How to Design Business Models Archives

September 13, 2021 By Denis Oakley

What You Learn from Drawing Out a Business Model?

This post is an extract of my forthcoming book on business model innovation. The innovation book looks at why business model innovation is needed and how it works. You can read more about it here. These posts are early drafts of planned content and I’m putting them out to get feedback. Please do comment below, or subscribe to these pages to get each new section as it is published. In today’s post, we will be looking at finding opportunities in this new world.

If you have done the exercise suggested above, or you’ve followed the worked example, what should be clear is that you have a much better understanding of the business. My first draft of the business model canvas for denis-oakley.com needed 26 words.

The model allows you to condense a lot of information. You can combine the power of a picture – the standard business model canvas framework – with the power of words.

I’ve done hundreds of business models for clients, and the following are some of the most frequent assumptions that we discover during the process.

Everyone in a very broad target group will like/want the product/service
The value being created is useful or wanted
The idea is good. Normally parts are, and lots aren’t
Day-to-day activities are clear. Often too much focus is put on setting up the business than figuring out how to run it
Resources = cash. Really resources = moat or USP. What do you have that others don’t

Motors

A motor in a business model is a small group of activities that work together to make the business successful. In the case of denis-oakley.com, there are two

Experience
Creates better consulting, which
Creates more value, which
Increases experience

And

Consulting
Creates more experience, which
Generates more content, which
Increases Lead Generation, which
Grows Consulting

Most businesses have something like this

Uber’s motor is:

Balance supply and demand
Makes Uber more attractive to Drivers and Passengers
Increasing market share
Which helps to balance supply and demand

Being able to be clear about your motor then allows you to focus your time and resources on these motors as you develop your business. If we think about Denis-Oakley.com again, pricing is down in the revenue box. It’s a long way from the main business motor. If we play with different pricing models there will be a change in the business, but it will be far smaller than the ones powered by the motors

What are your business motors?

Patterns

There are relatively few unique business models. As you look at more and more of them, you see that various patterns repeat. Many B2C companies for example have powerful motors around the front end. Marketing – Customer- Value proposition. That’s a very traditional, often advertising-led model. In contrast in manufacturing, you often see a Resource – Activity – Cost triangle as they compete primarily on their efficiency in creating high-quality low-cost products.

For example, a steel mill has a $5 billion fixed asset in the form of its steel mill and 200 years of onsite manufacturing knowledge. It uses this experience to make steel each day and bring the cost down which increases its IP (Resource) and allows it to make steel better and cheaper in the next period.

If You Want to Read More

I keep everything structured on my niftily titled business model innovation book page. Head there to browse, binge, read straight through, or cherry pick. Please do take a moment to comment below or upvote comments that you agree with

As I write each new section you can have them sent to your email. The plan is to write something 2 – 3 times a week. It is easy to unsubscribe, but I hope you won’t as the goal is to delight and entertain as well as educate and train you through this business model innovation journey.

September 10, 2021 By Denis Oakley

How To Use The Business Model Canvas To Draw Your First Business Model?

In this section, what I will do is walk you through the process of creating your business model using the business model canvas. This is a great tool developed by Alexander Osterwalder at Strategyzer.com.

We’ll look at each of the 9 nine segments of the business model canvas in turn, and I will explain the thought process behind how I developed the business model canvas for Denis-Oakley.com, which specializes in supporting early-stage entrepreneurs.

Customer Segments

When I set up Denis-Oakley.com, I’d been working in an entrepreneurial role for about 15 years. I’d recently separated from my wife and had little more than a suitcase, a laptop, and enough to live on for a month.
The first question I asked was “Where can I add value?” That then begged the question “Who am I adding it for?” That in turn generated a third question “Well, what problem do they have which needs solving?”
I knew a few things about entrepreneurs having been one for many years.

Summarised, these were:

Most fail
Most don’t know what they are doing
And most know where they want to go

I also knew that my experience was in the early-stage startup scene. That is getting started and getting your first customers all the way through to running a team of 10 – 20 people and making sales of $2-3 million.

That helped me to define my target customers
Entrepreneurs 25 – 50
Sole founders or solopreneurs
English speaking
University educated
Working part-time or with a source of funding
US/UK/Australia based

The value proposition was a bit more difficult. It’s amazing how many entrepreneurs are clear on what they want to do and yet cannot clearly state their value proposition. Here a lot of the ideas behind lean startup are good as you iterate through various formulations to find the best match with your customer’s pain point.

So, I knew that I wanted to support entrepreneurs. There are a lot of free resources out there and a huge number of small business consultants. What was the best value proposition that fitted my skill set and which added value?

My value proposition focuses on clarity, speed, and risk. There is a lot of noise, and there are literally millions of things that an entrepreneur can be doing. Which should YOU be doing? You have a limited runway – either cash, time, or market opportunity – to get things to work. I have lots of experience and tools to help you accelerate faster. Finally, the value proposition was about risk.

I have seen so many failures. Bad ideas, bad execution, bad luck. Lots can go wrong, but much of this is avoidable. The third part of my value proposition was to make sure that their plane didn’t get damaged on the runway as it took off.

The value proposition is captured as

Simple strategies to get startups focused on the key things they need to achieve
Using tools and processes to accelerate the startup process saving money and time
Reduce the chance of failure through testing and careful resource allocation

Customer Relations

If you read all that, it’s difficult to see how I can do that without quite a lot of one-to-one interaction with customers. I’m selling customized advice and experience which delivers better results. It’s not an automated hands-off experience like Uber. So not a lot of thought needed to go into this part.

