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Osterwalder, Alexander; Pigneur, Yves. (2013). Business Model Generation. Hoboken, NJ: Wiley.
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Osterwalder, Alexander; Pigneur, Yves. Business Model Generation Hoboken, NJ: Wiley, 2013.
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Osterwalder, Alexander; Pigneur, Yves. Business Model Generation. Hoboken, NJ: Wiley; 2013.
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Osterwalder, Alexander; Pigneur, Yves. 2013. Business Model Generation. Hoboken, NJ: Wiley.
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Alex Osterwalder's book is the source of the Business Model Canvas - that one page business snapshot that so many entrepreneurs are now using to plot and shape their start-ups. Business plan ... Read full review
Although I am not very fond about another type of management tool, I think the Canvas model is easy to use. The book has the approach that the model is described shortly and the rest are ... Read full review
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This is an amazing book. It is very well crafted. Full of well thought diagrams that helps you develop a real modern business plan from scratch, or evaluate an ongoing business. I plan to use its content in my university classes next term, ... Read more > — Pedro B. C.
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Osterwalder, A., & Pigneur, Y. (2010). Business model generation: a handbook for visionaries, game changers, and challengers. Willowbrook, IL, Audio-Tech Business Book Summaries.
Osterwalder, Alexander and Yves. Pigneur. 2010. Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers. Willowbrook, IL, Audio-Tech Business Book Summaries.
Osterwalder, Alexander and Yves. Pigneur, Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers. Willowbrook, IL, Audio-Tech Business Book Summaries, 2010.
Osterwalder, Alexander. and Yves Pigneur. Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers. Willowbrook, IL, Audio-Tech Business Book Summaries, 2010.
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- 11.2 Designing the Business Model
- 1.1 Entrepreneurship Today
- 1.2 Entrepreneurial Vision and Goals
- 1.3 The Entrepreneurial Mindset
- Review Questions
- Discussion Questions
- Case Questions
- Suggested Resources
- 2.1 Overview of the Entrepreneurial Journey
- 2.2 The Process of Becoming an Entrepreneur
- 2.3 Entrepreneurial Pathways
- 2.4 Frameworks to Inform Your Entrepreneurial Path
- 3.1 Ethical and Legal Issues in Entrepreneurship
- 3.2 Corporate Social Responsibility and Social Entrepreneurship
- 3.3 Developing a Workplace Culture of Ethical Excellence and Accountability
- 4.1 Tools for Creativity and Innovation
- 4.2 Creativity, Innovation, and Invention: How They Differ
- 4.3 Developing Ideas, Innovations, and Inventions
- 5.1 Entrepreneurial Opportunity
- 5.2 Researching Potential Business Opportunities
- 5.3 Competitive Analysis
- 6.1 Problem Solving to Find Entrepreneurial Solutions
- 6.2 Creative Problem-Solving Process
- 6.3 Design Thinking
- 6.4 Lean Processes
- 7.1 Clarifying Your Vision, Mission, and Goals
- 7.2 Sharing Your Entrepreneurial Story
- 7.3 Developing Pitches for Various Audiences and Goals
- 7.4 Protecting Your Idea and Polishing the Pitch through Feedback
- 7.5 Reality Check: Contests and Competitions
- 8.1 Entrepreneurial Marketing and the Marketing Mix
- 8.2 Market Research, Market Opportunity Recognition, and Target Market
- 8.3 Marketing Techniques and Tools for Entrepreneurs
- 8.4 Entrepreneurial Branding
- 8.5 Marketing Strategy and the Marketing Plan
- 8.6 Sales and Customer Service
- 9.1 Overview of Entrepreneurial Finance and Accounting Strategies
- 9.2 Special Funding Strategies
- 9.3 Accounting Basics for Entrepreneurs
- 9.4 Developing Startup Financial Statements and Projections
- 10.1 Launching the Imperfect Business: Lean Startup
- 10.2 Why Early Failure Can Lead to Success Later
- 10.3 The Challenging Truth about Business Ownership
- 10.4 Managing, Following, and Adjusting the Initial Plan
- 10.5 Growth: Signs, Pains, and Cautions
- 11.1 Avoiding the “Field of Dreams” Approach
- 11.3 Conducting a Feasibility Analysis
- 11.4 The Business Plan
- 12.1 Building and Connecting to Networks
- 12.2 Building the Entrepreneurial Dream Team
- 12.3 Designing a Startup Operational Plan
- 13.1 Business Structures: Overview of Legal and Tax Considerations
- 13.2 Corporations
- 13.3 Partnerships and Joint Ventures
- 13.4 Limited Liability Companies
- 13.5 Sole Proprietorships
- 13.6 Additional Considerations: Capital Acquisition, Business Domicile, and Technology
- 13.7 Mitigating and Managing Risks
- 14.1 Types of Resources
- 14.2 Using the PEST Framework to Assess Resource Needs
- 14.3 Managing Resources over the Venture Life Cycle
- 15.1 Launching Your Venture
- 15.2 Making Difficult Business Decisions in Response to Challenges
- 15.3 Seeking Help or Support
- 15.4 Now What? Serving as a Mentor, Consultant, or Champion
- 15.5 Reflections: Documenting the Journey
- A | Suggested Resources
Portions of the material in this section are based on original work by Geoffrey Graybeal and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.
By the end of this section, you will be able to:
- Define a business model and its purpose
- Describe a business model canvas
- Describe a lean model canvas
- Describe a social business model canvas
According to Alexander Osterwalder and Yves Pigneur , the authors of Business Model Generation , a business model “describes the rationale of how an organization creates, delivers and captures value.” Nevertheless, there is no single definition of this term, and usage varies widely. 29
In standard business usage, a business model is a plan for how venture will be funded; how the venture creates value for its stakeholders, including customers; how the venture’s offerings are made and distributed to the end users; and the how income will be generated through this process. The business model refers more to the design of the business, whereas a business plan is a planning document used for operations.
Each business model is unique to the company it describes. A typical business model addresses the desirability, feasibility, and viability of a company, product, or service. At a bare minimum, a business model needs to address revenue streams (e.g., a revenue model), a value proposition, and customer segments. In non-jargon English, this means you want to address what your idea is, who will use it, why they will use it, and how you will make money off it.
A canvas is a display that would-be entrepreneurs commonly use to map out and plan different components of their business models. There are several different types of canvases, with the business model canvas and the lean canvas being the most commonly used. There are hard-copy canvases modeled after an art canvas as well as digital versions. The original physical canvases are meant to serve as visual tools, used with sticky notes and sketches.
As developed by Osterwalder and Pigneur, the business model canvas has nine components, as shown in Figure 11.6 .
Link to Learning
Visit this site to see examples of completed Business Model Canvases for a variety of industries for a deeper understanding of how the different categories are filled in.
Osterwalder and Pigneur wrote Value Proposition Design as a sequel to Business Model Generation . Their value proposition canvas is a plug-in that complements the business model canvas, going in depth on activities such as encouraging entrepreneurs to address and tackle customer pains, gains, and jobs-to-be-done trigger questions, and designing pain relievers and gains. The complementary and accompanying activities and resources can be useful for a deeper dive into and understanding of customer value creation in the form of value proposition, although there are other approaches to conceptualizing your value proposition. For Christensen, the originator of the disruptive innovation and jobs-to-be-done theories, a value proposition is a product that helps customers do a job they’ve been trying to do more effectively, conveniently, and affordably.
Finding the intersection of your customers’ problems and your solutions is how you create a unique value proposition, according to the entrepreneur Ash Maurya , the author of Scaling Lean and Running Lean . In Running Lean , Maurya offers the following formula for creating an initial value proposition in the canvas, as shown in Figure 11.7 .
Maurya deviated from the standard business model canvas to create the lean canvas. It overlaps the business model canvas in five of the nine components: customer segments, value proposition, revenue streams, channels, and cost structure ( Figure 11.8 ]. Rather than addressing key partners, key activities, and key resources, the lean canvas helps you tackle problems, solutions, and key metrics instead.
Visit this site to see examples of completed Lean Model Canvases from some major companies for a deeper understanding of how the canvas can be applied.
While the business model canvas and the lean canvas are similar in format, there are differences in how they are used. It is generally accepted that the lean canvas model is a better fit for startups, whereas the business model canvas works well for already established businesses. The lean canvas is simpler; the business model canvas provides a more complete picture of a mature business.
Watch this Railsware video that demonstrates how the lean canvas model might be applied to startups to learn more. In the case example in the video, the lean canvas model is applied to the successful P2P ride-sharing app Uber, as if it were a startup.
Both the business model canvas and the lean canvas are designed for constant iterations, allowing for multiple versions and changes throughout the entrepreneurial process. Part of that process involves customer discovery; thus, the canvases invoke customer-focused design. The target customer is integrated into the canvas from the start through the use of a customer empathy map and a number of design-thinking ideation activities. 30 The customer empathy map is a portrayal of a target customer —the most promising candidate from a business’s customer segments—that explores the understanding of that person’s problems and needs ( Figure 11.9 ). Osterwalder and Pigneur used a customer empathy map as part of the design ideation phase of developing a business model canvas. There are differing versions of customer empathy maps, but most seek to answer common questions pertaining to the customer, such as:
- With whom are we empathizing?
- What do they need to do?
- What do they see?
- What do they say?
- What do they do?
- What do they hear?
- What do they think?
Phillips, Proctor & Gamble, Microsoft, and Yeti are examples of well-known companies that make use of customer empathy mapping because, according to the journal Entrepreneur , every transaction can be turned into a meaningful and valuable customer interaction. 31 Once a company analyzes the results of customer mapping exercises, it may very well lead to new products that serve customer needs and/or wants.
For example, Philips used empathy mapping to detect a high level of fear in young patients immediately before an MRI medical procedure, so it invented a miniature version of the CAT scan equipment used in the procedure called the “kitten scanner” along with toy animal characters that were used to dispel the fear of MRIs among children. Proctor & Gamble created a new advertisement that was released for the 2012 Olympics visualizing the trials and tribulations of mothers raising young athletes, demonstrating Proctor and Gamble’s awareness that some of its customers wanted or needed empathy for the sacrifices they had made to help their children succeed. Likewise, Microsoft has attempted to demonstrate empathy with customers’ privacy concerns by developing an interactive website that explains not only how data is stolen but also how we can better protect our own data. 32
On their company website, the now-famous Yeti cooler company publicly extols the value of empathy mapping, explaining that it leads to better products. Yeti doesn’t just create one on its own, it actually asks its clients to work with the company to create an empathy map. 33 Thus, empathy mapping for Yeti is part of its product development process.
Customer empathy maps also strive to address customer pains (in this case, fears, frustrations, and anxieties) and gains (wants, needs, hopes, and dreams). 34
Strategyzer offers six videos outlining the business model canvas that total about 12 minutes; specifically they cover the prototyping journey from ideation to visualization of conceptualization.
Business Model Canvas 35
As Osterwalder and Pigneur describe it, according to Media Innovation and Entrepreneurship , their business model canvas blocks include revenue streams, customer segments, value propositions, cost structures, channels, key activities, key partners, key resources, and customer relationships.
Early on, your greatest focus should be on the right side of the canvas because:
- These are, in many ways, the most critical aspects of starting a new venture (customer segments, value propositions, channels, and revenue streams).
