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.

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. You need to address somebody who is willing to buy something from you. A market can not buy something from you, regardless how great the market is. A market does not create revenue or sales for you. It is your customer who buys from you, who provides you with the cash-flow you need to run your business.

And you need not one customer but enough to make a living from. That is also important for entrepreneurs. Do you have enough potential customers? How many customers do you need for breakeven? Is this figure realistic? How many customers do you need for a very happy life? But first, you have to excite the potential customers so that they become paying customers.

The customer driven approach to business model design is bottom up vs. the top-down approach of the market. And even in mature and declining markets you can make a good living if you have the right business model.

Please, write business plans for customers

So, please write your business plan around customers and how you will excite them with your offer. It is the value proposition that makes the difference and, of course, the value architecture to fulfill the value proposition. It is great to start with a product idea but it is the value proposition that counts. Think about the job you solve for your customers.

Customer centric business cases

And please, write your business case accordingly. A VC told me recently that he checks all business cases he wants to invest for a little dirty secrete. He makes a small crosscheck between sales figures and sales & distribution costs.

First, he tries to understand the buying cycle of customers. That is how long it takes a customer from the first sales pitch to the final sales and payment. Most of the time, that takes much long than entrepreneurs expect.

The second calculation is how many customer do you have to pitch to in order to get an opportunity and later the lead. He is doing the classical sales funnel. What is in the pipeline and how long does it take a bid to go through your pipeline.

And than his little trick comes in to place. He calculates than how many sales guys you need in order to fill the pipeline with the needed leads to achieve the sales you have used in your business case on the top line. And than he compares this to the sales costs. And most of the time there is a huge mismatch between the sales figure (too high) and the sales costs (too low) and the number of sales you want to hire (too low).

For this successful VC this shows him that you are not customer driven and not sales driven but a victim of the wrong assumption of what a market is. For a business you have to find customers that are willing to pay. So think about customers in the future, not markets.

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.

The more precise the better, since that shows that you have precise thinking. That does not mean you have to know everything at the beginning of your thinking process. Mark clearly areas where you have to do more thinking instead of just filling out just something. If you have not enough space on the canvas then use the white board to draw the component. That is often the case for the production or value steps in your value architecture.

Be precise in your language

People love buzzwords particularly in the value proposition. They write about best-in-class, social something, customer-centric. All empty words (See post on the horror of Newspeak). Start with precisely describing who your customers are. Do not write business customers but identify some business customers that you can check tomorrow your value proposition with.

I force my participants to write down a list of ten names of customers they can call tomorrow to check if the value proposition is appealing or not. That leads to the next and most important point.

Customer Insights as starting point

A good and innovative business model starts with a customer insight, of something what is unsolved or badly solved for the customer. That is what I call a job to be done for your customers. But entrepreneurs love their products and they try desperately to find a need for their offer. They spent hours arguing why people should buy their offer during business model sessions instead of talking to real potential customers. It is important to convince your customers not others during the workshop.

The Art of business model design starts with a deep understanding of customers. So leave your conference room and test your assumptions about the value proposition when you do the business model design. Observe potential customers, ask them about the basic needs, not about today’s solutions, be curious, be adventurous.

The Art of Business Model Design

• It’s all about the customer
• Be specific what you say
• Keep it simple, but not simplistic
• Be self-explanatory
• Focus on the relevant points where you make a difference
• Do not reinvent everything

“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.

Some hard facts like the value chain or the products can be easily identified but as soon as we approach the value proposition, things get a bit more confusing. Why is this? The answer depends on who answers the question.

Take groups close to your firm: Will the board of your company have the same view as your customers? What about your employees and top management?

Hopefully your executive board will answer the question very similarly. However as I have seen in many consulting projects, that is not usually the case. And even the simple question of who your customers are is a tricky one. Are your customers your users or your paying customers? This is a particularly tough question in double-sided business models.

If you sell to end consumers through retailers, are your customers your channel partners like Walmart or the end customers? This is exactly the discussion you might have within your firm.

Ask customers the question of your value proposition. The answer will be different again. Do your customers understand your value proposition? Do you offer the value you promise with your value architecture also? (see post on value perception vs. value proposition).

In well-managed firms, there is a common and dominant logic of your business

In well-managed firms, we see a common and shared view of the value proposition and of the other components of a business model. Management of these firms is much easier because there is a common understanding of what you do and what makes you unique. In such firms, micro management isn’t necessary since everybody understands his or her role in the company. Innovation is still hard work, but since you understand your customer well, you regularly bring out innovations for your current customers.

Caveat!

