Business Model Generation

Business Model Generation
Written by Alexander Osterwalder and Yves Pigneur 2010 Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

Table of content Canvas Patterns Design Strategy Process Outlook
Afterword Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

1. Canvas Definition of a business model The 9 building blocks
The business model canvas template Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

1. Business Model 2. Elements of a Business Model
A business model describes the rationale of how an organization creates, delivers and captures value Key activities Customer Segments Channel Key resources Customer Relationship Revenue Stream Value Proposition Cost structure Key partners Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

CS. Customer segment Different group of people or organizations an enterprise aims to reach and serve Segments defined by: Customer needs Reach Relationships 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) Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

VP. Value Propositions Bundle of products and services that create value for a specific customer segment Ways of value creation: Newness Performance Customization Getting the job done Design Brand/ status Price Cost reduction (on usage) Risk reduction Accessibility Convenience/ usability Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

CH. Channels How company communicates with and reaches its customer segments to deliver value proposition Channel phases: Awareness Evaluation Purchase Delivery After sales Own Partner Direct Indirect Sales force Web sales Own stores Partner stores Wholesalers Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

CR. Customer Relationships
Type 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) Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

R$. Revenue Stream Cash 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 pricing List price Product feature dependent Customer segment dependent Volume dependent Negotiation Yield management (e.g. airline seats) Real-time-markets Auctions Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

KR. Key Resources The most important assets required to make a business model work Categories 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) Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

KA. Key Activities The most important things a company must do to make its business model work Key business activities could include: Production Problem solving (e.g. service/ utility industries) Platform/ network (e.g. matchmaking platforms, software, etc) Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

KP. Key Partnerships Network of partners or suppliers that make the business model work Types of partnerships could be: Strategic alliance between non-competitors Coopetition, as alliances between competitors Joint ventures for developing new products Buyer- supplier relationships to assure reliance supplies General motives are: Optimization and economies of scale Reduce risk and uncertainty (e.g. Blu-ray) Acquisition of particular resources and activities Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

C$. Cost Structure Cost incurred in operating a business model
Dominant cost structures Cost 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 costs Economies of scale Economies of scope Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

3. Business model canvas template
Key Partners Key Activities Value Proposition Customer Relation Customer Segments Key Resources Channels Cost Structure Revenue Streams Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

Apple iPod/ iTunes business Model
Key Partners Record companies OEMs Key Activities Hardware design Marketing Value Proposition Seamless music experience Customer Relation Lovemark Switching cost Customer Segments Mass market Key Resources People Apple brand iPod hardware iTunes software Content and agreement Channels Retail stores Apple stores iTune stores Apple.com Cost Structure Manufacturing Marketing and sales Revenue Streams iTunes stores Large hardware revenue Some music revenue Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

2. Patterns Unbundling business models The long tail
Multi-sided platforms Free as a business model Open business models Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

1. Unbundling business models
Customer Relationship Management Infrastructure Management Product Innovation Early 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 key High fixed costs make large volumes essential to achieve low unit costs; economics of sale are key Battle for talent; low barriers to entry; many small players thrive Battle for scope; rapid consolidation; a few big players dominate Battle for scale; rapid consolidation; a few big players dominate Employee entered; coddling the create stars Highly service oriented; customer-comes-first mentality Cost focused; stresses standardization, predictability and efficiency Economics Competition Culture Examples: mobile telecom industry, private banking industry Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

2. Long tail business models
Selling 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 Drivers Democratization of tools of production (e.g. movie making) Democratization of distribution (on Internet) Falling search cost of connecting supply with demand Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

Long tail explained for music industry
Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

3. Multi-sided platforms
Brings together two or more distinct but interdependent groups of customers. Product value by: Facilitating interactions Network effect (more leads to more) Same-side effect and other-side effect One side generates revenue, and other side is subsidized Examples: Visa, Google, eBay, Microsoft Windows SDK, Financial Times, Wii game console, Metro (free newspaper) Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

Google business Model Key Partners Key Activities Platform management
Managing services Expanding reach Value Proposition Targeted ads Free search Monetizing content Customer Relation Customer Segments Advertisers Web surfers Content owners Key Resources Search platform Channels Cost Structure Platform cost Revenue Streams Keyword auction Free Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