- The most fluid (revenue streams, channels, and value propositions will likely differ for the differing customer segments and, as you iterate and adapt throughout the customer discovery process, could likely change).
- These follow a logical temporal order (there’s no need to focus on the costs of building a company if you won’t have customers).
In a follow-up to business model generation, the Strategyzer team created a second canvas, the value proposition canvas: https://www.strategyzer.com/canvas/value-proposition-canvas. The value proposition canvas is a new tool that pulls out the customer segment and value proposition blocks of the business model canvas, and encourages more in-depth exploration of those blocks to achieve a good fit between the two. The value proposition canvas tool looks at customer pains, gains and jobs to be done on the customer side and painkillers, gain creators, and products and services on the value proposition side. 36
Read this blog that provides a walk-through of how to fill in a value proposition canvas to learn more.
When you peel away the language used to describe business models, the early startup planning stages come down to a series of questions. When it comes to formulating a business model for a startup concept, another popular framework used in entrepreneurial circles is that of desirability-feasibility-viability Figure 11.10 ). This framework forces the entrepreneur to address broad questions about the startup concept:
- Desirability: How desirable is the product? Who will use it and why?
- Feasibility: How feasible is this idea? What are the costs of making it? How practical is the concept?
- Viability: Will this idea remain viable? How will it make money? How will it be sustained over time?
These questions then begin to connect to form a narrative about where the startup concept came from, whom it serves, why it’s needed, how it will make money, and how it will be sustained in the future.
The value propositions, customer relationships, customer segments, and channels address the assumptions that will create customer value (desirability). The cost structure and revenue stream blocks are aimed at viability, or overcoming flawed business models. The key partners, key activities, and key resources are about execution and address feasibility. The risk of poor execution can undermine your assumptions that you chose the right infrastructure to execute your business model (feasibility). The risk of solving an irrelevant customer job (sometimes derisively labeled “a solution in search of a problem”) undercuts desirability in your business. The risk of a flawed business model would hamper the financial assumption that your business will earn more money than you spend (viability). Adaptability is about the assumption that you chose the right business model within the context of external factors such as technology change, competition, and regulation.
The business model canvas is not an exhaustive planning tool by any means. 37 , 38 The risk of such external threats is not specifically addressed on the canvas blocks. The external threats not specifically covered by the canvas blocks can be designed for adaptability, that is, the business model canvas is a necessary but insufficient component of determining the viability of the business idea/concept. There are many elements not included in the canvas that entrepreneurs must address. Industry analysis, including a competitive analysis, for example, falls “off canvas” but is important nonetheless.
The Lean Model Canvas
The lean model canvas is Ash Maurya ’s adaptation of the original business model canvas. As we noted earlier, gone are the customer relationships, key activities, key partners, and key resources blocks. Instead, a problem block is added, because as Maurya explains, “Most startups fail, not because they fail to build what they set out to build, but because they waste time, money and effort building the wrong product. I attribute a significant contributor to this failure to a lack of proper ‘problem understanding’ from the start.” Maurya next added a solution block to the lean model canvas, which corresponds well with features on a minimum viable product (MVP), which you will recall was covered in depth in Launch for Growth to Success . The lean model canvas also adds an “Unfair Advantage” block, similar to the block for competitive advantages or barriers to entry found in a business plan. 39
Social Business Model Canvas
As you’ve noticed by now, the core canvas components are common throughout the various versions. Many of the blocks of the social business model canvas are similar to those used in the business model canvas and the lean model canvas. 40 A few differences, as developed by Tandemic , focus on areas unique to social entrepreneurship ventures. For example, the new areas added include measures of what kind of social impact you are creating or developing, measures of surplus to address what happens with profits and where you intend to reinvest them, and measures of beneficiary segments, and social and customer value propositions. 41 These could be measures such as the number of trees planted, number of refugees housed and fed, jobs created, or investments made—depending on the venture. Social impact looks at an organization’s social mission beyond the bottom line. Measurement can differ among social entrepreneurs, but in terms of the canvas, impact measures are an effort to establish quantifiable metrics.
Social impact can be hard to measure, but nonetheless, many social entrepreneurs aim for long-lasting impact. 42 A 2014 report by the think tank, consultancy, and member network SustainAbility lists cooperative ownership, inclusive sourcing, and the “buy one, give one” model as three forms of social impact. 43 In addition to the Tandemic social business model canvas, there are other versions of similar canvases used for social entrepreneurship. For instance, Osterwalder adapted the business model canvas for mission-driven organizations into a mission model canvas. 44 There’s also a social lean canvas that adds purpose (explaining your reason for creating the venture in terms of social or environmental problems) and impact sections (describing the intended social or environmental impact). 45
This completed social business model canvas for the popular peer-to-peer lending platform Kiva illustrates how the business model canvas can and perhaps should be adapted for social entrepreneurship ventures.
What Can You Do?
Toms Shoes is perhaps one of the best-known companies for adopting a social entrepreneurship purpose into its business model. Part of its early success hinged on the fact that for every pair of shoes a customer bought, the company donated a pair of shoes to someone in need. The company won a prize in 2006 for its innovative solution to poverty. This “ 1-for-1 business model ,” sometimes commonly called the “Toms model” after the shoe company that popularized it, gained traction among other companies that followed suit in similar fashion, seeing both the social and the financial successes in the Toms model. Warby Parker is another example of a company that does essentially the same: A customer purchases a pair of eyeglasses, and the company donates a pair (although Warby Parker pays a third party to procure the glasses, as eyeglasses require an individual prescription, whereas shoes do not).
- Can you think of an innovative social entrepreneurship business model?
The Birthday Party Project
Paige Chenault wanted homeless children in Dallas to feel special on their birthdays. Many have never experienced a birthday party. So this professional event planner sprang into action in January 2012. She launched the Birthday Party Project (https://www.thebirthdaypartyproject.org/), a nonprofit group whose mission is to celebrate the lives of homeless children (ages one to twenty-two). The group organizes monthly birthday parties with partner shelters. Since its inception, the concept has spread beyond Texas to cities across the United States, including Atlanta, Chicago, Los Angeles, New York, and San Francisco. In six years, the Birthday Party Project has celebrated 4,800 birthdays with 30,000 kids in attendance, eaten 40,000 cupcakes, cracked 30,000 glow sticks, and performed 1,100 renditions of “Happy Birthday.”
- Identify a need in your community that could become a social entrepreneurship business, as Paige discovered with an initial passion project.
- 29 Alexander Osterwalder and Yves Pigneur. Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers. Hoboken, NJ: Wiley, 2010.
- 30 Charlene Perrin. “Create A Customer Empathy Map in 6 Easy Steps!” Conceptboard . March 28, 2019. https://conceptboard.com/blog/create-a-customer-empathy-map-in-6-easy-steps/
- 31 Vineet Arya. “How to Infuse Empathy in Your Marketing?” Entrepreneur . June 28, 2019. https://www.entrepreneur.com/article/335987
- 32 Vineet Arya. “How to Infuse Empathy in Your Marketing?” Entrepreneur . June 28, 2019. https://www.entrepreneur.com/article/335987
- 33 Mike Godlewski. “The Secret to Knowing What a Client Is Thinking? Empathy Maps.” Yeti. February 8, 2016. https://yeti.co/blog/the-secret-to-knowing-what-your-client-is-thinking-empathy-maps/
- 34 Germán Coppola. “What Is an Empathy Map, and Why Is It Valuable for Your Business?” Medium . November 28, 2017. https://medium.com/swlh/what-is-an-empathy-map-and-why-is-it-valuable-for-your-business-14236be4fdf4
- 35 This material is based on original work by Geoffrey Graybeal and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.
- 36 Michelle Ferrier and Elizabeth Mays. Media Innovation and Entrepreneurship . The Rebus Foundation, 2017. https://press.rebus.community/media-innovation-and-entrepreneurship/.
- 37 Jennifer van der Meer. "Do You Suffer from Value Proposition Confusion?" Linkedin . October 19, 2016. https://www.linkedin.com/pulse/do-you-suffer-from-value-proposition-confusion-jennifer-van-der-meer/
- 38 “The Value Proposition Canvas.” Strategyzer . n.d. https://strategyzer.com/canvas/value-proposition-canvas
- 39 Ash Maurya. “Why Lean Canvas vs Business Model Canvas?” Medium . February 27, 2012. https://blog.leanstack.com/why-lean-canvas-vs-business-model-canvas-af62c0f250f0
- 40 "Social Business Model Canvas.” Business Model Toolbox . 2013. https://bmtoolbox.net/tools/social-business-model-canvas/
- 41 “The Business Model Canvas Reinvented for Social Business.” Tandemic . n.d. http://www.socialbusinessmodelcanvas.com
- 42 Ayse Guclu, J. Gregory Dees, and Beth Battle Anderson. “The Process of Social Entrepreneurship: Creating Opportunities Worthy of Serious Pursuit.” Duke/Fuqua case . 2002. https://centers.fuqua.duke.edu/case/knowledge_items/the-process-of-social-entrepreneurship-creating-opportunities-worthy-of-serious-pursuit/
- 43 Lindsay Clinton and Ryan Whisnant. “Model Behavior: 20 Business Model Innovations for Sustainability.” SustainAbility . February 2014. https://sustainability.com/wp-content/uploads/2016/07/model_behavior_20_business_model_innovations_for_sustainability.pdf
- 44 Alexander Osterwalder. “The Mission Model Canvas: An Adapted Business Model Canvas for Mission-Driven Organizations.” Strategyzer . February 25, 2016. https://blog.strategyzer.com/posts/2016/2/24/the-mission-model-canvas-an-adapted-business-model-canvas-for-mission-driven-organizations
- 45 Social Lean Canvas. n.d. https://socialleancanvas.com/
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- Authors: Michael Laverty, Chris Littel
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- Book title: Entrepreneurship
- Publication date: Jan 16, 2020
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What Is a Business Model?
- Andrea Ovans
A history, from Drucker to Christensen.
A look through HBR’s archives shows that business thinkers use the concept of a “business model” in many different ways, potentially skewing the definition. Many people believe Peter Drucker defined the term in a 1994 article as “assumptions about what a company gets paid for,” but that article never mentions the term business model. Instead, Drucker’s theory of the business was a set of assumptions about what a business will and won’t do, closer to Michael Porter’s definition of strategy. Businesses make assumptions about who their customers and competitors are, as well as about technology and their own strengths and weaknesses. Joan Magretta carries the idea of assumptions into her focus on business modeling, which encompasses the activities associated with both making and selling something. Alex Osterwalder also builds on Drucker’s concept of assumptions in his “business model canvas,” a way of organizing assumptions so you can compare business models. Introducing a better business model into an existing market is the definition of a disruptive innovation, as written about by Clay Christensen. Rita McGrath offers that your business model is failing when innovations yield smaller and smaller improvements. You can innovate a new model by altering the mix of products and services, postponing decisions, changing the people who make the decisions, or changing incentives in the value chain. Finally, Mark Johnson provides a list of nineteen types of business models and the organizations that use them.
