Ryan Michael Reavis-Business Model Generation

Author of Book: Alexander Osterwalder and Yves Pigneur
Date Read:

Book Report

Book: Business Model Generation
By Alexander Osterwalder and Yves Pigneur

I got this title from the Harvard Business Review Entrepreneurs Handbook, one of the prior books I finished and reported on. I felt I needed more guidance on business models. This book isn’t what I expected it to be. It’s highly illustrated and more of a collaboration of work from people around the world. I thought it would help me greatly with my own ventures. I was right.

This book is really about innovation. Whether making changes to an existing organization, or creating an entirely new industry, the tools and techniques in this book are extremely powerful for creating the models to do it.

Here is what I learned.

The Business Model Canvas is the foundational tool of this book. It is a tool used to turn a rough business plan into a business process, or a business process into a detailed business plan. It is a visual depiction of all the elements of a business and how they interact as a system to operate as a whole. The value of the canvas is seeing these interconnections and having a birds eye view of how and where to make changes and adjustments. The elements of the business model, or building blocks, are 1. Key Partners 2. Key Activities 3. Key Resources 4. Cost Structure 5. Value Proposition 6. Customer Relationships 7. Channels 8. Customer Segments 9. Revenue Streams
Each building block is explained in detail in the book, but the canvas is best used when printed out and placed on a large surface so teams can sketch or place post-its directly to the blocks on the canvas.

Patterns
This section describes 5 business model patterns, with examples of well known companies that use them. A pattern is a business model arranged in such a way that it exhibits certain behavior and characteristics.
An “Unbundled” pattern is the breakdown of a company into its 3 different businesses within itself. The customer relationship business, the product innovation business, and the infrastructure business. Each of these internal “businesses” have their own economic, competitive, and cultural imperatives, which means if the main company, comprised of these individual businesses, tries to manage everything at once, conflicts of interest and trade-offs occur. Unbundling, by outsourcing all but one core business is the best way to avoid these conflicts and trade-offs. This concept is applied to the business model.
The Long Tail Pattern is a model that aims to sell less volume of a larger variety of products or services, rather than having one Rockstar product that only hits one niche. This model can be as or more profitable by reaching many niches in the market. Some examples are Netflix, YouTube, Facebook, and eBay.
A Multi-Sided Platform Pattern is one that brings together multiple interdependent groups that work together using the platform for an interface. The model grows in value as it attracts more customers, what is called the network effect.
The Free as a Business Model Pattern attracts lots of customers. A large customer segment is able to benefit from an offer that is free of charge. This group is subsidized by another part of the business model or another customer segment. Advertising is one way to do this, another is the freemium model. A small group of customers will pay a premium for additional features of the product not offered in the free version. Another example is the Bait & Hook, or “Loss Leader” used in the razor and blades model by offering the handle for cheap or free and then charging for blades, or happy hour and 1/2 off appetizers in the hospitality industry.
The Open Business Model Pattern is one that focuses on outside partnerships in situations where buying tech from outside sources might prove more valuable to the company’s goal than developing its own tech in house. Conversely, licensing out unused tech can be a source of revenue that also brings overall value to the market. Known as Outside-in, or Inside-out strategies.

Design
The Design section of this book is about taking the design process, which is basically creation, discovery, and achievement of function, and applying it to business model generation. Businesspeople practice design constantly in the form of organizations, strategies, and processes. This section describes six design techniques for businesspeople to use in generating business models
1. Customer Insights: Viewing the problem the business is trying to solve through the customers eyes is key to successful innovation. Asking customers what they want is simply not enough. The writers illustrate an “empathy Map” to separate what a customer, in their daily life, hears from friends, bosses or other influences, what they think and feel, what they see in their environment and the market, what they say and do as far as their attitude in public and their behavior towards others, and also their fear, frustrations, wants, and needs. Building a detailed customer profile will guide the design of better value propositions.
2. Ideation: Ideation is about brainstorming a large number of business ideas and isolating the best ones. It is not about building on what is already in place, or doing what the competitors are doing, but about challenging the status quo to design original models that meet unsatisfied, new, or hidden customer segments or needs. Ideation needs to focus on what are called the 4 epicenters of business model innovation. They are resource driven, offer driven, customer driven, and finance driven. The innovation team should be diverse, consisting of different age groups, departments, age, and experience. It is necessary to properly study the elements of the model for which you are attempting to generate new ideas, then expand on each building block individually. A set criteria for prioritizing ideas should be implemented, such as revenue potential, or impact on competitive advantage. Looking at or prototyping what the complete business model looks like using the business model canvas should be done for each of the shortlisted ideas.
3. Visual thinking is a technique that designers use to discuss meaning through visual tools. Sketches and post-it notes help to bring a business model concept to life, by allowing teams to see how the model works as a whole. That birds eye view transforms the abstract idea of a business model into a tangible, understandable system with all of its elements working together, helping to communicate the essence of the idea. Drawings enhance dialogue and can tell a story in a way that written words cannot.
5. Prototyping is another valuable technique that makes a concept tangible. It is a thinking tool that helps to determine which direction a business model could go. Using the business model canvas to add or remove customer segments, resources, or change revenue streams gives to innovation team the opportunity to address structural issues and relationships between blocks that would be more difficult through discussion alone. This is another great example of how visualization deepens the inquiry and the understanding of business models.
6. Storytelling is a way to engage with the people you want to communicate your ideas to. By creating a scenario in which a protagonist actually interacts with the product or service, the innovation team can identify ways to make it better. After a business model canvas is populated with sketches and post-its, taking it apart and putting it all back together while explaining how it works through the point of view of either the customer or maybe an employee can be very powerful. It can be a great way to pitch the concept to investors, or to get employees up to speed on a new model. Using scenarios is a great way to develop solutions for problems that might come up in the future that otherwise might have caught the business by surprise. Using the business model canvas in combination with future scenarios is a good way to prepare for a possible change in the market.

Strategy
This section is basically all about market position. It takes regular evaluation of the business environment and economic landscape to remain on the edge of industry. Technology, value propositions, and channels change the way customers are reached and how they interact with products and services. Identifying strength, weaknesses, opportunities, and threats, or SWOT, are paramount to staying ahead of the curve.

Process
This final section outlines the objectives and challenges in the process of business model innovation. There is a process, but it is messy and non-linear. Often many parts of the process occur at the same time. The 5 phases are 1. Mobilization, where all elements are assembled and motivation is discussed. 2. Understanding, which involves immersion in all the elements needed for design, such as customers, technology, and environment. 3. Design, where testing and prototyping occur to select the best ideas. 4. Implementation, when execution takes place. 5. Management, wherein adaptation and modification takes place in an ever changing business environment.

Conclusion
This is a very powerful book and an amazing tool for someone with a great idea to turn it into a work in progress. The beautiful thing about the business model canvas is that it can be used for anything. Any part of the organization or process can be mapped out visually to get a snap shot of all the moving parts, whether it’s the ideation process, the rough business plan, a prototype, or a pattern, the business model canvas brings it to life so that the innovation team can change or adjust together. This is a tool I’ll be using all the time, starting now with my own project.