Saturday, April 25, 2009

The Business Model Canvas - A Powerful Tool

Alex Osterwalder, an author, speaker and consultant on business model innovation has developed a powerful tool to describe business models in a structured, simplified and understandable way. This was, together with an overview and synthesis of existing literature about business models, perhaps the main contribution with his dissertation on business models in 2004. It is also the basis for the beautiful book he is currently finalizing on the subject.

Creating a common understanding
A very valid point Osterwalder makes, that also Linder and Cantrall made in 2000, when discussing the confusion related to the concept of business models, is that many people speak about business models when they only mean parts of a business model. By having a common understanding, and a visual representation, the users of the canvas can easily separate what parts are being discussed and relate it to the overall picture.

9 elements mentioned by at least two other authors
There are many different opinions among business practitioners and academics on how to define the term business model and what elements to include. Osterwalder's business model canvas is a very good attempt to compile the different existing models and he describes the different elements that he believes should be included in detail in his dissertation. He constructed his nine elements of the business model from the different business model building blocks that had been mentioned by at least two other authors prior to his work. The result is a business model canvas with 9 different business model elements.

Business model design template: Nine building blocks and their relationships, Osterwalder 2004

Visual thinking
What makes the business model canvas a really powerful tool is that it gives a simplified overview and helps people visualize and communicate their ideas. In his workshops Osterwalder often puts the canvas on the wall and have his participants draw their own business model.

My take on the business model canvas
I sometimes get the question how I relate to Osterwalders's business model canvas and what I think of it. And the answer to that is that I find the canvas very helpful and a powerful tool to discuss most business models. I often use it, explicitly or implicitly, to get a quick and structured picture of a business model.

However, businesses, due to the development in ICT, increasingly work in partnerships, offer joint value propositions, use standardization, offer platforms for others to build applications on, build multi-channel and multi-owned distribution networks, profit from diversified and shared revenue streams etc. This increased complexity, with value chains replaced by complex value networks, has made me believe that value propositions can not only be directed towards customers but to partners, suppliers, communities, etc. Why should they collaborate with you? What are their needs? What do you bring to the table? Read more about value propositions here

Also, with my background as a management consultant in IA/IP strategies, I often see and design business models where the control mechanisms for sustainability are crucial to understand the business model. A simplified version is the razor-and-blade model: without patents someone else would provide the blade for much lower price destroying the business model. A complex version is the positioning of technology and IP portfolios in collaborative R&D and standardization activities. And the use of control mechanisms is not only towards customers, but towards suppliers, partners, competitors etc. Read more about control mechanisms here

Also, as with the element “customer relationships” I would perhaps include a “partner relationships” as it can vary from loose supplier relationships to strategic alliances, joint ventures etc.

Finally I often find it useful to turn the model around starting with the customer or stakeholder far to the left and ask "who could we potentially provide value for?, what are their needs?" then look at what internal and external assets and capabilities that could be used, combined or developed into value propositions.

It’s a great tool and for those of you interested to know more check out the book chunk project.

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