In The New, New Thing , Michael Lewis refers to the phrase business model as “a term of art.” And like art itself, it’s one of those things many people feel they can recognize when they see it (especially a particularly clever or terrible one) but can’t quite define.
That’s less surprising than it seems because how people define the term really depends on how they’re using it.
Lewis, for example, offers up the simplest of definitions — “All it really meant was how you planned to make money” — to make a simple point about the dot.com bubble, obvious now, but fairly prescient when he was writing at its height, in the fall of 1999. The term, he says dismissively, was “central to the Internet boom; it glorified all manner of half-baked plans … The “business model” for Microsoft, for instance, was to sell software for 120 bucks a pop that cost fifty cents to manufacture … The business model of most Internet companies was to attract huge crowds of people to a Web site, and then sell others the chance to advertise products to the crowds. It was still not clear that the model made sense.” Well, maybe not then.
A look through HBR’s archives shows the many ways business thinkers use the concept and how that can skew the definitions. Lewis himself echoes many people’s impression of how Peter Drucker defined the term — “assumptions about what a company gets paid for” — which is part of Drucker’s “theory of the business.”
That’s a concept Drucker introduced in a 1994 HBR article that in fact never mentions the term business model. Drucker’s theory of the business was a set of assumptions about what a business will and won’t do, closer to Michael Porter’s definition of strategy . In addition to what a company is paid for, “these assumptions are about markets. They are about identifying customers and competitors, their values and behavior. They are about technology and its dynamics, about a company’s strengths and weaknesses.”
Drucker is more interested in the assumptions than the money here because he’s introduced the theory of the business concept to explain how smart companies fail to keep up with changing market conditions by failing to make those assumptions explicit.
Citing as a sterling example one of the most strategically nimble companies of all time — IBM — he explains that sooner or later, some assumption you have about what’s critical to your company will turn out to be no longer true. In IBM’s case, having made the shift from tabulating machine company to hardware leaser to a vendor of mainframe, minicomputer, and even PC hardware, Big Blue finally runs adrift on its assumption that it’s essentially in the hardware business, Drucker says (though subsequent history shows that IBM manages eventually to free itself even of that assumption and make money through services for quite some time).
Read more about
How to Design a Winning Business Model
Joan Magretta, too, cites Drucker when she defines what a business model is in “ Why Business Models Matter ,” partly as a corrective to Lewis. Writing in 2002, the depths of the dot.com bust, she says that business models are “at heart, stories — stories that explain how enterprises work. A good business model answers Peter Drucker’s age-old questions, ‘Who is the customer? And what does the customer value?’ It also answers the fundamental questions every manager must ask: How do we make money in this business? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?”
Magretta, like Drucker, is focused more on the assumptions than on the money, pointing out that the term business model first came into widespread use with the advent of the personal computer and the spreadsheet, which let various components be tested and, well, modeled. Before that, successful business models “were created more by accident than by design or foresight, and became clear only after the fact. By enabling companies to tie their marketplace insights much more tightly to the resulting economics — to link their assumptions about how people would behave to the numbers of a pro forma P&L — spreadsheets made it possible to model businesses before they were launched.”
Since her focus is on business modeling, she finds it useful to further define a business model in terms of the value chain. A business model, she says, has two parts: “Part one includes all the activities associated with making something: designing it, purchasing raw materials, manufacturing, and so on. Part two includes all the activities associated with selling something: finding and reaching customers, transacting a sale, distributing the product, or delivering the service. A new business model may turn on designing a new product for an unmet need or on a process innovation. That is it may be new in either end.”
Firmly in the “a business model is really a set of assumptions or hypotheses” camp is Alex Osterwalder, who has developed what is arguably the most comprehensive template on which to construct those hypotheses. His nine-part “ business model canvas ” is essentially an organized way to lay out your assumptions about not only the key resources and key activities of your value chain, but also your value proposition, customer relationships, channels, customer segments, cost structures, and revenue streams — to see if you’ve missed anything important and to compare your model to others.
Once you begin to compare one model with another, you’re entering the realms of strategy, with which business models are often confused. In “Why Business Models Matter,” Magretta goes back to first principles to make a simple and useful distinction, pointing out that a business model is a description of how your business runs, but a competitive strategy explains how you will do better than your rivals. That could be by offering a better business model — but it can also be by offering the same business model to a different market.
Introducing a better business model into an existing market is the definition of a disruptive innovation. To help strategists understand how that works Clay Christensen presented a particular take on the matter in “ In Reinventing Your Business Model ” designed to make it easier to work out how a new entrant’s business model might disrupt yours. This approach begins by focusing on the customer value proposition — what Christensen calls the customer’s “job-to-be-done.” It then identifies those aspects of the profit formula, the processes, and the resources that make the rival offering not only better, but harder to copy or respond to — a different distribution system, perhaps (the iTunes store); or faster inventory turns (Kmart); or maybe a different manufacturing approach (steel minimills).
Many writers have suggested signs that could indicate that your current business model is running out of gas. The first symptom, Rita McGrath says in “ When Your Business Model is In Trouble ,” is when innovations to your current offerings create smaller and smaller improvements (and Christensen would agree). You should also be worried, she says, when your own people have trouble thinking up new improvements at all or your customers are increasingly finding new alternatives.
Knowing you need one and creating one are, of course, two vastly different things. Any number of articles focus more specifically on ways managers can get beyond their current business model to conceive of a new one. In “ Four Paths to Business Model Innovation ,” Karan Giotra and Serguei Netessine look at ways to think about creating a new model by altering your current business model in four broad categories: by changing the mix of products or services, postponing decisions, changing the people who make the decisions, and changing incentives in the value chain.
In “ How to Design a Winning Business Model ,” Ramon Cassadesus-Masanell and Joan Ricart focus on the choices managers must make when determining the processes needed to deliver the offering, dividing them broadly into policy choices (such as using union or nonunion workers; locating plants in rural areas, encouraging employees to fly coach class), asset choices (manufacturing plants, satellite communication systems); and governance choices (who has the rights to make the other two categories of decisions).
If all of this has left your head swimming, then Mark Johnson, who went on in his book Seizing the White Space to fill in the details of the idea presented in “Reinventing Your Business Model,” offers up perhaps the most useful starting point — this list of analogies, adapted from that book:
Can’t Think of a New Business Model?
Try adapting one of these basic forms.
Source: Seizing the White Space, by Marc Johnson
- AO Andrea Ovans is a former senior editor at Harvard Business Review.
International Journal of Electronic Commerce
Characterizing Business Models for Digital Business Through Patterns
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The Nature of Business Models and Digital Business Models
Design science, design theory, and design artifacts, business patterns, pattern comics, making sense of online grocery in terms of business patterns, business patterns, business processes, and rich pictures, additional information, original articles.
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This article considers business models through the lenses of both design science and the design orientation in management. It describes a new way of thinking about and engaging with business models as patterns. The term “business pattern” is used to refer to a coherent and repeating sequence of action involving humans, machines (including information technologies systems) and artifacts (such as data structures) as a way of organizing a firm. The study also describes a way of visualizing either existing business patterns or envisaged business patterns through the design artifact of a pattern comic. This is used to provide a narrative of some business pattern in principle or in practice. The design theory of a business pattern as well as the design artifact of a pattern comic offer a range of contributions to the literature on business models. First, they permit a clearer distinction to be drawn between business model, business motivation, and business strategy. Second, they suggest a clearer way of building models of “business” (organizing) either as currently conceived (as-is) or in terms of envisaged models (as-if). This also allows clearer expression of business motivation in terms of transitions between as-is and as-if business patterns. Third, business patterns offer a practical way of thinking about the reuse of business models as patterns and their potential for benchmarking purposes. To help ground both the theorization and the visualization proposed we apply the design theory of a business pattern and the design artifact of pattern comics to help make sense of the domain of online grocery.
Key words and phrases:
- Business model
- business motivation
- business pattern
- design science
- digital business
- online groceries
- pattern comic
Table 1. the potential use of pattern comics for business modeling..
It is evident from such literature and discourse that the notion of a business model implicitly uses a framing of organization based in the idea of an open system [ Citation 105 ]—sometimes a complex, adaptive system [ Citation 89 ]. Zott, Amit, and Massa [ Citation 109 ] suggest that business models offer a holistic approach to understanding business. The “equifinality” characteristic of open systems implies that different systems of organizing can be designed to fulfill the same purpose [ Citation 41 ]. This begs the question as to how they should be designed and it is as an aid in this task that the concept of a business model is seen to have utility [ Citation 95 ]. With the rise of digital business, such design options multiply [ Citation 7 , Citation 107 ]. Chesbrough sums this up by saying that “business model innovation is vitally important, and yet very difficult to achieve” [ Citation 26 , p. 362].
In this study, we wish to consider business models through the lens of design science [ Citation 61 ] and the associated design orientation in management [ Citation 16 ]. March and Smith believe that “design science attempts to create things that serve human purposes” [ Citation 61 , p. 253]. We propose the business model as a key conceptual tool for driving the design orientation in management. Simon defined design as “courses of action aimed at changing existing situations into preferred ones” [ Citation 88 , p. 40]. A stream of inquiry within the management academy has recently called for design to be placed at the center of what it means to manage [ Citation 16 ]. This has led to significant calls for management education and practice to be reconfigured to promote design thinking [ Citation 32 , Citation 91 ].
But the business model as a design construct suffers from problems. Teece [ Citation 94 ] argues that the concept of a business model has no established theoretical grounding in any of the economics or business disciplines. Arend argues that the term “business model” as “a description of how a traditional venture operates is strong on redundancy and weak on theoretical grounding” [ Citation 6 , p. 390]. Porter concurs and argues that the definition of a business model is murky at best and that “the business model approach to management becomes an invitation for faulty thinking and self-delusion” [ Citation 82 , p. 64]. Thus he believes that business models as constructs are consequently unfruitful for understanding issues of business change and business strategy, particularly as it pertains to digital business [ Citation 52 ].
Design science works through design theories and design artifacts. A design theory specifies a set of practices for engaging with design whereas a design artifact instantiates a design theory. We propose an innovative design theory for business models that is based on patterns but relies on theory derived from the literature on organizational routines, sociotechnical thinking, and narrative explanation in the social sciences. We show how this theorization better encapsulates certain lessons about the nature of business models derived from the general business literature. Also, we show the relevance of this design theory for making sense of digital business by reflecting it against the current literature on digital business models.
We suggest a way of instantiating the design theory of a business model through the innovative design artifact of a pattern comic. We propose that this design artifact has potential for business modeling, particularly when used by practicing managers and technologists to make sense of the agency of information technology in business innovation and change. It allows easy expression of current or as-is business models as domains of sociotechnical action, giving equal primacy to technology as well as humans in business innovation. It can also be used as a mechanism for more clearly expressing equifinality—new ways of organizing sociotechnical action. These as-if business models can then be analyzed in terms of some defined expression of business purpose, which we refer to as a motivation model. A chosen to-be business model can be further used as the centerpiece for driving strategic change and innovation in some setting. We propose that expressing a business model in this manner may provide greater clarity to issues of business model reuse and benchmarking.
