definition

Four core questions you need to answer for any great business

Monday, November 28th, 2011

Thanks to the business model canvas people are enthusiastic to build new business models and find business model innovations, but often they get lost in technocratic details. They just see building blocks but they forget the overal logic every great business needs.

Actually, you as an entrepreneur have to answer just one core question: Why should your firm exist on this planet? You need a Daseinseinsberechtigung (right to exist) for your firm. This is a very philosophical question. To be more operational, you can break down the Daseins question into four core questions. But still the answers will not come with a pure analytical process but with creativity and lot’s of empathy for your customers and their jobs they want to have solved. 

The technocratic approach is useless for finding love (source: http://xkcd.com/55/)

The four core questions on your business model canvas

  1. Why should customers be excited to do business with you? That is the value proposition. You could almost go as far as asking: Why should customers love to do business with you?
  2. How do you create the excitement of your customers in a productive way? That is the value architecture or operating model. Here you describe how you fulfill your value proposition.
  3. How do you earn money? That is your revenue model or the profit formula and here you should be able to explain why you as the owner should be excited about the business.
  4. What are your values you live up to in your team and with your customers and partners? That is the human side of the business and of utmost important, since it is the most difficult part to copy. I call it the culture and values of a business.

For these questions, you need compelling answers and the nine or elven building blocks are very helpful in answering the questions but do not get lost in details but look at the broader picture and see the interdependencies.  If you can answer the questions you have a great strategy that is customer-oriented, profitable and sustainable.

The bad part for any mediocre business is that you cannot answer the questions. Please all mediocre business, why don’t you try harder and work on “why should your customers be exicted about you?” instead of optimizing a dull business.

Markets vs customer driven business model design

Saturday, September 3rd, 2011

Do you have to be market-oriented or is this again one of the buzz words that hides more than its reveals? Or should you be customer driven? Let’s take a look at the two words and concepts and see why Alex and I have chosen not the term market but customers for our canvases.

I just return from a workshop for entrepreneurs in Wolfsburg, the birthplace of Volkswagen. We used the business model canvas to focus the entrepreneurs and their coaches on the core building blocks of a business models.

Interestingly, most participants of the workshop always talked about markets, that we need to be more market oriented, that we have to conquer new markets. But is this true?

Customers pay your bill not "markets"

Markets, top-down approach

Markets are the sum of customers that spent money and therefore have shown a demand in the market. But a market is abstract and impersonal. You can not sell your product to a market. There is no Mrs Market to write a bill to and that is exactly the problem for entrepreneurs. You might be in a great, growing and profitable market but that does not mean you have one single customer who pays your bills.

Markets is a top-down approach very well suited for analyst and consultants. The market is great for analysis but not good to sell something to.

Customers, bottom-up approach

Let’s take a look at customers. As a business you need an individual client that is willing to pay for the service or product you offer. (more…)

The Art of Painting on the Business Model Canvas

Thursday, June 30th, 2011

We have a great tool for visualization of a business model: the canvas. There is a hype on visual thinking and business model design. But can the tools deliver?

In the last years, I have seen many uses of the business model canvas to real cases. Some showed astonishing results, others were disappointing. Why? Any tool is only as good as the user. A fool with a tool is still a fool. But also: A genius without the right tool might be a fool. So let’s see, what makes the difference.

Visual Thinking = Thinking with Visual aid

Visual Thinking is often mistaken as nice visualization. A bad idea does not become better by visualization. Visual Thinking is great since you think in pictures. Visualization can help to make your thinking better, to see more options and see the interdependencies among all components. But you still have to think!

There was a reason why god gave us two brain hemispheres: Visual Thinking is the combination of analytical and creative thinking. So do the thinking.

Be precise in your thinking

Due to the limited space, people tend to be pretty imprecise when filling out the canvas. They fill the canvas as if it is just a form, not the master plan for a venture or for the future of your firm. That happens particularly often in large corporations where the people are so stuck in their old thinking. (more…)

What business are you in? Business models as social constructs

Wednesday, June 8th, 2011

“What business are you in?” sounds like a simple question. But it’s not. How you define your business determines which direction your firm can go. Based on your answer, you define and limit your strategic options.

In a company, the business model is defined by a dominant group of people. They have a common understanding of what business they are in and how they create value. However, the business model is not an absolute reality. It’s a social construct of dominant opinion makers, e.g. your top management. This is important to understand.

By taking a different look at your business, and thereby challenging your dominant logic, you can identify more and different strategic options for your firm. But beware; by doing so, you are also challenging the top dogs in your firm.

Life is not that simple. Changing perspectives by xkcd.com

How you define your business depends on the dominant logic of your management

Considering the definition of what a business model is, it seems easy to describe the business model of a company. You can use  the business model canvas (Alex Osterwalder‘s or mine) and then you describe how value is created. Often we assume that regardless of who describes the business model, we will end up with the same description. This is a mistake.

(more…)

Business Models, Long Range Planning, Baden-Fuller and latency

Friday, July 23rd, 2010

Long Range Planning, a prestigious academic journal on strategy, discovered the topic of Business Models and Strategy. It dedicated a whole Special Issue to Business Models. I have mixed feelings regarding the Special Issue. On the one hand it is great that academia takes up such an important topic; on the other hand, it is shows again that academia is a self-referential system which has a strong bias to not-invented-here syndrome since most authors do not reference earlier works that were published outside their closed community of Strategy professors. Sad. Many of the ideas I have read at other places before.

Already in May, I have heard that Long Range Planning had published a Special Issue on Business Models. Today, I got hands on it thanks to Andres Sundelin from The Business Model DataBase.