PSP/ Xbox versus Wii focus
Key Partners Key Activities Value Proposition High performance console Console audience Customer Relation Customer Segments Hardcore gamers Game developers Key Resources Channels Cost Structure Revenue Streams Hardware sales at a loss Royalties from developers Sony PlayStation Microsoft Xbox Key Partners Key Activities Value Proposition Family console Access to console users Cheap game development cost Customer Relation Customer Segments Casual gamers Game developers Key Resources Channels Cost Structure Revenue Streams Profitable hardware sales Royalties from developers Nintendo Wii Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

4. ‘Free’ as a business model
Non-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) Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

Red Hat Linux business model
Key Partners Linux Open Source development community Key Activities Software support services Software visioning and testing Value Proposition Free (Linux) open source based software Continuous upgraded, services and guaranteed software Customer Relation Self service and direct access to engineers Customer Segments Advertisers Web surfers Content owners Key Resources Red Hat (Linux) software Channels Redhat.com Red Hat global branches Cost Structure Elements of a service company Revenue Streams Professional subscription Free software Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

Skype business model Key Partners Payment providers
Distribution partners Telco partners Key Activities Software development Value Proposition Free Internet and voice calling Cheap calls to phones (SkypeOut) Customer Relation Mass customized Customer Segments Web users globally People who want to call phones Key Resources Software developers Software Channels Skype.com Headset partnerships Cost Structure Compliance management Revenue Streams SkypeOut pre-paid or subscription Hardware sales Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

Gillette: ‘Bait and hook’ business model
Key Partners Manufacturers Retailers Key Activities Marketing R&D Logistics Value Proposition Razor handle Blades Customer Relation Built-in ‘lock-in’ Customer Segments Customers Key Resources Brand Patents (blocking) Channels Retail Cost Structure Manufacturing Revenue Streams One time hand purchase Frequent blade replacement Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

5. Open Business Models Principles of innovation Closer Open
The smart people in our field work with us We need to work with smart people both inside and outside our company To 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 value In we conduct most of the best research in the industry, we will win. We don’t have to originate the research to benefit from it If 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 don’t profit from our ideas We should profit from others’ use of our innovations, and we should buy others’ intellectual property whenever it advances our own interest Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

Outside-in versus inside-out approaches
Key Partners Other company’s IP External scientists Retires scientists Key Activities Internal R&D Key Resources Cost Structure Leveraging internal R&D Procter & Gamble: Connect and Develop Value Proposition IP for underserved diseases Customer Relation Acquisition Retention Customer Segments Outside researchers Channels Patent pools Revenue Streams License fee GlaxoSmithKline: Patent Pools Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

InnoCentive Key Partners Major ‘seekers’ Key Activities
Platform management Acquire solvers and seekers Value Proposition Access to broad network of scientist ‘solvers’ Connect ‘seekers’ and ‘solvers’ Access to scientific challenges with cash rewards Customer Relation Online profiles Customer Segments Seekers (company) Solvers (scientists) Key Resources Brand Patents (blocking) Channels Innocentive.com Cost Structure Acquisition of solvers and seekers Revenue Streams Free access to challenges Fee to list challenges Commission on rewards for solutions Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

3. Design Customer insights Ideation Visual thinking Prototyping
Storytelling Scenarios Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

1. Customer insights “If I had asked my customers what they wanted, they would have told me ‘a faster horse.’”- Henry Ford Empathy Map What does the customer SEE? What does the customer HEAR? What does the customer SAY and DO? What does the customer THINK and FEEL? PAIN GAIN Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

2. Ideation A 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 Innovation What if? Analysis Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

Epicenters of Business Model Innovation
Resource- driven Offer- driven Customer- driven Finance- driven Example: 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 copy Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

Power of ‘what if’ questions
Examples IKEA (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) Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

Ideation Process Brainstorming rules
General approach Team 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 rules Stay 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 Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

3. Visual Thinking Sketches- however rudimentary or amateurish- help people better describe, discuss, and understand issues. Suggested processes Visualizing with Post-it notes Visualizing with drawings Understand the essence Enhance dialogue Explore ideas Improve communication Telling a visual story Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

4. Prototyping For pre-implementation visualization and testing
Tool of inquiry Infuses a design attitude, which includes Willingness to explore crude ideas Rapidly discarding them Take time to examine multiple possibilities Accept uncertainty until design direction matures Scale of prototypes Napkin sketches  elaborate canvas  business case  field- test Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

5. Storytelling Why 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 image Video clips Role play Text and image Comic strip Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

6. Scenarios Types of scenarios Define different customer settings
How products or services are used What kind of customers use them Customer concerns, desires and objectives Possible future environments Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

