Business Model Innovation

What is a Business Model

Your business model is the blueprint for your business and works in conjunction with your value proposition. While your value proposition defines “what” your business creates, your business model describes “how” you create your value proposition. The products or services you offer are the results of a system of activities and relationships that take resources and technology as inputs, and transform them into economic value through customers and markets. Your business model describes these activities and relationships. A business model basically captures:

Everything related to creating the value proposition.
Everything related to selling the product, from reaching the right customers to distributing the product.
Everything related to how customers will pay and your company will make money.

The business model is similar to a business plan in its makeup and content and provides the required foundation for the business plan. The business model captures all of the strategic choices made in terms of the elements required to make the business work successfully. The business plan then builds upon this foundation by adding the details needed to execute the plan such as staffing levels, organization structure, and financial proforma, as required to demonstrate the feasibility of the business model.

Parts of a Business Model

Some refer to the phrase business model as “a term of art” being one of those things many people feel they can recognize when they see it, but have difficulty defining. Using a contemporary approach now used by millions around the globe, we provide a structure and common language for describing a business model, enabling innovation around different approaches for delivering the same value proposition.

All business models can be viewed as consisting of the (9) nine building blocks below. (click on each title to expand the section) The decisions made in each one of the building blocks will collectively define your business model and the space in which you compete.

Value Proposition

The Value Proposition building block is at the heart of the business model, representing your unique solution (product or service) for a problem faced by a customer segment, or value you provide for the customer segment. A value proposition should be unique and stand out from your competitors. Value propositions can be either quantitative (price and speed of service) or qualitative (customer experience or design). The design of a good value proposition is an effort in itself (see value proposition design), the results of which become this building block.

Customer Segments

Customer segments are the groups of people or companies that you are targeting to buy your product or service. Segments are based on similarities such as geographical area, gender, age, behaviors, interests, etc. Segmenting gives you the opportunity to better serve needs by customizing your solution for those specific needs. Different approaches to customer segmentation include:

Mass market: A business model that focuses on mass markets doesn’t group its customers into segments. Instead, it focuses on the general population or a large group of people with similar needs. For example, a product like a phone.
Niche market: Here the focus is centered on a specific group of people with unique needs and traits. The value propositions, distribution channels, and customer relationships should be customized to meet their specific requirements. An example would be buyers of sports shoes.
Segmented: Based on slightly different needs, there could be different groups within the main customer segment. Accordingly, you can create different value propositions, distribution channels, etc. to meet the different needs of these segments.
Diversified: A diversified market segment includes customers with very different needs.
Multi-sided markets: this includes interdependent customer segments. For example, a credit card company caters to both their credit card holders as well as merchants who accept those cards.

Customer Relationships

This building block defines the type of relationship you will have with each of your customer segments or how you will interact with them throughout their journey with your company. There are several types of customer relationships:

Personal assistance: you interact with the customer in person or by email, through phone call or other means.
Dedicated personal assistance: you assign a dedicated customer representative to an individual customer.
Self-service: here you maintain no relationship with the customer, but provides what the customer needs to help themselves.
Automated services: this includes automated processes or machinery that helps customers perform services themselves.
Communities: these include online communities where customers can help each other solve their own problems with regard to the product or service.
Co-creation: here the company allows the customer to get involved in the designing or development of the product. For example, YouTube has given its users the opportunity to create content for its audience.

You can understand the kind of relationship your customer has with your company through a customer journey map. It will help you identify the different stages your customers go through when interacting with your company, and it will help you make sense of how to acquire, retain and grow your customers.

Channels

This block describes how your company will communicate and transact with your customers, representing the touch points that let your customers connect with your company. Channels include how you will raise awareness of your product or service among customers, as well as how you will execute a transaction, and deliver your value propositions to them. Channels can also be used to offer post-purchase support. There are two types of channels.

Owned (direct) channels: company website, social media sites, in-house sales, etc. where the company connects directly with the customer.
Partner channels: partner-owned websites, wholesale distribution, retail, etc. where an independent third party connects with the customer.