We provide various illustrations of the use our design theory and design artifact in making sense of innovation in the domain of online grocery. Online grocery is a particularly interesting aspect of online retail because of the way in which strategy is currently being played out as a series of “experiments” with various business patterns by major market players [ Citation 68 ]. Arend [ Citation 6 ], as one of his six key research areas for the business model concept, sees value in ways of understanding the emergence of new business models in an industry as a way of fostering innovation. To date, the innovation in this domain has primarily been one of process innovation, but there are some obvious ways in which new patterns can foster what Yoo, Henfridsson, and Lyytinen [ Citation 107 ] refer to as digital innovation. We also compare our proposal with related approaches and distinguish between those approaches that occupy a similar space in treating business models as design concepts and those that take a similar systems viewpoint. We conclude with a discussion of some avenues of further work.
In this section, we consider what current literature tells us about the nature of business models. We summarize this literature as a series of key lessons that help frame features of a business model as a domain construct [ Citation 61 ]. We then consider the literature on digital business models, which leads us to refine certain of our lessons to account for the unique position of information technology in organizational change.
The first lesson is that business models are models . Baden-Fuller and Morgan [ Citation 9 ] portray a number of different senses in which business models may be treated as business models—they provide a useful way to describe and classify businesses, as sites for scientific investigation, and to act as “recipes” for creative managers. In the first sense, a business model is a description of a “kind” or ideal-type of business. In the second sense, a business model consists of an entity upon which both academics and managers can conduct “experiments” of various forms. In the third sense, a business model acts as a “recipe” that managers can use to accomplish aspects of business practice. In this latter sense, Baden-Fuller and Mangematin [ Citation 8 ] argue that business models are particularly useful as cognitive instruments—as a fruitful kind of configuration that may be manipulated cognitively by managers. In relation to digital business, Osterwalder and Pigneur [ Citation 72 ] have a contrasting view of a business model as an ontology for a particular business domain. In philosophy the term ontology [ Citation 31 ] is used to stand for a theory of reality, or more precisely theories that consider the nature of being or the kinds of things that have existence. More recently, the term ontology has been adopted both by academics and practitioners in the information disciplines [ Citation 56 ] (information systems, information management, information science, and computer science) to denote a “formal explicit specification of a shared conceptualization” [ Citation 50 , p. 200]. In this sense, a business model would be considered an ontology that specifies what is deemed to exist in some bounded area of institutional reality.
The second lesson is that business models are narrative models not motivation models. Magretta [ Citation 60 ] argues that “Business models … are at heart, stories—stories that explain how enterprises work.” She believes that “creating a business model is … a lot like writing a new story. At some level, all new stories are variations on old ones, re-workings of the underlying themes underlying all human experience.” Revenue models, in contrast, involve outlining the “underlying economic logic that explains how we can deliver value to customers at an appropriate cost?” [ Citation 60 , p. 87]. Revenue models are one way of establishing motivation for organizational change. We use the term motivation model here to refer collectively to some expression of the need for business change. Hence, in the private sector, increased profit might be the primary motive for change, while in the public or voluntary sector, the motive for change might be expressed in terms of better service provision. Arend [ Citation 6 ] calls for exploration of the value of the business model concept in nonprofit domains, such as government agencies, where revenue generation is not the motivator but the effectiveness of service delivery.
A business model outlines the essential details of a firm’s value proposition for its various stakeholders and the activity system the firm uses to create and deliver value to its customers … a business model may be defined as an abstract representation of some aspect of a firm’s strategy. However, unlike strategy, business models do not consider a firm’s competitive positioning. [ Citation 87 , p. 427]
Business model refers to the logic of the firm, the way it operates and how it creates value for its stakeholders; and strategy refers to the choice of business model through which the firm will compete in the marketplace; while tactics refers to the residual choices open to a firm by virtue of the business model it chooses to employ. [ Citation 24 , p. 195]
The fourth lesson arises from viewing business models as activity models (such as that used by Seddon et al. [ Citation 87 ]). Business models outline the sequences of action necessary for the achievement of certain goals that may have strategic consequences. Zott and Amit [ Citation 108 ] clearly focus on the notion of a business model as a set of interrelated activities. They define a business model as an activity system that transcends the boundaries of the firm into its wider environment. Zott, Amit, and Massa [ Citation 109 ] suggest that a firm’s activities play a dominant role in the way in which business models are conceptualized. They also propose that business models seek to explain how value is created—suggesting that there is a family resemblance between the concept of a business model and that of a value-creating system [ Citation 76 ]—a concept that is particularly useful in terms of explanatory power because of its basis in systems thinking [ Citation 54 ] and its clear linkage with the concept of the value chain and value network evident in Porter’s work [ Citation 82 , Citation 83 ]. According to this view, organizations are conceived of as chains of activity systems [ Citation 25 ] associated with the production and dissemination of value, which in their entirety can be portrayed as value-creating systems [ Citation 76 ]. Linder and Cantrell [ Citation 58 ] define a business model as the organization’s core logic for creating value. For commercial organizations, the value created will typically constitute products. For public sector organizations, value will typically be embodied in the services such organizations provide. In the community, value will constitute social capital—networks of information, trust, and reciprocity [ Citation 84 ].
The fifth lesson is that business models can be fruitful as a means of developing taxonomy . Baden-Fuller and Morgan [ Citation 9 ] argue that business models as ideal types may be organized in wider taxonomy. In this regard, Osterwalder, Pigneur, and Tucci [ Citation 75 ] make an important distinction between the business model concept as a metamodel and a business model as a type, perhaps as a type within a larger taxonomy of types. Business models as types should also be distinguished from business models as instances. For example, the business model of Tesco online and the business model of Ocado may have certain characteristics in common that may be abstracted in a business-model type, such as that of an online grocer. They further believe that a business model should be a holistic representation of the core logic of all of some business, not a particular part of the business [ Citation 73 ].
At the turn of the century, Alt and Zimmerman [ Citation 4 ] in their introduction to a special issue of Electronic Markets on eBusiness models argued that consensus on the elements of a business model was lacking but that business models are largely believed to help determine the success of an electronic venture. Little appears to have changed in the intervening decade and a half [ Citation 99 ]. Osterwalder and Pigneur, for instance, describe a business model as the “conceptual and architectural implementation of a business strategy [that] represents the foundation for the implementation of business processes and information systems” [ Citation 72 , p. 256]. Al-Debei and Avison [ Citation 2 ] concur in placing a business model as a multifaceted concept that mediates strategic outcomes with information and communication technology–enabled business processes. This accounts for the observations of Hedman and Kalling [ Citation 52 ] and Pateli and Giaglis [ Citation 77 ] that the concept of the business model has been most productively applied to digital business (eBusiness and eCommerce).
The key problem is that the architecture of digital business models is expressed in the majority of extant literature as a set of integrated features, building blocks, or components of organization [ Citation 45 ], rather than as a narrative of sociotechnical action. In the 1990s, IBM used a component-based approach that divided a business model into a horizontal set of typical business functions (such as administration) and a vertical set of purposes (direct, control, execute). Pateli and Giaglis [ Citation 77 ] conducted a bottom-up analysis of eBusiness models and suggested that such models are typically defined in terms of a number of standard components such as mission, target market, value proposition, resources, activities, cost and revenue model, and value chain or value network. Gassman, Frankenberger, and Csik [ Citation 42 ] treat business models as similar patterns of strategic elements such as the customer, the value proposition, the value chain, and the profit mechanism. Osterwalder and Pigneur [ Citation 73 ] in their earlier business model canvas and in their more recent value proposition canvas [ Citation 74 ] take a feature-based approach, suggesting the importance of infrastructure, offering, customers, finances, and resources.
We suggest that such a features-based approach although useful, makes it difficult to see the relationship between strategy, processes, and information systems—which is seen as the key orientation of digital business models. In other words, a feature-based approach to business models makes it difficult to make sense of ways of organizing as sociotechnical ensembles of action. In the next section we suggest a particular design theory directed precisely at this issue.
We see value in approaching the nature of digital business models from the position of design science. Indeed, we suggest that the notion of a business model is usefully recast as a design theory for some system of sociotechnical action. To instantiate such design theory we need a suitable design artifact for expressing not only the narrative of current sociotechnical action but also narratives of envisaged sociotechnical action as well as plans for implementing sociotechnical action.
The idea of a design science, distinct from a natural or a social science, was first proposed in Simon’s Sciences of the Artificial [ Citation 88 ]. For Simon, such a science is directed at the production of artificial entities (artifacts) rather than something that occurs naturally. Hevner et al. [ Citation 53 ] have packaged this perspective more recently as a design science and like Simon believe that such a science should be a “tough, analytic, partly formalizable, partly empirical, teachable doctrine” [ Citation 88 , p. 58]. There is a certain synergy between proposals for a design science and the development of design thinking in management [ Citation 16 , Citation 32 , Citation 36 , Citation 46 , Citation 91 ]. Some have even suggested that management broadly as an academic endeavor should be conceived of as a design science [ Citation 63 , Citation 97 , Citation 100 ].
Members of academia have proposed a conception of design science that is focused both on building theories and constructing artifacts for design and action [ Citation 47 , Citation 48 , Citation 53 ]. According to Gregor and Hevner [ Citation 48 ], design science research in this tradition “involves the construction of a wide range of socio-technical artefacts such as decision support systems, modelling tools, governance strategies, methods for IS evaluation and IS change interventions” [ Citation 48 , p. 337]. But such design artifacts should also be situated in appropriate design theories. Design theories focus on how to do something. They provide explicit prescriptions on how to design and develop an artifact—whether the artifact is a product of technology or a methodology for doing something, including managerial intervention. It should be evident from this discussion that critical to all three interrelated notions of design science, design theory, and design artifact is that of the artificial “object”—the artifact—produced as the outcome of any design practice that hopefully also serves to instantiate some design theory [ Citation 49 ].
Gregor [ Citation 47 ] suggests that design theory can be seen as one of the five fundamental types of theory relevant to the discipline of information systems. Gregor and Jones [ Citation 49 ] propose eight component parts of an acceptable and justifiable design theory. Although not mentioned by these authors it is useful to divide these principles or components into two halves, which, borrowing from Simon’s definition of design science, we refer to as the doctrine and the application of a design theory [ Citation 45 ].
The first four component parts of a design theory [ Citation 49 ] establish its doctrine—a set of ideas or beliefs that are believed to be true. The doctrine of a design theory consists of (1) purpose and scope, (2) justificatory knowledge, (3) constructs, and (4) principles of form and function. The purpose and scope of a design theory indicates what type of design artifact the theory applies to and defines the boundary of applicability of the theory. Justificatory knowledge specifies the underlying sources of knowledge on which the design theory is based. Constructs provide representations of the entities of interest in the theory. Principles of form and function provide an architecture that describes artifacts produced by the design theory.
The doctrine of our design theory is situated in the notion of patterns of sociotechnical action—which we refer to as business patterns. In terms of purpose and scope , we see business modeling involving acts of making sense of business patterns. In terms of justificatory knowledge , we think of business patterns as constitutive routines of sociotechnical action. As constructs we think of business patterns in terms of three layers of interrelated action, which serve to build patterns of articulation, communication, and coordination. Finally, in terms of principles of form and function we see such patterns as entangled, meaning that although they can be separated analytically, they are coupled in continuous praxis.
