The Model Business
The art of (re) establishing your business model is about changing the rules and adapting to the harsh (or antiquated) realities of doing business today. So, how’s your strategy going?
What if Alexander Osterwalder is right? What if you could sketch out your company’s future on a canvas and strategically redirect its fortunes with nothing more than a large whiteboard and some sticky notes? What if this seemingly simple method of helping transform your business model was as easy as that?
A business model describes the rationale of how an organization creates, delivers and captures value.
– Definition of a Business Model
Osterwalder, the best selling author, advisor and highly sought after lecturer, believes it is that simple – sort of. In his groundbreaking book, the “Business Model Generation,” Osterwalder takes the art of the business model to a whole new level, challenging today’s entrepreneurial leaders to rethink the way they create value, build new businesses and transform their organizations.
But to fully understand Osterwalder’s ideals, you must start from the beginning.
Osterwalder’s concept is rooted in a Ph.D. dissertation he completed on business model innovation with Professor Yves Pigneur at HEC in Lausanne, Switzerland. In 2006, his concept, the crux of which was defined in a must-read blog, began being applied around the world in companies such as 3M, Deloitte, Ericsson and Telenor. And then one day, during a workshop in the Netherlands, Business Model Inc. founder Patrick van der Pijl asked the question: “Why is there no book accompanying the method?”
The question spurred Osterwalder and Pigneur into action. But the last thing they wanted to do was publish a book on business models in a market flooded with books on business models. So they tried a different approach. Ditching the traditional publishing route, they launched a hub. The online platform would not only enable them to share their writings, but it also would allow them to seek input from followers who would pay a membership fee (ranging from $24 per month in the beginning, to $243, which helped keep the site exclusive). The innovative approach worked. The fees helped finance the production of the book, while the forums provided invaluable insight on business model innovations from some 470 practitioners in 45 countries around the world.
The “Business Model Generation” encourages business owners to plot out their business models using, what Osterwalder calls, the “business model canvas.” The strategy forces entrepreneurs to communicate their business model visually, allowing them to get what’s in their heads onto a canvas for others to see and contribute to. “Once your vision has been exported from your head onto a canvas your employees helped to create, you’ll have a business that can grow without you calling all the shots – which is the essence of a sellable company,” he says.
Osterwalder believes that a successful business model can best be described through nine basic building blocks that show the logic of how a company intends to make money. The building blocks cover the four main areas of how any business makes money: customers, offer, infrastructure and financial viability. The business model is like a blueprint for a strategy to be implemented through organizational structures, processes and systems. The tool resembles a painter’s canvas that enables you to paint pictures of new or existing business models.
In an economic climate defined by how your company responds to change, the “Business Model Generation” lends credence to the theory that the key to a company’s success is rooted in business model innovation, not technical innovation. “Technology innovation (product innovation) is always going to be important,” Osterwalder says. “But in many cases, it’s not technology or product innovation that gives you an advantage, it’s business model innovation.”
Take Apple, which in 2001 launched its iconic iPod portable media player. Working in conjunction with its iTunes software, the device enables users to transfer music and other content from the iPod to a computer. But Apple wasn’t the first to hit the portable media player market. Others such as Diamond Multimedia and its Rio brand were there initially.
Apple’s advantage was its business model, Osterwalder maintains. Its strategy offers a seamless music experience by combining its distinctively designed iPod devices with iTunes software (more than 40,000 developers and 400,000 applications and counting) and the iTunes online store (easily searchable and accessible digital music). Part of Apple’s business model also included a number of deals with major record companies, creating one of the world’s largest online music libraries.
“What Apple showed us is that business model innovation gives you a longer competitive advantage than just product or technology,” Osterwalder says. “Technology in and of itself is just a technology. It’s how you apply it. Product technology can lead to, five, 10, 30 different business models. The challenge is to think through alternative business models to see which ones are the most suitable. Technology innovation in itself isn’t losing its relevance; it’s just not as sufficient anymore.”
When Gina Testa looks at the evolution of today’s printers, she can firmly say that a company’s decision to transform its business model is what will continue to keep the industry relevant going forward. As the Vice President, Graphic Communications, Xerox Corporation, she has seen how product offerings – and, in effect, business models – were dictated by the type of technology a company used.
