry over the
last decade
• Main new entrants are generic drug companies, particularly
from India
substitute products
and services
Describes potential substitutes for your offers—including
those from other markets and industries
Which products or services could replace ours? How
much do they cost compared to ours? How easy it is for
customers to switch to these substitutes? What business
model traditions do these substitute products stem from
(e.g. high-speed trains versus airplanes, mobile phones
versus cameras, Skype versus long-distance telephone
companies)?
• To a certain extent, prevention represents a substitution
for treatment
• Patent-expired drugs replaced by low-cost generics
suppliers and other
value chain actors
Describes the key value chain incumbents in your market
and spots new, emerging players
Who are the key players in your industry value chain?
To what extent does your business model depend
on other players? Are peripheral players emerging?
Which are most profi table?
• Increasing use of research contractors
• Biotech fi rms and specialty drug developers as important
new product generators
• Doctors and healthcare providers
• Insurance companies
• Bioinformatics providers growing in importance
• Laboratories
stakeholders Specifi es which actors may infl uence your organization
and business model
Which stakeholders might infl uence your business
model? How infl uential are shareholders? Workers?
The government? Lobbyists?
• Shareholder pressure forces drug companies to focus
on short term (quarterly) fi nancial results
• Governments/regulators have a strong stake in the actions
of pharmaceutical companies because of their pivotal role
in healthcare services
• Lobbyists, social enterprise groups and/or foundations,
particularly those pursuing agendas such as low-cost
treatments for developing countries
• Scientists, who represent the core talent of the drug
manufacturing industry
204
(incumbents)
new entrants
(insurgents)
Identifi es new, insurgent players and determines whether
they compete with a business model different from yours
substitute products
and services
Describes potential substitutes for your offers—including
those from other markets and industries
stakeholders
they compete with a business model different from yours
(incumbents)(incumbents)(incumbents)(incumbents)(incumbents)(incumbents)(incumbents)
Identifi es new, insurgent players and determines whether Identifi es new, insurgent players and determines whether Identifi es new, insurgent players and determines whether Identifi es new, insurgent players and determines whether
they compete with a business model different from yoursthey compete with a business model different from yoursthey compete with a business model different from yoursthey compete with a business model different from yoursthey compete with a business model different from yoursthey compete with a business model different from yours
Describes potential substitutes for your offers—including Describes potential substitutes for your offers—including Describes potential substitutes for your offers—including Describes potential substitutes for your offers—including Describes potential substitutes for your offers—including
those from other markets and industriesthose from other markets and industriesthose from other markets and industriesthose from other markets and industriesthose from other markets and industriesthose from other markets and industriesthose from other markets and industries
— competitive analysis —
industry
forces
Describes the key value chain incumbents in your market
and spots new, emerging players
Who are the key players in your industry value chain?
To what extent does your business model depend
on other players? Are peripheral players emerging?
Which are most profi table?
suppliers and other
value chain actors
Describes the key value chain incumbents in your market
and spots new, emerging players
Describes the key value chain incumbents in your market Describes the key value chain incumbents in your market
and spots new, emerging playersand spots new, emerging playersand spots new, emerging playersand spots new, emerging players
bmgen_final.indd 204 6/15/10 5:44 PM
205
Main Qs Pharmaceutical Industry Landscape
competitors
(incumbents)
Identifi es incumbent competitors and their
relative strengths
Who are our competitors? Who are the dominant
players in our particular sector? What are their
competitive advantages or disadvantages? Describe
their main offers. Which Customer Segments are they
focusing on? What is their Cost Structure? How much
infl uence do they exert on our Customer Segments,
Revenue Streams, and margins?
• Several large and medium size players compete in pharma
• Most players are struggling with empty product
pipelines and low R&D productivity
• Growing trend toward consolidation through mergers
and acquisitions
• Major players acquire biotech, specialty drug developers
to fi ll product pipeline
• Several players starting to build on open innovation processes
new entrants
(insurgents)
Identifi es new, insurgent players and determines whether
they compete with a business model different from yours
Who are the new entrants in your market? How
are they different? What competitive advantages or
disadvantages do they have? Which barriers must they
overcome? What are their Value Propositions? Which
Customer Segments are they focused on? What is their
Cost Structure? To what extent do they infl uence your
Customer Segments, Revenue Streams, and margins?
• Little disruption of the pharmaceutical industry over the
last decade
• Main new entrants are generic drug companies, particularly
from India
substitute products
and services
Describes potential substitutes for your offers—including
those from other markets and industries
Which products or services could replace ours? How
much do they cost compared to ours? How easy it is for
customers to switch to these substitutes? What business
model traditions do these substitute products stem from
(e.g. high-speed trains versus airplanes, mobile phones
versus cameras, Skype versus long-distance telephone
companies)?
• To a certain extent, prevention represents a substitution
for treatment
• Patent-expired drugs replaced by low-cost generics
suppliers and other
value chain actors
Describes the key value chain incumbents in your market
and spots new, emerging players
Who are the key players in your industry value chain?
To what extent does your business model depend
on other players? Are peripheral players emerging?
Which are most profi table?
• Increasing use of research contractors
• Biotech fi rms and specialty drug developers as important
new product generators
• Doctors and healthcare providers
• Insurance companies
• Bioinformatics providers growing in importance
• Laboratories
stakeholders Specifi es which actors may infl uence your organization
and business model
Which stakeholders might infl uence your business
model? How infl uential are shareholders? Workers?
The government? Lobbyists?
• Shareholder pressure forces drug companies to focus
on short term (quarterly) fi nancial results
• Governments/regulators have a strong stake in the actions
of pharmaceutical companies because of their pivotal role
in healthcare services
• Lobbyists, social enterprise groups and/or foundations,
particularly those pursuing agendas such as low-cost
treatments for developing countries
• Scientists, who represent the core talent of the drug
manufacturing industry
for which parts of
the industry value
chain should key
partnerships be built
as opposed to develop-
ing key resources and
activities in-house?
must the value
proposition change to
accommodate shifts in
the industry (e.g. the
growing importance
of biotech fi rms)?
which part of the
pharma industry
offers the greatest
earnings potential?
which of the key
resources emerging
among new actors in
the value chain need to
be developed in-house
(e.g. bioinformatics)?
is it necessary to
acquire smaller
fi rms to fi ll product
pipelines?
could suppliers
such as research
contractors turn
into competitors?
VP CR
CH
CSKP KA
KR
R$C$
• Increasing use of research contractors
• Biotech fi rms and specialty drug developers as important
new product generators
• Doctors and healthcare providers
• Insurance companies
• Bioinformatics providers growing in importance
• Laboratories
bmgen_final.indd 205 6/15/10 5:44 PM
206
Main Qs Pharmaceutical Industry Landscape
technology trends Identifi es technology trends that could threaten your
business model—or enable it to evolve or improve
What are the major technology trends both inside and
outside your market? Which technologies represent
important opportunities or disruptive threats? Which
emerging technologies are peripheral customers adopting?
• Emergence of pharmacogenomics, declining cost of gene
sequencing, and the immenent rise of personalized medicine
• Major advances in diagnostics
• Use of pervasive computing and nanotechnology for the
injection/delivery of drugs
regulatory trends Describes regulations and regulatory trends that infl uence
your business model
Which regulatory trends infl uence your market? What
rules may affect your business model? Which regulations
and taxes affect customer demand?
• Heterogeneous global regulatory landscape in the pharma-
ceutical industry
• Many countries prohibit drug companies from marketing
directly to consumers
• Regulatory agency pressure to publish data on unsuccessful
clinical trials
societal and
cultural trends
Identifi es major societal trends that may infl uence your
business model
Describe key societal trends. Which shifts in cultural or
societal values affect your business model? Which trends
might infl uence buyer behavior?
• Generally unfavorable image of big drug makers
• Growing social consciousness among consumers
• Customers increasingly conscious of global warming,
sustainability issues, prefer “green” purchases
• Customers are better informed about drug maker activity
in developing countries (e.g. HIV/AIDS drugs)
socioeconomic
trends
Outlines major socioeconomic trends relevant to your
business model
What are the key demographic trends? How would
you characterize income and wealth distribution in your
market? How high are disposable incomes? Describe
spending patterns in your market (e.g. housing, health-
care, entertainment, etc.). What portion of the popula-
tion lives in urban areas as opposed to rural settings?
• Aging society in many mature markets
• Good but costly healthcare infrastructure in mature markets
• Growing middle class in emerging markets
• Large, unsatisfi ed healthcare needs in developing countries
206
technology trends Identifi es technology trends that could threaten your
business model—or enable it to evolve or improve
societal and
cultural trends
Identifi es major societal trends that may infl uence your
business model
socioeconomic
trends
Outlines major socioeconomic trends relevant to your
business model
Identifi es major societal trends that may infl uence your Identifi es major societal trends that may infl uence your
business modelbusiness modelbusiness modelbusiness modelbusiness model
Outlines major socioeconomic trends relevant to your Outlines major socioeconomic trends relevant to your Outlines major socioeconomic trends relevant to your Outlines major socioeconomic trends relevant to your
business modelbusiness modelbusiness modelbusiness modelbusiness model
Identifi es technology trends that could threaten your Identifi es technology trends that could threaten your Identifi es technology trends that could threaten your Identifi es technology trends that could threaten your
business model—or enable it to evolve or improve business model—or enable it to evolve or improve business model—or enable it to evolve or improve business model—or enable it to evolve or improve
— foresight —
key
trends
Describes regulations and regulatory trends that infl uence
your business model
Which regulatory trends infl uence your market? What
rules may affect your business model? Which regulations
and taxes affect customer demand?
regulatory trends Describes regulations and regulatory trends that infl uence
your business model
Describes regulations and regulatory trends that infl uence Describes regulations and regulatory trends that infl uence Describes regulations and regulatory trends that infl uence Describes regulations and regulatory trends that infl uence
your business modelyour business modelyour business modelyour business model
bmgen_final.indd 206 6/15/10 5:44 PM
207
Main Qs Pharmaceutical Industry Landscape
technology trends Identifi es technology trends that could threaten your
business model—or enable it to evolve or improve
What are the major technology trends both inside and
outside your market? Which technologies represent
important opportunities or disruptive threats? Which
emerging technologies are peripheral customers adopting?
• Emergence of pharmacogenomics, declining cost of gene
sequencing, and the immenent rise of personalized medicine
• Major advances in diagnostics
• Use of pervasive computing and nanotechnology for the
injection/delivery of drugs
regulatory trends Describes regulations and regulatory trends that infl uence
your business model
Which regulatory trends infl uence your market? What
rules may affect your business model? Which regulations
and taxes affect customer demand?
• Heterogeneous global regulatory landscape in the pharma-
ceutical industry
• Many countries prohibit drug companies from marketing
directly to consumers
• Regulatory agency pressure to publish data on unsuccessful
clinical trials
societal and
cultural trends
Identifi es major societal trends that may infl uence your
business model
Describe key societal trends. Which shifts in cultural or
societal values affect your business model? Which trends
might infl uence buyer behavior?
• Generally unfavorable image of big drug makers
• Growing social consciousness among consumers
• Customers increasingly conscious of global warming,
sustainability issues, prefer “green” purchases
• Customers are better informed about drug maker activity
in developing countries (e.g. HIV/AIDS drugs)
socioeconomic
trends
Outlines major socioeconomic trends relevant to your
business model
What are the key demographic trends? How would
you characterize income and wealth distribution in your
market? How high are disposable incomes? Describe
spending patterns in your market (e.g. housing, health-
care, entertainment, etc.). What portion of the popula-
tion lives in urban areas as opposed to rural settings?
• Aging society in many mature markets
• Good but costly healthcare infrastructure in mature markets
• Growing middle class in emerging markets
• Large, unsatisfi ed healthcare needs in developing countries
which new key
resources and
activities will prove
advantageous when
personalized drugs
and diagnostics are
widely used?
which technologies
are likely to improve
value proposition
competitiveness in
the evolving pharma
landscape?
how are customers
reacting to new tech-
nological develop-
ments in the pharma-
ceutical industry?
do advances in
pharmacogenomics,
diagnostics, pervasive
computing, or nano-
technology offer new
revenue opportunities?
how will technology
such as pharmacoge-
nomics, pervasive
computing, and nano-
technology affect the
cost structure of a
drug maker’s business
model?
which partnerships
will become essential
when pharmacoge-
nomics is an integral
part of the industry
landscape?
VP CR
CH
CSKP KA
KR
R$C$
• Heterogeneous global regulatory landscape in the pharma-
ceutical industry
• Many countries prohibit drug companies from marketing
directly to consumers
• Regulatory agency pressure to publish data on unsuccessful
clinical trials
bmgen_final.indd 207 6/15/10 5:44 PM
208
Main Qs Pharmaceutical Industry Landscape
global market
conditions
Outlines current overall conditions from a
macroeconomic perspective
Is the economy in a boom or bust phase? Describe
general market sentiment. What is the GDP growth rate?
How high is the unemployment rate?
• Global recession
• Negative GDP growth in Europe, Japan, and the United States
• Slower growth rates in China and India
• Uncertainty as to when recovery will occur
capital markets Describes current capital market conditions as they
relate to your capital needs
What is the state of the capital markets? How easy is
it to obtain funding in your particular market? Is seed
capital, venture capital, public funding, market capital, or
credit readily available? How costly is it to procure funds?
• Tight capital markets
• Credit availability restricted due to banking crisis
• Little venture capital available
• Risk capital availability extremely limited
commodities and
other resources
Highlights current prices and price trends for resources
required for your business model
Describe the current status of markets for commodi-
ties and other resources essential to your business
(e.g. oil prices and labor costs). How easy is it to obtain
the resources needed to execute your business model
(e.g. attract prime talent)? How costly are they?
Where are prices headed?
• Fierce “battles” for prime talent
• Employees seek to join pharmaceutical companies
with positive public image
• Commodity prices rising from recent lows
• Demand for natural resources likely to pick up with
economic recovery
• Oil prices continue to fl uctuate
economic
infrastructure
Describes the economic infrastructure of the market
in which your business operates
How good is the (public) infrastructure in your market?
How would you characterize transportation, trade, school
quality, and access to suppliers and customers? How
high are individual and corporate taxes? How good are
public services for organizations? How would you rate
the quality of life?
• Specifi c to the region in which a company operates
208
global market
conditions
Outlines current overall conditions from a
macroeconomic perspective
capital markets Describes current capital market conditions as they
relate to your capital needs
commodities and
other resources
Highlights current prices and price trends for resources
required for your business modelrequired for your business modelrequired for your business model
Outlines current overall conditions from a Outlines current overall conditions from a Outlines current overall conditions from a Outlines current overall conditions from a Outlines current overall conditions from a Outlines current overall conditions from a
macroeconomic perspectivemacroeconomic perspectivemacroeconomic perspectivemacroeconomic perspective
Describes current capital market conditions as they Describes current capital market conditions as they
relate to your capital needsrelate to your capital needsrelate to your capital needsrelate to your capital needs
Highlights current prices and price trends for resources Highlights current prices and price trends for resources Highlights current prices and price trends for resources Highlights current prices and price trends for resources
required for your business modelrequired for your business model
— macroeconomics —
macro-
economic
forces
Describes the economic infrastructure of the market
in which your business operates
How good is the (public) infrastructure in your market?