The application of a design theory [ Citation 49 ] refers to how such theory may be applied in practice. Such application demands (1) principles of implementation, (2) expository instantiation, (3) testable propositions, and (4) artifact mutability. Principles of implementation provide a description of the processes by which the theory may be implemented in specific situations. Expository instantiation indicates a physical implementation of the artifact that can be used both as a mode of exposition and for the purposes of testing theory. Testable propositions refer to the ways in which instantiations of a design theory may be evaluated in practice. Artifact mutability indicates changes in the state of the artifact anticipated by the theory.
In practical application, we suggest that it is possible to instantiate our design theory through comics of patterned sociotechnical action. In principles of implementation , comics are proposed as a useful way of visualizing the narrative of business patterns that constitute some domain of sociotechnical organization. They are also proposed as a way of expressing new ways of organizing. As testable propositions about the nature of sociotechnical organization, three types of model of business patterns need to be constructed: as-is (current), as-if (envisaged), and to-be (planned). As expository instantiations these models serve to accumulate common ground between the business modeler and organizational actors; such common ground is critical to changing patterns of sociotechnical action. Finally, regarding artifact mutability we suggest the importance of abstracting business patterns and using such abstraction in pattern reuse and benchmarking.
The idea of pattern is central to many disciplines. For instance, Alexander [ Citation 3 ] proposed that architectural design is based on a number of archetypal patterns that encapsulate fundamental principles of building design. This idea has had much influence in other disciplines such as software engineering, where design patterns are proposed as general solutions to programming problems [ Citation 51 ]. Eriksson and Penker [ Citation 39 ] have proposed the construction of business models as UML (Unified Modeling Language) patterns.
A pattern is anything that repeats across more than one situation. The things that repeat within a business pattern are various types of action undertaken not only by humans but also by “machines” such as information technologies systems) and somewhat by artifacts (such as records). We therefore see business patterns as enacted routines of sociotechnical action [ Citation 38 ]. There is a developing consensus about three core features of routine action in organizations [ Citation 40 ]. An organizational routine is (1) a repetitive pattern (2) of interdependent actions (3) involving multiple actors. There is also growing awareness of the differences between routines in principle and routines in practice [ Citation 80 ].
A finite set of actors, which may be individual or collective. They may be humans or institutions, artifacts or even “machines”;
A finite set of descriptive states relevant to some domain of sociotechnical organization;
A weak order in time expressed on the set of states. This defines the chronology of states for the domain;
A binary causal relation between some pairs of states. The relations will run from earlier states to later states in the chronology. These ordered pairs can be considered events in the business pattern;
A finite set of actions that transform some elements of the states of the world. The actions transform earlier to later states in the chronology of the business pattern. Actions are partitioned into acts of articulation of data structures, the communication of intent that results from such articulation and the coordinated, instrumental action that results from such communication;
A mapping of the set of actions onto the set of actors. This will show which actor(s) performs which action.
Two features of a business pattern deserve further explanation—the partition of the set of actors into humans, machines, and artifacts and the partition of the set of actions into actions of articulation, communication, and coordination. First, the partition of the set of actors is proposed to better account for the nature of sociotechnical action. Real patterns of routine action in some domain of organization are almost never carried out by humans alone. Such patterns are better conceptualized as sociotechnical ensembles of actors [ Citation 11 ] that include not only machines such as computers but also artifacts such as records or data structures more broadly [ Citation 81 ]. Second, the partition of actions is proposed to better account for the relationship between representation, communication, and coordinated performance in any constructive conceptualization of the accomplishment of organizing. This partition therefore defines a business pattern as a complex of three types of coupled action, which we refer to as articulation, communication, and coordination.
Consider the domain of online grocery. Actors in the domain consist not only of humans (customers) but also information and communications technologies (ICT), such as websites, as well as data structures, such as shopping lists, product records, and sales orders. Articulation of a data structure such as updating a shopping list serves as a communication between the customer and the website in the sense that it directs the website to take some coordinated action, namely, placing a sales order for a product with the company sales-order processing system.
A given business pattern can also be considered either as a pattern in principle or a pattern in practice. A pattern in principle is an abstraction that represents the ideal or schematic form of routine action in some domain. A pattern in practice consists of a collection of specific actions undertaken by specific actors in specific places and at specific times. Our description of articulating, communicating, and coordinating action through an online shopping list would be considered a pattern in principle. The actual scenarios of defined customers creating specific shopping lists through interaction with online grocery websites and databases would constitute patterns in practice. These two viewpoints are mutually constituted through structuration [ Citation 44 ]. Patterns in principle constitute resources for actors that enable and constrain the performance of patterns in practice. Patterns in practice constitute actual performance that creates and re-creates patterns in principle. This helps explain how patterns are not just repetitive but potential catalysts for organizational change.
We concur with Baden-Fuller and Morgan about the value of business modeling [ Citation 9 ]. We propose that a business pattern can be seen as an appropriate design theory for use in business modeling, in the sense that it provides a suitable way of expressing some domain of sociotechnical organization [ Citation 9 ]. We further suggest that business patterns may be useful as sense-making devices [ Citation 102 ]—as “recipes” that managers can adopt and adapt within benchmarking, reuse, and strategy making [ Citation 7 ]. We particularly suggest their value in the development of digital business strategy, where there is typically a clear need to improve communication between general business managers and technologists. We propose their efficacy for understanding and thinking through the subtle interactions between technological and activity change.
Teece [ Citation 94 ] argues that although technological innovation and business model innovation tend to be conflated they are not necessarily the same. Baden-Fuller and Haefliger [ Citation 7 ] argue for considering technology innovation and business model innovation as a process of two-way interaction. In the idea of a business pattern we want to establish technologies as central actors in some business model. This, we think, gives us a more nuanced way of understanding the linkages between technology (particularly information technology [IT]) and value creation. Like Baden-Fuller and Haefliger [ Citation 7 ] we use business patterns particularly to highlight the way in which contemporary innovation in business models is frequently linked to technological innovation, particularly to innovation through use of information technology.
Like Zott and Amit [ Citation 108 ] we think it important to build business models from activities or action. We see a business pattern as an interrelated set of actions designed to achieve some form of value creation. But business patterns are not business processes. Business processes [ Citation 64 ] use a similar system’s view of organization but are deficient as a design theory for modeling sociotechnical systems, mainly because they tend to conflate the social with the technical. In other words, the idea of a business process typically abstracts out any notion of actors taking action. Upon a business process, both actors and their action are typically reified as the “mechanical” transformation of various forms of “stuff.” We consider the differences between business processes and business patterns in more detail in a later section.
The idea of a business pattern is similar to Osterwalder, Pigneur, and Tucci’s [ Citation 75 ] idea of a metamodel for a business model. But in modeling practice, business patterns [ Citation 75 ] can be considered in principle as types or in practice as instances of business practice. Business patterns in principle are ideal types of business practice [ Citation 9 ], while business patterns in practice are descriptions of actual ongoing practice. Indeed, the design theory of a business pattern may allow more explicit abstraction between type and instance in terms of some domain of sociotechnical action. However, unlike Osterwalder, Pigneur, and Tucci [ Citation 75 ], we do not assume that a business pattern should cover all of an organization’s core “logic.” A business pattern can be used to express part of such “logic,” particularly that part deemed important to change.
A business pattern can be considered a narrative [ Citation 60 ] of action appropriate to either some current (as-is) or some envisaged (as-if) domain of organizing—a distinction evident in the work of Osterwalder, Pigneur, and Tucci [ Citation 75 ]. It is a particular way of making sense [ Citation 60 ] of the “logic” of operations appropriate to some organization. A business model for us is a narrative of how the business works (or should work). This means that the representation of a business pattern should answer Magretta’s “narrative” test but will not answer Magretta’s “numbers” test. A business pattern does not provide an expression of motivation such as an improved revenue stream or achieving good customer service directly. Any such expression of the purpose of some business pattern, should be represented in a linked business motivation model. Hence, we believe that the modeling proposed by Casadesus-Masanell and Ricart [ Citation 24 ] does not provide a business model, it provides a model of motivation—a model of choices (goals) and consequences. Such motivation will be realized through changes to business patterns. The concept of motivation is deliberately chosen here instead of issues such as revenue because, as Baden-Fuller and Morgan [ Citation 9 ] cogently argue, public-sector and voluntary-sector organizations will have the need to express the purpose of change differently from the typically narrow profit motive of the private-sector organization.
Likewise, business patterns are not the same as strategic models [ Citation 87 ]—they represent the end-points of either current strategy or envisaged strategy. In this sense a business pattern is consistent with the view of Casdesus-Masanell and Ricart who define the relationship between business strategy and business model in the following terms—“strategy refers to the choice of business model through which the firm will compete in the marketplace” [ Citation 24 , p. 196]. Like Casadesus-Masanell and Ricart, we think that strategy details choice of business model. Such choice should clearly relate the motivation for changing business models. Likewise, tactics relates to the implementation of some chosen business model. The residual choices open to the firm are part of the ways in which the firm achieves instantiation of some chosen ideal type of business model [ Citation 70 ].
Figure 1. Business Motivation, Models, and Strategy
We propose the value of visualizing business patterns as narratives. Much recent business literature emphasizes the advantages of visualization [ Citation 20 ]—of producing pictures rather than words to communicate something. Typically, such visualization aids other forms of communication such as oral or written communication. Some advantages claimed for visualization include being faster for people to process the message, being more easily remembered for longer, having more of an impact on the viewer than the spoken word, being better at avoiding ambiguity in communication, and being more efficient at capturing detail or complex messages [ Citation 22 ].
Visualization has, of course, been an accepted part of business analysis practice for many decades, in areas such as process modeling, information modeling, and data modeling [ Citation 19 ]. More recently, the term visualization has become associated with ideas of data or information visualization as practiced in the field of business intelligence. Visualization is also seen as appropriate in the context of qualitative research in social science, particularly as a means of “capturing” the viewpoints of varying social actors [ Citation 62 ]. There has also been an attempt to promote visualization more generally in managerial practice in areas such as business model generation [ Citation 73 ] or strategy making [ Citation 101 ].
Our approach to visualization differs from such approaches. First, our visualizations of business patterns are much broader in scope than data or information visualizations. We are interested in ways of visualizing patterns of action rather than in presenting statistical patterns in innovative ways pertinent to some data set. Second, visualization practices in business analysis (such as process models) are typically technocentric. By this we mean that they are typically used as a means of documenting and communicating requirements between technical actors. In contrast, our approach is meant to be business-centric. We want to offer a way of encouraging businesspeople themselves to think about sociotechnical patterns. Third, our approach to visualization is closer to that of business model generation, the use of visualization for strategy exercises, and the use of “journey maps” for service design. They carry the same intent of acting as a relatively free-form tool for the analysis and design of business organization. However, our visualizations exploit a background of theory [ Citation 10 ] that helps structure the narrative of action constituting some business pattern. This, we feel, acts as a useful focus for enabling cocreation of such visualizations between business modelers and business actors.