Revenue Streams

Revenues streams are the sources of money and describe how you will earn revenue by providing your value proposition to your the targeted customers. A revenue stream can belong to one of the following revenue models:

Transaction-based revenue: made from customers who make a one-time payment
Recurring revenue: made from ongoing payments for continuing services or post-sale services

Different revenue sources include:

Asset sales: by selling the rights of ownership for a product to a buyer
Usage fee: by charging the customer for the use of its product or service
Subscription fee: by charging the customer for using its product regularly and consistently
Lending/ leasing/ renting: the customer pays to get exclusive rights to use an asset for a fixed period of time
Licensing: customer pays to get permission to use the company’s intellectual property
Brokerage fees: revenue generated by acting as an intermediary between two or more parties
Advertising: by charging the customer to advertise a product, service or brand using company platforms

Key Activities

This building block defines the activities/ tasks needed to fulfill your business purpose. It includes all the key activities you need to do to make your business model work and should focus on fulfilling its value proposition, reaching customer segments and maintaining customer relationships, and generating revenue. There are 3 categories of key activities:

Production: designing, manufacturing and delivering a product in significant quantities and/ or of superior quality.
Problem-solving: finding new solutions to individual problems faced by customers.
Platform/ network: Creating and maintaining platforms. For example, Microsoft provides a reliable operating system to support third-party software products.

Key Resources

Key Resources describe the internal sssets required to carry out your key activities in creating and delivering your value proposition. Your resources allow your enterprise to create your offering, reach markets, maintain relationships with Customer Segments, and earn revenues. Key resources can be owned or leased by the company or acquired from key partners.

Key Partners

Key Partnerships describes the external network of suppliers and partners that provide external resources and activities needed to make the business model work. There are four different types of partnerships: strategic alliances between non-competitors, Coop-petition (strategic partnerships between competitors), Joint ventures to develop new businesses, buyer-supplier relationships to assure reliable supplies.

Cost Structure

In this block, you identify all the costs associated with operating your business model. You’ll need to focus on evaluating the cost of creating and delivering your value propositions, creating revenue streams, and maintaining customer relationships. And this will be easier to do so once you have defined your key resources, activities, and partners.

Business Model Examples

Below are some examples of different business models.

TYPE OF MODEL	HOW IT WORKS	EXAMPLES
Affinity Club	Pay royalties to some large organization for the right to sell your product exclusively to their customers.	MBNA
Brokerage	Bring together buyers and sellers, charging a fee per transaction to one or another party.	Century 21 Orbitz
Bundling	Package related goods and services together.	Value meals iPod/iTunes
Cell phone	Charge different rates for discrete levels of a service.	Sprint Better Place
Crowdsourcing	Get a large group of people to contribute content for free in exchange for access to other people's content.	Wikipedia YouTube
Disintermediation	Sell direct, sidestepping traditional middlemen.	Dell WebMD
Fractionalization	Sell partial use of something.	NetJets Time-shares
Freemium	Offer basic services for free, charge for premium service.	Linkedln
Leasing	Rent, rather than sell, high-margin, high-priced products.	Cars; MachineryLink
Low touch	Lower prices by decreasing service.	Walmart; IKEA
Negative	Lower prices by receiving operating payment before delivering cycle the offering.	Amazon
Pay as you go	Charge for actual metered usage	Utility Companies
Razor	Offer the high margin razor and printer below cost to increase volume sales of the low margin razor blades and ink	Printers; Razor Blades
Reverse razor	Offer the low-margin item below cost to encourage sales of the high-margin companion product.	Kindle; iPod/iTunes
Reverse	Set a ceiling price and auction have participants bid as the price drops.	Elance.com
Product to Service	Rather than sell a product, sell the service the product performs.	Zipcar
Standardization	Standardize a previously personalized service to lower costs.	MinuteClinic
Subscription	Charge a subscription to gain access to a service.	Netflix
User Communities	Grant members access to a network, charging both membership fees and advertising.	Angie's List

Source: Seizing the White Space - Mark Johnson - Harvard Business Review

What is Business Model Innovation

Business Model Innovation is simply the process of defining or modifying a firm's business model, which involves making specific choices in each one of the nine core elements. Business Model Innovation does not focus on the definition of the product or service offered; it focuses on how the value the product offers is delivered to the customer, and/or how the firm appropriates value from the customer offering. This include what internal resources and processes are used, what external partnerships are required, how the customer is reached, what type of customer relationships are established, and how that overall process is monetized.

