Business Model Generation

Business Model GenerationWritten byAlexander Osterwalder and Yves Pigneur2010

12/6/20141Business Model Generation (Osterwalder and Pigneur, 2010)Table of contentCanvasPatternsDesignStrategyProcessOutlookAfterword 12/6/20142Business Model Generation (Osterwalder and Pigneur, 2010)1. Canvas Definition of a business modelThe 9 building blocksThe business model canvas template 12/6/20143Business Model Generation (Osterwalder and Pigneur, 2010)1. Business Model2. Elements of a Business ModelA business model describes the rationale of how an organization creates, delivers and captures value Customer SegmentsCustomer RelationshipValue Proposition Channel Revenue Stream Key activitiesKey partners Key resources Cost structure 12/6/20144Business Model Generation (Osterwalder and Pigneur, 2010)CS. Customer segmentDifferent group of people or organizations an enterprise aims to reach and serve Segments defined by:Customer needsReachRelationships Profitability Willingness to pay

Dominant forms:Mass market (e.g. Wal-Mart)Niche market (e.g. Apple)Segmented (e.g. Microsoft Home/ Office/ Enterprise)Diversified (e.g. Amazon Cloud)Multi-sided platforms (e.g. eBay)12/6/20145Business Model Generation (Osterwalder and Pigneur, 2010)VP. Value PropositionsBundle of products and services that create value for a specific customer segmentWays of value creation:Newness Performance Customization Getting the job doneDesignBrand/ statusPrice Cost reduction (on usage)Risk reductionAccessibility Convenience/ usability 12/6/20146Business Model Generation (Osterwalder and Pigneur, 2010)CH. ChannelsHow company communicates with and reaches its customer segments to deliver value proposition Channel phases: AwarenessEvaluation PurchaseDelivery After sales

OwnPartner Direct Indirect Sales force Web salesOwn storesPartner storesWholesalers 12/6/20147Business Model Generation (Osterwalder and Pigneur, 2010)CR. Customer RelationshipsType of relationship a company establishes with specific customer segments Nature of customer relationships:Personal assistance (e.g. call centers)Dedicated personal assistance (e.g. private banking HNIs)Self-service (e.g. online banking)Automated services (e.g. customer rating/ review)Communities (e.g. PatientsLikeMe.com )Co-creation (e.g. YouTube.com)

12/6/20148Business Model Generation (Osterwalder and Pigneur, 2010)R$. Revenue StreamCash a company generates from each customer segment (transaction revenue or recurring revenue)Revenue models:Asset sales (e.g. automobiles)Usage fee (e.g. telecom)Subscription fee (e.g. gym)Lending/ renting/ leasing (e.g. car rental)Licensing (e.g. patent royalties)Brokerage fee (e.g. credit cards)Advertising (e.g. media industry)Pricing mechanisms Fixed menu pricing Dynamic pricingList price Product feature dependentCustomer segment dependentVolume dependent NegotiationYield management (e.g. airline seats)Real-time-markets Auctions 12/6/20149Business Model Generation (Osterwalder and Pigneur, 2010)KR. Key ResourcesThe most important assets required to make a business model workCategories of resources include:Physical (e.g. facilities, buildings, machines, systems, networks)Intellectual (e.g. brands, proprietary knowledge, patents and copyrights, partnerships and customer databases)Human (e.g. knowledge intensive and creative industries)Financial (e.g. cash, lines of credit, stock options)12/6/201410Business Model Generation (Osterwalder and Pigneur, 2010)KA. Key ActivitiesThe most important things a company must do to make its business model workKey business activities could include:Production Problem solving (e.g. service/ utility industries)Platform/ network (e.g. matchmaking platforms, software, etc)

12/6/201411Business Model Generation (Osterwalder and Pigneur, 2010)KP. Key PartnershipsNetwork of partners or suppliers that make the business model work Types of partnerships could be:Strategic alliance between non-competitorsCoopetition, as alliances between competitorsJoint ventures for developing new productsBuyer- supplier relationships to assure reliance supplies

General motives are:Optimization and economies of scaleReduce risk and uncertainty (e.g. Blu-ray)Acquisition of particular resources and activities

12/6/201412Business Model Generation (Osterwalder and Pigneur, 2010)C$. Cost StructureCost incurred in operating a business model Dominant cost structuresCost driven (e.g. low-price value proposition, automation, outsourcing)Value driven (e.g. premium value creation, and high degree of personalization)

Characteristics of cost structure:Fixed costs Variable costsEconomies of scaleEconomies of scope