4. Strategy Business model environment Evaluating business models
Business model perspectives on Blue Ocean Strategy Managing multiple business models Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

1. Business Model Environments
Industry forces Suppliers and other value chain actors Stakeholders Competitors (incumbents) New entrants (insurgents) Substitute products and services Key trends Regulatory trends Technology trends Societal and cultural trends Socioeconomic trends Macro-economic factors Global market conditions Capital markets Economic infrastructure Commodities and other resources Market forces Market segments Needs and demands Market issues Switching cost Revenue attractiveness Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

2. Evaluating business models
Big picture assessment Happens on the business model Identification of +/ - for each of the nine elements of business model SWOT analysis (Strength- Weakness- Opportunity- Threat) Value proposition assessment Cost/ revenue assessment Infrastructure assessment Customer interface assessment Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

SWOT analysis (indicative questions)1/4
Value proposition assessment Our value propositions are well aligned with customer needs Our value propositions have strong network effect There are strong synergies between our products and services Our customers are very satisfied Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

SWOT analysis (indicative questions) 2/4
Cost/ revenue assessment We benefit from strong margins Our revenues are predictable We have recurring revenue streams and frequent repeat purchases Our revenue streams are diversified Our revenue streams are sustainable We collect revenue before we incur expenses We charge for what customers are really willing to pay for Our pricing mechanisms capture full willingness to pay Our costs are predictable Our cost structure is correctly matched to our business model Our operations are cost-efficient We benefit from economies of scale Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

Infrastructure assessment Our key resources are difficult for competitors to replicate Recourse needs are predictable We deploy key resources in the right amount at the right time We efficiently execute key activities Our key activities are difficult to copy Execution quality is high Balance of in-house versus outsourced execution is ideal We are focused and work with partners when necessary We enjoy good working relationships with key partners Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

Customer interface assessment Customer churn rates are low Customer base is well segmented We are continuously acquiring new customers Our channel are very efficient Out channels are very effective Channel reach is strong among customers Customers can easily see our channels Channels are strongly integrated Channels provide economies of scope Channels are well matched to customer segments Strong customer relationships Relationship quality correctly matches customer segments Relationships bind customers through high switching costs Our brand is strong Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

SWOT- Assessing threats – 1/2
Value proposition threats Are substitute products and services available? Are competitors threatening to offer batter price or value? Cost/ revenue threats Are 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? Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

SWOT- Assessing threats – 2/2
Infrastructure threats Could 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 threats Could 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? Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

SWOT- Assessing opportunities– 1/2
Value proposition opportunities Could 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 opportunities Can 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? Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

SWOT- Assessing threats – 2/2-a
Infrastructure opportunities Could 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? Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

SWOT- Assessing threats – 2/2-b
Customer interface opportunities How 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? Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

3. Business model perspectives on Blue Ocean Strategy
Four 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? KP KA VP CR CS KR CH C$ R$ Cost Side Value Side Eliminate/ Reduce Raise/ Create Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

4. Managing multiple business models
Choices of business model in bringing an idea to the market Integration (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) Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

5. Process Starting point Five phases
Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

1. Starting point Objectives of new business models
Satisfy 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) Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

2. Five phases Phases are Mobilize (setting the stage)
Understand (immersion) Design (inquiry) Implement (execution), and Manage (evolution) Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

6. Outlook Business models beyond profit
Computer aided business models Business model and business plan Implementation issues Leveraging IT Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

1. Beyond-profit business models
Categories Third-party funded enterprise models Triple bottom line business models Grameenphone KP Grameen Bank Network Consortium (Telenor) KA Manage network VP Income opportunity Mobile commn’ CR CS Village phone ladies Villagers KR CH C$ Network R$ Communication income Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

2. Computer aided There are a host of computer application useful for mind mapping, scenario generation, large data analysis, trend spotting, etc, that could complement paper-based approaches Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

3. Business plans Executive summary External environment The team
Management profile Why we are a winning team The business model Vision, mission and values How our business models works Value proposition Target market Marketing plan Key resources and activities Financial analysis Breakeven analysis Sales scenarios and projections Capital spending Operating costs Funding requirements External environment The economy Market analysis and key trends Competitor analysis Competitive advantage of our business model Implementation roadmap Projects Milestones Roadmap Risk analysis Limiting factors and obstacles Critical success factors Specific risks and countermeasures Conclusion Annexes Business Model Generation (Osterwalder and Pigneur, 2010) 2/15/2019

Business Model Generation

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