Today, most of the growth graphic communications companies are experiencing comes from selling value-added services that generally include print as one of several deliverables. “Print as a stand-alone product is no longer a growth engine,” Testa says. “In making this transition, graphic communications is aligning with the global economy, which is based largely upon services.”
While having the right technology remains critical, today’s market differentiators and opportunities for growth come from applying a flexible set of services to the task of solving a customer’s business problems, not from offering a rigid set of product-based services. “So, a high-capacity offset press might still be the right solution for printing a large quantity of a particular book or marketing collateral piece,” Testa says. “[But other times] printing is part of an overall communications solution consisting of print and related services that can be tailored to meet a customer’s precise needs. The companies that succeed need a more services-oriented business model that can be adjusted to optimize each application and, potentially each customer’s application.”
Surveys regularly show that businesses of all sizes pay less attention than they should to business planning and business models. Small and medium-sized businesses can be especially burdened, as they typically run lean and have limited resources for addressing issues outside of day-to-day operations.
Enter Xerox, which has been a leader in providing business development resources and services designed to help graphic communications companies of all sizes focus on developing optimal business models. “The process of designing a model begins with a plan that addresses the business’s challenges and opportunities, and establishes measureable goals and a path to achieve them moving forward,” Testa says. “This exercise should help guide entrepreneurs and small businesses to the type of business model they need to achieve their goals.”
For companies that might not have made the transformation and/or re-evaluated their business models, Testa says it’s not too late. “We get asked this question all the time. The first step is to sit down and take that deep dive analysis – ‘Where is your business today? Where is all the revenue coming from? What are your core competencies?’ You have to do a true SWAT analysis on strengths, weaknesses, opportunities and threats. Next, you have to make a decision with your leadership team on where your company’s future lies. Without a plan, you’re just floundering.”
After a decision is made, Testa recommends mapping out a strategy that details where you want the company to be over the next three months, six months, twelve months, etc. “You don’t have to do this alone,” she says. “Look for strategic partnerships. We establish partnerships at Xerox on both ends of the spectrum (in software applications and on the back end in areas such as inline finishing equipment). No one company can afford it all.”
As for the printing industry, the product is just one small piece of the equation. The solutions are the key. “That’s the direction today’s business models are following,” Testa says. “Everybody can print. You need to talk the language of your customer. You need to be solving their problems, not producing something for the sake of selling it. For some, that’s the hardest thing to come to grips with. We [Xerox] have been on the transformation trail for 10 years now. It’s something we work at every day.”
As the scope of the economic landscape continues to change, the winners will be those who can adjust to changes in their respective markets. “You can’t predict the future,” Osterwalder says. “What we see in a lot of industries is that a lot of disruptors are succeeding, and in some industries, replacing the incumbents.”
Osterwalder says that existing companies are finding better ways to deal with innovation, a sign that start-ups won’t be the only ones creating new business models. “You hear the folks in Silicone Valley say that everything will come from start ups. But I think large companies have some strengths. They just haven’t found out how to overcome their weaknesses yet. But they will learn how to deal with this.”
Innovation for new business models can come from anywhere. As an example, Osterwalder cites the story of Xerox’s foray into photocopiers. Chester Carlson, a patent attorney, and part-time researcher and inventor, created the technology that enabled a company to photocopy 2,000 copies per day in a time when machines could only generate between 15 and 30 copies per day.
But after sitting down with its consultants, the consensus was that the machine was too expensive to sell. Xerox didn’t listen to the consultants. But that’s not the lesson, Osterwalder says. Xerox went back to the drawing board and invented a new business model that would commercialize the machine. If nobody was going to buy it, they were going to lease it for $95 a month. As part of the lease, the company could make 2,000 copies per month at no charge. Anything over that would cost them a few cents a copy.
And then something revolutionary happened. Companies started making 2,000 copies a day. And as those extra copies started to add up, the market was transformed. “Xerox couldn’t look at what the competition was doing,” Osterwalder says. “A company’s first inclination is to be better than the competition. But there wasn’t any competition. So they went a step further. They invented a new business model.”
Osterwalder says this type of behavior will become the norm rather than the exception today. “There will be barriers that will force a company to go beyond product innovation. They will have to eliminate those barriers. They will have to rethink their business models. It won’t be about beating the competition. It will be about changing the landscape.”