Business Model Generation

Book Review-Business Model Generation: A Handbook for Visionaries, Game Changers and Challengers

It’s the spark that ignites a fire. It’s that initial fragment of an idea that finds other fragments and eventually assembles itself like a jigsaw puzzle into the next big thing. Each component of the core offering comes together bit by bit and piece by piece. As they do, you realize that you’ll need a business model to support the idea, to provide the engine that can take the fuel of your passionate idea and convert it into something that will transform the world – at least in some small way. It’s this process that Business Model Generation: A Handbook for Visionaries, Game Changers, and Challenges seeks to enable.

Facilitation

Whether you’re leading a group to a review of their existing business model or standing at the precipice of change, there’s an element of facilitation necessary to get from the current state to the future state – and before that, even defining what the future state is.

In my experience with facilitation, there are two ways that we start: too few ideas, and too many. In the too few category, people know that their organization or, more commonly, industry is threatened, but they’re paralyzed by the way that they’ve always done things. The result is that no one seems to have a vision for where the organization should go. The other extreme is too many ideas. The threat is the same, but the proposed solutions aren’t. Everyone has their own ideas of how to survive the wave or change – and they don’t agree.

If you don’t have ideas, you need a push to get to a state where you can consider alternatives and create a set of possible paths. Now that you have too many ideas, it’s time to review the benefits and weaknesses of each idea and see which one is the best idea to move forward with. (An ideal way to do this is with Dialogue Mapping.)

This is the facilitation process, creating possibilities, then refining the possibilities to the one course of action to be taken. The point of Business Model Generation is to provide a process that can serve as a substitute for a skilled facilitator. While this isn’t an even trade – you won’t get same impact from a book that you will from a skilled facilitator – if you’re just starting out, it may be enough to break your inertia.

Put Out the Fire

Exercises

At the heart of the facilitation process is a set of exercises that the group does. The exercise can be a physical exercise, such as bridge-building to help solidify the team before beginning. (See Collaborative Intelligence for more about setting the stage.) The exercise might also be a writing exercise at a table, where each person sits and quietly reflects on their thoughts about the organization, the industry, or a more specific topic. Somewhere between these two is the shared experience of working with flip charts, Post-It Notes, or a whiteboard – and sometimes all three of these. The structure of these exercises provides both a framework for discovery of some essential truth that has remained hidden from the group and a way for moving forward.

When I’m looking for an exercise to do with a group, and none of my “standard” exercises work, I flip through Innovation Games. It’s a great book with 12 premade games (or exercises). If that doesn’t work, I’ll head over to LiberatingStructures.com or The Thiagi Group (www.thiagi.com) and look at their games. Sometimes I’ll find that I combine and adjust ideas to get to specific goals with the facilitation and with the session.

The exercises in Business Model Generation are of the sit and write sort – so they don’t require group participation. They also focus on developing a business model that can be tested, refined, and accepted or abandoned. The exercises fit within a framework of nine building blocks. Alexander Osterwalder and Yves Pigneur believe that these nine building blocks are the core of what you need to know to have an organization.

The Nine Building Blocks

The framework is nine building blocks:

  • Customer Segments – The people the organization serves
  • Value Propositions – What the organization does to generate value to the customer
  • Channels – The mechanism through which the value proposition is delivered
  • Customer Relationships – How the organization builds relationships with customers
  • Revenue Streams – How the organization makes money
  • Key Resources – The assets and resources (people) necessary to deliver the value
  • Key Activities – The key activities that create the value that the customer wants
  • Key Partnerships – The key non-customer relationships necessary to create the value
  • Cost Structure – The costs associated with creating the value

A worksheet to work through these nine building blocks is available on the businessmodelgeneration.com website – but it looks something like this:

Customer Segments

In the marketing world, customer segments might be called “personas.” That is, they are the distinct groups of users that have different needs, habits, and behaviors. We think in terms of personas to simplify the range of potential customers into groups that make sense. (See The New Rules of Marketing and PR for more on creating personas.)

There are some business models where there is really only one customer; however, in most cases there’s more than one type of customer. For instance, for the Shepherd’s Guide, we market differently to IT people than we market to end users and differently still to HR folks who look to implement organizational change. So it’s one product with a corporate customer but a few different customer segments and personas.

Value Propositions

Simon Sinek suggests that we should Start With Why, and that’s what the value propositions are. They’re the “why” people would bother to care about what we’re creating. It’s how what we create positively impacts their life. It can be practical or entirely intangible. The value propositions may be risk avoidance, pain avoidance, or creating new opportunities that didn’t exist before.

Channels

It’s great that you know the value you have to offer and the customers who would be interested, but that doesn’t instantly create sales. You need channels to communicate the value propositions to the customers. Without a channel, the customer will never know your value. Channels bridge the gap between the customer and the value. Channels have an impact on how you are able to communicate because of the inherent limitations. Some channels are one-way. Other channels are two-way. Some channels are one-to-one, others one-to-many. Some are instant, and others take time. Listing the channels – both direct and indirect – to communicate with the customer can expose key limitations in how you’ll get the message out.

Customer Relationships

What kind of relationships are you going to have with your customers? Even for a fully-automated, self-service website, where the customer can complete their transaction without a human in your organization touching the transaction, there is still a relationship between the customer and the organization. How are you going to handle problems? What does customer support look like? What will you do to reengage with customers after the sale? These are all aspects of the customer relationship. The kind of relationships that you desire to have with your customers will drive the experience that they receive – and your costs.

Revenue Streams

Even in philanthropy, the money must come from somewhere. Every organization needs to understand how it will get revenue. Governments get money through taxes. Non-profit organizations get money through donations. The models for for-profit businesses are far more varied. Some make money through advertising. Others accept money from organizations on behalf of its employees. Of course, many organizations accept fees directly from the consumer. Whatever sources of revenue are available, they need to exceed the costs of doing business and producing the goods or services.

Key Resources

Key resources may be the physical assets that most people assume at the mention of resources. However, they may also be intellectual property or intellectual capital. It could be that you can do something that no one else can do. They may be the wealth of tacit experience that a team member has that simply can’t be replaced. (See Lost Knowledge for more on tacit knowledge.) In some cases, the resources may be financial. The ability to give more favorable terms may be a key part of your overall business model.

Key Activities

Often – but not always – the key activities that you perform are production. Sometimes the key to the business is the masterful use of the channels to the customer. Another key may be your ability to solve problems or even the ability to leverage a network of connections.

Key Partnerships

Partners exist to help you be more successful. They can be as mundane as your relationship with your bank or investors that allow you access to capital to support growth. Partners can allow you access to techniques for risk reduction as well as the economies of scale. Further, they may allow you to work together to create a larger scope of service for a customer than would be possible alone.

Cost Structure

At the end of the day, it comes down to how much you charge each of the customers – or partners – in the solution. This might be a cost-plus model, where there’s a fixed markup. It might be a value-driven model, where the customer pays based on the performance that you have with them. It might be time and materials or fixed bid. However, costs are established, and it’s obviously essential that they’re able to support the financial needs of the business.

All Together

Altogether, Business Model Generation gives us a map that allows us to evaluate whether we can be successful with the model we’re interested in. Here’s my mind map of the content:

With luck, you’ll find an idea that you can use the Business Model Generation framework to convert into a business.