How would you characterize transportation, trade, school
quality, and access to suppliers and customers? How
high are individual and corporate taxes? How good are
public services for organizations? How would you rate
the quality of life?
economic
infrastructure
Describes the economic infrastructure of the market
in which your business operatesin which your business operates
Describes the economic infrastructure of the market Describes the economic infrastructure of the market Describes the economic infrastructure of the market Describes the economic infrastructure of the market
in which your business operatesin which your business operatesin which your business operates
bmgen_final.indd 208 6/15/10 5:44 PM
209
Main Qs Pharmaceutical Industry Landscape
global market
conditions
Outlines current overall conditions from a
macroeconomic perspective
Is the economy in a boom or bust phase? Describe
general market sentiment. What is the GDP growth rate?
How high is the unemployment rate?
• Global recession
• Negative GDP growth in Europe, Japan, and the United States
• Slower growth rates in China and India
• Uncertainty as to when recovery will occur
capital markets Describes current capital market conditions as they
relate to your capital needs
What is the state of the capital markets? How easy is
it to obtain funding in your particular market? Is seed
capital, venture capital, public funding, market capital, or
credit readily available? How costly is it to procure funds?
• Tight capital markets
• Credit availability restricted due to banking crisis
• Little venture capital available
• Risk capital availability extremely limited
commodities and
other resources
Highlights current prices and price trends for resources
required for your business model
Describe the current status of markets for commodi-
ties and other resources essential to your business
(e.g. oil prices and labor costs). How easy is it to obtain
the resources needed to execute your business model
(e.g. attract prime talent)? How costly are they?
Where are prices headed?
• Fierce “battles” for prime talent
• Employees seek to join pharmaceutical companies
with positive public image
• Commodity prices rising from recent lows
• Demand for natural resources likely to pick up with
economic recovery
• Oil prices continue to fl uctuate
economic
infrastructure
Describes the economic infrastructure of the market
in which your business operates
How good is the (public) infrastructure in your market?
How would you characterize transportation, trade, school
quality, and access to suppliers and customers? How
high are individual and corporate taxes? How good are
public services for organizations? How would you rate
the quality of life?
• Specifi c to the region in which a company operates
does the economic
infrastructure
adequately support
key activities?
does the infrastruc-
ture and trade envi-
ronment adequately
support channels?
how will local and
national taxes affect
the business model?
do universities and
other educational
institutions furnish
a suffi cient amount
of qualifi ed talent?
VP CR
CH
CSKP KA
KR
R$C$
• Specifi c to the region in which a company operates
bmgen_final.indd 209 6/15/10 5:44 PM
210
how should your
business model evolve
in light of a changing
environment?
A competitive business model that makes sense in today’s environment
might be outdated or even obsolete tomorrow. We all have to improve
our understanding of a model’s environment and how it might evolve.
Of course we can’t be certain about the future, because of the complexities,
uncertainties, and potential disruptions inherent in the evolving business
environment. We can, however, develop a number of hypotheses about the
future to serve as guidelines for designing tomorrow’s business models.
Assumptions about how market forces, industry forces, key trends, and
macroeconomic forces unfold give us the “design space” to develop potential
business model options or prototypes (see p. 160) for the future. The role
of business model scenarios (see p. 186) in forecasting should also be evi-
dent by now. Painting pictures of the future makes it much easier to generate
potential business models. Depending on your own criteria (e.g. acceptable
level of risk, growth potential sought, etc.) you may then select one option
over another.
bmgen_final.indd 210 6/15/10 5:44 PM
211
drivingtrends
marketforces
industry
forces
macro-
economic
forces
forces
economic
forces
forces
VP
CR
CH
CS
KP
KA
KR
R$
C$
R$
VP
CR
CS
KA
KP
KR
C$
KP
CS
KPKPKPKP
KRKR
CSCSCSCS
industry
forces
macro-
economic
forces
Time
Options
drivingtrends
marketforces
— present environment — — projected environment —
bmgen_final.indd 211 6/23/10 1:15 AM
212
evaluating business models
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 accord-
ingly. This checkup may become the basis for incremental business model
improvements, or it might trigger a serious intervention in the form of a
business model innovation initiative. As the automobile, newspaper, and
music industries have shown, failing to conduct regular checkups may
prevent early detection of business model problems, and may even lead
to a company’s demise.
In the previous chapter on the business models environment (see p. 200),
we evaluated the infl uence of external forces. In this chapter, we adopt the
point of view of an existing business model and analyze external forces from
the inside out.
The following pages outline two types of assessment. First, we provide a
big picture assessment of Amazon.com’s online retailing model circa 2005
and describe how the company has built strategically on that model since.
Second, we provide a set of checklists for assessing your business model’s
strengths, weaknesses, opportunities, and threats (SWOT) and to help
you evaluate each Building Block. Keep in mind that assessing a business
model from a big picture perspective and assessing it from a Building Block
perspective are complementary activities. A weakness in one Building
Block, for example, may have consequences for one or several other
Building Blocks—or for the entire model. Business model assessment,
therefore, alternates between individual elements and overall integrity.
bmgen_final.indd 212 6/15/10 5:44 PM
213
— positive — — negative —
—
in
te
rn
a
l
—
—
e
xt
er
n
a
l
—
bmgen_final.indd 213 6/15/10 5:44 PM
214
logistics
partners
affi liates
fulfi llment
it
infrastructure
& software
development
& maintenance
online retail
shop
customized
online profi les &
recommendations
global
consumer
market
(north america,
europe, asia)
it
infrastructure
& software
global
fulfi llment
infrastructure
amazon.com
(& overseas sites)
affi liates
marketing
technology & content
fulfi llment
sales margin
VP CR
CH
CSKP KA
KR
R$C$
Amazon.com provides a powerful illustration of implementing business model innova-
tion based on an analysis of strengths and weaknesses. We’ve already described why it
made sense for Amazon.com to launch a series of new service offers under the moniker
Amazon Web Services (see p. 176). Now let’s examine how those new offers launched
in 2006 related to Amazon.com’s strengths and weaknesses the previous year.
Assessing the strengths and weaknesses of Amazon.com’s business model circa
2005 reveals an enormous strength and a dangerous weakness. Amazon.com’s
strength was its extraordinary customer reach and huge selection of products for sale.
The company’s main costs lay in the activities in which it excelled, namely fulfi llment
($745 million, or 46.3 percent of operating expenses) and technology and content
($451 million, or 28.1 percent of operating expenses). The key weakness of Amazon.
com’s business model was weak margins, the result of selling primarily low-value, low-
margin products such as books, music CDs, and DVDs. As an online retailer, Amazon.
com recorded sales of $8.5 billion in 2005 with a net margin of only 4.2 percent. At the
time, Google enjoyed a net margin of 23.9 percent on sales of $6.1 billion while eBay
achieved a net margin of 23.7 percent on sales of $4.6 billion.
Looking to the future, founder Jeff Bezos and his management team took a two-
pronged approach to building on Amazon.com’s business model. First, they aimed to
grow the online retail business through a continuing focus on customer satisfaction
and effi cient fulfi llment. Second, they began growth initiatives in new areas. Manage-
ment was clear on the requirements for these new initiatives. They had to (1) target
underserved markets, (2) be scalable with potential for signifi cant growth, and (3)
leverage existing Amazon.com capabilities to bring strong customer-facing differentia-
tion to that marketplace.
big picture
assessment:
amazon.com
relatively
low value
items
relatively
capital
sensitive
low
margins
cost
effi ciency
economies
of scope
large
reach
fulfi llment
excellency
IT infra
excellency
large
product
range
Amazon.com’s main strengths and weaknesses in 2005:
bmgen_final.indd 214 6/15/10 5:44 PM
215
logistics
partners
affi liates
fulfi llment
it
infrastructure
& software
development
& maintenance
online retail
shop
fulfi llment by
amazon
amazon web
services: s3, ec2,
sqs, other web
services
customized
online profi les &
recommendations
global
consumer
market
(north america,
europe, asia)
developers &
companies
individuals &
companies that
need fulfi llment
it
infrastructure
& software
global
fulfi llment
infrastructure
amazon.com
(& countries)
affi liates
aPIs
marketing
technology & content
fulfi llment
sales margin
utility computing fees
fulfi llment handling fees
VP CR
CH
CSKP KA
KR
R$C$
In 2006 Amazon.com focused on two new initiatives that satisfi ed the above require-
ments and which promised to powerfully extend the existing business model. The fi rst
was a service called Fulfi llment by Amazon, and the second was a series of new Amazon
Web Services. Both initiatives built on the company’s core strengths—order fulfi llment
and Web IT expertise—and both addressed underserved markets. What’s more, both
initiatives promised higher margins than the company’s core online retailing business.
Fulfi llment by Amazon allows individuals and companies to use Amazon.com’s
fulfi llment infrastructure for their own businesses in exchange for a fee. Amazon.com
stores a seller’s inventory in its warehouses, then picks, packs, and ships on the seller’s
behalf when an order is received. Sellers can sell through Amazon.com, their own Chan-
nels, or a combination of both.
Amazon Web Services targets software developers and any party requiring high-
performance server capability by offering on-demand storage and computing capacity.
Amazon Simple Storage Systems (Amazon S3) allows developers to use Amazon.com’s
massive data center infrastructure for their own data storage needs. Similarly, Amazon
Elastic Compute Cloud (EC2), allows developers to “rent” servers on which to run
their own applications. Thanks to its deep expertise and unprecedented experience
scaling an online shopping site, the company can offer both at cutthroat prices, yet still
earn higher margins compared to its online retail operations.
Investors and investment analysts were initially skeptical about these new long-term
growth strategies. Unconvinced that the diversifi cation made sense, they contested
Amazon.com’s investments in even more IT infrastructure. Eventually, Amazon.com
overcame their skepticism. Nonetheless, the true returns from this long-term strategy
may not be known for several more years—and after even more investment
in the new business model.
Opportunities Amazon.com explored in 2006:
synergies in the use
of activities and
resources
for new offers
two totally new
customer segments which
are underserved as to the
proposed offer
new revenue streams with
higher margins than retail
bmgen_final.indd 215 6/15/10 5:44 PM
216
Assessing your business model’s overall integrity is crucial, but looking at
its components in detail can also reveal interesting paths to innovation and
renewal. An effective way to do this is to combine classic strengths, weak-
nesses, opportunities, and threats (SWOT) analysis with the Business Model
Canvas. SWOT analysis provides four perspectives from which to assess the
elements of a business model, while the Business Model Canvas provides
the focus necessary for a structured discussion.
SWOT analysis is familiar to many businesspeople. It is used to analyze
an organization’s strengths and weaknesses and identify potential opportuni-
ties and threats. It is an attractive tool because of its simplicity, yet its use
can lead to vague discussions because its very openness offers little direc-
tion concerning which aspects of an organization to analyze. A lack of useful
outcomes may result, which has lead to a certain SWOT-fatigue among
managers. When combined with the Business Model Canvas, though, SWOT
enables a focused assessment and evaluation of an organization’s business
model and its Building Blocks.
SWOT asks four big, simple questions. The fi rst two—what are your
organization’s strength and weaknesses?—assess your organization inter-
nally. The second two—what opportunities does your organization have
and what potential threats does it face?—assess your organization’s posi-
tion within its environment. Of these four questions, two look at helpful areas
(strengths and opportunities) and two address harmful areas. It is useful to
ask these four questions with respect to both the overall business model and
each of its nine Building Blocks. This type of SWOT analysis provides a good
basis for further discussions, decision-making, and ultimately innovation
around business models.
detailed swot
assessment of each
building block
What are your business model’s . . .
strengths weaknesses
opportunities threats
— helpful — — harmful —
—
e
xt
er
n
a
l
—
—
in
te
rn
a
l
—
The following pages contain non-exhaustive sets of questions to help
you assess the strengths and weaknesses of each of your business model
Building Blocks. Each set can help jumpstart your own assessments. Results
from this exercise can become the foundation for business model change
and innovation in your organization.
bmgen_final.indd 216 6/15/10 5:44 PM
217
Value Proposition Assessment
Our Value Propositions are well
aligned with customer needs
54321 12345 Our Value Propositions and
customer needs are misaligned
Our Value Propositions have strong
network effects
54321 12345 Our Value Propositions have
no network effects
There are strong synergies between
our products and services
54321 12345 There are no synergies between
our products and services
Our customers are very satisfi ed 54321 12345 We have frequent complaints
Cost/Revenue Assessment
We benefi t from strong margins 54321 12345 Our margins are poor
Our revenues are predictable 54321 12345 Our revenues are unpredictable
We have recurring Revenue
Streams and frequent repeat
purchases
54321 12345 Our revenues are transactional
with few repeat purchases
Our Revenue Streams are
diversifi ed
54321 12345 We depend on a single Revenue
Stream
Our Revenue Streams are
sustainable
54321 12345 Our revenue sustainability is
questionable
We collect revenues before
we incur expenses
54321 12345 We incur high costs before we
collect revenues
We charge for what customers
are really willing to pay for
54321 12345 We fail to charge for things
customers are willing to pay for
Our pricing mechanisms capture
full willingness to pay
54321 12345 Our pricing mechanisms leave
money on the table
Our costs are predictable 54321 12345 Our costs are unpredictable
Our Cost Structure is correctly
matched to our business model
54321 12345 Our Cost Structure and business
model are poorly matched
Our operations are cost-effi cient 54321 12345 Our operations are cost-ineffi cient
We benefi t from economies of scale 54321 12345 We enjoy no economies of scale
certa
in
ty o
f eva
lu
a
tio
n
1-10
certa
in
ty o
f eva
lu
a
tio
n
1-10im
po
rt
a
n
ce
t
o
m
y
b.
m
. 1
–1
0
im
po
rt
a
n
ce
t
o
m
y
b.
m
. 1
–1
0
bmgen_final.indd 217 6/15/10 5:44 PM
218
Infrastructure Assessment
Our Key Resources are diffi cult for
competitors to replicate
54321 12345 Our Key Resources are easily
replicated
Resource needs are predictable 54321 12345 Resource needs are unpredictable
We deploy Key Resources in the
right amount at the right time
54321 12345 We have trouble deploying the
right resources at the right time
We effi ciently execute Key Activities 54321 12345 Key Activity execution is ineffi cient
Our Key Activities are diffi cult
to copy
54321 12345 Our Key Activities are easily
copied
Execution quality is high 54321 12345 Execution quality is low
Balance of in-house versus
outsourced execution is ideal
54321 12345 We execute too many or too few
activities ourselves
We are focused and work with
partners when necessary
54321 12345 We are unfocused and fail to work
suffi ciently with partners
We enjoy good working
relationships with Key Partners
54321 12345 Working relationships with Key
Partners are confl ict-ridden
certa
in
ty o
f eva
lu
a
tio
n
1-10im
po
rt
a
n
ce
t
o
m
y
b.
m
. 1
–1
0
bmgen_final.indd 218 6/15/10 5:44 PM
219
Customer Interface Assessment
Customer churn rates are low 54321 12345 Customer churn rates are high
Customer base is well segmented 54321 12345 Customer base is unsegmented
We are continuously acquiring
new customers
54321 12345 We are failing to acquire new
customers
Our Channels are very effi cient 54321 12345 Our Channels are ineffi cient
Our Channels are very effective 54321 12345 Our Channels are ineffective
Channel reach is strong among
customers
54321 12345 Channel reach among prospects
is weak
Customers can easily see our
Channels
54321 12345 Prospects fail to notice our
Channels
Channels are strongly integrated 54321 12345 Channels are poorly integrated
Channels provide economies
of scope
54321 12345 Channels provide no economies
of scope
Channels are well matched to
Customer Segments
54321 12345 Channels are poorly matched to
Customer Segments
Strong Customer Relationships 54321 12345 Weak Customer Relationships
Relationship quality correctly
matches Customer Segments
54321 12345 Relationship quality is poorly
matched to Customer Segments
Relationships bind customers
through high switching costs
54321 12345 Customers switching costs are low
Our brand is strong 54321 12345 Our brand is weak
certa
in
ty o
f eva
lu
a
tio
n
1-10im
po
rt
a
n
ce
t
o
m
y
b.
m
. 1
–1
0
bmgen_final.indd 219 6/15/10 5:44 PM
220
assessing threats
We’ve described how business models are situated within specifi c envi-
ronments, and shown how external forces such as competition, the legal
environment, or technology innovation can infl uence or threaten a business
model (see p. 200). In this section we look at threats specifi c to each busi-
ness model Building Block, and provide a non-exhaustive set of questions
to help you think about ways to address each threat.