12/6/201413Business Model Generation (Osterwalder and Pigneur, 2010)3. Business model canvas templateKey PartnersKey ActivitiesValue PropositionCustomer RelationCustomer SegmentsKey ResourcesChannelsCost StructureRevenue Streams

12/6/201414Business Model Generation (Osterwalder and Pigneur, 2010)Apple iPod/ iTunes business ModelKey PartnersRecord companiesOEMsKey ActivitiesHardware designMarketingValue PropositionSeamless music experience Customer RelationLovemarkSwitching cost Customer SegmentsMass market Key ResourcesPeopleApple brand iPod hardwareiTunes softwareContent and agreementChannelsRetail storesApple storesiTune storesApple.com Cost StructurePeopleManufacturing Marketing and sales Revenue Streams iTunes storesLarge hardware revenueSome music revenue 12/6/201415Business Model Generation (Osterwalder and Pigneur, 2010)2. PatternsUnbundling business modelsThe long tailMulti-sided platformsFree as a business model Open business models

12/6/201416Business Model Generation (Osterwalder and Pigneur, 2010)1. Unbundling business modelsEarly market entry enables charging premium prices and acquiring large market share; speed is key High cost of customer acquisition makes it imperative to gain wallet share; economics of scope are keyHigh fixed costs make large volumes essential to achieve low unit costs; economics of sale are keyBattle for talent; low barriers to entry; many small players thriveBattle for scope; rapid consolidation; a few big players dominateBattle for scale; rapid consolidation; a few big players dominateEmployee entered; coddling the create starsHighly service oriented; customer-comes-first mentalityCost focused; stresses standardization, predictability and efficiency Product InnovationCustomer Relationship Management Infrastructure Management Economics Competition Culture Examples: mobile telecom industry, private banking industry 12/6/201417Business Model Generation (Osterwalder and Pigneur, 2010)2. Long tail business models12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)18Selling less of more; large number of niche products, each of which sells relatively infrequently Moving away from only selling hit products Examples: Netflix, eBay, YouTube, Facebook, Lulu.com (book publishing), Lego Factory DriversDemocratization of tools of production (e.g. movie making)Democratization of distribution (on Internet)Falling search cost of connecting supply with demand Long tail explained for music industry 12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)19