We have found that the production of comics to represent business patterns is an effective means for getting businesspeople to think like business analysts [ Citation 13 ]—not only managers but also various other levels of employees in particular organizations. Comics are particularly useful as instantiations of business patterns for the following reasons. First, they are both a visual and textual genre. Comics are a unique hybrid that exploit in a free-form way the strengths of both images and text as media for portraying a coherent storyline [ Citation 43 ]. Second, comics are well-known and well-read as a popular genre. Because of such familiarity, as intermediate representations, comics appear to be readily accepted and understood by nontechnical actors. Third, this genre is particularly well-suited for expressing the ways in which actors take action. They are also good at expressing the transformation resulting from designated actions. Fourth and finally, comics use well-established conventions for expressing events as “movement” of action through time and space. Therefore, they offer a particularly useful way of expressing the dynamics of business patterns, such as routine work.
Figure 2. Elements of a Pattern Comic
In our comics, named mannequins are used to denote either human actors in the case of patterns in practice or roles in the case of patterns in principle. Nonhuman actors such as IT systems are indicated with appropriate icons. Our use of communicative patterns is important for documenting the ways in which material artifacts such as data structures act. Artifacts, such as orders or product records, are clearly indicated as displaying “textual” agency [ Citation 29 ]. Hence, our representations offer a tool for disentangling “the relative contributions of the actions taken by humans and those taken by computers or other non-human actors” [ Citation 81 , p. 1486].
In terms of adequately representing the spatiotemporal sequence of action, we have found our use of comics to be effective as narrative devices—as means of telling a story of either how things happen or how organizational actors would like things to happen [ Citation 79 ]. In our comics, the temporal sequence of action is indicated through dotted arrows between cells. When representing patterns in practice, the precise location of each act is annotated on each cell within a panel. Also, the start- and end-time of each act/cell can be indicated in a comic.
Traditionally, the design artifacts produced in the analysis and design of sociotechnical systems are constructed with the needs of analysts in mind rather than organizational actors, implicitly framing such activity as a technocratic endeavor. The design artifacts proposed in this study are an attempt to break with this tradition and reestablish some of the tenets of participatory, collaborative, or cocreative design [ Citation 28 ]. The central design artifact proposed is created with the express purpose of opening up dialogue and establishing common ground between analysts and organizational actors about the nature of some domain of sociotechnical action. Common ground is the mass of knowledge, beliefs, and suppositions that participants in some discourse believe that they share with one another. The purpose of such discourse is typically to advance, accumulate, or update such common ground [ Citation 27 ]. This approach appears compatible with the idea of open business model innovation [ Citation 33 ]. We have used pattern comics as an intermediate and user-centric representation in business modeling. Pattern comics lie somewhere between formal specification approaches such as BPMN (Business Process Model and Notation) for process modeling [ Citation 96 ] and informal specification approaches such as a written description.
It is possible to envisage pattern comics being used for business modeling in different ways (see Table 1 ). In terms of layers of sociotechnical organization, patterns of articulation, communication, and coordination as forms of action can be drawn as comics. Such comics may be similar to scenarios comprising documented, observed action of routines in practice. They may also be abstractions—narratives of routines in principle. But pattern comics can also be used as tools for design—as ways of suggesting the form of envisaged (as-if) sociotechnical action. Pattern comics might also be useful as tools of strategic implementation. Abstractions contained within a pattern comic might offer potential as a resource in change management intervention (to-be).
Consider the domain of online grocery—particularly the customer-side or customer-chain events relevant to the business models adopted by food retailers. The account given here is built from a case database [ Citation 106 ] of literature comprising documentation published both by food retailers themselves and consultancies dealing with food retail. All the supermarket chains in the UK operate a traditional model of supermarket retail designed to manage the flow of physical goods from suppliers to customers. This involves maintaining a large floor-space stocked with products. Customers travel to the supermarket, pick products from the shelves, and transport them home themselves. At present this domain uses one or more different business patterns for online grocery [ Citation 57 ]. Each pattern involves a significant departure from the “narrative” of food retail, which helps explain the clear differences between business models among online grocery retailers. Five key business patterns dominate—stock from store, stock from conventional warehouse, stock from “dark stores,” click and collect from store, and click and collect from collection points. Some grocers adopt more than one such business pattern for operating online grocery [ Citation 85 ].
Figure 3. Stock from Store as a Communication Pattern
The stock-from-store pattern was an easy business pattern to develop for Tesco as an initial “brick and mortar” company making the transition to a “click and mortar” company. Tanskanen, Yrjola, and Holmstrom [ Citation 93 ] argue that this business pattern of picking from a local store works out as the least expensive option to innovate online grocery for an existing brick-and-mortar operation. This is because it allows rapid expansion with limited investment in terms of changes to established business operating patterns such as logistics and IT infrastructure [ Citation 17 ]. However, this pattern for online grocery does suffer from problems such as customers experiencing a high level of substitutions when stock becomes unavailable in nominated supermarket stores. Conventional shoppers in supermarkets operating stock from store can also become irritated with the presence of many virtual shoppers competing with them for space to shop [ Citation 35 ].
Business motivation involves the need to document explicit reasons for business change and thus expresses the relationship between ends and means. The key advantage of the approach suggested in this article is that business change can be expressed in terms of the transition between an existing pattern and one or more envisaged business patterns. A business motivation model in this sense should clearly express the “costs” and “benefits” associated with the transition between one business pattern and another. Both cost concerns and customer dissatisfaction provided the motivation for Tesco to investigate other as-if patterns of conducting online grocery. Other motivation was to attempt to emulate the best practices of online grocers such as Ocado, which have always operated a business pattern in which groceries are delivered from conventional warehouses. In response to this competitive environment and the increasing business being done in online grocery, Tesco has invested considerable effort in advancing a new business pattern for online grocery. Tanskanen, Yrjola, and Holmstrom [ Citation 93 ] argue that as sales volume grow, picking groceries from a dedicated warehouse works out as the least expensive strategy for brick–and-mortar operators. In certain areas of the UK, Tesco as the dominant grocery retailer now delivers foodstuffs to homes from so-called dark stores. The term dark store refers fundamentally to a business pattern in which a retail outlet or distribution center operates exclusively for online shopping.
In achieving this strategic change, it is evident that Tesco effectively designed an as-if pattern in principle, which built upon some elements of its earlier stock from store pattern, as well as reusing elements of a pattern adopted by its competitors. Hence, the front-end activities in the pattern, such as creating a customer shopping list via a website and producing a sales order from this, remained the same in terms of actors and actions. The major differences clearly lie in back-end events where fulfillment of orders and delivery of orders is now done from strategically placed warehouses and transshipment points.
The idea of a business pattern suggests that we can observe common patterns of sociotechnical organization across different organizations or their parts. In this sense, the idea of a business pattern has resonance with the idea of best practice and process benchmarking [ Citation 90 ]. For example, recently many online grocers have started to operate a modified business pattern (generally referred to as click and collect) in which customers order a list of groceries to be collected from a nominated supermarket store. This emulates a business pattern that is being offered across other areas of online retail [ Citation 21 ] and appears to be one example of what Weill and Vitale [ Citation 103 ] refer to as the second wave of digital business. In this second wave, existing firms evolve digital business models that attempt to combine “the best of place and space,” while breaking down barriers between traditional categories of digital business such as B2C and B2B.
The key motivation for moving to a “click-and-collect” pattern for grocery retailers here is that they can reduce delivery costs. It also serves to address some of the difficulties involved in online orders tending to clump at the beginning and end of the working week [ Citation 35 ]. But the motivation also includes improving value for customers in that they can access given products at a time and place of their choosing rather than wait at home for delivery of groceries. From what is known of the ways in which online grocers operate it is evident that these organizations share a core set of actions in terms of this business pattern in principle. A click-and-collect pattern also shares sequences of action with both a stock-from-store pattern and a stock-from-warehouse or stock-from-dark-store pattern. It should therefore be possible to use pattern comics as a way of being more precise about the taxonomy of business models in current use within a delimited domain of digital business. The taxonomy of online grocery, for instance, might be developed inductively [ Citation 34 ] from a close analysis of pattern differences. But taxonomy may also be used as a design tool—as a way of considering possible options using as-if business models to populate the design space for strategy making.
Certain problems exist in attempts to turn the orienting principle of a sociotechnical system view into a coherent way of understanding and engaging with organizational action and change. First, in attempting to analyze and design sociotechnical systems, due and equal justice must be given to both work (social) systems and technology (technical) systems. Second, the ways in which work and technology entangle in practice should be evident in any representations we make of such systems. Third, the narrative of such systems should be evident from such representation. Finally, both actors and action should be explicit in any such narrative.
Traditionally, approaches to analysis and design of sociotechnical organization privilege either the technical system or the work system [ Citation 71 ]. Hence, most process modeling approaches focus on documenting the workings of technical systems [ Citation 66 ], while approaches such as value-stream-mapping or Kanban [ Citation 5 ] tend to emphasize the design of work systems. There have been attempts to provide a more balanced accounting of the two domains of system. Mumford’s ETHICS [ Citation 69 ], for instance, proposes the parallel conduct of two streams of analysis and design: one directed at proposing the most effective technical system for some problem situation; the other proposing the most effective work system for the same situation. Checkland’s [ Citation 25 ] soft system methodology adopts a similar orientation of attempting to conceptually model soft (work) systems as well as hard (technical) systems. However, a significant problem remains with such approaches, namely, that a further explicit, and frequently uncomfortable, stage is required to meld the chosen work system with the most appropriate technical system.
The idea of narrative has had limited influence in design science. The idea of a scenario [ Citation 23 ] as used in human–computer interaction (HCI) has some similarity with that of narrative used here. Use cases are also frequently described as stories or user stories in UML [ Citation 86 ]. Williams [ Citation 104 ] refers to rich pictures as cartoon-style diagrams of some challenging situation. He proposes rich pictures as symbol systems useful in management consulting for surfacing the organizational unconscious. Monk and Howard [ Citation 65 ] see rich pictures as particularly useful in participatory design and lightweight usability engineering. This explains why rich pictures have potential as a way of visualizing key actors (stakeholders), issues, and perspectives relevant to some business pattern and why they might provide some focus to the process of forming an initial set of pattern comics. However, we feel that pattern comics provide much more range than other techniques familiar from within soft system methodology (SSM) such as conceptual models. Conceptual models in SSM overlap in some ways with pattern comics but are particularly limited in the ways in which they differentiate both actors and action.
As “activity models” business processes appear to have a surface similarity with business patterns. Melao and Pidd [ Citation 64 ] argue that there are four different viewpoints on the nature of a business process, which influence approaches in areas such as process modeling and mapping. Two of these viewpoints are similar to the metaphors of organization employed by Morgan [ Citation 67 ]—that of thinking of business processes as deterministic machines and complex dynamic systems. A third viewpoint introduces clearer notions of control into the concept of a business process and thinks of it in terms of interacting feedback loops. The fourth viewpoint has particularly influenced the work discussed here. This views a business process as a social construct. It is in this sense that we have exploited lessons from a cognate literature within organization science to build a conception of a business pattern founded in the nature of organizational routines. However, we have extended the notion of both actors and action familiar in constructive definitions of the organizational routine to include the performativity of machines and artifacts.