Value Proposition Threats
Are substitute products and
services available?
12345
Are competitors threatening to
offer better price or value?
12345
Cost/Revenue Threats
Are our margins threatened by
competitors? By technology?
12345
Do we depend excessively on one
or more Revenue Streams?
12345
Which Revenue Streams are likely
to disappear in the future?
12345
Which costs threaten to become
unpredictable?
12345
Which costs threaten to grow
more quickly than the revenues
they support?
12345
bmgen_final.indd 220 6/15/10 5:44 PM
221
Infrastructure Threats
Could we face a disruption in the
supply of certain resources?
12345
Is the quality of our resources
threatened in any way?
12345
What Key Activities might
be disrupted?
12345
Is the quality of our activities
threatened in any way?
12345
Are we in danger of losing any
partners?
12345
Might our partners collaborate
with competitors?
12345
Are we too dependent on certain
partners?
12345
Customer Interface Threats
Could our market be saturated
soon?
12345
Are competitors threatening
our market share?
12345
How likely are customers
to defect?
12345
How quickly will competition
in our market intensify?
12345
Do competitors threaten our
Channels?
12345
Are our Channels in danger of
becoming irrelevant to customers?
12345
Are any of our Customer Relation-
ships in danger of deteriorating?
12345
bmgen_final.indd 221 6/15/10 5:44 PM
222
assessing opportunities
As with threats, we can assess the opportunities that may lie within each
business model Building Block. Here’s a non-exhaustive set of questions
to help you think about opportunities that could emerge from each of the
Building Blocks in your business model.
Value Proposition Opportunities
Could we generate recurring
revenues by converting products
into services?
12345
Could we better integrate our
products or services?
12345
Which additional customer needs
could we satisfy?
12345
What complements to or
extensions of our Value Proposition
are possible?
12345
What other jobs could we do on
behalf of customers?
12345
Cost/Revenue Opportunities
Can we replace one-time
transaction revenues with recurring
revenues?
12345
What other elements would
customers be willing to pay for?
12345
Do we have cross-selling
opportunities either internally
or with partners?
12345
What other Revenue Streams could
we add or create?
12345
Can we increase prices? 12345
Where can we reduce costs? 12345
bmgen_final.indd 222 6/15/10 5:44 PM
223
Infrastructure Opportunities
Could we use less costly resources
to achieve the same result?
12345
Which Key Resources could be
better sourced from partners?
12345
Which Key Resources are
under-exploited?
12345
Do we have unused intellectual
property of value to others?
12345
Could we standardize some Key
Activities?
12345
How could we improve effi ciency
in general?
12345
Would IT support boost effi ciency? 12345
Are there outsourcing
opportunities?
12345
Could greater collaboration with
partners help us focus on our core
business?
12345
Are there cross-selling
opportunities with partners?
12345
Could partner Channels help us
better reach customers?
12345
Could partners complement our
Value Proposition?
12345
Customer Interface Opportunities
How can we benefi t from a growing
market?
12345
Could we serve new Customer
Segments?
12345
Could we better serve our custom-
ers through fi ner segmentation?
12345
How could we improve channel
effi ciency or effectiveness?
12345
Could we integrate our Channels
better?
12345
Could we fi nd new complementary
partner Channels?
12345
Could we increase margins by
directly serving customers?
12345
Could we better align Channels
with Customer Segments?
12345
Is there potential to improve
customer follow-up?
12345
How could we tighten our
relationships with customers?
12345
Could we improve personalization? 12345
How could we increase switching
costs?
12345
Have we identifi ed and “fi red”
unprofi table customers? If not,
why not?
12345
Do we need to automate some
relationships?
12345
bmgen_final.indd 223 6/15/10 5:44 PM
224
using swot assessment analysis results to
design new business model options
A structured SWOT assessment of your business model yields two results.
It provides a snapshot of where you are now (strengths and weaknesses)
and it suggests some future trajectories (opportunities and threats). This is
valuable input that can help you design new business model options toward
which your enterprise can evolve. SWOT analysis is thus a signifi cant part
of the process of designing both business model prototypes (see p. 160) and,
with luck, a new business model that you will eventually implement.
bmgen_final.indd 224 6/15/10 5:44 PM
225
Current Model
Future Model(s)
— swot process —
bmgen_final.indd 225 6/15/10 5:44 PM
226
In this section we blend our business model tools with the
Blue Ocean Strategy concept coined by Kim and Mauborgne in their
million-selling book of the same name. The Business Model Canvas is a
perfect extension of the analytical tools presented by Kim and Mauborgne.
Together they provide a powerful framework for questioning incumbent
business models and creating new, more competitive models.
Blue Ocean Strategy is a potent method for questioning Value Proposi-
tions and business models and exploring new Customer Segments. The
Business Model Canvas complements Blue Ocean by providing a visual
“big picture” that helps us understand how changing one part of a business
model impacts other components.
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. This means increasing value for customers by creating
new benefi ts and services, while simultaneously reducing costs by eliminat-
ing less valuable features or services. Notice how this approach rejects the
traditionally accepted trade-off between differentiation and lower cost.
To achieve value innovation, Kim and Mauborgne propose an analytical
tool they call the Four Actions Framework. These four key questions
challenge an industry’s strategic logic and established business model:
1. Which of the factors that the industry takes for granted should
be eliminated?
2. Which factors should be reduced well below the industry standard?
3. Which factors should be raised well above the industry standard?
4. Which factors should be created that the industry has never offered?
In addition to value innovation, Kim and Mauborgne propose exploring
non-customer groups to create Blue Oceans and tap untouched markets.
Blending Kim and Mauborgne’s value innovation concept and Four
Actions Framework with the Business Model Canvas creates a powerful new
tool. In the Business Model Canvas the right-hand side represents value
creation and the left-hand side represents costs. This fi ts well with Kim and
Mauborgne’s value innovation logic of increasing value and reducing costs.
business model perspective
on blue ocean strategy
bmgen_final.indd 226 6/15/10 5:44 PM
227
which factors should
be raised well above the
industry’s standard?
which factors should be
created that the industry
has never offered?
which factors should be
reduced well below the
industry’s standard?
which factors can you
eliminate that your indus-
try has long competed on?
— four actions framework —— value innovation —
+ value– costs
eliminate raise
reduce create
Source: Adapted from Blue Ocean Strategy.
bmgen_final.indd 227 6/15/10 5:44 PM
228
The Business Model Canvas consists of a right-hand
value and customer-focused side, and a left-hand cost
and infrastructure side, as descibed earlier (see p. 49).
Changing elements on the right-hand side has implica-
tions for the left-hand side. For example, if we add to
or eliminate parts of the Value Proposition, Channels,
or Customer Relationship Building Blocks, this will
have immediate implications for Resources, Activities,
Partnerships, and Costs.
Blue Ocean Strategy is about simultaneously increasing
value while reducing costs. This is achieved by identify-
ing which elements of the Value Proposition can be elimi-
nated, reduced, raised, or newly created. The fi rst goal
is to lower costs by reducing or eliminating less valuable
features or services. The second goal is to enhance or
create high-value features or services that do not signifi –
cantly increase the cost base.
Blending Blue Ocean Strategy and the Business Model
Canvas lets you systematically analyze a business model
innovation in its entirety. You can ask the Four Actions
Framework questions (eliminate, create, reduce, raise)
about each business model Building Block and imme-
diately recognize implications for the other parts of the
business model, (e.g. what are the implications for the
cost side when we make changes on the value side?
and vice versa).
+value
value-side
value
creation
–costs
cost-side
cost
implications
blending the blue ocean strategy framework
with the business model canvas
+ =
eliminate raise
reduce create
Business Model Canvas Value innovation Blending approaches
bmgen_final.indd 228 6/15/10 5:44 PM
229
artistic
development
animal care
star performers
animal shows
aisle consession
sales
multiple show
arenas
fun & humor
thrill & danger
theme
refi ned
environment
mutliple
productions
artistic music &
dance
unique venue
focus on families
focus on theater
& opera visitors
animals
star performers
refi ned
environment
costly animal maintenance
costly star performer fees
artistic production
ticket price increase
aisle concession sales
Cirque du Soleil features prominently among Blue Ocean
Strategy examples. Next we apply the blended Blue
Ocean and Business Model Canvas approach to this
intriguing and highly successful Canadian business.
First, the Four Actions Framework shows how Cirque
du Soleil “played” with the traditional elements of the cir-
cus business Value Proposition. It eliminated costly ele-
ments, such as animals and star performers, while adding
other elements, such as theme, artistic atmosphere, and
cirque du soleil
unique venue
theme
refi ned environment
multiple productions
artistic music & dance
fun & humor
thrill & danger
star performers
animal shows
aisle concession sales
multiple show arenas
VP CR
CH
CSKP KA
KR
R$C$
adding the artistic
element to the value
proposition changes
activities & costs
eliminating animals from
the show substantially
reduces costs
the value proposition
combines elements from
circus, theater & opera,
which allows catering to
higher end customers who
pay higher ticket prices
refi ned music. This revamped Value Proposition allowed
Cirque du Soleil to broaden its appeal to theatergoers and
other adults seeking sophisticated entertainment, rather
than the traditional circus audience of families.
As a consequence, it was able to substantially raise
ticket prices. The Four Actions Framework, outlined in
blue and gray in the business model canvas above, illus-
trates the effects of changes in the Value Proposition.
Source: Adapted from Blue Ocean Strategy.
animal care
animals
star performers
refi ned
environment
eliminate
reduce
create
raise
bmgen_final.indd 229 6/15/10 5:44 PM
230
We’ve discussed Nintendo’s successful Wii game console
as an example of a multi-sided platform business model
pattern (see p. 76). Now we look at how Nintendo dif-
ferentiated itself from competitors Sony and Microsoft
from the standpoint of Blue Ocean Strategy. Compared
to Sony’s PlayStation 3 and Microsoft’s Xbox 360, Nin-
tendo pursued a fundamentally different strategy and
business model with Wii.
The heart of Nintendo’s strategy was the assumption
that consoles do not necessarily require leading-edge
power and performance. This was a radical stance in an
industry that traditionally competed on technological
performance, graphic quality, and game realism: factors
valued primarily by diehard gaming fans. Nintendo
shifted its focus to providing a new form of player interac-
tion targeted at a wider demographic than the traditional
avid gamer audience. With the Wii, Nintendo brought
to market a console that technologically underperformed
rival machines, but boosted the fun factor with new
motion control technology. Players could control games
through a sort of “magic wand,” the Wii Remote, simply
through physical movement. The console was an instant
success with casual gamers, and outsold rival consoles
focused on the traditional market of “hardcore” gamers.
nintendo’s wii
Nintendo’s new business model has the following
characteristics: A shift in focus from “hardcore” to casual
gamers, which allowed the company to reduce console
performance and add a new element of motion control
that created more fun; elimination of state-of-the-art
chip development and increased use of off-the-shelf
components, reducing costs and allowing lower console
prices; elimination of console subsidies resulting in prof-
its on each console sold.
game
developers
off-the-shelf
hardware
component
manufacturers
state of
the art chi
development
high end console
performance &
graphics
motion
controlled
games
fun factor &
group (family)
experience
narow market
of “hardcore”
gamers
large market of
casual gamers &
families
game developersnew proprietary
technology
motion control
technology
retail
distribution
console production price
technology development costs
console subsidies
profi t on console sales
console subsidies
royalties from game developers
VP CR
CH
CSKP KA
KR
R$C$
new proprietary
technology
motion control
technology
eliminate
unchanged
create
reduce
bmgen_final.indd 230 6/15/10 5:45 PM
231
The combination of Blue Ocean Strategy tools and the Business Model Canvas provide
a solid foundation upon which to question your business model from value creation,
customer, and Cost Structure perspectives. We propose that three different perspec-
tives—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. Changes to each starting point then
allow you to analyze impacts on other areas of the Business Model Canvas (see also
innovation epicenters on p. 138).
Identify the highest cost infrastructure elements and
evaluate what happens if you eliminate or reduce them.
What value elements disappear, and what would you
have to create to compensate for their absence? Then,
identify infrastructure investments you may want to
make and analyze how much value they create.
• Which activities, resources, and partnerships have
the highest costs?
• What happens if you reduce or eliminate some of
these cost factors?
• How could you replace, using less costly elements,
the value lost by reducing or eliminating expensive
resources, activities, or partnerships?
• What value would be created by planned new
investments?
Begin the process of transforming your Value Proposition
by asking the Four Actions Framework questions.
Simultaneously, consider the impact on the cost side
and evaluate what elements you need to (or could)
change on the value side, such as Channels, Relation-
ships, Revenue Streams, and Customer Segments.
• What less-valued features or services could be
eliminated or reduced?
• What features or services could be enhanced or newly
created to produce a valuable new customer experience?
• What are the cost implications of your changes to
the Value Proposition?
• How will changes to the Value Proposition affect the
customer side of the model?
Ask yourself the Four Actions Framework questions
about each business model Building Block on the
customer side of the Canvas: Channels, Relationships,
and Revenue Streams. Analyze what happens to the
cost side if you eliminate, reduce, raise, or create value
side elements.
• Which new Customer Segments could you focus
on, and which segments could you possibly reduce or
eliminate?
• What jobs do new Customer Segments really want
to have done?
• How do these customers prefer to be reached and
what kind of relationship do they expect?
• What are the cost implications of serving new
Customer Segments?
value-sidecost-side cost-side
Cost Impact Exploration Exploring Value Proposition Impact Exploring Customer Impact
? ???eliminatereduce
raise
create
eliminate
reduce
raise
create
eliminate
reduce
raise
create
questioning your canvas with the
four actions framework
bmgen_final.indd 231 6/15/10 5:45 PM
232
Visionaries, game changers, and challengers are generating
innovative business models around the world—as entrepreneurs and as
workers within established organizations. An entrepreneur’s challenge is
to design and successfully implement a new business model. Established
organizations, though, face an equally daunting task: how to implement
and manage new models while maintaining existing ones.
Business thinkers such as Constantinos Markides, Charles O’Reilly III,
and Michael Tushman have a word for groups that successfully meet this
challenge: ambidextrous organizations. Implementing a new business model
in a longstanding enterprise can be extraordinarily diffi cult because the
new model may challenge or even compete with established models.
The new model might require a different organizational culture, or it might
target prospective customers formerly ignored by the enterprise. This begs
a question: How do we implement innovative business models within
long-established organizations?
Scholars are divided on the issue. Many suggest spinning off new busi-
ness model initiatives into separate entities. Others propose a less drastic
approach and argue that innovative new business models can thrive within
established organizations, either as-is or in separate business units.
Constantinos Markides, for example, proposes a two-variable framework
for deciding on how to manage new and traditional business models simul-
taneously. The fi rst variable expresses the severity of confl ict between the
models, while the second expresses strategic similarity. Yet, he also shows
that success depends not only on the correct choice—integrated versus
standalone implementation—but also on how the choice is implemented.
Synergies, Markides claims, should be carefully exploited even when the new
model is implemented in a standalone unit.
