{"id":51426,"date":"2021-10-10T08:15:00","date_gmt":"2021-10-10T12:15:00","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=51426"},"modified":"2021-10-18T13:28:20","modified_gmt":"2021-10-18T17:28:20","slug":"business-model-generation-osterwalder","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/business-model-generation-osterwalder\/","title":{"rendered":"Business Model Generation by Osterwalder & Pigneur"},"content":{"rendered":"\n

What is Osterwalder and Pigneur’s Business Model Generation<\/em> about? What are the nine elements that make up a business model?<\/p>\n\n\n\n

Business Model Generation<\/em> by innovation experts Alexander Osterwalder and Yves Pigneur is a contemporary guide to systematic business innovation. The authors provide a template for brainstorming<\/a> and visualizing the overarching elements that make up a successful, holistic business model.\u00a0In addition, they provide techniques you can use to generate your own innovative business models, as well as strategies you can incorporate to regularly analyze and optimize your existing business models.<\/p>\n\n\n\n

Below is a brief overview of the key points.<\/p>\n\n\n\n\n\n\n\n

Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers<\/em><\/h2>\n\n\n\n

In Business Model Generation<\/em>, Osterwalder and Pigneur outline the different ways you can combine nine different elements to create the most successful business<\/a> model patterns. In addition, they provide techniques you can use to generate your own innovative business models, as well as strategies you can incorporate to regularly analyze and optimize your existing business models.<\/p>\n\n\n\n

The Business Model <\/strong>Canvas<\/h3>\n\n\n\n

Osterwalder and Pigneur developed a flexible template, which they refer to as the \u201cBusiness Model Canvas<\/a>,\u201d to help you understand and focus on the nine overarching elements that they believe make up any successful business model. The template offers a visual framework to describe, assess, update, or design business models. You can use it to analyze the strategies of your competitors, to evaluate or to create new strategies for your existing business, or to design an entirely new business.<\/p>\n\n\n\n

(Shortform note: The Lean Canvas<\/a> is a popular adaptation of the Business Model Canvas. Developed by Ash Maurya, the author of Running Lean<\/em><\/a>, it\u2019s designed specifically for action-orientated start-up companies that rely on continuous experimentation to develop their products and services. Consequently, it places more emphasis on defining customer problems and identifying competitive solutions<\/a>.)<\/p>\n\n\n\n

The 9 Elements of the Business Model <\/strong>Canvas<\/h4>\n\n\n\n

Osterwalder and Pigneur encourage you to consider each of the nine elements as interdependent components that impact the effectiveness of the other elements. In other words, changes to one element can impose constraints or amplify the effects of other elements. Therefore, as you work on your business models, consider how you can leverage all of your elements to work together.<\/p>\n\n\n\n

Element 1: Define Your Customer Groups<\/h5>\n\n\n\n

Define the different groups of customers your business intends to target\u2014Osterwalder and Pigneur refer to this element as \u201cCustomer Segments.\u201d You may serve one group of customers or several groups of customers depending on the needs you intend to fulfill. <\/p>\n\n\n\n

The Four Steps to the Epiphany<\/em><\/a> by Steve Blank emphasizes the importance of identifying and validating your customer groups<\/a> before you develop your business model. The book includes a four-step customer development process<\/a> to help businesses effectively define and target customer groups.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n
Element 2: Define Your Touchpoints<\/h5>\n\n\n\n

Define your touchpoints, how you\u2019ll communicate with your customers and deliver your products and services\u2014Osterwalder and Pigneur refer to this element as \u201cChannels.\u201d For your communication, sales, and distribution, you have the option of using your own touchpoints<\/strong> (assets under your direct control such as your website or your store), or partner-owned touchpoints<\/strong> (external touchpoints that result from cooperation with marketing agencies or distribution partners), or a mix of both. In addition, the authors also make a distinction between direct touchpoints<\/strong> (communication you control such as your blog), and indirect touchpoints<\/strong> (communication you can\u2019t control such as user reviews). <\/p>\n\n\n\n

Touchpoints and Interactions (Element 3) are closely linked\u2014consider the level of interaction you want to have with your customers when defining your touchpoints.<\/p>\n\n\n\n

Businesses tend to assume that more touchpoints will lead to more customers, so they work hard to create multiple interaction points across the five stages. However, research indicates that too many touchpoints can reduce the quality of service that you deliver and damage customer experience<\/a>. Customers care more about the quality of service you provide than what touchpoints you use\u2014you\u2019re more likely to create successful channels if you prioritize the development and integration of fewer touchpoints.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n
Element 3: Define Your Interactions <\/h5>\n\n\n\n

Define the type of interactions you want to establish for each of your customer groups\u2014Osterwalder and Pigneur refer to this element as \u201cCustomer Relationships.\u201d The authors advise that you consider what your motivations are for communicating with your customers as your approach will differ depending on whether you intend to acquire new customers, retain existing customers, or upsell to existing customers. <\/p>\n\n\n\n

Brand relationship experts have identified 29 different types of interactions that customers expect from a business\u2014they use relationship metaphors such as \u201cone-night stand\u201d or \u201cmarriage\u201d to clearly define each interaction<\/a>. These experts argue that businesses can\u2019t understand or leverage customer relationships unless they collect and analyze the relationship signals their customers send. <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n
Element 4: Define Your Value Offer<\/h5>\n\n\n\n

Define how you intend to offer value to these customers\u2014Osterwalder and Pigneur refer to this element as \u201cValue Propositions.\u201d Your value offer outlines the benefits you intend to provide in the form of products and services. The authors state that successful value offers align with the needs of your customers and<\/em> differentiate themselves from existing solutions. <\/p>\n\n\n\n