3. Multi-sided platforms12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)20Brings together two or more distinct but interdependent groups of customers. Product value by:Facilitating interactionsNetwork effect (more leads to more) Same-side effect and other-side effectOne side generates revenue, and other side is subsidized Examples: Visa, Google, eBay, Microsoft Windows SDK, Financial Times, Wii game console, Metro (free newspaper)Google business ModelKey PartnersKey ActivitiesPlatform managementManaging servicesExpanding reach Value PropositionTargeted adsFree searchMonetizing contentCustomer RelationCustomer SegmentsAdvertisersWeb surfersContent ownersKey ResourcesSearch platformChannelsCost StructurePlatform cost Revenue Streams Keyword auctionFree 12/6/201421Business Model Generation (Osterwalder and Pigneur, 2010)PSP/ Xbox versus Wii focus12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)22Key PartnersKey ActivitiesValue PropositionHigh performance consoleConsole audience Customer RelationCustomer SegmentsHardcore gamersGame developers Key ResourcesChannelsCost StructureRevenue Streams Hardware sales at a lossRoyalties from developersSony PlayStationMicrosoft XboxKey PartnersKey ActivitiesValue PropositionFamily consoleAccess to console usersCheap game development cost Customer RelationCustomer SegmentsCasual gamersGame developersKey ResourcesChannelsCost StructureRevenue Streams Profitable hardware salesRoyalties from developersNintendo Wii4. Free as a business model12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)23Non-paying customers are financed by another part of the business model or by another customer segment Examples: Metro (free paper), Flickr, Open Source, Skype, Google, Free Mobile Phones, Insurance Some models are:Advertising (one side of multi-sided platform pays)Freemium (free basic offerings, and optional premium services)Bait and hook (free or inexpensive trials)Red Hat Linux business modelKey PartnersLinux Open Source development community Key ActivitiesSoftware support servicesSoftware visioning and testingValue PropositionFree (Linux) open source based softwareContinuous upgraded, services and guaranteed software Customer RelationSelf service and direct access to engineers Customer SegmentsAdvertisersWeb surfersContent ownersKey ResourcesRed Hat (Linux) software ChannelsRedhat.comRed Hat global branches Cost StructureElements of a service company Revenue Streams Professional subscription Free software 12/6/201424Business Model Generation (Osterwalder and Pigneur, 2010)Skype business modelKey PartnersPayment providersDistribution partnersTelco partnersKey ActivitiesSoftware developmentValue PropositionFree Internet and voice callingCheap calls to phones (SkypeOut)Customer RelationMass customizedCustomer SegmentsWeb users globallyPeople who want to call phonesKey ResourcesSoftware developersSoftware ChannelsSkype.comHeadset partnershipsCost StructureSoftware developmentCompliance managementRevenue Streams SkypeOut pre-paid or subscriptionHardware sales 12/6/201425Business Model Generation (Osterwalder and Pigneur, 2010)Gillette: Bait and hook business model12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)26Key PartnersManufacturersRetailers Key ActivitiesMarketingR&DLogistics Value PropositionRazor handleBlades Customer RelationBuilt-in lock-inCustomer SegmentsCustomers Key ResourcesBrandPatents (blocking)ChannelsRetail Cost StructureMarketingManufacturingLogistics R&D Revenue Streams One time hand purchaseFrequent blade replacement 5. Open Business Models 12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)27CloserOpen The smart people in our field work with usWe need to work with smart people both inside and outside our companyTo profile from research and development, we must discover it, develop it, and ship it ourselves External R&D can create significant value; internal R&D is needed to claim some portion of that valueIn we conduct most of the best research in the industry, we will win.We dont have to originate the research to benefit from itIf we create the most or the best ideas in the industry, we will win.If we make the best use of internal and external ideas, we win.We should control our innovation process, so that competitors dont profit from our ideasWe should profit from others use of our innovations, and we should buy others intellectual property whenever it advances our own interest Principles of innovationOutside-in versus inside-out approaches12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)28Key PartnersOther companys IPExternal scientists Retires scientists Key ActivitiesInternal R&DKey ResourcesInternal R&DCost StructureLeveraging internal R&DValue PropositionIP for underserved diseasesCustomer RelationAcquisition Retention Customer SegmentsOutside researchers ChannelsPatent pools Revenue Streams License fee Procter & Gamble: Connect and Develop GlaxoSmithKline: Patent Pools InnoCentive 12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)29Key PartnersMajor seekersKey ActivitiesPlatform managementAcquire solvers and seekers Value PropositionAccess to broad network of scientist solversConnect seekers and solversAccess to scientific challenges with cash rewards Customer RelationOnline profilesCustomer SegmentsSeekers (company)Solvers (scientists)Key ResourcesBrandPatents (blocking)ChannelsInnocentive.com Cost StructurePlatform management Acquisition of solvers and seekers Revenue Streams Free access to challenges Fee to list challenges Commission on rewards for solutions3. DesignCustomer insightsIdeationVisual thinkingPrototyping Storytelling Scenarios

12/6/201430Business Model Generation (Osterwalder and Pigneur, 2010)1. Customer insights 12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)31If I had asked my customers what they wanted, they would have told me a faster horse.- Henry FordEmpathy MapWhat does the customer SEE?What does the customer HEAR?What does the customer SAY and DO?What does the customer THINK and FEEL?PAINGAIN2. Ideation 12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)32A creative process for generating a large number of (business model) ideas and successfully isolating the best ones.

Generation Synthesis Suggested approaches:Epicenters of Business Model InnovationWhat if? Analysis

Epicenters of Business Model Innovation12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)33Resource- driven Offer- driven Customer- drivenFinance- drivenExample: Amazon Web Services Example: Cemex (Mexican cement company)Example: 23andMe (personalized DNA testing)Example: Xerox 914 (lease at $95 per month, 2000 free copies, 5 cents per copyPower of what if questions 12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)34ExamplesIKEA (buyers pick up components in flat packaging and assemble themselves)Rolls-Royce (maintenance price for every hour an engine runs)Skype (free voice calling over Internet)Car2go by Daimler (car rental anywhere in the city)Zopa (peer-to-peer landing system)Grameen Phone (microfinance coupled with mobile devices)Ideation Process12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)35General approachTeam composition (diverse at all levels)Immersion (home work on customer, technology, trends, business models)Expanding (ideation with a focus on quantity, not quality)Criteria selection (e.g. implementation time, revenue potential, possible customer resistance, and impact on competitive advantage)Prototyping (creation of a business model for shortlisted ideas)Brainstorming rulesStay focused on a well honed statement Enforce rules, such as deferring judgment, go for quality, encourage wild ideas, etc. Think visually with post-it notes, sketches, etc.Prepare, with an immersion exercise beforehand 3. Visual Thinking12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)36Sketches- however rudimentary or amateurish- help people better describe, discuss, and understand issues. Suggested processesVisualizing with Post-it notesVisualizing with drawings Understand the essenceEnhance dialogueExplore ideasImprove communication Telling a visual story 4. Prototyping 12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)37For pre-implementation visualization and testingTool of inquiryInfuses a design attitude, which includesWillingness to explore crude ideasRapidly discarding themTake time to examine multiple possibilitiesAccept uncertainty until design direction matures Scale of prototypesNapkin sketches elaborate canvas business case field-test