Risk is a third variable to consider when deciding whether to integrate
or separate an emerging model. How big is the risk that the new model will
negatively affect the established one in terms of brand image, earnings,
legal liability, and so forth?
During the fi nancial crisis of 2008, ING, the Dutch fi nancial group, was
nearly toppled by its ING Direct unit, which provides online and telephone
retail banking services in overseas markets. In effect, ING treated ING Direct
more as a marketing initiative than as a new, separate business model that
would have been better housed in a separate entity.
Finally, choices evolve over time. Markides emphasizes that compa-
nies may want to consider a phased integration or a phased separation of
business models. e.Schwab, the Internet arm of Charles Schwab, the U.S.
retail securities broker, was initially set up as a separate unit, but later was
integrated back into the main business with great success. Tesco.com, the
Internet branch of Tesco, the giant U.K. retailer, made a successful transition
from integrated business line into standalone unit.
In the following pages we examine the issue of integration versus separa-
tion with three examples described using the Business Model Canvas. The
fi rst, Swiss watch manufacturer SMH, chose the integration route for its new
Swatch business model in the 1980s. The second, Swiss foodmaker Nestlé,
chose the separation route for bringing Nespresso to the marketplace. As
of this writing, the third, German vehicle manufacturer Daimler, has yet to
choose an approach for its car2go vehicle rental concept.
managing multiple business models
bmgen_final.indd 232 6/15/10 5:45 PM
233
— similarity of nine
building blocks —
— potential
for synergies —
— potential
for confl icts —
avoid confl icts between the
integrated business models and
allow for necessary autonomy
create synergies among the separated
business models and coordinate
between them as necessary
integration
autonomy
separation
bmgen_final.indd 233 6/15/10 5:45 PM
234
smh’s autonomous model for swatch
In the mid-seventies the Swiss watch industry, which had historically dominated the
timepiece sector, found itself in deep crisis. Japanese and Hong Kong watch manu-
facturers had dislodged the Swiss from their leadership position with cheap quartz
watches designed for the low-end market. The Swiss continued to focus on tradi-
tional mechanical watches for the mid- and high-end markets, but all the while
Asian competitors threatened to intrude on these segments as well.
In the early 1980s competitive pressure intensifi ed to the point that most Swiss
manufacturers, with the exception of a handful of luxury brands, were teetering on
collapse. Then Nicolas G. Hayek took over the reigns of SMH (later renamed Swatch
Group). He completely restructured a newly formed group cobbled together from com-
panies with roots in the two biggest ailing Swiss watchmakers.
Hayek envisioned a strategy whereby SMH would offer healthy, growing brands in
all three market segments: low, mid, and luxury. At the time, Swiss fi rms dominated the
luxury watch market with a 97 percent share. But the Swiss owned only 3 percent of
the middle market and were non-players in the low end, leaving the entire segment of
inexpensive timepieces to Asian rivals.
Launching a new brand at the bottom end was provocative and risky, and triggered
fears among investors that the move would cannibalize Tissot, SMH’s middle-market
brand. From a strategic point of view, Hayek’s vision meant nothing less than combin-
ing a high-end luxury business model with a low-cost business model under the same
roof, with all the attending confl icts and trade-offs. Nevertheless, Hayek insisted on this
three-tiered strategy, which triggered development of the Swatch, a new type of afford-
able Swiss watch priced starting at around U.S. $40.
The specifi cations for the new watch were demanding: inexpensive enough to
compete with Japanese offers yet providing Swiss quality, plus suffi cient margins and
the potential to anchor a larger product line. This forced engineers to entirely rethink
the very idea of a timepiece and its manufacture; they were essentially deprived of the
ability to apply their traditional watchmaking knowledge.
The result was a watch made with far fewer components. Manufacturing was highly
automated: molding replaced screws, direct labor costs were driven down to less than
10 percent, and the watches were produced in large quantities. Innovative guerrilla
marketing concepts were used to bring the watch to market under several different
designs. Hayek saw the new product communicating a lifestyle message, rather than just
telling time on the cheap.
Thus the Swatch was born: high quality at a low price, for a functional, fashionable
product. The rest is history. Fifty-fi ve million Swatches were sold in fi ve years, and in
2006 the company celebrated aggregate sales of over 333 million Swatches.
SMH’s choice to implement the low end Swatch business model is particularly inter-
esting in light of its potential impact on SMH’s higher end brands. Despite a completely
different organizational and brand culture, Swatch was launched under SMH and not as
a standalone entity.
SMH, though, was careful to give Swatch and all its other brands near-complete
autonomy regarding product and marketing decisions, while centralizing everything else.
Manufacturing, purchasing, and R&D were each regrouped under a single entity serving
all of SMH’s brands. Today, SMH maintains a strong vertical integration policy in order
to achieve scale and defend itself against Asian competitors.
bmgen_final.indd 234 6/15/10 5:45 PM
235
production &
quality control
r&d
hr, fi nance, etc. blancpain,
omega, longines,
rado
tissot, certina,
hamilton, mido
swatch, fl ik fl ak
high end
and luxury
segment
mid
segment
mass market
manufacturing
plants
brand portfolio
watch sales
VP CR
CH
CSKP KA
KR
R$C$
smh as
production
partner
product design
marketing &
communication
trendy low-cost
lifestyle
(second) watch
lifestyle
movement
mass-market
swatch design
swatch brand
swatch shops
retail
lifestyle events
guerrilla
marketing
manufacturing payments to smh
marketing
watch sales
VP CR
CH
CSKP KA
KR
R$C$
SMH is vertically integrated and
centralized with respect to production,
R&D, sourcing and HR.
Each SMH brand enjoys autonomy
regarding product, design, and marketing
communication decisions.
blancpain,
omega, longines,
rado
high end
and luxury
segment
high end
and luxury
segment
tissot, certina,
hamilton, mido
mid
segmentCH
segment
mid
segment
segmentsegment
swatch, fl ik fl ak mass marketmass marketmass market
segment
plants
watch sales
R$
plants
brand portfolio
SMH
Swatch
smh as
production
partner
product design
marketing &
communication
trendy low-cost
lifestyle
(second) watch
lifestyle
movement
mass-market
swatch design
swatch brand
swatch shops
retail
lifestyle events
guerrilla
marketing
manufacturing payments to smh
marketing
watch sales
VP CR
CH
CSKP KA
KR
R$C$
centralized decentralized
bmgen_final.indd 235 6/15/10 5:45 PM
236
the nespresso success model
Another ambidextrous organization is Nespresso, part of Nestlé, the world’s largest
food company with 2008 sales of approximately U.S. $101 billion.
Nespresso, which each year sells over U.S.$1.9 billion worth of single-serve
premium coffee for home consumption, offers a potent example of an ambidextrous
business model. In 1976, Eric Favre, a young researcher at a Nestlé research lab, fi led
his fi rst patent for the Nespresso system. At the time Nestlé dominated the huge
instant coffee market with its Nescafé brand, but was weak in the roast and ground
coffee segments. The Nespresso system was designed to bridge that gap with a dedi-
cated espresso machine and pod system that could conveniently produce restaurant-
quality espresso.
An internal unit headed by Favre was set up to eliminate technical problems and
bring the system to market. After a short, unsuccessful attempt to enter the restaurant
market, in 1986 Nestlé created Nespresso SA, a wholly-owned subsidiary that would
start marketing the system to offi ces in support of another Nestlé joint venture with a
coffee machine manufacturer already active in the offi ce segment. Nespresso SA was
completely independent of Nescafé, Nestlé’s established coffee business. But by 1987
Nespresso’s sales had sagged far below expectations and it was kept alive only because
of its large remaining inventory of high-value coffee machines.
In 1988 Nestlé installed Jean-Paul Gaillard as the new CEO of Nespresso. Gaillard
completely overhauled the company’s business model with two drastic changes. First,
Nespresso shifted its focus from offi ces to high-income households and started sell-
ing coffee capsules directly by mail. Such a strategy was unheard of at Nestlé, which
traditionally focused on targeting mass markets through retail Channels (later on Nes-
presso would start selling online and build high-end retail stores at premium locations
such as the Champs-Élysées, as well as launch its own in-store boutiques in high-end
department stores). The model proved successful, and over the past decade Nespresso
has posted average annual growth rates exceeding of 35 percent.
Of particular interest is how Nespresso compares to Nescafé, Nestlé’s traditional
coffee business. Nescafé focuses on instant coffee sold to consumers indirectly through
mass-market retailers, while Nespresso concentrates on direct sales to affl uent con-
sumers. Each approach requires completely different logistics, resources, and activi-
ties. Thanks to the different focus there was no risk of direct cannibalization. Yet, this
also meant little potential for synergy between the two businesses. The main confl ict
between Nescafé and Nespresso arose from the considerable time and resource drain
imposed on Nestlé’s coffee business until Nespresso fi nally became successful. The
organizational separation likely kept the Nespresso project from being cancelled during
hard times.
The story does not end there. In 2004 Nestlé aimed to introduce a new system,
complementary to the espresso-only Nespresso devices, that could also serve cap-
puccino and lattes. The question, of course, was with which business model and under
which brand should the system be launched? Or should a new company be created, as
with Nespresso? The technology was originally developed at Nespresso, but cappuc-
cinos and lattes seemed more appropriate for the mid-tier mass market. Nestlé fi nally
decided to launch under a new brand, Nescafé Dolce Gusto, but with the product
completely integrated into Nescafé’s mass-market business model and organizational
structure. Dolce Gusto pods sell on retail shelves alongside Nescafé’s soluble coffee,
but also via the Internet—a tribute to Nespresso’s online success.
1976
first patent
filed for
nespresso
system
1982
focus on
the office
market
1986
separate
company
created
1988
new ceo
overhauls
strategy
1991
nespresso
is launched
interna-
tionally
1997
first ad
campaigns
launched
2006
george
clooney
retained
as spokes-
man for
nespresso
1998
focus on
internet
with web
site redesign 2000–2008
average
annual
growth of
over 35%
bmgen_final.indd 236 6/15/10 5:45 PM
237
retailers
production
marketing
dolce gusto:
multi-beverage
machine & pods
nescafé: quality
instant coffee
retail
online shop
mass market
manufacturing
plants
brand portfolio
retail
marketing & sales
production
sales through retail
(lower margin)
VP CR
CH
CSKP KA
KR
R$C$
C$
coffee machine
manufacturers
marketing
production
logistics
high-end
restaurant
quality espresso
at home
nespresso club
households
offi ce marketdistribution
channels
patents on
system
brand
production
plants
nespresso.com
nespresso
boutiques
call center
retail (machines
only)
mail order
manufacturing
marketing
distribution & Channels
main revenues: capsules
other: machines & accessories
VP CR
CH
CSKAKP
KR
R$C$
dolce gusto:
multi-beverage
machine & pods
retail
online shop
nescafé: quality
instant coffee retail
Nescafé
high-end
(Nespresso)
mid-tier
(Dolce Gusto)
mass-market
(Nescafé)
Nespresso
coffee machine
manufacturers
marketing
production
logistics
high-end
restaurant
quality espresso
at home
nespresso club
households
offi ce marketdistribution
channels
patents on
system
brand
production
plants
nespresso.com
nespresso
boutiques
call center
retail (machines
only)
mail order
manufacturing
marketing
distribution & Channels
main revenues: capsules
other: machines & accessories
VP CR
CH
CSKAKP
KR
R$C$
nestlé’s portfolio of
coffee business models
mass market
bmgen_final.indd 237 6/15/10 5:45 PM
238
daimler’s car2go business model
Our fi nal example is still emerging as of this writing. Car2go is a new concept in mobility
created by German vehicle manufacturer Daimler. Car2go provides an example of a busi-
ness model innovation that complements the parent company’s core model of manu-
facturing, selling, and fi nancing vehicles ranging from luxury cars to trucks and buses.
Daimler’s core business generates annual revenue exceeding U.S. $136 billion
through sales of more than two million vehicles. Car2go, on the other hand, is a
startup business offering city dwellers mobility on demand using a citywide fl eet
of smart cars (smart is Daimler’s smallest and lowest-priced vehicle brand). The
service is currently being tested in the German city of Ulm, one of Daimler’s key
operational bases. The business model was developed by Daimler’s Business Innovation
Department, which is tasked with developing new business ideas and supporting their
implementation.
Here’s how car2go works: a fl eet of smart “fortwo” two-person vehicles is made
available throughout the city, serving as a vehicle pool accessible by customers at any
time. Following a one-time registration process, customers can rent fortwo cars on the
spot (or reserve them in advance) then use them for as long as they like. Once a trip is
completed, the driver simply parks the car somewhere within the city limits.
Rentals cost the equivalent $0.27 per minute, all-inclusive, or $14.15 per hour with
a maximum of $70 per day. Customers pay monthly. The concept resembles popular
car-sharing companies such as Zipcar in North America and the U.K. Distinctive char-
acteristics of car2go include freedom from the obligation to use an assigned parking
place, on-the-spot rental for as long as one likes, and a simple pricing structure.
Daimler launched car2go in response to the accelerating global trend toward urbaniza-
tion, and saw the service as an intriguing complement to its core business. As a pure
service model, car2go naturally has completely different dynamics compared to Daim-
ler’s traditional business, and revenues will likely remain comparatively small for some
years. But Daimler clearly has high hopes for car2go over the long term.
In the pilot phase, launched in October of 2008, 50 fortwo cars were made avail-
able to some 500 employees of the Daimler Research Center in Ulm. These 500,
plus 200 family members, participated as initial customers. The aim was to test the
technical systems, gather data on user acceptance and behavior, and give the service
an overall “road test.” In February 2009, the pilot was extended to include employees
of Mercedes-Benz sales and service outlets and other Daimler subsidiaries, with the
number of vehicles increased to 100. At the end of March, a public test was initiated
with 200 vehicles and car2go was made available to all 120,000 of Ulm’s residents
and visitors.
At the same time, Daimler announced a U.S. pilot in Austin, Texas, a city with
750,000 residents. As in the fi rst phase of the German test, car2go will begin with a
limited user group, such as city employees, then be opened to the public. These pilots
can be seen as prototypes of a business model (see p. 160). Now, car2go’s business
model prototype is being fi xed into organizational form.
As of this writing, Daimler had not yet decided whether to internalize car2go or spin
it off as a separate company. Daimler chose to start with business model design, then
test the concept in the fi eld, and defer decisions regarding organizational structure until
it could assess car2go’s relationship to its long-established core business.
concept
development
internal
pilot
extended
internal pilot
ulm
public pilot
austin
internal pilot
austin
public pilot
which
organizational
form?