What sounds like a dream may be a double-edged sword. Dream businesses can exist if technologies develop along known paths, if you have a clearly defined set of competitors, if your customers have stable and predictable needs and if you have found a business model which can thrive in stable conditions. That’s a lot of ifs! If times are changing, you might be trapped in your way of looking at the world.

The better you adjust to stable business conditions (sustaining), the more difficult you will have with disruptions or unpredictable situations. This is what Clayton Christensen calls Innovators’ Dilemma. Your dominant logic works as a filter. Information is filtered and interpreted in a way that fits your view of the world.

Business Model(s) of the Yellow Pages

The best way to illustrate my point that business models are a social construct and not an absolute reality is to take an industry of business directories, like yellow pages. What is the business model of the yellow pages?

1. Yellow pages as publishers of Yellow Pages and other directories (a product based definition)

If we go back some 15 years, we could easily describe the business model of directories as publishers of paper directories in the form of white pages (private addresses) and yellow pages (business addresses). When you subscribe to this view, you might have envisioned an integrated value chain with its own printing facilities. Even the printing faction of the yellow pages businesses has shifted to online directory services. For such companies, going online was a great step forward, even if it meant simply transferring their business model from paper to online.

2. The search & find business

Another way to look at directory services is to look at the jobs or problems they solve for customers. Remember that the job-to-be-done is a core-defining element of the value proposition. Well, which job does a directory service solve for its clients?

Directory services offer the chance to FIND somebody when somebody else SEARCHes for them. So, the business can be called “Search & Find” business. In this view, one defines the business by the end users and the job you help them solve.

If your dominant logic is grounded in the Search & Find business, you probably understand that customers need more than a flat directory of businesses (today called yellow pages). How about adding recommendations to the business listings like Yelp or Qype are doing? How about making specialized sites for certain professions such as craftsmen or doctors like Angie’s List . After all, people are looking for the best doctor in town, not just any doctor.

When you see your business in this way, you move away from a flat search (finding little information about everything) to a deep search (finding specialized information about a niche). Think about it: Google will probably always beat you in flat search so you better go into deep search.

3. The lead generating business

A third way to define your business takes both the end-user and the paying customer into account. In the case of directory services, your customers are small and mid-sized businesses who you sell ads to.

What problem do the SMEs want to solve with an ad or a bold listing in your directory? Well, they want to be found in order to generate more and better leads with the ad. With these glasses on, you are in the Lead Generating Business. This is quite different from the other two perspectives.

What happens if you take this view? You will probably realize that you have one of the best local sales forces for SMEs as a key asset and part of your core capabilities. And why not leverage your key assets to sell a whole range of products to SMEs that help them to generate more and better leads? Why not sell Google Adwords? With this view of the world, Google is a partner and not a mammoth competitor anymore. Google’s weakness in local business is its weak sales force. They are a technology firm. You have a great local sales force and you will never beat Google in search. Why not join them? Google can be your partner.

In the lead generating business, you suddenly see fresh competitors that compete for the same job and for the same clients’ budget. Groupon and its clones are exactly doing this: Competing for the lead generating business.

4. The Address source

A fourth way of defining what kind of business you are starts by looking at the core competencies. As a directory company, you have or had the best address material for individuals and businesses. You could call yourself an address business.

Potential strategic options would include moving into identity and address management for businesses and individuals. In this situation, you would sell addresses to business and keep the main address of individuals. Unfortunately, it’s a bit late for this kind of business because new directory services have appeared in the form of social networks like Facebook, LinkedIn and Xing. Now, individuals or business maintain their own profiles on these sites.

Conclusion: A business model is a social construct

All four perspectives of the business model are logical and supported by facts. They are totally different descriptions of the same business. Each view allows for very different strategic options. Even the competitors change with each different view of the business. of the business.

It is very important to understand that your business model is not a static and fixed model, it’s the construct of a dominant group of people in your firm.

Challenge the dominant logic with the business model canvas to see new strategic options

You see very different strategic options if you define your business differently. A great way to do this is to better understand the problem you solve for your customer.

Different perspectives open new options by xkcd.com

I illustrated this two years ago in a post on the newspaper industry. The classic business model of a newspaper consisted of three different businesses brought together by a shared medium: paper.

1. The first kind of business you are in concerns the reader. You provide news, background information and entertainment in exchange for the reader’s attention and a small amount of money (just 30% of total revenues, but even less of a contribution margin).
2. The second business you are in is to sell the reader’s attention to advertisers. And this is where the margins were made in the past.
3. The third is the classifieds business. Here, a paper functions as a market place. As we see on the Internet, you do not need content to sell advertising or classifieds. Google and Craig’s List have proven this.