5. Storytelling 12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)38Why storytelling?Introducing the new (provoke ideas/ justify change/ introducing tangibility)Pitching to inventors (for clarification)Engaging employees

Typical starting points (choice of protagonist)Company perspective (employee observer)Customer perspective (customer jobs)Techniques:Talk and imageVideo clipsRole playText and imageComic strip 6. Scenarios12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)39Types of scenariosDefine different customer settingsHow products or services are usedWhat kind of customers use themCustomer concerns, desires and objectivesPossible future environments

4. StrategyBusiness model environmentEvaluating business modelsBusiness model perspectives on Blue Ocean StrategyManaging multiple business models12/6/201440Business Model Generation (Osterwalder and Pigneur, 2010)1. Business Model Environments 12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)41Industry forcesSuppliers and other value chain actorsStakeholdersCompetitors (incumbents)New entrants (insurgents)Substitute products and servicesKey trendsRegulatory trendsTechnology trendsSocietal and cultural trendsSocioeconomic trendsMacro-economic factorsGlobal market conditionsCapital marketsEconomic infrastructureCommodities and other resources Market forcesMarket segmentsNeeds and demandsMarket issuesSwitching costRevenue attractiveness 2. Evaluating business models12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)42Big picture assessmentHappens on the business model Identification of +/ - for each of the nine elements of business modelSWOT analysis (Strength- Weakness- Opportunity- Threat)Value proposition assessmentCost/ revenue assessmentInfrastructure assessmentCustomer interface assessment

SWOT analysis (indicative questions)1/412/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)43Value proposition assessmentOur value propositions are well aligned with customer needsOur value propositions have strong network effectThere are strong synergies between our products and servicesOur customers are very satisfiedSWOT analysis (indicative questions) 2/412/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)44Cost/ revenue assessmentWe benefit from strong marginsOur revenues are predictableWe have recurring revenue streams and frequent repeat purchasesOur revenue streams are diversifiedOur revenue streams are sustainable We collect revenue before we incur expensesWe charge for what customers are really willing to pay forOur pricing mechanisms capture full willingness to pay Our costs are predictableOur cost structure is correctly matched to our business modelOur operations are cost-efficient We benefit from economies of scale

SWOT analysis (indicative questions) 3/412/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)45Infrastructure assessment Our key resources are difficult for competitors to replicateRecourse needs are predictableWe deploy key resources in the right amount at the right timeWe efficiently execute key activitiesOur key activities are difficult to copyExecution quality is highBalance of in-house versus outsourced execution is idealWe are focused and work with partners when necessaryWe enjoy good working relationships with key partners SWOT analysis (indicative questions) 4/412/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)46Customer interface assessment Customer churn rates are lowCustomer base is well segmentedWe are continuously acquiring new customersOur channel are very efficientOut channels are very effectiveChannel reach is strong among customersCustomers can easily see our channelsChannels are strongly integratedChannels provide economies of scopeChannels are well matched to customer segmentsStrong customer relationshipsRelationship quality correctly matches customer segmentsRelationships bind customers through high switching costsOur brand is strong SWOT- Assessing threats 1/212/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)47Value proposition threatsAre substitute products and services available?Are competitors threatening to offer batter price or value?

Cost/ revenue threatsAre our margins threatened by competitors? By technology?Do we depend exclusively on one or more revenue streams?Which revenue streams are likely to disappear in the future?Which costs threaten to become unpredictable?Which costs threaten to grow more quickly than the revenues they support?SWOT- Assessing threats 2/212/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)48Infrastructure threatsCould we face a disruption in the supply of certain resources?Is the quality of our resources threatened in any way?What key activities might be disrupted?Is the quality of our activities threatened in any way?Are we in danged of losing any partners?Might our partners collaborate with competitors?Are we too dependent on certain partners?