Market introduction of car2go
bmgen_final.indd 238 6/15/10 5:45 PM
239
car parts
manufacturers
manufacturing
design
cars, trucks,
vans, buses,
fi nancial
services
(e.g. mercedes
brands)
mainly high-end
brands
mass market
vehicle plants
intellectual
property
brands
dealers
sales force
marketing & sales
manufacturing
r&d
vehicle sales
vehicle fi nancing
VP CR
CH
CSKP KA
KR
R$C$
C$
city
management
fl eet
management
telematics
management
cleaning
individual urban
mobility without
car ownership
one-off sign-up
city dwellers
service team
telematic
systems
smart fortwo
car fl eet
car2go.com
mobile phone
car2go parking
lots
car2go shops
pick-up/drop-off
anywhere
systems management
fl eet management
pay per minute—$0.27
(all inclusive)
VP CR
CH
CSKAKP
KR
R$C$
Daimler
car2go
car parts
manufacturers
manufacturing
design
cars, trucks,
vans, buses,
fi nancial
services
(e.g. mercedes
brands)
mainly high-end
brands
mass market
vehicle plants
intellectual
property
brands
dealers
sales force
marketing & sales
manufacturing
r&d
vehicle sales
vehicle fi nancing
VP CR
CH
CSKP KA
KR
R$C$
Daimler’s phased approach
to business model innovation:
Phase 1: Business model design within
Daimler Innovation Department
Phase 2: Field test of the concept run
by Daimler Innovation
Phase 3: Decision on organizational
structure of new business model
(integration versus separation) vis-à-vis
relationship to established core business
city
management
fl eet
management
telematics
management
cleaning
individual urban
mobility without
car ownership
one-off sign-up
city dwellers
service team
telematic
systems
smart fortwo
car fl eet
car2go.com
mobile phone
car2go parking
lots
car2go shops
pick-up/drop-off
anywhere
systems management
fl eet management
pay per minute—$0.27
(all inclusive)
VP CR
CH
CSKAKP
KR
R$C$
bmgen_final.indd 239 6/15/10 5:45 PM
improve
bmgen_final.indd 240 6/15/10 5:45 PM
invent
bmgen_final.indd 241 6/15/10 5:45 PM
Process
bmgen_final.indd 242 6/15/10 5:45 PM
Process
bmgen_final.indd 243 6/15/10 5:45 PM
244
In this chapter we tie together the concepts and tools from the book
to simplify the task of setting up and executing a business model
design initiative. We propose a generic business model design pro-
cess adaptable to your organization’s specific needs.
Every business model design project is unique, and presents its own
challenges, obstacles, and critical success factors. Every organization
starts from a different point and has its own context and objectives
when it begins addressing an issue as fundamental as its business
model. Some may be reacting to a crisis situation, some may be seek-
ing new growth potential, some may be in startup mode, and still oth-
ers may be planning to bring a new product or technology to market.
The process we describe provides a starting point upon which just
about any organization can customize its own approach. Our process
has five phases: Mobilize, Understand, Design, Implement, and
Manage. We describe each of these phases in a general way, then
revisit them from the perspective of the established organization, as
business model innovation in enterprises already executing on one
or more existing business models requires taking additional factors
into account.
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.
In longstanding enterprises, business model innovation efforts
typically reflect the existing model and organizational structure.
The effort usually has one of four motivations: (1) a crisis with the
existing business model (in some cases a “near death” experience),
(2) adjusting, improving, or defending the existing model to adapt
to a changing environment, (3) bringing new technologies, products,
or services to market, or (4) preparing for the future by exploring
and testing completely new business models that might eventually
replace existing ones.
Business Model Design Process
bmgen_final.indd 244 6/15/10 5:45 PM
245
Business Model Design
and Innovation
Satisfy market: Fulfill an unanswered market need
(e.g. Tata car, NetJets, GrameenBank, Lulu.com)
Bring to market: Bring a new technology, product, or
service to market or exploit existing intellectual property
(IP) (e.g. Xerox 914, Swatch, Nespresso, Red Hat)
Improve market: Improve or disrupt an existing market
(e.g. Dell, EFG Bank, Nintendo Wii, IKEA, Bharti Airtel,
Skype, Zipcar, Ryanair, Amazon.com retail, better place)
Create market: Create an entirely new type of business
(Diners Club, Google)
c h a l l e n g e s
• Finding the right model
• Testing the model before a full-scale launch
• Inducing the market to adopt the new model
• Continuously adapting the model in response to market feedback
• Managing uncertainty
c h a l l e n g e s
• Developing an appetite for new models
• Aligning old and new models
• Managing vested interests
• Focusing on the long term
Factors Specific to
Established Organizations
Reactive: Arising out of a crisis with the existing business model
(e.g. IBM in the 1990s, Nintendo Wii, Rolls Royce jet engines)
Adaptive: Adjusting, improving, or defending the existing business
model (Nokia “comes with music,” P&G open innovation, Hilti)
Expansive: Launching a new technology, product, or service
(e.g. Nespresso, Xerox 914 in the 1960s, iPod/iTunes)
Pro-active/explorative: Preparing for the future
(e.g. car2go by Daimler, Amazon Web Services)
s t a r t i n g p o i n t f o r b u s i n e s s m o d e l i n n o v a t i o n
bmgen_final.indd 245 6/15/10 5:45 PM
246
Business model innovation rarely happens by coincidence. But
neither is it the exclusive domain of the creative business genius.
It is something that can be managed, structured into processes, and
used to leverage the creative potential of an entire organization.
The challenge, though, is that business model innovation remains
messy and unpredictable, despite attempts to implement a process.
It requires the ability to deal with ambiguity and uncertainty until a
good solution emerges. This takes time. Participants must be willing
to invest significant time and energy exploring many possibilities
without jumping too quickly to adopt one solution. The reward for
time invested will likely be a powerful new business model that
assures future growth.
We call this approach design attitude, which differs sharply from
the decision attitude that dominates traditional business manage-
ment. Fred Collopy and Richard Boland of the Weatherhead School
of Management eloquently explain this point in their article “Design
Matters” in the book Managing as Designing. The decision attitude,
they write, assumes that it is easy to come up with alternatives but
difficult to choose between them. The design attitude, in contrast,
assumes that it is difficult to design an outstanding alternative,
but once you have, the decision about which alternative to select
becomes trivial (see p. 164).
This distinction is particularly applicable to business model innova-
tion. You can do as much analysis as you want yet still fail to develop
a satisfactory new business model. 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. Such exploration involves messy, opportunistic bouncing
back and forth between market research, analysis, business model
prototyping, and idea generation. Design attitude is far less linear and
uncertain than decision attitude, which focuses on analysis, decision,
and optimization. Yet a purposeful quest for new and competitive
growth models demands the design approach.
Damien Newman of the design firm Central eloquently expressed
the design attitude in an image he calls the “Design Squiggle.” The
Design Squiggle embodies the characteristics of the design process:
Uncertain at the outset, it is messy and opportunistic, until it focuses
on a single point of clarity once the design has matured.
Design Attitude
bmgen_final.indd 246 6/15/10 5:45 PM
247
u n c e r t a i n t y c l a r i t y / f o c u s
Source: Adapted from Damien Newman, Central
research
& understand
design business
model prototypes
implement business
model design
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248
The business model design process we propose has five phases:
Mobilize, Understand, Design, Implement, and Manage. As previ-
ously mentioned, the progression through these phases is rarely
as linear as depicted in the table on the right. In particular, the
Understanding and Design phases tend to proceed in parallel. Busi-
ness model prototyping can start early in the Understanding phase,
in the form of sketching preliminary business model ideas. Similarly,
prototyping during the design phase may lead to new ideas requiring
additional research—and a revisiting of the Understand phase.
Finally, the last phase, Manage, is about continuously managing your
business model(s). In today’s climate, it’s best to assume that most
business models, even successful ones, will have a short lifespan.
Considering the substantial investment an enterprise makes in
producing a business model, it makes sense to extend its life through
continuous management and evolution until it needs complete
rethinking. Management of the model’s evolution will determine
which components are still relevant and which are obsolete.
For each process phase we outline the objective, the focus, and
which content in Business Model Generation supports that phase.
Then we outline the five phases in more detail, and explain how the
circumstances and focus can change when you are working with an
existing business model in an established organization.
5 Phases
Mobilize Understand Design Implement Manage
objective Prepare for a successful
business model design
project
Research and analyze
elements needed for the
business model design eΩort
Generate and test viable
business model options,
and select the best
Implement the
business model prototype
in the field
Adapt and modify the
business model in response
to market reaction
focus Setting the stage Immersion Inquiry Execution Evolution
description Assemble all the elements for
successful business model design.
Create awareness of the need for a
new business model, describe the
motivation behind the project, and
establish a common language to
describe, design, and analyze and
discuss business models.
You and the business model
design team immerse yourselves
in relevant knowledge: custom-
ers, technology, and environment.
You collect information, interview
experts, study potential cus-
tomers, and identify needs and
problems.
Transform the information and
ideas from the previous phase
into business model prototypes
that can be explored and tested.
After an intensive business model
inquiry, select the most satisfac-
tory business model design.
Implement the selected business
model design.
Set up the management struc-
tures to continuously monitor,
evaluate, and adapt or transform
your business model.
book sections • Business Model Canvas (p. 44)
• Storytelling (p. 170)
• Business Model Canvas (p. 44)
• Business Model Patterns (p. 52)
• Customer Insights (p. 126)
• Visual Thinking (p. 146)
• Scenarios (p. 180)
• Business Model Environment (p. 200)
• Evaluating Business Models (p. 212)
• Business Model Canvas (p. 44)
• Business Model Patterns (p. 52)
• Ideation (p. 134)
• Visual Thinking (p. 146)
• Prototyping (p. 160)
• Scenarios (p. 180)
• Evaluating Business Models (p. 212)
• Business Model Perspective
on Blue Ocean Strategy (p. 226)
• Managing Multiple Business Models
(p. 232)
• Business Model Canvas (p. 44)
• Visual Thinking (p. 146)
• Storytelling (p. 170)
• Managing Multiple Business Models
(p. 232)
• Business Model Canvas (p. 44)
• Visual Thinking (p. 146)
• Scenarios (p. 180)
• Business Model Environment (p. 200)
• Evaluating Business Models (p. 212)
bmgen_final.indd 248 6/15/10 5:45 PM
249
Mobilize Understand Design Implement Manage
objective Prepare for a successful
business model design
project
Research and analyze
elements needed for the
business model design eΩort
Generate and test viable
business model options,
and select the best
Implement the
business model prototype
in the fi eld
Adapt and modify the
business model in response
to market reaction
focus Setting the stage Immersion Inquiry Execution Evolution
description Assemble all the elements for
successful business model design.
Create awareness of the need for a
new business model, describe the
motivation behind the project, and
establish a common language to
describe, design, and analyze and
discuss business models.
You and the business model
design team immerse yourselves
in relevant knowledge: custom-
ers, technology, and environment.
You collect information, interview
experts, study potential cus-
tomers, and identify needs and
problems.
Transform the information and
ideas from the previous phase
into business model prototypes
that can be explored and tested.
After an intensive business model
inquiry, select the most satisfac-
tory business model design.
Implement the selected business
model design.
Set up the management struc-
tures to continuously monitor,
evaluate, and adapt or transform
your business model.
book sections • Business Model Canvas (p. 44)
• Storytelling (p. 170)
• Business Model Canvas (p. 44)
• Business Model Patterns (p. 52)
• Customer Insights (p. 126)
• Visual Thinking (p. 146)
• Scenarios (p. 180)
• Business Model Environment (p. 200)
• Evaluating Business Models (p. 212)
• Business Model Canvas (p. 44)
• Business Model Patterns (p. 52)
• Ideation (p. 134)
• Visual Thinking (p. 146)
• Prototyping (p. 160)
• Scenarios (p. 180)
• Evaluating Business Models (p. 212)
• Business Model Perspective
on Blue Ocean Strategy (p. 226)
• Managing Multiple Business Models
(p. 232)
• Business Model Canvas (p. 44)
• Visual Thinking (p. 146)
• Storytelling (p. 170)
• Managing Multiple Business Models
(p. 232)
• Business Model Canvas (p. 44)
• Visual Thinking (p. 146)
• Scenarios (p. 180)
• Business Model Environment (p. 200)
• Evaluating Business Models (p. 212)
bmgen_final.indd 249 6/15/10 5:45 PM
250
a c t i v i t i e s
• Frame project objectives
• Test preliminary business ideas
• Plan
• Assemble team
critical success factors
• Appropriate people, experience,
and knowledge
k e y d a n g e r s
• Overestimating value of initial idea(s)
Mobilize
Prepare for a successful business
model design project
1
2
3
4
5
Crucial activities in this first phase include assembling the project
team and gaining access to the right people and information. While
there are no rules about training the perfect team—again, each
project is unique—it makes sense to seek a mix of people with broad
management and industry experience, fresh ideas, the right personal
networks, and a deep commitment to business model innovation.
You may want to start doing some preliminary testing of the basic
business idea during the mobilization phase. But since the potential
of a business idea depends heavily on the choice of the right business
model, this is easier said than done. When Skype launched its busi-
ness, who would have imagined it would become the world’s largest
long-distance call carrier?
In any case, establish the Business Model Canvas as the shared
language of the design effort. This will help you structure and present
preliminary ideas more effectively and improve communications. You
may also want to try weaving your business model ideas into some
stories to test them.
The main activities of this first phase are framing the project objec-
tives, testing preliminary ideas, planning the project, and assembling
the team.
How objectives are framed will vary depending on the project, but
this usually covers establishing the rationale, project scope, and
main objectives. Initial planning should cover the first phases of a
business model design project: Mobilize, Understand, and Design.
The Implementation and Management phases depend heavily on
the outcome of these first three phases—namely the business model
direction—and therefore can only be planned later.
bmgen_final.indd 250 6/15/10 5:59 PM
251
cooperation. A straightforward way to create legitimacy and visible sponsorship is to directly
involve a respected member of top management from the very beginning.
} Manage vested interests Take care to identify and manage vested interests throughout the
organization. Not everybody in an organization is interested in reinventing the current business
model. In fact, the design effort may threaten some people.
} Cross-functional team As described previously (see p. 143), the ideal business model task force
is composed of people from across the organization, including different business units, business
functions (e.g. marketing, finance, IT), levels of seniority and expertise, and so forth. Different
organizational perspectives help generate better ideas, and increase the likelihood that the
project will succeed. A cross-functional team helps identify and overcome potential obstacles
to reinvention early in the game and encourages buy-in.
} Orienting decision makers You should plan on spending a considerable amount of time
orienting and educating decision makers on business models, their importance, and the design
and innovation process. This is critical to gaining buy-in and overcoming resistance to the
unknown or not-yet-understood. Depending on your organization’s management style you may
want to avoid overemphasizing the conceptual aspects of business models. Stay practical and
deliver your message with stories and images rather than concepts and theory.
One clear danger in the Mobilization phase is that people tend to
overestimate the potential of initial business model ideas. This can
lead to a closed mindset and limited exploration of other possibili-
ties. Try to mitigate this risk by continuously testing the new ideas
with people from varied backgrounds. You may also want to consider
organizing a so-called kill/thrill session in which all participants
are tasked first with brainstorming for 20 minutes on reasons why
the idea won’t work (the “kill” portion), then spend 20 minutes
brainstorming exclusively on why the idea will fly (the “thrill” por-
tion). It’s a powerful way to challenge an idea’s fundamental worth.
Working from the Established Company Perspective
} Project legitimacy Building project legitimacy is a critical suc-
cess factor when working within established organizations.
Since business model design projects affect people across
organizational boundaries, a strong and visible commitment by
the board and/or top management is indispensable to obtaining
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252
Understanding
1
2
3
4
5
Scanning, though, is inevitably accompanied by the risk of over-
researching. Make your team aware of this risk at the outset and
ensure that everyone agrees to avoid excessive researching. “Analysis
paralysis” can also be avoided by prototyping business models early
on (see Prototyping, p. 160). This has the added benefit of allowing you
to quickly collect feedback. As mentioned earlier, research, under-
standing, and designing go hand in hand, and the boundaries separat-
ing them are often unclear.
During research, one area that deserves careful attention is develop-
ing deep knowledge of the customer. This sounds obvious, but it
is often neglected, particularly in technology-focused projects.
The Customer Empathy Map (see p. 131) can serve as a powerful tool
to help you structure customer research. One common challenge is
that the Customer Segment is not necessarily clear from the outset.
A technology “still in search of a problem to solve” may be applicable
in several different markets.
This second phase consists of developing a good understanding
of the context in which the business model will evolve.