The notion of a business process is clearly an attempt to apply this systemic idea of defined transformations to that of organization. In its most deterministic guise an organization is considered as a series of operational processes that are regulated by one or more control processes. As a complex, dynamic, or adaptive system an organization is considered an open system in which inputs from the environment of the organization are transformed into outputs that are returned to this environment [ Citation 37 ]. However, the small amount of literature that critiques the idea of a business process tends to support many of the lessons underlying our construct of a business pattern. Buchanan [ Citation 18 ], for instance, found in his attempt to apply a process orientation to the scheduling of patients in acute hospitals that visualizing “processes” through techniques such as process mapping was only effective when conducted with staff participation and with the aim of fostering cross-functional awareness and understanding. Lindsay, Downs, and Lunn [ Citation 59 ] critique the dominant “machine” view of a business process and support the idea of thinking through the practice of process modeling in terms of a social constructivist viewpoint.
This suggests that the process idea adopted in the literature of both business processes and process modeling is limited and limiting, particularly as a conception of sociotechnical organization, for a number of reasons. At a high level, the concept of a business process is deficient as a design theory for modeling sociotechnical systems, mainly because, like many methods mentioned, it tends to conflate the social with the technical. The idea of a business process typically abstracts out any notion of actors taking action. On the process model, both actors and their action is reified as the “mechanical” transformation of various forms of “stuff.” Processes are treated as black boxes that transform stuff such as physical or tangible things or immaterial or intangible things. The transformation of stuff is also not elaborated in terms of the differences it makes for action. Hence, it is particularly unclear how flows of data relate to flows of physical material. On a process model, flows of tangible or intangible “stuff” serve to connect sequences of black boxes and different routes through the flow are enacted through abstract decision points that select between alternative sequences of flows and transformations. In this form of representation, decision strategies are thus divorced from notions of specific actors making specific decisions.
In service design [ Citation 55 , Citation 92 , Citation 98 ], various techniques are used as attempts to augment or enrich process models. These include journey maps, empathy maps, and customer life-cycle mapping. While some of these techniques attempt to introduce and represent ideas of actors making sense of organizing through action in various ways, most fall short of encompassing the range of features described for a pattern comic. For instance, journey maps or customer life-cycle maps typically provide the narrative of action from only one actor’s perspective. They also fail to distinguish between different types of action important to the actor’s experience of organization.
In this study we have attempted to rise to a number of the challenges set for business model research by Pateli and Giaglis [ Citation 77 ] as it pertains to digital business: to clarify the essence of a business model and how it relates to other business concepts such as business strategy; to develop better business model ontologies; to provide better means of visualizing business models; to propose better ways of developing new business models and implementing change.
The article has described an innovative way of thinking about and engaging with business models as patterns. A business pattern refers to a coherent and repeating sequence of action involving humans, machines (including IT systems), and artifacts appropriate to some way of organizing. The study also described a way of visualizing either existing business patterns or envisaged business patterns through the design artifact of pattern comics. A pattern comic is a visualization that can be used to provide a narrative model of some business pattern in principle or in practice.
The article began with a distillation of five key lessons gleaned from the literature on business models. Business models are models in the sense of comprising abstractions of bounded areas of institutional reality. Business models are narratives in that they act as representations of how institutions either currently work or as how we would like them to work. Business models are not motivation models. A business model expresses the essence of the logic of some way of organizing. In contrast, a motivation model expresses how such logic meets established goals such as revenue generation or improved service delivery. Business models are activity models in that they portray the interrelationship between activities that serve to constitute some value-creating system. Finally, business models are particularly fruitful as ideal types that may be useful for reuse and benchmarking purposes.
The design theory associated with the concept of a business pattern as well as the design artifact of a pattern comic builds on these five key lessons. Therefore, business patterns and pattern comics offer defined contributions to the literature on business models. First, a business pattern expressed through pattern comics permits a clearer delineation of what a business model is and is not. In particular, it allows a clearer distinction to be drawn between business strategy, business motivation, and business model. Second, the process of building pattern comics as representations of delimited institutional domains suggests a clearer way of making sense of models of “business” (organizing) either as currently conceived (as-is) or in terms of envisaged models (as-if). This allows a clearer expression of business motivation in terms of transitions between as-is and as-if business patterns as well as a clearer expression of business strategy in the choice and implementation of to-be business patterns. As Chesbrough intimates, “by providing depictions of both current and prospective business models, managers can quickly surmise many of the likely implications of making such a change” [ Citation 26 , p. 361].
There are clearly many areas of further work. First, Peffers et al. [ Citation 78 ] suggest a model for design science research (DSR) having the following key stages: identifying problem and motivation; defining objectives and solution; detailing design and development; demonstrating applicability in use; evaluating outcomes; and communicating lessons. Clearly the work described in this study only addresses the first three stages of this DSR model in any real depth. We have demonstrated some of the limitations of current approaches to business modeling for sociotechnical purposes and gleaned some of the parameters needed for a more satisfactory approach to digital business modeling. We have also discussed the development of a design artifact and its basis in a well-defined theory of business patterns. Hence, there is much scope for describing application and evaluation of the approach discussed here in various settings. Although we have validated on the micro level both the design theory of a business pattern and the design artifact of pattern comics in work conducted in production [ Citation 14 ] and the supply chain [ Citation 15 ], there is a need to test the business modeling approach proposed here in more macro-level exercises. Second, although we have suggested an idea of taxonomy in the current study as a way of being clearer about the classification and instantiation of business models, there are certain practical issues of how to form this taxonomy that demand further work. For instance, it is unclear currently how to effectively operationalize the notion of generalization/specialization between business patterns. Third, we wish to explore the separation between business and motivation models further by satisfying the call of Arend [ Citation 6 ] to explore the value of the business model concept in nonprofit domains. In this vein, we are already starting to take this work further and investigate the application of business patterns to the growing area of electronic government (eGovernment), particularly the recent interest in redesigning aspects of public service delivery around digital public services. Fourth and finally, there is potential for exploring the efficacy of building some IT tool [ Citation 33 ] for the construction of pattern comics, which might help further systematize the approach suggested here.
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Business Model Generation by Alexander Osterwalder Summary and Review
posted on April 12, 2021
Life gets busy. Has Business Model Generation been sitting on your reading list? Learn the key insights now.
We’re scratching the surface here. If you don’t already have the book, order the book or get the audiobook for free to learn the juicy details.
Alexander Osterwalder’s Perspective
Alexander Osterwalder is a Swiss business theorist, author, speaker, consultant, and entrepreneur, known for his work on business modeling. Osterwalder obtained his MA in Political Science in 2000 at the University of Lausanne, where in 2004 he also obtained his PhD in Management Information Systems. He is one of the developers of the Business Model Canvas. In 2006, he founded BusinessModelDesign.com, and in 2010 he co-founded the consultancy firm Strategyzer, which has provided over 5 million people with Osterwalder’s Business Model Canvas.
Yves Pigneur’s Perspective
Yves Pigneur is a Belgian computer scientist, and Professor of Management Information Systems at the University of Lausanne since 1984. He is considered a “mastermind” among business strategists. His canvas has been used by numerous companies, including P&G, Amazon, Lockheed Martin and Tesla. Pigneur authored and co-authored a series of books and articles since the 1980s . Pigneur and Osterwalder are both considered within the world’s 50 most influential management thinkers.
Business Model Generation is a guide to the highly influential business model canvas. This canvas was co-created by 470 practitioners from 45 countries. The book features practical innovation techniques used by leading consultants and companies worldwide. It is currently used by P&G, Amazon and Tesla to improve business efficiency. The book features a highly visual, 4-color design that simplifies powerful strategic ideas and tools.
Business Model Building Blocks
A business model describes the rationale of how an organization creates, delivers, and captures value” – Alexander Osterwalder
The foundation of business models should always be what the authors call a Business Model Canvas. This canvas should provide a visual prompt for participants to focus on the crucial criteria. The aim of a business model canvas is to focus the discussion on strategic thinking rather than being distracted by small operational details. The building blocks that form this canvas make it dynamic. This means some options in certain sections will impose limits on or amplify other sections.
The authors provide nine different building blocks that every business should incorporate into their business model canvas:
- Key Partners – You can start to control more market share simply by working together with other businesses. This cooperation can lead to a superior product and better supplier links.
- Key Activities – Your company will have its own key activities that lead to profit.
- Value Propositions – These are groups of benefits which incentivize clients to work with you over your competitors. You can improve this category by innovating new products or optimizing them to fit client needs.
- Customer Relationships: Different industries and customers require different types of assistance.
- Customer Segments – Try to target specific groups of customers to gain competitive advantage in a few key areas. These groups are called customer segments.
- Key Resources – These resources can be used to gain a competitive advantage. This includes superior talent or land.
- Channels – You must develop communication channels other than advertising. Every product must be able to be scrutinized.
- Cost Structure – Your cost structure will determine your business structure. This is because your cost structure will place constraints on other parts of the business.
- Revenue Streams – The authors describe the revenue streams as the arteries of the business model. This is because they obtain income but impose certain constraints on operations.
Business Model Patterns
While reviewing your business model building blocks and the model they create you are likely to notice patterns. There will be some patterns unique to your business but there are also five patterns that are extremely common across all business sectors. The authors argue that understanding these patterns will help you to understand the synergy and tradeoffs associated with certain building blocks.
This is where an organization splits three aspects into their own discrete identities. This is most common in businesses where they are actually offering multiple different services, like telephone companies who also offer broadband. Unbundling these services will prevent decisions in one area leading to limitations for the other areas. The authors offer an example of banking to explain the importance of unbundling services:
- The bank simultaneously advises wealthy clients and sells financial instruments. The former is a long-term business.
- The bank wants to sell its financial instruments to competing banks for extra revenue. But, this could hurt their competitive position.
- There is a clash between the advisory division and the product division. The former was to offer the best advice while the latter wants to sell as much of their product as possible.
- So, to remain efficient in both arms of the business, unbundling is required.
Long tail businesses aim to diversify their products rather than focusing on one best selling. As these niche products will likely ebb and flow in popularity, it is crucial that a wide variety of products are chosen. Long tail models like this can be effective but they require these key features:
- Efficient operation
- Low inventory costs
- Access to or control of a mass market platform
An industry that has often neglected the long tail approach is book publishing. This sector would traditionally focus solely on editing, marketing, design and printing of books. They could only offer this service to a finite number of writers, so they spent lots of time and money on screening books. The authors offer the example of Lulu.com to challenge this traditional approach. They wanted to serve a large number of authors who may not have had opportunities with other book publishers. Rather than spending their resources on screening, they spent it on a platform that allowed authors to essentially do all the publishing work themselves. So, Lulu.com is not worried about finding the needle in the haystack of best sellers. They have an economy of scale whereby they have so many authors they are guaranteed some success. Lulu.com is an example of effectively combining a multi-sided platform with a long tail model.
As just explained, Lulu.com is an example of a multi-sided platform combined with a long tail model. A multi-sided platform is where two parties are brought together to deal with supply and demand on one platform. A common example of this is a marketplace. One of the limitations of a multi-sided platform is that success relies on the other sides. For example, video game consoles only will sell if they have quality games. But video game publishers will only want to design a game for that console if it has many users who will buy it.
To overcome these issues, Nintendo completely changed their approach. They stopped developing expensive systems with great graphics and aimed to meet the needs of casual players. The best example of this is the Nintendo Wii and its motion-response hardware. Although the graphics were basic, the console allowed for real world movement. Making their console cheaper also allowed them to charge royalties to game studios. This is an example of taking advantage of a multi-sided platform.