Business Model Innovation has emerged as a new category of innovation, distinct and separate from other established and well know innovation types.

Product Innovation: This involves the development of a new product or service or improvement in the performance or features of an existing product. Apple’s continued iteration of its iPhone is an example of this.

Market Innovation:This involves finding a new application or market segment for an existing offering. It may also include changes in the channel used to reach the target customer.

Process Innovation: Process innovation is the implementation of new or improved production and delivery methods in an effort to increase a company’s production levels and reduce costs. One of the most notable examples of this is when Ford Motor Company introduced the first moving assembly line reducing the assembly time for a single vehicle down from 12 hours to roughly 90 minutes.

Business Model Innovation: Is the introduction of a new way of creating value for customers, the way the value is delivered, and/or the way the firm appropriates value from the customer offering through changes in any of the .

Business model design or modification can be applied to a firm's business model on multiple levels: it can be applied to the entire business, or just to an individual product or service offering. Design changes can involve a single element such as the value proposition, value creation and delivery, and value capture elements, or it can involve the alignment between these elements.

Who should use Business Model Innovation and why

Business model differentiation has become the new way for companies to stand out from competitors and protect their margins. Changes in the business model can have a stronger impact on profit margins than product and service innovations and can create strong competitive advantage. The older static competitive forces based on size, scale, and product features are being replaced by new forces based on speed, agility, and new approaches to business. Thus, business model differentiation is defining a new competitive playing field and has become the new basis for competitive differentiation and advantage.

While most firms adjust their offerings through new products and services, they often do so without changing how they conduct their business. As a result, established business models tend to remain fixed. This results in firms providing offerings that yield less value then they might otherwise and leaves the business open to disruption by a more innovative competitor.

New business models are being enabled by the new capabilities of disruptive technologies such as ultra-fast Internet everywhere, mobile systems, and artificial intelligence. Failure to consider the impact these technologies can have on your business model can leave your business exposed to diminishing margins and increased competitive pressure.

For these reasons, every company should review their business model and apply the techniques of Business Model Innovation. This applies to business situations ranging from start-ups and new ventures looking to create their initial business model to exiting businesses seeking opportunities for transformation, or confirmation that have an appropriately competitive business model. In the future, it will no longer suffice to deal only with new products or new processes in isolation. It is always necessary to deal with the innovation of the business model. Every change and innovation in the company has the potential for a business model innovation. It is only by changing the business model that a true differentiation from the masses and a competitive advantage and lead can be generated. Business model innovation must be at the top of the innovators' agenda.

Benefits of using the methodologies of business model innovation cut across all levels of an organization.

Innovation Units - Create new business models and value propositions to build new growth engines.

Product Managers - Utilize a clear, customer-oriented approach to designing new value propositions and bringing them to the market, or improving existing products.

Sales Teams - Better understand the business model and how to sell their value propositions to various customer segments.

HR Divisions -To enable understanding of business models among all employees and foster innovative thinking.

Corporate Development -Clarify and create a shared language around a business model, for strategic reorientation, or for more effective internal corporate reorganizations.

The Business Model Canvas

The Business Model Canvas (view video) is a tool for mapping your business model. It is a visual one-page document containing nine boxes that represent the nine fundamental building blocks of a business plan.

Advantages of the Business Model Canvas include:

A simplified overview of the business model, devoid of the details in a traditional business plan.
A visual model easy to refer to and be understood by anyone.
Easy to edit and can be easily shared with employees and stakeholders.
Can be used by large corporations as well as startups with just a few employees.
Clarifies how different aspects of the business are related to each other.
Can be used as a template to guide a brainstorming session on defining your business model effectively.
Helps identifies opportunities for innovation in the business model.

