What is a business model?
In my last post I discussed the need for business model innovation to enable entrepreneurs to find solutions to the problems and opportunities we face. In this post I will expand on that by proposing some structure around the term business model. Having this structure is important if business model innovation is going to be a major driver of an entrepreneurial society.
We have all had discussions with colleagues and clients around an idea or concept where we all believed we had a common understanding. Later when we tried to execute what we had discussed we found that we didn’t have common ground at all. That is the danger with certain terms we use in business such as business models or innovation. We each have our own interpretation of the terms and often believe that everyone in our discussions has the same one. It will be difficult to have a conversation with a potential investor, customer or supplier if we don’t all have a shared interpretation of what a business model is.
Saul Kaplan, the founder of the Business Model Innovation Factory defines a business model as a “story about how organizations create, capture, and deliver value.” This is a good one line definition but doesn’t provide enough structure to build a business on. Fortunately a structure has emerged from work done by Alexander Osterwalder that is outlined in his book Business Model Generation.
In Business Model Generation a business model is comprised of a set of interrelated building blocks:
- Customer segments
- Value propositions
- Customer relationships
- Revenue streams
- Key resources
- Key activities
- Key partnerships, and
- Cost structure.
A worksheet has also been designed that summarizes all of these elements on a page to facilitate the development and evolution of business model generation. There are also good resources on this framework at www.BusinessModelGeneration.com. These tools are used in conjunction with the lean approach to business startups.
Using the canvas a founding team can quickly develop a version of a business model in order to get the startup process moving. It is understood that the first draft of the business model is based on the founding team’s assumptions about the various elements. Each of these assumptions will need to be tested resulting in successive iterations on the business model design. Ultimately the team will end up with a final business model that has been vetted by customers and may look quite different from the initial concept.
The structure proposed in this post is not the only way to look at business models but it is becoming widely adopted and it is the one we will use when discussing business model innovation. We will expand on the list of business model elements in future posts as we explore business model innovation.