Google offers an alternative approach by combining the free model, which we will talk about next, with the multi-sided platform. Google allows users to make unlimited searches for free. Then, they make money because they produce so much user activity. This activity invites advertisers to get involved, which means Google can easily make the user searches free.
As just spoken about, the benefit of free business models is that you can create large user bases. These free products are subsidized by having other parties pay to gain access to this large user base. An alternative to this cost structure is one which is sometimes described as freemium. A company may choose to offer a wide audience through a free version of a service and then allow users to pay to receive a premium service. This small group of individuals who are willing to pay for the additional features are able to subsidize the free users.
Bait & Hook
Another business model pattern is called the bait and hook. This model uses a cheap upfront price that then provides you with consistent income generation over time. The authors use the example of Gillette’s disposable razor blades. The first razor is actually sold for a slight loss but this then entices customers to continue to purchase the razor blades which have a high margin. These margins are made high enough that they account for the initial loss and also provide profit on top of this.
The authors also outline the open business model pattern. The open approach involves openly collaborating with other organizations. For example, you might use crowdsourcing or connect with a small team of specialists. The authors offer the example of Procter & Gamble. They spend considerable amounts to connect their internal research and development teams with external collaboration groups. These groups consisted of third party researchers, tech entrepreneurs and its own retired employees.
Multiple business models (portfolio)
The final business model pattern that emerges is adopting many or all of the business models spoken about. Different business will work within different industries. So, if you have several different markets the multiple business models approach might work best for you. The authors use the example of the Swatch Group. This Swiss manufacturer of watches was previously renowned for producing luxury watches. They were pushed to move into other markets when the Japanese started creating watches at an affordable price. So, Swatch now offers luxury watches which use one business model and they use another business model to supply their budget watches.
Developing New Business Models
Choosing the business model that is best for you will rely on your ability to evaluate. You should start by putting yourself in the shoes of potential customers. Doing this is far more important than customer research, which businesses spend millions of dollars on. It is essential that you pay attention to the customer’s perspective in the product and business model design phase. An example of a company which has effectively done this is Apple. The iPod was created because Apple realized customers wanted a low-friction way of acquiring all the music they wanted. Market research may have highlighted digital media players as being popular, but it wouldn’t have helped them understand the potential for easily downloadable digital music.
The authors offer an alternative to market research with their empathy map. This map requires your business team to visually draw a large cross on a chart, which separates the page into four sections. The bottom should include what customers say and do. The right hand side should include what the customer obtains from their environment, friends and the market. The top should include what you believe your potential customers really think and feel. Finally, the left hand side should include what your potential customers are likely hearing from their peers, superiors and influencers. Each section should also be considered within the context of what the authors call pain points and desired gains. A pain point decreases your product’s likelihood of being chosen while a desired gain does the opposite. Developing this map will help you better understand who your target customers are and what motivates them.
Epicenters of Business Model Innovation
It is always important to keep in mind the factors that kickstart a transition towards a new business model. Often this factor will fall within one of four patterns that the authors call epicenters of creating model change. The four patterns and an example for each are:
- Resource-driven – Amazon web services used its existing retail infrastructure to allow cloud storage to other companies who lacked that infrastructure.
- Offer-driven – Cement maker Cemex promised to deliver poured cement within four hours of ordering instead of the industry-standard 48.
- Customer-driven – 23andMe personalized DNA testing to the mass market, when it had been previously available to only health professionals.
- Finance-driven – Xerox couldn’t sell its copying machines at a price high enough to make a profit. So it leased the machines at $95/month, with 2,000 free copies, and charged 5 cents for each extra copy over that limit.
Telling a story that illustrates how your business model solves a customer problem is a clear way to introduce listeners to the idea. Stories give you the “buy-in” needed to subsequently explain your model in detail.” – Alexander Osterwalder
You want your business team to be focused on the business-side but also have the mentality of a designer. If your team is merely following a process your business will never impact the market. One way to easily start adopting a creative mindset is to use what-if questions. These questions challenge the status quo and force you and your team to think about alternatives. A similar approach would be to use fictional storytelling to highlight potential scenarios.
One key part of adopting a creative process is encouraging team members to keep an open mind. High commitment to new ideas is like freezing the product design before it is ready. Creativity is an iterative process that relies on open minds. This is why the authors recommend introducing crude models rather than elaborate and concise ideas that will win people over instantly. These models can be sketched out on the business model canvas.
Like seeing the doctor for an annual exam, regularly assessing a business model is an important management activity that allows an organization to evaluate the health of its market position and adapt accordingly.” – Alexander Osterwalder
Business models can easily become obsolete. So, you must always be on your toes. Adopt a proactive approach where you are generating new business models all the time. This also means reviewing the existing business model should become a habit. Reviewing will help you spot potential problems before they arise and it will also improve your team’s evaluation skills. The authors suggest planning reviewing sessions to look over the business model. They recommend using the SWOT approach to systematically review the current model. SWOT stands for:
Each of the four parts of SWOT analysis should be applied to each of the nine business model blocks. One example of a company that used SWOT analysis effectively is Nestle. It improved its overall business model by focusing on channel expansion. Although they were successful through sales of Nespresso coffee and coffee machines, their model prevented them from selling to offices and restaurants. They managed to review the model and shift into this market by switching the coffee machines’ target customer base to high-income households. They then sold capsules via mail to these customers. In the 2000s, Nespresso saw an average growth rate of over 35% annually.
Final Summary and Review of Business Model Generation
Business Model Generation highlights the importance of establishing a strong business model based on several options. To choose the right one you must be willing to step into your potential customer’s shoes rather than relying on market research. Once you have found the perfect model for your business you must be willing to adapt. This model won’t work forever and requires constant reviews to ensure it is future-proof. You can also combine multiple models to help different arms of your business work independently.
We rate this book 4.3/5.
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How to cite "Business model generation" by Osterwalder and Pigneur APA citation Formatted according to the APA Publication Manual 7 th edition. Simply copy it to the References page as is. If you need more information on APA citations check out our APA citation guide or start citing with the BibguruAPA citation generator. APA
Business Model Generation is a handbook for visionaries, game changers, and challengers striving to defy outmoded business models and design tomorrow's enterprises. If your organization needs...
Business Model Generation is a handbook for visionaries, game changers, and challengers striving to defy outmoded business models and design tomorrow's enterprises. If your organization needs to adapt to harsh new realities, but you don't yet have a strategy that will get you out in front of your competitors, you need Business Model Generation.
Business Model Generation is a handbook for visionaries, game changers, and challengers striving to defy outmoded business models and design tomorrows enterprises. If your organization needs to adapt to harsh new realities, but you dont yet have a strategy that will get you out in front of your competitors, you need Business Model Generation.
Citation Tool: Business Model Generation The correct form for the bibliographic reference element of a citation for the selected resource is shown in a variety of the most widely-accepted citation styles below. See below for information about citations and references, and how to use them. Citation for the entire book
A handbook striving to defy outmoded business models and design tomorrow's enterprises. Co-created by 470 "Business Model Canvas" practitioners from 45 countries, the book features a beautiful, highly visual, 4-color design that takes powerful strategic ideas and tools, and makes them easy to implement in your organization. It explains the most common Business Model patterns, based on concepts ...
Business Model Generation teaches you how to systematically understand, design and differentiate your business model. Order your copy now! Amazon.com Barnes & Noble BAM Provides practical tools to understand, design and implement a new business model or renovate an old one.
Business Model Generation is a handbook for visionaries, game changers, and challengers striving to defy outmoded business models and design tomorrow's enterprises. If your organization needs to adapt to harsh new realities, but you don't yet have a strategy that will get you out in front of your competitors, you need Business Model Generation.
Model Generation; Citation. Storch Rudall, Y.R. (2012), "Business Model Generation", Kybernetes, Vol. 41 No. 5/6, pp. 823-824. ... This is not only a book that describes business model generation it also tells the reader how in a very practical way they can be constructed.
Business model generation : a handbook for visionaries, game changers, and challengers Authors: Alexander Osterwalder (Author), Yves Pigneur (Author), Tim Clark (Editor, Contributor), Alan Smith Summary: Offers tools and techniques to systematically understand, design, and implement new business models and renovate and rework old models
Offers tools and techniques to systematically understand, design, and implement new business models and renovate and rework old models. Osterwalder, A., & Pigneur, Y. (2010). Business model generation: a handbook for visionaries, game changers, and challengers. Willowbrook, IL, Audio-Tech Business Book Summaries. Osterwalder, Alexander and Yves.
Osterwalder and Pigneur wrote Value Proposition Design as a sequel to Business Model Generation.Their value proposition canvas is a plug-in that complements the business model canvas, going in depth on activities such as encouraging entrepreneurs to address and tackle customer pains, gains, and jobs-to-be-done trigger questions, and designing pain relievers and gains.
Advanced Search Citation Search. Search term. Advanced Search Citation Search. Login / Register. Book Review Editor: Teresa Jurgens-Kowal. Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers by Alexander Osterwalder and Yves Pigneur. Hoboken, NJ: John Wiley & Sons, 2010. 281 + iv pages. US$34.95.
Business Model Generation. A. Osterwalder, Y. Pigneur. Published 2010. History. Few books in the business literature can truly be called breakthroughs. This may be one. Alexander Osterwalder and Yves Pigneur, professors of information technology at the University of Lausanne, have produced what may be the first book on business models written ...
The "business model" for Microsoft, for instance, was to sell software for 120 bucks a pop that cost fifty cents to manufacture … The business model of most Internet companies was to attract...
Advanced Search Citation Search. Search term. Advanced Search Citation Search. Login / Register. Journal of Product Innovation Management. Volume 29, Issue 6 p. 1099-1100. Book Review Editor: Teresa Jurgens-Kowal. Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers by Alexander Osterwalder and Yves Pigneur ...
Citations (8,022) ... The BMC approach is appropriate for identifying the most critical parts of business development, determining a reasonable strategy, and guaranteeing sustainability...
It is evident from such literature and discourse that the notion of a business model implicitly uses a framing of organization based in the idea of an open system [Citation 105]—sometimes a complex, adaptive system [Citation 89].Zott, Amit, and Massa [Citation 109] suggest that business models offer a holistic approach to understanding business.The "equifinality" characteristic of open ...
Capture a web page as it appears now for use as a trusted citation in the future. Please enter a valid web address. About; Blog; Projects; ... Business model generation : a handbook for visionaries, game changers, and challengers ... design, and implement new business models and renovate and rework old models Includes bibliographical references ...
Business Model Generation is a guide to the highly influential business model canvas. This canvas was co-created by 470 practitioners from 45 countries. The book features practical innovation techniques used by leading consultants and companies worldwide. It is currently used by P&G, Amazon and Tesla to improve business efficiency.
Business Model Generation Summary by Alexander Osterwalder is a lifeline to all visionaries, entrepreneurs, and other business enthusiasts who want to explore the market and its features. 2023 EARLY BIRD OFFER! 67%. OFF. NEW YEAR, NEW ME! 2500+ MICROBOOKS . AUDIO & TEXT . 70% OFF.