The Business Model Canvas offers an easy way to understand the relationship of the nine core elements of a business model to each other. The right side of the canvas focuses on the customer or the market (external factors that are not under your control) while the left side of the canvas focuses on the business (internal factors that are mostly under your control). In the middle, you get the value propositions that represent the exchange of value between your business and your customers.

Click on individual sections of the canvas model below for a more detailed description of each section.

History of The Business Model Canvas

The Value Proposition Canvas and Business Model Canvas were initially developed by Dr. Alexander Osterwalder and published in his books Value Proposition Design (2014) and Business Model Generation (2010). The initial work on the business models was grounded in the lean start-up movement and subject of his first publication Business Model Generation (2010). Value Proposition Design (2014) was then written as a companion to Business Model Generation. These books have now sold over a million copies and have been published in 37 languages. USA Today named Business Model Generation among the 12 best business books of all time, and the German edition was named Management Book of the Year 2011. The Value Proposition and Business Model Canvas are currently being used by over 5 million business practitioners around the globe and are now taught in hundreds of business school programs (globally, and growing). They are rapidly becoming mainstream best practices in the corporate innovation space.

The value of these frameworks is their ability to consolidate a significant amount of leading-edge business theories into pragmatic, easy to understand tools, that can be immediately applied to produce results and improve business success rates. The rapid adoption rate of these tools within global corporations is a testament to their value and usefulness.

In 2015 Alexander Osterwalder won the strategy award by Thinkers 50, called the “Oscars of Management Thinking”, and ranks #15 among the leading business thinkers of the world. In 2013 he won the inaugural Innovation Luminary Award by the European Union. He is a frequent keynote speaker at Fortune 500 companies and has held guest lectures in top universities around the world, including Wharton, Stanford, Berkeley, IESE, MIT, KAUST and IMD.

In 2018, our principle consultant, Dr. Daniel Lewis, traveled to Baden, Switzerland to receive 50 hours of intensive personal training from Dr. Osterwalder on how to train practitioners in the use and application of these tools, and is focused on bringing this knowledge to the smaller sized business.

More than 322 schools across the United States, plus countless more worldwide now these techniques, which we apply in advisory services and cover in our seminars and workshops.

• Missouri University Of Sci & Tech • Butler University • University Of St Thomas St Paul • University Of Chicago • Ivy Tech Cc Indianapolis • University Of Calif Santa Cruz • Asbury Theological Sem • Calif St University Northridge • Biola Univ • Pittsburg State Univ • Georgetown Univ • Arkansas State University Jonesboro • Mira Costa College • Dartmouth College • Imperial Valley College • Auburn University Auburn • Peru State College • Niagara University • Arizona St University Tempe • University Of Delaware • Metropolitian Community Coll • University Of Hawaii Manoa • Central Michigan Univ • Calvin College • University Of Incarnate Word • North Lake College • Pratt Institute • University Of Central Florida • Emery Weiner School • University Of Tenn Knoxville • Seminole State Coll Seminole • University Of Washington • Skyline College • Saddleback College • University Of Conn Hartford • Purdue University Main Campus • Los Angeles Sw College • Calif St Poly University Pomona • University Of Miami • University Of Virginiasch Medicine Health System • University Of South Florida Tampa • Brooklyn Law School • Expression Coll Of Digital Art • Smith College • Miami Dade College • Itt Tech Inst Duluth • Hagerstown Comm College • Mississippi College • Art Inst Of Houston • University Of Mass Bostonharbor Campus • Miami University Oxford • North Lake College • University Of Conn Storrs • Siena Heights University • Texas Christian Univ • University Of Iowa • University Of St Thomas St Paul • Skyline College • Salem State University • Colorado School Of Mines • John Carroll University • Grace College Seminary • Depaul University • University Of Maryland Coll Pk • School Of Visual Arts • Calif St University Northridge • Everest University Orange Park • Concordia University River Forest • Florida A & M Univ • University Of Tenn Knoxville • Los Angeles Sw College • Glendale Comm Coll (Az) • Itt Tech Inst Orland Park • Cuny Brooklyn College • Paradise Valley Comm Coll • Mira Costa College • Capella University Minneapolis • University Of Louisville • Ivy Tech Cc Indianapolis • Wayne State Univ • Biola Univ • Westminster Coll Slc • New School University New York • University Of Central Florida • Trident Technical Coll • Art Inst Of Las Vegas • Texas A & M University Coll Sta • North Shore Comm College • Western Mich Univ • Wichita State University • College Of Lake County • Tulsa Community College