Scanning the business model environment is a mix of activities,
including market research, studying and involving customers,
interviewing domain experts, and sketching out competitor business
models. The project team should immerse itself in the necessary
materials and activities to develop a deep understanding of the
business model “design space.”
a c t i v i t i e s
• Scan environment
• Study potential customers
• Interview experts
• Research what has already been
tried (e.g. examples of failures and
their causes)
• Collect ideas and opinions
critical success factors
• Deep understanding of potential
target markets
• Looking beyond the traditional
boundaries defining target markets
k e y d a n g e r s
• Over-researching: disconnect
between research and objectives
• Biased research because of precom-
mitment to a certain business idea
Research and analyze the elements needed
for the business model design effort
Understanding
bmgen_final.indd 252 6/15/10 5:59 PM
253
informed
design
make tangible
Directions
Working from the Established Company Perspective
} Mapping/assessing existing business models Established organizations start with existing
business models. Ideally, mapping and assessing your current business model should be done in
separate workshops involving people throughout the organization, at the same time ideas and
opinions for new business models are being collected. This will provide multiple perspectives
on the strengths and weaknesses of your business model, and provide the first ideas for new models.
} Looking beyond the status-quo It is particularly challenging to see beyond the current business
model and business model patterns. Because the status quo is usually the result of a successful
past, it is deeply embedded in organizational culture.
} Searching beyond the existing client base Searching beyond your existing client base is critical
when seeking lucrative new business models. Tomorrow’s profit potential may well lie elsewhere.
} Demonstrate progress Excessive analysis risks losing senior management support due to a
perceived lack of productivity. Demonstrate your progress by describing customer insights or
showing a series of business model sketches based on what you’ve learned from research.
A critical success factor in this phase is questioning industry
assumptions and established business model patterns. The game
console industry was building and selling cutting edge subsidized
consoles until the Nintendo Wii overturned commonly accepted
assumptions (see p. 82). Questioning assumptions includes
exploring the potential of “the low end” of established markets,
as Scott Anthony points out in The Silver Lining. As you scan
the environment and assess trends, markets, and competitors,
remember that the seeds of business model innovation can be
found just about anywhere.
During the Understanding phase you should also actively seek input
from varied sources, including customers. Start testing preliminary
business model directions early by soliciting feedback on Business
Model Canvas sketches. Bear in mind, though, that breakthrough
ideas may encounter strong resistance.
bmgen_final.indd 253 6/15/10 5:59 PM
254
seek alternative revenue streams, and explore the value of multiple
distribution channels. Try out different business model patterns (see
p. 52) to explore and test new possibilities.
To test potential business models with outside experts or prospective
clients, develop a narrative for each and seek feedback on your telling
of each model’s “story.” This is not to imply that you need to modify
your model based on each and every comment. You will hear feedback
such as “this won’t work, customers don’t need it,” “that’s not doable,
it goes against industry logic,” or “the marketplace just isn’t ready.”
Such comments indicate potential roadblocks ahead but should not
be considered showstoppers. Further inquiry may well enable you to
successfully refine your model.
Iqbal Quadir’s quest to bring mobile telephony to poor rural villagers
in Bangladesh in the late 1990s provides a powerful example. Most
industry experts rejected his idea, saying poor villagers were pressed by
more basic needs and wouldn’t pay for mobile telephones. But seeking
feedback and developing contacts outside the telecommunications
a c t i v i t i e s
• Brainstorm
• Prototype
• Test
• Select
critical success factors
• Co-create with people from across
the organization
• Ability to see beyond status quo
• Taking time to explore multiple
business model ideas
k e y d a n g e r s
• Watering down or suppressing
bold ideas
• Falling in love with ideas too quickly
Design
Adapt and modify the business model
in response to market response
1
2
3
4
5
The key challenge during the Design phase is to generate and stick
with bold new models. Expansive thinking is the critical success
factor here. In order to generate breakthrough ideas, team members
must develop the ability to abandon the status quo (current business
models and patterns) during ideation. An inquiry-focused design
attitude is also crucial. Teams must take the time to explore multiple
ideas, because the process of exploring different paths is most likely
to yield the best alternatives.
Avoid “falling in love” with ideas too early. Take the time to think
through multiple business model options before selecting the one
you want to implement. Experiment with different partnership models,
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255
design
decide executeinquiry
provoke
prototype
decidedecide
uncertainty. If you clearly define the uncertainties involved (e.g. new pricing mechanisms, new
Distribution Channels), you can prototype and test them in the market to better predict how the
model will perform when launched full-scale.
} Participatory design Another way to improve the likelihood of having bold ideas adopted and
subsequently implemented is to be especially inclusive when assembling the design team. Co-
create with people from different business units, different levels of the organizational hierarchy,
and different areas of expertise. By integrating comments and concerns from across the organi-
zation, your design can anticipate and possibly circumvent implementation roadblocks.
} Old versus new One big design question is whether the old and new business models should
be separated or integrated into one. The right design choice will greatly affect chances of suc-
cess (see Managing Multiple Business Models, p. 232).
} Avoid short-term focus One limitation to avoid is a short-term focus on ideas with large first-
year revenue potential. Big corporations, in particular, can experience huge absolute growth.
A company with annual sales of U.S. $5 billion, for example, generates $200 million in new
revenues by growing at the modest rate of four percent. Few breakthrough business models can
achieve such revenues during their first year (doing so would require acquiring 1.6 million new
customers, each paying an annual fee of $125). Therefore, a longer-term perspective is required
when exploring new business models. Otherwise, your organization is likely to miss out on
many future growth opportunities. How much do you imagine Google earned in its first year?
industry led to a partnership with microfinance institution Grameen
Bank, which became the cornerstone of Grameenphone’s business
model. Contrary to expert opinion, poor villagers were indeed willing to
pay for mobile connectivity, and Grameenphone became Bangladesh’s
leading telecommunications provider.
Working from the Established Company Perspective
} Prevent taming of bold ideas Established organizations tend
to water down bold business model ideas. Your challenge is
to defend their boldness —while assuring that they won’t face
overwhelming obstacles if implemented.
To achieve this tricky balance it can be helpful to draw a
risk/reward profile of each model. The profile could include
questions such as, What is the profit/loss potential? Describe
potential conflicts with existing business units. How might
this affect our brand? How will existing customers react? This
approach can help you clarify and address the uncertainties
in each model. The bolder the model, the higher the level of
prototype
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256
Business Model Generation focuses on understanding and developing
innovative business models, but we’d also like to offer some sug-
gestions on implementing new business models, particularly within
established organizations.
Once you’ve arrived at a final business model design, you will start
translating this into an implementation design. This includes defining all
related projects, specifying milestones, organizing any legal structures,
preparing a detailed budget and project roadmap, and so forth. The
implementation phase is often outlined in a business plan and itemized
in a project management document.
Particular attention needs to be paid to managing uncertainties. This
implies closely monitoring how risk/reward expectations play out
against actual results. It also means developing mechanisms to quickly
adapt your business model to market feedback.
1
2
3
4
5
a c t i v i t i e s
• Communicate and involve
• Execute
critical success factors
• Best practice project management
• Ability and willingness to rapidly
adapt the business model
• Align “old” and “new” business
models
k e y d a n g e r s
• Weak or fading momentum
Implement
Implement the business model
prototype in the field
bmgen_final.indd 256 6/15/10 6:00 PM
257
mentation of the new model is even planned. Deep, cross-functional participation allows you to
directly address any concerns regarding the new business model before drawing the roadmap
for its implementation.
} Project sponsorship A second success element is the sustained and visible support of your
project sponsor, something that signals the importance and legitimacy of the business model
design effort. Both elements are crucial to keeping vested interests from undermining the
successful implementation of a new business model.
} Old versus new business model A third element is creating the right organizational structure
for your new business model (see Managing Multiple Business Models, p. 232). Should it be a
standalone entity or a business unit within the parent organization? Will it draw on resources
shared with an existing business model? Will it inherit the parent’s organizational culture?
} Communication campaign Finally, conduct a highly visible, multi-channel internal commu-
nication campaign announcing the new business model. This will help you counter “fear of the
new” in your organization. As outlined earlier, stories and visualizations are powerful, engaging
tools that help people understand the logic of and rationale for the new business model.
For example, when Skype started becoming successful and was
signing up tens of thousands of new users each day, it had to
immediately develop mechanisms to cost-effectively handle user
feedback and complaints. Otherwise, skyrocketing expenses and
user dissatisfaction would have brought the company to its knees.
Working from the Established Company Perspective
} Proactively managing “roadblocks” The single element that
most increases the likelihood of a new business model’s
success is in place long before actual implementation. By this
we are referring to the participation of people from throughout
the organization during the Mobilization, Understanding, and
Design phases. Such a participatory approach will have already
established buy-in and uncovered obstacles before the imple-
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258
At least one person on the organizational strategy team—if not a new
team—should be assigned responsibility for business models and
their long-term evolution. Consider organizing regular workshops with
cross-functional teams to evaluate your business model. This will help
you judge whether a model needs minor adjustments or a complete
overhaul.
Ideally, improving and rethinking the organization’s business model
should be every employee’s obsession rather than something that
preoccupies only top management. With the Business Model Canvas
you now have a formidable tool with which to make business models
clear to everybody throughout the enterprise. New business model
ideas often emerge from unlikely places within an organization.
Proactive response to market evolutions is also increasingly important
Consider managing a “portfolio” of business models. We live in the
business model generation, a time when the shelf life of successful
business models is shrinking quickly. As with traditional product life-
1
2
3
4
5
a c t i v i t i e s
• Scan the environment
• Continuously assess your
business model
• Rejuvenate or rethink your model
• Align business models throughout
the enterprise
• Manage synergies or conflicts
between models
critical success factors
• Long-term perspective
• Proactiveness
• Governance of business models
k e y d a n g e r s
• Becoming a victim of your own
success, failing to adapt
Manage
Adapt and modify the business model
in response to market reaction
For successful organizations, creating a new business model or
rethinking an existing one is not a one-time exercise. It’s an activity
that continues beyond implementation. The Manage phase includes
continuously assessing the model and scanning the environment
to understand how it might be affected by external factors over the
long term.
bmgen_final.indd 258 6/15/10 6:01 PM
259
vation or redesign projects, and track the overall evolution of the organization’s business mod-
els. It should also manage the “master” business model that describes the entire organization.
This master template could serve as the starting point for each business model project within
the organization. The master business model would also help different functional groups, such
as operations, manufacturing, or sales align with the organization’s overarching goals.
} Manage synergies and conflicts One of the business model governance authority’s main tasks
would be to align business models with each other to exploit synergies and avoid or manage
conflicts. A Canvas document describing each business model in the organization would help
illuminate the big picture and achieve better alignment.
} Business model portfolio Successful, established companies should proactively manage a
“portfolio” of business models. Many formerly successful companies in the music, newspaper,
and automotive industries failed to proactively examine their business models and slid into
crisis as a result. A promising approach to avoiding this fate is to develop a portfolio of business
models whereby cash-generating businesses finance business model experiments for the future.
} A beginner’s mindset 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.
cycle management, we all need to start thinking about replacing
our current cash-generating business models with growth models
for tomorrow’s marketplace.
Dell disrupted the PC industry when it introduced the build-to-order
format and direct online sales. Over the years, Dell grew so success-
fully that it established itself as the industry leader. But the company
failed to fully rethink its once disruptive business model. Now that
the industry landscape has changed, Dell risks remaining stuck
in a commoditized PC market, while growth and profits, generated
elsewhere, lie outside its reach.
Working from the Established Company Perspective
} Business Model Governance Consider establishing a “business
model governance” authority to help better manage business
models across the enterprise. This group’s role would be to
orchestrate business models, engage stakeholders, launch inno-
informed
design
make tangible
DirectionsDirections
bmgen_final.indd 259 6/15/10 6:01 PM
Prototyping is
potentially the
most important
part of the
book and tools
provided.
My reasoning is based upon the stress
and resistance that established orga-
nizations are facing in the process of
innovating their own business models.
Therefore a very potent strategy is
prototyping—in order to create buy-in
processes needed.
Terje Sand, Norway
Typically when an
organization looks
at improving their
business model,
it is as a result of
gaps. Visualizing your current
business model can demonstrate
the logical gaps that exist and make
them tangible as action items.
Ravila White, United States
In established companies, there are
often ample physical “product ideas”
that never get serious consideration
because they don’t immediately fit the
prevailing business model.
Gert Steens, Netherlands
Do not get too attached to the
first idea or implementation.
Build in feedback loops and monitor
early warning signals to explicitly
challenge your original concept and be
willing and able to completely change
it if required.
Erwin Fielt, Australia
The freemium business model as the
reverse of insurance—insightful!
Makes me want to turn other models
upside down!
Victor Lombardi, United States
A business model is the
“core content”
or the
“SHort StorY”
of the company (actual or prospective).
A business plan is the “guideline for the
action” or the “full story.”
Fernando Saenz-Marrero, Spain
When I work with non-profits the first
thing I tell them is that they in fact have
a “business” (model) in that they must
create and capture value, whether that
value comes from donations, subscrip-
tions, and so on.
Kim Korn, United States
Begin with the
end in mind
while taking
the end client
perspective.
Karl Burrow, Japan
WhAT
ELSE?
260
bmgen_final.indd 260 6/15/10 6:01 PM
It’s one thing to map out a
Business Model Canvas. But for
creating a business model that in
itself is a breakthrough innovation,
it is helpful to use tools used to
create breakthrough innovation in
other industries, such as in design.
Ellen Di Resta, United States
Aravind uses the Freemium Business
Model to enable FREE eye surgery
for the poor in India. Business model
innovation can really make a difference!
Anders Sundelin, Sweden
I find that although
most managers
understand strategy
concepts, they
have a tough time
applying these
concepts at their
level of the
organization.
however, discussions about business
models connect the high-level
concepts to day-to-day decision-
making. It’s a great middle ground.
Bill Welter, United States
Personas, Scenarios, Visualization,
Empathy maps, and so on are techniques
that I have used since the late 1990s in
user experience type projects. In the last
few years I have seen that they are incred-
ibly effective at a strategy/business level.
Eirik V Johnsen, Norway
If solving
humanity’s current
problems requires
rethinking how value
is generated and for
whom, then business
model innovation
is the premier
tool to organize,
communicate, and
implement that
new thinking.
Nabil Harfoush, Canada
I’m interested in hearing how people
are integrating technology ideas into
their models using the Canvas. We’ve
explored adding it as a separate layer
(above or below financial) but have
now settled on integrating it as notes
on each of the 9 key areas. From this we
then step back and develop a separate
integrated technology plan.
Rob Manson, Australia
YoUr
business
model
Is not YoUr
business
It’s a method of inquiry to help
you understand what to do next.
Testing and iteration is key.
Matthew Milan, Canada
Multi-sided platforms are actually rather
easy at the business model level; the dif-
ficulty comes in execution: attracting the
“subsidized side,” pricing on both sides,
vertical or horizontal integration, how to
change the business model in step with
the size of the market on each side.
Hampus Jakobsson, Sweden
business model
innovation
combines creativity
with a structured
approach—the best
of both worlds.
Ziv Baida, Netherlands
Many of my clients do not have a
holistic view of their business model
and tend to focus on trying to address
the immediate problem. The Business
Model Canvas provides a framework
that helps clarify the why, who, what,
when, where, and how.
Patrick van Abbema, Canada
I love the idea of
using these tools to
design businesses
and to tinker under
the hood of
the engine of an
organization.
Michael Anton Dila, Canada
There are thousands of business
models to be investigated and many
thousands of people who are
interested in them.
Steven Devijver, Belgium
Simplicity is very important to explain
the patterns and to trigger the non-
professional’s involvement in business
innovation.