The pity for the newspaper industry is that most of the costs come from the first business, the content, but the revenue comes from the second and third businesses (here a post on the changing economics of newspapers). In this case , the jobs-to-be done analysis is a frustrating one since you see that just moving your content online will never be a profitable business.

Ways to define your business model and starting points for innovation

Taking the yellow pages example, we can identify four defining elements

• The product you offer
• The problems and jobs you solve for your users
• The problems and jobs you solve for your paying customers
• Your core competences

But there are even more elements that you can define your business around.

• The core input or raw material used in your production. This is the way how the plastics industry defines itself. The oil industry and other traditional commodity industries do, too.
• The core production process. Food processing industries focus on this.

Reconstructing your firm by taking another perspective will allow you to see fresh, strategic options which will lead to business model innovations. Take the business model canvas and play with the components. You will see there are more options than you can handle. So please never say that you have no idea how to reinvent your business. Ideas come easily, but executing these ideas is the tough part.

Regardless of which definition you choose, be aware that it is only a construct able to be changed. Competition will not care about your definition. Your success will come from new ways of solving a problem for your customers. And do not complain of unfairness when a competitor enters the arena and breaks all of the rules that you thought were holy. All of these rules made sense in your way of looking at your business, but your competitor, who defines his business totally differently, is acting in a totally fair and just manner. This is what we see in the moment between the content industry which is being challenged by Google in the search and find industry.

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.

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.

Zappos and its core values as a business model innovation

A great example to see how the culture and values can be the uniqueness and differentiation factor in its business model is Zappos . Looking from a technocratic point of view, Zappos is just an eShop for shoes with a great customer services.

But with this limited view you forget that it is not just the great customer service that makes the difference. You need people that can provide this great service. You need values in the firm that helps you to make the right decision in favor of your customers. And your values should be reflected in your controlling systems since otherwise people just do what they are measured for.

Zappos gives a great example that culture and core values is more than just having an HR department with marketing material for recruting. Check out what Zappos is saying about its culture. This culture was Amazon worth almost $1 billion when it announced it wants to by Zappos in July 2009.

Culture and values are part of the business model

I use in change project where big corporations are looking for a better business model an adapted business model canvas. The canvas uses besides the main components value proposition, value architecture and revenue model also a box for culture and values. Together with my colleague Dr. Harry Wiener who is a psychologist by training we have developed three categories that make together the culture and values of a business.

• Leadership style answers the questions: How do we lead people? How much freedom do we give them in their daily work?
• Relationship style answers the question: How do we work together with our customers? How do we work together with our peers in the firm?
• Values answer the questions: What value governs our overall behavior? What values do we pursue?

I do use the adapted version of the business model canvas not in all cases since it must fit the task.

And the more components you have the less the people really try to grasp the complexity of the business. In cases where a cultural change is not needed I sacrifices  the culture for simplicity but add the culture and value dimension as soon as the new business model is designed and the implementation process is planned.

Unlearning and cultural change

From my work experience (having been a line manager for 7 years) and consulting experience the changes in the culture and values are by far more difficult than changing the business model since the traditional business model is so impeded in the heads of all people. Culture and values have to be unlearned and unlearning is the most difficult task as we see from all big American car firms or from the bankruptcy of retail conglomerate Karstadt/Quelle aka Arcandor.

[update:] Via netzwertig.com I found the following blog post of disgruntled journalist from the German media group WAZ. Unfortunately, the article is in German but it shows extremely well how people can react to changes. The journalist discuss if – as print journalist – they can be forced to take a camcorder with them when investigating a story. That sounds ridiculous for outsiders but the traditional culture of journalist is very class oriented and a print journalist is a print journalist and therefore he/she has nothing to do with pictures or even video.

So in the case of the WAZ their strong journalistic network in the Ruhrgebiet is not only an asset for their online venture (DerWesten.de) but also a huge libility due to its traditional core values.

Even when you have the best new business model you will fail if you cannot change the traditional values that impede change. So the culture should be included on the business model canvas if you do a business model innovation in a traditional firm. Otherwise, your business transformation will fail.

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.

Newspeak is all about saying almost nothing with great sounding words. Every bank had its risk management system in place, used sophisticated mathematical simulations, had dozens of compliance officers, trusted well-paid analyst in their triple A ratings. And what was the result? They did not see that a mortgage given to somebody with inadequate income will always be a bad loan regardless how often you mix it with other subprime loans and regardless how much financial modeling you apply.