Businesses often associate value creation with competition\u2014they assume that they need to offer something that outperforms and displaces what\u2019s currently on the market. However, Sesame Street<\/em>, life coaching, and Viagra all prove that it\u2019s possible to create innovative products and services without disrupting existing markets<\/a>. Instead, the businesses behind these products and services bypass competition by focusing on creating demand in entirely new marketplaces.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n
Element 5: Define Your Resources<\/h5>\n\n\n\n

Define what resources you need to create and deliver your products and services to your customer\u2014Osterwalder and Pigneur refer to this element as \u201cKey Resources.\u201d According to the authors, you can own, lease, or acquire the resources you need. All resources fall into the following categories: material, monetary, intellectual, and human.<\/p>\n\n\n\n

This method often highlights the need to acquire more resources before you can move forward with your business model. However, some businesses approach this in reverse: They use their resource limitations to inspire product and service innovations<\/a>. For example, Southwest Airlines<\/a> used its resource constraints to reposition its offering and become one of the most profitable airlines in the industry. <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n
Element 6: Define Your Network<\/h5>\n\n\n\n

Define the alliances you need to form to optimize your business model and increase market share, acquire resources, or reduce risk\u2014Osterwalder and Pigneur refer to this element as \u201cKey Partnerships.\u201d In other words, what alliances will provide you with a sustainable competitive advantage<\/a> and help you to grow quickly? <\/p>\n\n\n\n

One innovation expert compares strategic alliance relationships to marriage\u2014like marriage, many strategic alliances fail to live up to expectations. In other words, both suffer from a high failure rate. However, the expert argues that strategic alliances are more likely to succeed if businesses focus on creating strong foundations built on shared values and mutual benefits<\/a>.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n
Element 7: Define Your Critical Actions<\/h5>\n\n\n\n

Define the core actions you need to take to operate successfully and meet customer demands\u2014Osterwalder and Pigneur refer to this element as \u201cKey Activities.\u201d The authors state that your actions will fall into the following categories: production (designing, manufacturing, and delivering products), troubleshooting (finding solutions to problems), and infrastructure management (managing interactions between multiple applications and parties).<\/p>\n\n\n\n

Osterwalder and Pigneur don\u2019t provide practical advice here since different business models rely on different activities to operate successfully. Measure What Matters<\/em><\/a> provides an effective goal-setting process that you can use to define the objectives and key results<\/a> for each of your business model elements. For example, if your objective is to acquire X number of customers in each customer group, your key results could be growing platform visitors by 5% every month and increasing organic traffic by 10% every six weeks.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n
Element 8: Define Your Profit Sources<\/h5>\n\n\n\n

Define how you intend to profit from the value you provide to your customers\u2014Osterwalder and Pigneur refer to this element as \u201cRevenue Streams.\u201d The authors state that there are two types of income<\/a> streams to consider: profits from single transactions<\/strong> and profits from ongoing payments such as subscriptions<\/strong>. You may have multiple income streams for each of your customer groups. Further, each of these income streams may involve different pricing mechanisms depending on whether you choose to set a fixed or variable price<\/strong> for your products and services.<\/p>\n\n\n\n

How should you determine the price for your products and services? Many businesses determine their prices using the cost-plus method\u2014calculate the costs involved and add on a percentage (desired profit). However, experts argue that businesses need to consider how much value customers attach to their products and services before they determine their prices<\/a>. <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n
Element 9: Define Your Expenses<\/h5>\n\n\n\n

Define the expenses of operating all of the elements you\u2019ve defined in your business model\u2014Osterwalder and Pigneur refer to this element as \u201cCost Structure.\u201d Your expenses will vary depending on whether you choose to minimize costs and offer an inexpensive product or service, or if you choose to create premium-priced products and services. The authors state that your cost structures will include at least one of the following characteristics: fixed costs (salaries, rent), variable costs (costs that vary in proportion to the volume of goods or services produced), economies of scale<\/a> (bulk purchase rates lessen cost per unit), and economies of scope (a single resource or activity supports multiple operations or services).<\/p>\n\n\n\n

(Shortform note: All of your costs will also fall into the following categories: direct costs and indirect costs. Knowing the difference between these costs will help you to identify your overall business expenses<\/a>.)<\/p>\n\n\n\n

Business Model Formulas<\/strong><\/h3>\n\n\n\n

Osterwalder and Pigneur argue that the nine elements can combine into distinct patterns to create specific outcomes. To illustrate this, they present patterns they claim are common across all successful business models\u2014a single business model can include several of these patterns. Once you familiarize yourself with these patterns, you\u2019ll understand how the combination of certain elements can create dramatically different results, and you\u2019ll be better prepared to manipulate the elements to successfully position your business.<\/p>\n\n\n\n

(Shortform note: The Business Model Navigator<\/em><\/a> presents an alternative way to approach business model patterns\u2014it offers 55 patterns<\/a> that you can pick and choose from, manipulate and combine to suit your needs. This method may be more suitable for established businesses that seek to innovate existing business models.)<\/p>\n\n\n\n

Formula 1: Unbundled<\/strong><\/h4>\n\n\n\n

Unbundled businesses split up (\u201cunbundle\u201d) their operations into three distinct business categories to increase efficiency: product innovation, customer relationship management, and infrastructure management.<\/p>\n\n\n\n

Some business experts argue that businesses that offer services in one or more of these distinct categories can\u2019t operate efficiently unless they unbundle. Further, they advise that businesses should focus only on one of these categories as their core service, and outsource the rest to specialized companies<\/strong>. As long as more than one of these activities coexists on a single business model, each of the elements will include conflicting priorities<\/strong> that will create limitations or \u201ctradeoffs\u201d across the business. <\/p>\n\n\n\n

Businesses Focused on Product Innovation<\/strong>: <\/p>\n\n\n\n