Many very smart business people don’t understand business modeling, or can’t differentiate it from strategic planning. Until recently, business modeling was a concept used primarily by larger organizations due to its complexity.
Alexander Osterwalder and Yves Pigneur took on the challenge of making business modeling accessible to organizations of all sizes. They wrote the book Business Model Generation, based on input from 470 practitioners in 45 countries. The book identified 9 key elements of a business model, and structured them into a visual format called the Business Model Canvas.
A business model describes how an organization creates, delivers, and captures value. A strong business model makes all the difference in being able to create value for the client/customer, and make money from the effort. Business models may change over time, and most organizations have multiple business models for distinctive products or customer segments.
The 9 key elements on the Business Model Canvas are defined as follows:
1. Customer Segments
A customer segment is a distinct target customer with similar needs, desires, and ability to pay. Knowledge of a customer segment is critical to a successful business model. For a tire manufacturer, one customer segment might be sports car manufacturers.
2. Value Propositions
Value propositions are the bundles of products and services which satisfy the needs of a particular customer segment. It is important to understand the match of value propositions to customer segments. For the tire manufacturer, one value proposition would be the combination of performance, durability, and price.
Channels are the ways in which the customer or client is engaged. For a tire manufacturer, the initial contact would come through a long sales process of getting to know the client and their needs. The delivery channel would include just-in-time delivery of the right mix of tires.
4. Customer Relationships
Customer Relationships defines the type of relationship established with the customer, ranging from fully automated to highly personalized. For a tire manufacturer, one of the key features is integration with the client’s resource planning system so that orders can be fulfilled quickly and accurately.
5. Revenue Streams
Revenue Streams represent the cash that is generated through the business model. Revenue streams can be on a transaction or recurring basis, and can represent asset sales or various usage or rental fees. The tire manufacturer would have a revenue stream from tire sales, and might have another in consulting on developing complementary suspension systems.
6. Key Activities
Key Activities are the things the company must do for the business model to work. Key activities at the tire manufacturer would include design, production, and delivery.
7. Key Resources
Key Resources describes the major assets required, including people, finances, physical infrastructure, and intellectual property. The tire manufacturer would require a manufacturing plant, patentable tire designs, and people for development/manufacturing/delivery/management.
8. Key Partnerships
Key Partnerships add complementary capabilities that are provided by outsiders. Reasons for partnerships include accessing limited resources or knowledge, minimizing risk, and decreasing costs. The tire manufacturer might have a key partnership with the rubber supplier and another with a trucking company.
9. Cost Structure
Cost Structure describes the major costs incurred in executing the business model. Examples include payroll, rent, financing, and licensing fees. The tire manufacturer’s cost structure would include people, raw materials, manufacturing, and delivery.
There are numerous possible options for each of the 9 elements, which means that there exist opportunities for unique market niches even in crowded categories. An innovative business model can transform an industry. Apple did just that when they created a smart phone that included access to music and apps – both developed by partners.