And I will hear now all my friends from investment banking that you can decrease the risk by pooling loans. Well, this pooling works well with uncorrelated loans but if they are all bad loans in the same market, well, then bad stays and bad regardless of how much you diversify.

For a great overview of financial Newspeak,  click here for a pdf file. It is “The [now defunct] Lehman Brothers Guide to Exotic Credit Derivatives”. You will learn everything about Credit Default Swaps (CDS), Collateralized Debt Obligation (CDO) and their modeling. The basic ideas were great at the beginning but when the bankers believed that they could escape the laws of gravity the products turned into bombs to the world economy.

And this is typical for Newspeak, at the beginning the words had a meaning but when they became popular, the meaning was diluted and lost.

Please be politically incorrect in your firm!

In Nineteen Eighty-Four the government calls a thought that is against the common way of thinking a thoughtcrime. Thoughtcrimes are thoughts that are unorthodox and outside the dominant logic.

I want you to commit these thoughtcrimes in your firms. I want you to dig deeper when people use Newspeak. I want you to fight conventional wisdom. Conventional wisdom might be shared by the masses but is not necessarily true. Use your own sense and reason.

So if somebody uses the term core competencies ask him what competence he really means, ask him what consumer benefits the competence provides, ask him why competitors cannot easily imitate the competency and ask him if the competency can be leveraged widely across many products and markets. If he can answer all these questions clearly, well than the competency is really a core competence that is valuable and that should be nurtured and protected.

Our world of business model innovation is also full of words that many of us use meaninglessly. Business model in itself is such a word. We argue in strategies that we offer a great value proposition to our customers. And, of course, we are so unique. But is that the reality? Are the customers well acquainted with our unique business model or is it a great strategy plan we want to execute or is it just fiction with no support from reality?

Be cruel to yourself, the market is much harder!

Get real! Do not mix marketing talk with strategy!

Please, do not mix marketing talk with strategy. Marketing can be about pretending. Strategy and business modeling is not about pretending or self-denial. Strategy must be clear in language and free of Newspeak. The best is not to use words that are prone to Newspeak. The best way of getting a great business model is to answer simple questions with honesty and modesty:

• What job do you solve for your customers? What value or benefit do you offer to your customers? What excites your customers?
• How do you create the benefit/ value/ excitement for your customers?
• And how do you earn money with your business?

So the first question is about the value proposition (great example here), the second is the value architecture and the third is the revenue model. Simple! So simple is the definition of a business model. And below you find the business model canvas to describe your own business.

The business model canvas by Patrick Stähler

If you want to print the canvas, you find the pdf of the Business Model Canvas here.

And if you answer e.g. that your value proposition is to offer the best service in the industry, you have to be honest about your core competencies. Do they really support the best service? And don’t forget the culture. Do you have the right values and corporate culture to support the value proposition?

And please, do not claim that you are the lowest cost-provider with the best service. I won’t believe you unless you have a great value architecture to support that claim, but even then I would be skeptical because that would be a real disruptive business model innovation and they happen to happen rather seldom.

And please remember a great strategy is not something what looks great on a piece of paper. A great strategy what works in reality!

(photo: http://www.flickr.com/photos/duncan/ / CC BY-NC 2.0)

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.

In strategic management the classical unit of research is the business unit, the industry in which a business unit is competing and the corporation which is the legal entity of most business units (Bettis 1998: 357). On the basis of these units of analysis researchers try to evaluate why certain companies have higher profits than other, comparable companies.

While researchers all try to find new units of analysis like clusters of firms, value nets, value webs or inter organizational systems, the real world was very pragmatic and uses more and more the term business (model). For managers and entrepreneurs the business became the locus of competition and of strategy.

Business model as the answer?

One of the reasons why the term business model has became popular is that people want to answer the question about the purpose of their business. This question was raised by Peter Drucker, a management philosopher and thinker.  He made the point that making profit – very often mentioned as the purpose of a firm – “is not only false, it is irrelevant.” and may even be harmful

Profit-making is not the purpose, but the test if the purpose of the business works. For Drucker “there is only valid definition of business purpose: to create a customer.” And you get your customers only if you do a job they need, you fulfill a want they have.

Business model describes the meaning of your endeavor

When you define your business via the value proposition you offer to your customers that is exactly the bridge between your company’s purpose and the need and wants of your customers. In a philosophical way the business model is a vehicle for the meaning of your endeavor.  And that meaning drives the employees, the management and the customers of the firm.

References

Bettis , R.A. (1998). “Commentary on “Redefining Industry Structure for the Information Age” by J.L. Sampler”, Strategic Management Journal, Vol. 19, p. 357-361.