Gertjan Verstoep, Netherlands
We have been working too long
and too hard for companies with
bad or improper business models.
Lytton He, China
The term business model is thrown
around a lot and more frequently
than not to mean an incomplete
understanding of what makes a
business a business (mostly just
the financial/revenue aspect).
Livia Labate, United States
Business model innovation is one of the
LEAST uSED
& most powerful
ways to create sustainable profit
growth, economic development and
create new ‘markets’ and ‘industries’.
Deborah Mills-Scofield, United States
261
bmgen_final.indd 261 6/15/10 6:01 PM
Outlook
bmgen_final.indd 262 6/15/10 6:01 PM
We hope we’ve shown you how visionaries, game changers, and
challengers can tackle the vital issue of business models. We hope
we’ve provided you with the language, the tools and techniques, and
the dynamic approach needed to design innovative and competitive
new models. But much remains to be said. So here we touch on five
topics, each of which might well merit its own book.
The first examines business models beyond profit: how the Canvas can
drive business model innovation in the public and non-profit sectors.
The second suggests how computer-aided business model design might
leverage the paper-based approach and allow for complex manipulation
of business model elements. The third discusses the relationship between
business models and business plans. The fourth addresses issues that
arise when implementing business models in either new or existing
organizations. The final topic examines how to better achieve business
model and IT alignment.
bmgen_final.indd 263 6/15/10 6:01 PM
264
VP CR
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CS
R$
Beyond-Profit Business Models
The application of the Canvas is in no way limited to for-profit cor-
porations. You can easily apply the technique to non-profit organiza-
tions, charities, public sector entities, and for-profit social ventures.
Every organization has a business model, even if the word “busi-
ness” is not used as a descriptor. To survive, every organization that
creates and delivers value must generate enough revenue to cover its
expenses. Hence it has a business model. The difference is merely a
matter of focus: the for-profit business’s goal is to maximize earnings,
while the organizations discussed in the following pages have strong
non-financial missions focused on ecology, social causes, and public
service mandates. We find useful entrepreneur Tim Clark’s suggestion
that the term “enterprise model” be applied to such organizations.
We distinguish between two categories of beyond-profit models:
third-party funded enterprise models (e.g. philanthropy, charities,
government) and so-called triple bottom line business models with a
strong ecological and/or social mission (“triple bottom line” refers to
the practice of accounting for environmental and social, as well as finan-
cial, costs). It is mainly the source of revenue that distinguishes these
two, but as a direct consequence they have two very different business
model patterns and drivers. Many organizations are experimenting
with blending the two models in order to exploit the best of both.
Third-Party Funded Models
In this type of enterprise model, the product or service recipient is
not the payer. Products and services are paid for by a third party,
which might be a donor or the public sector. The third party pays the
organization to fulfill a mission, which may be of a social, ecological,
or public service nature. For example, government (and indirectly,
taxpayers) pays schools to deliver education services. Likewise,
donors to Oxfam, a large U.K. non-profit organization, help finance
its efforts to end poverty and social injustice. Third parties rarely
expect to receive direct economic benefits from the exchange, unlike
advertisers—who are players in for-profit business models which
also feature third party financing.
One risk of the third-party enterprise model is that value creation
incentives can become misaligned. The third-party financer becomes
the main “customer,” so to speak, while the recipient becomes a
mere receiver. Since the very existence of the enterprise depends on
contributions, the incentive to create value for donors may be stron-
ger than the incentive to create value for recipients.
All this is not to say that third-party funded enterprise models
are bad and recipient-funded business models are good. Conven-
tional businesslike selling of products and services doesn’t always
work: education, healthcare, and utility services are clear examples.
There are no simple answers to the questions raised by third-party
financed enterprise models and the resulting risks of misaligned
incentives. We must explore which models make sense, then strive
to design optimal solutions.
mission
product or
service
“donor”
“recipient”
free
donation
bmgen_final.indd 264 6/15/10 6:01 PM
265
Solving the big issues of
our generation requires
bold new business models
Triple Bottom Line Business Models
Earlier we shared the story of how Iqbal Quadir, an investment
banker in New York, set out to build Grameenphone. His goal was to
provide universal access to telecommunications services in remote,
rural areas of his home country of Bangladesh. He achieved his aim
with a for-profit model that had a profound, positive impact on rural
Bangladesh. Grameenphone eventually provided over 200,000
women in rural areas with income-earning opportunities, raised their
social status, connected 60,000 villages to a mobile phone network,
reached 100 million people, turned a profit, and became the Bangla-
deshi government’s biggest taxpayer.
To accommodate triple bottom line business models, we can
extend the Canvas with Blocks illustrating two outcomes: (1) the
social and environmental costs of a business model (i.e. its negative
impact), and (2) the social and environmental benefits of a business
model (i.e. its positive impact). Just as earnings are increased by
minimizing financial costs and maximizing income, the triple bottom
line model seeks to minimize negative social and environmental
impacts and maximize the positive.
Villagers in Bangladesh were too poor
to afford phones, so Grameenphone
partnered with Grameen Bank, the
microfinance institution, to provide local
women with microloans to purchase
mobile phones. The women sold calling
services in their villages, repaid the loans,
earned income, and thereby improved
their social status.
Grameenphone went beyond establishing
near universal access to telephone service
and earning a profit. It also had substan-
tial social impact by providing “village
phone ladies” with earning opportunities
and improved social status.
grameen bank
network
consortium
(telenor)
manage
network
income
opportunity
mobile
communication
village phone
ladies
villagers
network
grameen bank
village phone
ladies
network communication income
VP CR
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social and environmental costs social and environmental benefits
“universal access”
income for women and
better social status
bmgen_final.indd 265 6/15/10 6:01 PM
Prototype of a computer aided business
model editor: www.bmdesigner.com
266
Computer-Aided Business Model Design
Mike, a senior business analyst with a large financial group, wraps up
the first of a two-day workshop he is facilitating with a group of 24
executives. He collects the business model prototypes and ideas that
participants sketched on large Canvas posters and hurries to his office.
There, Mike and his team enter the ideas into a collaborative
computer-aided business model design program to further develop
the prototypes. Other business analysts working overseas add
resource and activity cost estimates, as well as calculations of
potential Revenue Streams. The software then spits out four dif-
ferent financial scenarios, with business model data and prototype
diagrams for each plotted on large posters. The following morning
Mike presents the results to the executives, who have gathered for
the second day of their workshop to discuss the potential risks and
rewards of each prototype.
This scenario doesn’t yet describe reality, but it soon will. A
Business Model Canvas printed on a large poster and a big box of
Post-it™ notes are still the best tools for triggering creativity and
generating innovative business model ideas. But this paper-based
approach could be extended with the help of computers.
Turning a prototype business model into a spreadsheet is time-
consuming, and each change to the prototype usually requires a
manual modification of the spreadsheet. A computer-aided system
could do this automatically and make possible lightning-quick,
comprehensive business model simulations. Furthermore, computer
support could make creating, storing, manipulating, tracking, and
communicating business models far easier. Such support would
seem to be almost a requirement for collaboratively working on busi-
ness models with geographically disparate teams.
Doesn’t it seem strange that we can design, simulate, and
build airplanes or develop software across continents, yet we can’t
manipulate highly valuable business models outside of the board-
room and without paper and pencil? It’s time to bring the speed and
power of microprocessors to the development and management of
new business models. Inventing innovative business models certainly
requires human creativity, but computer-aided systems could help us
manipulate business models in more sophisticated and complex ways.
An example from the field of architecture is helpful in illustrat-
ing the power of computer-aided design. In the 1980s so-called
Computer-Aided Design (CAD) systems started becoming more
affordable and slowly were adopted by architectural firms. CAD
made it much easier and cheaper for architects to create three-
dimensional models and prototypes. They brought speed, integration,
improved collaboration, simulation, and better planning to architec-
ture practices, Cumbersome manual tasks, such as constant redraw-
ing and blueprint sharing, were eliminated, and a whole new world
of opportunity, such as rapid visual 3D exploration and prototyping,
opened up. Today paper-based sketching and CAD happily co-exist,
each method retaining its own strengths and weaknesses.
bmgen_final.indd 266 6/15/10 6:01 PM
267
In the realm of business models, too, computer-aided systems
could make many tasks easier and quicker, while revealing as-yet
unseen opportunity. At the least, CAD systems could help visual-
ize, store, manipulate, track, annotate, and communicate business
models. More complex functions would involve manipulating layers
or business model versions, or moving business model elements
dynamically and evaluating the impact in real-time. Sophisticated
systems might facilitate business model critiquing, provide a reposi-
Paper-based
• Paper or poster-based Canvases can be easily created
and used just about anywhere
• Paper and poster-based Canvases impose few barriers:
no need to learn a specific computer application
• Very intuitive and engaging in group settings
• Fosters creativity, spurs ideation when used on large surfaces
• Napkin sketches to draw, understand, or explain
business models
• Collaborative brainstorming sessions to develop
business model ideas
• Collaborative assessment of business models
Computer-aided
Easy to create, store, manipulate, and track business models
• Enable remote collaboration
• Quick, comprehensive financial, other simulations
• Provide business model design guidance (critiquing
systems, business model database, pattern ideas,
control mechanisms)
• Collaborative business model design with remote teams
• Complex manipulations of business models (navigation,
business model layers, merging models)
• Deep, comprehensive analysis
A
d
va
n
ta
g
es
A
p
p
li
ca
ti
o
n
s
tory of business model patterns and off-the-shelf building blocks,
enable distributed business model development and management,
simulate models, or integrate with other enterprise systems (e.g.
ERP or business process management).
Computer-aided business model design systems will likely evolve
in step with interface improvements. Manipulating business models
on wall-sized touch screens would bring computer-aided design
closer to the intuitive paper-based approach and improve usability.
bmgen_final.indd 267 6/15/10 6:01 PM
268
Business Models and Business Plans
The purpose of a business plan is to describe and communicate a
for-profit or non-profit project and how it can be implemented, either
inside or outside an organization. The motivation behind the busi-
ness plan may be to “sell” a project, either to potential investors or
internal organizational stakeholders. A business plan may also serve
as an implementation guide.
In fact, the work you may have done designing and thinking
through your own business model is the perfect basis for writing a
strong business plan. We suggest giving business plans a five-section
structure: The Team, The Business Model, Financial Analysis, Exter-
nal Environment, Implementation Roadmap, and Risk Analysis.
The Team
One business plan element that venture capitalists particularly
emphasize is the management team. Is the team experienced, knowl-
edgeable, and connected enough to accomplish what they propose?
Do the members have successful track records? Highlight why your
team is the right one to successfully build and execute the business
model you propose.
The Business Model
This section showcases the attractiveness of the business model.
Use the Canvas to provide readers with an immediate visual portrait
of your model. Ideally, illustrate the elements with drawings. Then,
describe the Value Proposition, show evidence of customer need,
and explain how you will reach the market. Use stories. Highlight the
attractiveness of your target segments to pique the reader’s interest.
Finally, describe the Key Resources and Activities needed to build
and execute the business model.
Financial Analysis
This is traditionally an important business plan component that
attracts much attention. You can make pro forma calculations based
on your Canvas Building Blocks and estimate how many customers
can be acquired. Include elements such as breakeven analysis, sales
scenarios, and operating costs. The Canvas can also help with capital
spending calculations and other implementation cost estimates.
Total cost, revenue, and cash flow projections determine your fund-
ing requirements.
External Environment
This section of the business plan describes how your business model is
positioned with respect to the external environment. The four external
forces covered earlier (see p. 201) provide the basis for this descrip-
tion. Summarize your business model’s competitive advantages.
Implementation Roadmap
This section shows the reader what it will take to implement your
business model and how you will do it. Include a summary of all
projects and the overarching milestones. Outline the implementation
agenda with a project roadmap that includes Gantt charts. Projects
can be derived directly from your Canvas.
Risk Analysis
In closing, describe limiting factors and obstacles, as well as critical
success factors. These can be derived from a SWOT analysis of your
business model (see p. 216).
bmgen_final.indd 268 6/15/10 6:01 PM
269
BUSINESS PLAN
executive summary
the team
• Management Profile
• Why We Are a Winning Team
the business model
• Vision, Mission, and Values
• How Our Business Model Works
• Value Proposition
• Target Markets
• Marketing Plan
• Key Resources and Activities
financial analysis
• Breakeven Analysis
• Sales Scenarios and Projections
• Capital Spending
• Operating Costs
• Funding Requirements
external environment
• The Economy
• Market Analysis and Key Trends
• Competitor Analysis
• Competitive Advantages of Our Business Model
implementation roadmap
• Projects
• Milestones
• Roadmap
risk analysis
• Limiting Factors and Obstacles
• Critical Success Factors
• Specific Risks and Countermeasures
conclusion
annexes
VP CR
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environmental analysis
financial spreadsheets
implementation roadmap
SWOT and uncertainty analysis
bmgen_final.indd 269 6/15/10 6:01 PM
270
Implementing Business Models in Organizations
We’ve laid out the fundamentals of business model innovation,
explained the dynamics of different patterns, and outlined tech-
niques for inventing and designing models. Naturally there is much
more to say about the implementation that is critical to a business
model’s success.
We’ve already addressed the question of how to manage multiple
business models (see p. 232). Now let’s turn to another aspect of
implementation: turning your business model into a sustainable
enterprise, or implementing it in an existing organization. To illus-
trate, we’ve combined the Canvas with Jay Galbraith’s Star Model to
suggest aspects of organizational design you may want to consider
when executing a business model.
Galbraith specifies five areas that should be aligned in an organi-
zation: Strategy, Structure, Processes, Rewards, and People. We place
the business model in the middle of the star as a “center of gravity”
that holds the five areas together.
Strategy
Strategy drives the business model. Do you want to grow 20 percent
in new market segments? Then that should be reflected in your
business model in terms of new Customer Segments, Channels, or
Key Activities.
Structure
The characteristics of a business model determine the optimal
organizational structure for its execution. Does your business model
call for a highly centralized or decentralized organizational structure?
If you will implement the model in an established business, should
the new operation be integrated or spun off (see p. 233)?
Processes
Each business model demands different processes. Operations
run under a low-cost business model should be lean and highly
automated. If the model calls for selling high-value machines, quality
processes must be exceptionally rigorous.
Rewards
Different business models require different reward systems. A reward
system must use appropriate incentives to motivate workers to do
the right things. Does your model require a direct sales force to
acquire new customers? Then your reward system should be highly
performance oriented. Does your model depend heavily on customer
satisfaction? Then your reward system must reflect that commitment.
People
Certain business models call for people with particular mindsets. For
example, some business models call for particularly entrepreneurial
mechanisms to bring products and services to market. Such models
must give employees significant leeway, which means hiring proac-
tive, but dependable, free-thinkers.
bmgen_final.indd 270 6/15/10 6:01 PM
271
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people
processes
structure
strategy
Power
What type of organizational structure
does your business model require?
Skills/mindset
What kinds of people with what skills
does your business model require? What
type of mindset is needed?
Direction
What are your strategic goals? How do
they drive the business model?
Information
What information flows, processes,
and workflows does your business
model require?
Motivation
What reward system does your business
model require? How can you motivate
your people?
rewards
bmgen_final.indd 271 6/15/10 6:01 PM
272
Aligning IT with Business
Aligning information systems and business goals is fundamental
to the success of an enterprise. Chief executives officers ask their
chief information officers (CIOs), Do we have the right IT? How do
we know? How can we best align our business with our technology
systems?
Information technology research and advisory firm Gartner
highlights this issue in a report called “Getting the Right IT: Using
Business Models.” Gartner asserts that the Business Model Canvas
is a powerful tool that helps CIOs quickly grasp how a business
works without getting bogged down in operational details. Gartner
recommends that CIOs use the Business Model Canvas to align IT
and key business processes. This helps them align business and IT
decisions without diving too deeply into tactical issues.