You can access the article via http://www.sciencedirect.com/science/journal/00246301 as a guest. Very interesting topics like “Business Models as Models” by C. Baden-Fuller and M. Morgan or “Business Models, Business Strategy and Innovation” by D.J. Teece are included, so the Special Issue is definitely worthwhile reading.  That is the happy part of the Special Issue.

C. Baden-Fuller, M. Morgan, Henry Chesbrough and business model

What makes me sad about the issue is the closed and self-referential world of the academia in Strategy Research. The topic was broadly covered in early 2000 at least in two Ph.D. theses, I know. However, so far I have found only two citation to Alex Osterwalder’s work in the article “Business Model Innovation: Opportunities and Barriers” by Henry Chesbrough and in the article by Wirtz & al.. Thanks Henry, that you take your open innovation approach also your research. Thanks Bernd.

I hoped to find some background on Business Models in Baden-Fullers and Morgan’s article. Negative. They seemed to have not heard from Osterwalder before, they do not cite him. They are not mentioning ideas of Gary Hamel on business concept innovation from 2000, a concept very close to business model innovation. They cite only their own kind. They still live in their closed community where it is extremely important from whom the idea is coming, even when the original idea is 10 years old and not even cited. That is what I call a long latency!

Origin of business model thinking

The origin in business model thinking dates back to the information management researchers that were building information systems. To do so, they needed models of the reality. They talked about data models, process models, enterprise models and later about business models. When the first Internet entrepreneurs were talking about their strategy, they talked naturally about their business model since that was a language familiar to them. From there, the term transcended to Strategy. E.g., I wrote my Ph.D. thesis exactly at this crossing of information systems and strategy. My supervisors were Prof. Beat Schmid, background in computer science and Prof. Georg von Krogh, a strong researcher in Strategy. Quite a balancing act.

Business model is just a model of a business

When I was writing my Ph.D. thesis, Prof. von Grogh told me that I needed a unit of analysis for my research. I know the traditional culprits like industry or firm but they did not fit into what we saw in the New Economy. Industry boarders become meaningless; competition came from competitors you had not even heard before.

Therefore, my answer to Georg was very simple: I used the business model as my unit of analysis. He said fine. Just define it. Well, easy said difficult done. I was positive at the beginning that there must be something since we all got Masters of Business Administration so Business should be defined. Nope. Not really.

And again, it was Peter Drucker who had worked on this. He asked the simple questions “What business are you in?” and “What is the purpose of a business”.  And this is exactly what a business model should answer when used for strategizing.

Chesbrough and Rosenbloom (2002) explain the antecedents to the business model concept in their article “The Role of the Business Model in Capturing Value from Innovation: Evidence from Xerox Corporation’s Technology Spinoff Companies”. It is interesting that it was not the academic world that saw the necessity to have the business in focus for strategy but the real world. The business is where the competition is. Welcome to the real world.

Culture and the Business Model: We are humans

Tuesday, October 13th, 2009

In the discussion on business model innovation an important point is missing: the culture in which the business is conducted. A business is all about people “creating” customers.

Businesses are not a technical machine with input and output factors. Businesses are places where human beings work together for a common goal and therefore the culture in a business is a defining part of a business and therefore also for the business model.

Most definitions of what a business model is are rather technical. We talk about components, patterns, building blocks. We make a lot of fuss about how we rearrange the components as if they were just Lego bricks. We believe that having in mind a great new business model is already a business model innovation.

Where are the people?

Ups, no! That does not work. Somehow the most important “building block” of a business is missing: The human being that designs, shapes and makes the business work and the customer who has to buy into the new value proposition and pay. And here again we have the human factor. “[I]nnovation is not what innovators do but what customers adopt.” We always have to remember what Michael Schrage is saying. It is the customer acceptance that makes an innovation. (more…)

Let’s commit a thoughtcrime

Friday, August 21st, 2009

In formulated strategy we use a lot of words like innovative, based on core competencies, market driven, customer centric, operational excellence, best-in-class, top quality, leveraging existing brand, etc…. You named it and of course business model and business model innovation are now part of these buzz words. Are they still meaningful or did we forget the deeper concepts behind the words? Do we use the technocratic jargon to signal others that we are the experts?

doublethink by duncan

As I have argued in my last post, I think we use in strategy and in management in general too many generic and meaningless words. And I think we use also too many meaningless graphs and pictures to say nothing as a matter of fact. Visualization does not help you if your strategy is bad. Sorry, Alex for this 😉 .

Every decent firm claims in restructuring that it is concentrating on its core competencies when divesting or closing parts of its firm. Well, and often it is the same firm that argued some time ago that it was necessary to buy this now divested firm since it wanted to offer full service to its customers. We have so many words for “Sorry, it did not work. We just could not make it work”. Why are we so afraid about the truth?

Management Newspeak

In management we have invented Newspeak. Original, Newspeak is a fictional language in the novel Nineteen Eighty-Four by George Orwell. The basic idea behind Newspeak is to remove all shades of meaning from language. While in Orwell’s novel the government tries to introduce Newspeak to the people in order to make the people more compliant to its will, in the case of management it is our own fault. We managers use our own Newspeak and we have taken all meaning out of it. (more…)

What is the purpose of your business?

Thursday, February 26th, 2009

Beginning of the week, I had a long discussion with Dr. oec. Susan Müller and  Prof. Dr. Thierry Volery, two researchers at the University of St. Gallen. They want to figure out how high the excess return is earned by business model innovators. They want to know which kind of business innovation like value innovation or architectural innovation leads to what kind of über return or excess return.

Very interesting question in particular since most researchers including myself are still using case studies to make our point.

What made the discussion even more interesting was that we discussed what a business model is. There are several technical definitions like mine but for us more interesting was why the term became so prominent in the last years. With the term business model the word business returned to prominence in the conversation on strategy. (more…)