Customer interface threatsCould our market be saturated soon?Are competitors threatening our market share?How likely are customers to defect?How quickly will competition in our market intensify?Do competitors threaten our channels?Are our channels in danged of becoming irrelevant to customers?Are any of our customer relationships in danger of deterioration? SWOT- Assessing opportunities 1/212/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)49Value proposition opportunitiesCould we generate recurring revenues by converting products into services?Could we better integrate our products or services?Which additional customer needs could we satisfy?What complements to or extensions of our value propositions are possible?What other jobs could we do on behalf of customers?Cost/ revenue opportunitiesCan we replace one-time transaction revenues with recurring revenues?What other elements would customers be willing to pay for?Do we have cross-selling opportunities either internally or with partners?What other revenue streams could we add or create?Can we increase price?Where can we reduce cost?SWOT- Assessing threats 2/2-a12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)50Infrastructure opportunitiesCould we use less costly resources to achieve the same result?Which key resources could be better sourced from partners?Which key resources are under-exploited?Do we have unused intellectual property of value to others?Could we standardize some key activities?How could we improve efficiency in general?Would IT support boost efficiency?

Are there outsourcing opportunities?Could greater collaboration with partners help us focus on our core business?Are there cross-selling opportunities with partners?Could partner channels help us better reach customers?Could partner complement our value proposition?SWOT- Assessing threats 2/2-b12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)51Customer interface opportunitiesHow can we benefit from a growing market?Could we serve new customer segments?Could we better serve our customers through finer segmentation?How could we improve channel efficiency or effectiveness?Could we integrate our channels better?Could we find new complementary partner channels?

Could we increase margins by directly serving customers?Could we better align channels with customer segments?Is there potential to improve customer follow-up?How could we tighten our relationships with customers?Could we improve personalization?How could we increase switching cost?Have we identified and fired unprofitable customers? If not, why not?Do we need to automate some relationships? 3. Business model perspectives on Blue Ocean Strategy12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)52Four action framework (ERRC Grid)Which of the factors that the industry takes for granted should be eliminated?Which factors should be reduced well below the industry standards?Which factors should be raised well above the industry standards?Which factors should be created that the industry has never offered?KPKAVPCRCSKRCHC$R$Cost Side Value Side Eliminate/ Reduce Raise/ Create4. Managing multiple business models12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)53Choices of business model in bringing an idea to the marketIntegration (e.g. integration of each SMH (Swatch Group) watch brand across the high, mid and low segments)Autonomy (e.g. Car2go care rental startup from Daimler?)Separation (e.g. complete independence of Nespresso SA from Nescafe)5. Process Starting pointFive phases12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)541. Starting point12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)55Objectives of new business modelsSatisfy markets (e.g. Tata Nano, NetJets, GrameenBank, Lulu.com)Bring new product to market (e.g. Xerox 914, Swatch, Nespresso, Red Hat)Improve market (e.g. Dell, Nintendo Wii, IKEA, Bharati Airtel, Skype, Ryan air, Amazon.com, Better Place)Create market (e.g. Diners Club, Google)2. Five phases12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)56Phases areMobilize (setting the stage)Understand (immersion)Design (inquiry)Implement (execution), and Manage (evolution)6. Outlook Business models beyond profitComputer aided business models Business model and business planImplementation issuesLeveraging IT12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)571. Beyond-profit business models12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)58CategoriesThird-party funded enterprise modelsTriple bottom line business models KPGrameen BankNetwork Consortium (Telenor)KAManage network VPIncome opportunityMobile commnCRCSVillage phone ladiesVillagers KRCHGrameen BankVillage phone ladies C$Network R$Communication income Grameenphone 2. Computer aided 12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)59There are a host of computer application useful for mind mapping, scenario generation, large data analysis, trend spotting, etc, that could complement paper-based approaches3. Business plans12/6/2014Business Model Generation (Osterwalder and Pigneur, 2010)60Executive summaryThe teamManagement profileWhy we are a winning teamThe business modelVision, mission and valuesHow our business models worksValue propositionTarget marketMarketing planKey resources and activities Financial analysisBreakeven analysisSales scenarios and projectionsCapital spendingOperating costsFunding requirements External environmentThe economyMarket analysis and key trendsCompetitor analysisCompetitive advantage of our business modelImplementation roadmapProjectsMilestonesRoadmapRisk analysisLimiting factors and obstaclesCritical success factorsSpecific risks and countermeasuresConclusionAnnexes