We find it useful to pair the Canvas with an Enterprise Archi-
tecture approach. Many of the various Enterprise Architecture
concepts describe the enterprise from three perspectives: the busi-
ness perspective, the applications perspective, and the technology
perspective. We recommend using the Canvas to guide the business
perspective, then align the business with the applications and tech-
nology perspectives.
In the application perspective, you describe the portfolio of
applications that leverage aspects of your business model (e.g.
recommendation systems, supply chain management applications,
etc.) and you describe all the business model’s information require-
ments (e.g. customer profiles, warehousing, etc.). In the technology
perspective you describe the technology infrastructure that drives
your business model (e.g. server farms, data storage systems, etc.).
Authors Weill and Vitale propose another interesting way to
explore IT alignment. They pair categories of IT infrastructure service
with business models. Weill and Vitale propose aligning business
models with application infrastructure, communications manage-
ment, data management, IT management, security, IT architecture,
channel management, IT research and development, and IT training
and education.
On the opposite page we’ve brought these elements together in
a graphic to help you pose some fundamental questions regarding
business and IT alignment.
bmgen_final.indd 272 6/15/10 6:01 PM
273
Business
Applications
Technology
VP CR
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strategy
business model
operational models
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?
bmgen_final.indd 273 6/15/10 6:01 PM
274
Context
2004: Alexander Osterwalder com-
pletes a Ph.D. dissertation on the topic
of business model innovation with
Professor Yves Pigneur at hEC Lausanne,
Switzerland. Fast forward. 2006: The
approach outlined in the dissertation
starts being applied around the world
based on Alexander’s business model
blog, notably in companies such as 3M,
Ericsson, Deloitte, and Telenor. During
a workshop in the Netherlands Patrick
van der Pijl asks “why is there no
book accompanying the method?”
Alexander and Yves take up the chal-
lenge. But how does one stand
out in a market where countless
strategy and management books
are published every year?
INNOVATING
the model
Alexander and Yves decide they can’t
credibly write a book about
business model innovation with-
out an innovative business model.
They ditch publishers and launch the
hub, an online platform to share their
writings from day one. Anybody with
an interest in the topic can join the
platform for a fee (initially u.S. $24,
which is gradually raised to u.S. $243 to
keep the platform exclusive). That this
and other innovative Revenue Streams
finance the book production in advance
itself is an innovation as well. It breaks
the format of conventional strategy and
management books in order to create
more value for readers: it is co-created
highly visual, and complemented by
exercises and workshop tips.
key audience
visionary and
game changing . . .
entrepreneurs /
consultants /
executives
WhERE
DID ThIS
BOOK
COME
FROM?
onsultants /
ecutives
nd
bmgen_final.indd 274 6/15/10 6:01 PM
275
process
The core team, consisting of Alexander, Yves, and Patrick start the project
with a number of meetings to sketch out the business model of the book.
The Hub is launched to co-create the book with business model innovation
practitioners throughout the world. Creative Director Alan Smith of The
Movement hears about the project and puts his company behind it. Finally,
Hub member Tim Clark joins the core team after recognizing the need for an
editor. The group is completed by JAM, a company that uses visual thinking
to solve business problems. An engagement cycle is started to pump fresh
“chunks” of content out to the Hub community for feedback and contribu-
tions. The writing of the book becomes completely transparent. Content,
design, illustrations, and structure are constantly shared and thoroughly com-
mented upon by Hub members worldwide. The core team responds to every
comment and integrates the feedback back into the book and design. A “soft
launch” of the book is organized in Amsterdam, Netherlands, so members of
the Hub can meet in person and share their experiences with business model
innovation. Sketching out participant business models with JAM becomes the
core exercise of the day. Two hundred special limited edition prototypes of the
(unfinished) book go to print and a video of the writing process is produced
by Fisheye Media. After several more iterations the first print run is produced.
toolS uSeD
strategy:
• Environmental Scanning
• Business Model Canvas
• Customer Empathy Map
content and r&d:
• Customer Insights
• Case Studies
open process:
• Online Platform
• Co-Creation
• Access to unfinished Work
• Commenting & Feedback
design:
• Open Design Process
• Moodboards
• Paper Mockups
• Visualization
• Illustration
• Photography
the numbers
9
years of
research
and practice
470
co-authors
19
book chunks
8
prototypes
200
copies of a
messed
up test print
77
forum
discussions
287
Skype calls
1,360
comments
45
countries
137,757
views of method
online before
book publishing
13.18
GB of content
28,456
Post-it™ notes used
4,000+
hours of work
521
photos
MADE IN. . .
Written: Lausanne, CH
Designed: London, UK
Edited: Portland, USA
Photographed: Toronto, CA
Produced: Amsterdam, NL
Events: Amsterdam & Toronto
bmgen_final.indd 275 6/15/10 6:01 PM
276
references
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Buxton, Bill. Sketching User Experience, Getting the Design Right
and the Right Design. New York: Elsevier. 2007.
Denning, stephen.The Leader’s Guide to Storytelling: Mastering
the Art and Discipline of Business Narrative.
san Francisco: Jossey-Bass. 2005.
Galbraith, Jay r. Designing Complex Organizations. reading:
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Goodwin, Kim. Designing for the Digital Age: How to Create
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Harrison, sam. Ideaspotting: How to Find Your Next Great Idea.
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Heath, Chip, and Heath, Dan. Made to Stick: Why Some Ideas
Survive and Others Die. New York: random House. 2007.
Hunter, richard, and McDonald, Mark, “Getting the right IT:
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Kelley, Tom, et. al. The Art of Innovation: Lessons in Creativity
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Kelley, Tom. The Ten Faces of Innovation: Strategies for Heighten-
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Kim, W. Chan, and Mauborgne, renée. Blue Ocean Strategy:
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Markides, Constantinos C. Game-Changing Strategies: How to
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Medina, John. Brain Rules: 12 Principles for Surviving and Thriving
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Moggridge, Bill. Designing interactions. Cambridge:
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Pillkahn, Ulf. Using Trends and Scenarios as Tools for Strategy
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Porter, Michael. Competitive Strategy: Techniques for Analyzing
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schrage, Michael. Serious Play: How the World’s Best
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bmgen_final.indd 276 6/15/10 6:01 PM
277#bmgen
@business_design Three steps to
effective use of “Business Model
Generation”: 1) Buy book 2) Test live 3)
Be amazed 😉 http://bit.ly/OzZh0
@Acluytens
Excitement! Business Model Genera-
tion book arrived! It’s going to be an
“I’m reading weekend,” sorry darling!
🙂 #bmgen
@tkeppins
Still quiet in the house this sunday
morning. Enjoying a cappuccino and
reading Business Model Generation.
@hvandenbergh
I have a dilemma now: to catch up
on class reading or have fun with
Business Model Generation by
@business_design…
@vshamanov
Just got my copy of Business Model
Generation by @business_design
designed by @thinksmith Even more
beautiful than I imagined #bmgen
@remarkk
heading over to #ftjco to visit @ryan-
taylor and borrow his copy of #bmgen
tonight. Exciting evening all-around!
@bgilham
I’m SO tempted to write all over my
copy of #bmgen, but it’s too beautiful
to destroy. Think I need 2 copies.
#bmgento
@skanwar
Just got my copy
of Business Model
Generation – looks
to be as beautifully
made as it is useful. Congrats!
@francoisnel
@business_design I am BLOWN
AWAY by the stuff I’ve learned
from #bmgen!! I can’t thank you
guys enough for writing it!
@will_lam
Is reading Business Model Genera-
tion… This is perhaps the neatest
and most innovative book I have
ever read!
@jhemlig
I am so in love with my copy!
Thanks @business_design #bmgen
@evelynso
market response
The market response to Business Model Generation has been
extremely gratifying. The first print run of 5,000 books sold
out in two months, with no marketing budget and without the
support of a traditional publisher. News about the book spread
exclusively by word-of-mouth, blogs, Web sites, e-mail, and
Twitter. Most gratifying of all, local meetups, where readers and
Hub followers got together to discuss Business Model Genera-
tion’s content, formed spontaneously worldwide.
277
@skanwar
beautiful
ation”: 1) Buy book 2) Test live 3)
😉 http://bit.ly/OzZh0
@Acluytens
I’m SO
copy of
to destroy.
#bmg
@skanwar@skanwar
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Is it me or is everybody in Toronto
picking up a copy of Business Model
Generation? #bmgen
@will_iam
Just
got
my
copy of
Business
Model
Generation..
Too good!!
The new age
of innovation in book-writing
@Neerumarya
Just received my copy of the book
‘Business Model Generation’. It’s a
musthave for entrepreneurs who think
out of the box
@Peter_Engel
Business model generatiom really
is a stunning book. Feeling like a kid
at Christmas with it in my hands.
#bmgen
@mrchrisadams
my edition of http://www
.businessmodelgeneration.com has
arrived! This is the coolest business
book ever! WOW! #bmgen
@snuikas
The Business Model Generation book
will bring a lot more depth to current,
often superficial BM discussions
#bmgen http://pic.gd/6671ef
@provice
Reading Business Model Generation
over a lonely dinner in London. The
book is exquisitely designed. Once you
see it, there’s no going back.
@roryoconnor
Excited to have participated in the
Business Model Generation book.
Now published!!
@pvanabbema
giddy as a little kid. just received my
copy of Business Model Generation
http://tinyurl.com/l847fj awesome
book design.
@santiago_rdm
Reading
Business Model Generation by
Alex Osterwalder and Yves Pigneur:
best mngt book in a long time
@JoostC
your big experiment just arrived
in Japan. First printing of “Business
Model Generation.” Electrifying
hands-on book.
@CoCreatr
My Business Model Generation by
@business_design & Yves Pigneur
arrived! So awesome to have been a
TINY part.
@jaygoldman
@thinksmith @business_design @
patrickpijl Guys, I am happy! Insane.
What a wonderful result.
@dulk
Got my hands on the #bmgen book
a few days ago, very nice! Great job,
@business_design, @thinksmith et al!
@evangineer
It was so amazing to experience
40+ people all embracing business
model gen thinking in Toronto
#bmgento – this city is exploding!
@davidfeldt
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279
bmgen_final.indd 279 6/15/10 6:02 PM
the movement (design)
ning platform
amazon.com
3rd party logistics
company
publishers
content
production
hub management
guerrilla marketing
and word-of-mouth
logistics and
shipping
visual, practical, and
beautiful handbook
for business model
innovators
co-creation of a
potential bestseller
personalized books for
companies and their
customers
businessmodelhub
.com
business model event,
amsterdam
visionaries, game
changers, and
challengers
entrepreneurs,
executives,
consultants,
academics
companies
blog and visibility on
the web
business model hub
powerful methodology
hub members
word-of-mouth
(1) businessmodel
generation.com
(2) amazon.com
(3) book stores
intermediation
through
publishers
design
content production
printing
distribution
hub membership fees
advance & post-publication sales
FREE give away canvas section
fees for customized versions
royalties from publishers
hub members
VP CR
Ch
CSKA
KR
R$
KP
C$
Differentiation
An entirely different format, business
model, and story for the book makes it
stand out in a crowded market.
Revenues
The book was financed through advance
sales and fees paid by co-creators.
Additional revenues come from custom-
ized versions for companies and their
clients.
Production and Logistics
Anything beyond content creation
is outsourced to readily available
service providers.
Buyers
Paying customers are not only readers,
but co-creators and companies that want
customized books for their employees
and clients.
Reach
A mix of direct and indirect Channels and
a phased approach optimizes reach and
margins. The story of the book lends itself
well to viral marketing and word-of-
mouth promotion.
Community
The book is co-created with practitioners
from around the world who feel owner-
ship thanks to attribution as contributing
co-authors.
the canvas of
business model
generation
bmgen_final.indd 280 6/15/10 6:02 PM
Alex osterwalder, Author
Dr. Osterwalder is an author, speaker, and adviser on the topic of business model
innovation. his practical approach to designing innovative business models, devel-
oped together 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 combating hIV/
AIDS and malaria, and did research at the university of Lausanne, Switzerland.
Yves Pigneur, co-Author
Dr. 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 at the university of British Columbia in Vancouver. he
has served as the principal investigator for many research projects involving informa-
tion system design, requirements engineering, information technology management,
innovation, and e-business.
Alan Smith, creative Director
Alan is a big scale thinker who loves the details just as much. he’s a co-founder at the
aptly named change agency: The Movement. There he works with inspired clients
to blend community knowledge, business logic, and design thinking. The resulting
strategy, communications, and interactive projects feel like artifacts from the future
but always connect to the people of today. Why? Because he designs like he gives a
damn—every project, every day.
tim clark, editor and contributing co-Author
A teacher, writer, and speaker in the field of entrepreneurship, Tim’s perspective is
informed by his experience founding and selling a marketing research consultancy that
served firms such as Amazon.com, Bertelsmann, General Motors, LVMh, and PeopleSoft.
Business model thinking is key to his Entrepreneurship for Everyone approach to
personal and professional learning, and central to his doctoral work on international
business model portability. Business Model Generation is his fourth book.
Patrick van der Pijl, Producer
Patrick van der Pijl is the founder of Business Models, Inc., an international business
model consultancy. Patrick helps organizations, entrepreneurs, and management
teams discover new ways of doing business by envisioning, evaluating, and
implementing new business models. Patrick helps clients succeed through intensive
workshops, training courses, and coaching.
bmgen_final.indd 281 6/15/10 6:02 PM
You’re holding a handbook for visionaries, game changers,
and challengers striving to defy outmoded business models
and design tomorrow’s enterprises. It’s a book for the . . .
written by
Alexander Osterwalder & Yves Pigneur
co-created by
An amazing crowd of 470 practitioners from 45 countries
designed by
Alan Smith, The Movement
Disruptive new business models are
emblematic of our generation.
Yet they remain poorly understood,
even as they transform competitive
landscapes across industries.
Business Model Generation offers
you powerful, simple, tested tools for
understanding, designing, reworking,
and implementing business models.
Business Model Generation is a practical,
inspiring handbook for anyone striving to improve
a business model — or craft a new one.
change the way you think about business models
Business Model Generation will teach you powerful and
practical innovation techniques used today by leading
companies worldwide. You will learn how to systematically
understand, design, and implement a new business
model — or analyze and renovate an old one.
co-created by 470 strategy practitioners
Business Model Generation practices what it preaches.
Coauthored by 470 Business Model Canvas practitioners
from forty-five countries, the book was financed and
produced independently of the traditional publishing
industry. It features a tightly integrated, visual, lie-flat
design that enables immediate hands-on use.
designed for doers
Business Model Generation is for those ready to abandon
outmoded thinking and embrace new, innovative
models of value creation: executives, consultants,
entrepreneurs — and leaders of all organizations.
$34.95 USA/$41.95 CAN
2/C: PANTONE PMS COOL GRAY 11 M + PROCESS BLACK
Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers
Seven Faces of Business Model Innovation
Table of Contents
Canvas
The Business Model Canvas
Definition of a Business Model
The 9 Building Blocks
The Business Model Canvas Template
Patterns
Un-Bundling Business Models
The Long Tail
Multi-Sided Platforms
FREE as a Business Model
Open Business Models
Design
Customer Insights
Ideation
Visual Thinking
Prototyping
Storytelling
Scenarios
Strategy
Business Model Environment
Evaluating Business Models
Business Model Perspective on Blue Ocean Strategy
Managing Multiple Business Models
Process
Business Model Design Process
Outlook
Afterword
References