The Innovation Process

Business Model Innovation involves a structured practical approach to understanding, designing, identifying alternatives, and testing business models. It includes analyzing existing business models or developing a business model for a new startup venture, and validating business model building blocks. Business model innovation is at the center of value creation and many leading companies and social ventures owe much of their success to the process of business model innovation.

The overall process consists of four stages:

Understand the current state - This step involves capturing the elements of the current business model for an existing business, or the proposed model for a new venture. It involves mapping exactly how you currently create and generate value on a Business Model Canvas. This also includes gaining a general understanding the target customers, technological developments, business models of industry competitors, and taking a look at past and present market and customer boundaries.

Innovate - This activity starts with assessing the quality of your current business model and identifying areas for improvement. Here you look for opportunities to create unique value that differentiate you from your competition. Next ideas that pivot around different options for the various basic business model elements are generated and captured to identify new potentially viable business models.

Validate - This step involves the identification of key assumptions embedded in the models generated in the previous step. These assumptions are then tested for validation against the realities of the market place. Based on new knowledge acquired in the process, the second step may be repeated in multiple innovate and validate cycles. The goal here is to de-risk any new business model by addressing what can call the idea or cause failure.

Implement - This is the implementation of the output of the innovate and validate cycles and involves transformation of the business to the new business model.

Business Model Innovation Training & Advisory Services

We provide training and consulting on the use of the Business Model Canvas to help clients design new business models or improve existing ones.

Learn how to:

Use the Business Model Canvas methodology, used by 5 million+ business practitioners.
Build a strong, profitable business model that can compete in today’s market.
Map your business model using an easy to understand one page template.
Improve collaboration across disciplines with a shared language.
Uncover new ways to deliver unique value and differentiate yourself from competitors.
Assess the quality of your business model and discover ways to improve it.
De-risk your model by identifying underlying assumptions to avoid crippling failures.
Use tools and techniques to test ideas and designs.
Learn the most common reasons business model fail and how to avoid them.

Target Audience:

New start-up businesses who are seeking to define their market offerings.
Established businesses seeking to improve their market traction and competitive advantage of current offerings.
Established businesses seeking to add new products and services.

We offer three (3) tiers of Value Proposition consulting services:

FOUNDATIONS BOOTSTRAP SEMINAR:

This 3 - hour seminar presents an introduction to the concepts and components of the Business Model Canvas. It provides attendees with the foundation knowledge needed to pursue additional knowledge acquisition and use of the tools, either on their own or through additional structured training and consulting.

The Bootstrap Seminar is periodically offered in a public (open registration) venue at various locations. Please see our seminar schedule for the next seminar near you.

MASTER CLASS WORKSHOP

This is an intensive two-day workshops providing in-depth, interactive, hands-on training in the use and application of the Business Model Canvas. Learn how to apply the model along with approaches to drive innovation and specific techniques to validate ideas and assumptions with customers.

The Master Class Workshop is offered in two formats:

Public (open registration) venue, which are offered periodically at various locations. Please see our seminar schedule for the next seminar near you.

Private - restricted to your company or team, and provided on demand at your location. (Contact us to schedule a private in-house seminar for your team(s).

GUIDED IMPLEMENTATION AND ADVISORY SERVICES

Enlist us for a comprehensive engagement that includes coaching and advise as you work through the process of defining and validating a business model. This journey begins with customized in-house training that can span over an extended period of time, with advice and guidance as you work through a Business Model Innovation project.

contact us for a free, no obligation discussion of your needs - 281.858.3271