Channels

When it came to channels, this was a lot more difficult. In most cases, a startup consultant can go along to local startups, talk, make friends, and get hired. I was 10,000km away from potential clients. I needed to find effective ways of finding them apart from traditional networking. To work out which marketing channels I wanted to use, I used a list of 19 different traction channels and considered how easy it would be to reach my audience on each. To start with Upwork.com was great. It was an existing platform, and all I needed to do was turn up and bid.

The next channel was LinkedIn. Traditional networking lets you interact with 10-20 people a night. LinkedIn gave me a potential pool of millions. The final channel was content marketing. This was twofold. First entrepreneurs do read a lot, and I could write well about entrepreneurship. This would pull organic traffic. Secondly, as it’s a B2B sale, the authority that a good blog would generate would then help to convert prospects.

What Resources Do I Need?

I needed a little bit of money to get things set up. It’s not on the same scale as $4 billion chip foundry, and so it’s not that relevant. Consultancy is not capital intensive. What it does need is experience. So I’d got 10 years of engineering experience and another 15 years of startup experience with a good dose of consulting mixed in. That was a key resource. Without the deep knowledge of the subject and experience as a practitioner, it’s difficult to get going.

The other key resource was the size of my network. With a bunch of startups under my belt, I had over 2,500 connections on LinkedIn. That gives me access to about 400,00 2nd connections and 130 million third connections. That makes it easy to connect with people and research potential clients. Other networks – such as Quora help leverage that even more

What do I Need To Do On A Day-To-Day Basis?

One of the key tasks is leveraging that network and using my experience to generate sales. At a top level, that’s good enough. When it gets into the details it does get very complicated. There are 21 top-level process steps in my LinkedIn lead generation funnel, for instance. All of those will change over time as LinkedIn, and the business evolves – the top-level Lead Generation on LinkedIn probably won’t.

There is a lot of content generation. Initially, I had one idea – generate reports for clients and then repackage those reports for other clients and turn them into case studies. Now it more often works that We see a new tool and think – how does this work. We create content around that. Again – what is the top-level activity? Focus on that. Finally, the key value-creating activity from my customer’s point of view – spending time doing the consulting work that they pay me for.

As you create your business model canvas, one of the things that start to intrude is – How do I do this operationally? In this case, I have three activities – Lead Generation – Consulting – Content Creation. How do I get the internal flow right so that the business works smoothly? That’s something we will come back to later and is one of the valuable outcomes of the exercise.

Partnerships Are Critical.

To start with, I had no partnerships, and the business struggled. There was too much to do, and the flow didn’t work. So first, Leander came on board (we run a business model guru together). Secondly, there is a VA team to help operationalize everything.

In some cases, startups may have critical partnerships with open source software providers, or they may require a network of resellers. Partners are the third parties that you need to make the business model work.
In some cases, costs and revenue can become quite complicated. With two-sided models, you may have one customer segment paying nothing and another customer segment paying for something – Google’s Search/Adwords product is like that.

In my case, not a lot of thought went in. There are marketing and salary costs. The revenue is straight-up hourly rates or project-based fees.
Tips on How to Produce a Business Model Canvas
That should have given you a little bit of an insight as to how to produce a business model canvas. The next step is to do it yourself.

The way that I do it is as follows.

Go through each segment and brainstorm. If it seems vaguely reasonable throw it in.
Look at the big picture and understand whether you are selling B2B, B2C or B2B2C, or another variant.
Think of a similar company and see how your business model canvas varies from theirs.
Prune and edit it. Simplify everything.
Then stand up in front of the mirror and talk through it.
Iterate and improve again

Step 1 I normally try to keep each entry to two to three words. Lots of text is difficult to absorb. If you can use images that can be awesome. They have to be clear.

Step 5 normally creates the most value. It is relatively easy to put something down. Taking it off the paper and verbalizing it. Explaining it. Explaining it just to yourself before you try on a partner, client or investor makes the flaws stand out.

You can spot the weaknesses because your voice loses confidence or you elide over the point. It’s either a weakness or not important.
A useful step is to break each component on the business model canvas down into three bullets or sentences on a separate piece of paper. That’s repeatable and can start to then give you the outline of a task list or project plan (or Trello cards).

If You Want to Read More

September 7, 2021 By Denis Oakley

Why Do Entrepreneurs Need Business Models?

Entrepreneurs need a business model because they are either

Doing new stuff
Doing stuff that is new to them

If you keep it all in your head, your thoughts are often not clear. There are always big chunks of your business that you don’t think about in enough detail. This is due to human psychology and the big package of cognitive biases that get thrown in free when we are born.

When we write long-form, it can be a mess and highly unstructured. I remember one client, a bitcoin entrepreneur, who gave me over 20,000 words in about five documents explaining what he wanted to do. It covered about 50% of what he needed to do to deliver on the value proposition, and we summarized it in less than a thousand.

Entreprenuers and Business Models

Entrepreneurs need business models because they help to challenge their assumptions.

We are all subject to confirmation bias. We see the things that confirm our own beliefs, and we ignore inconvenient evidence. Theranos in 2016 had clearly been in trouble for some time. It was only then, though, that the bad news became powerful enough to break through the dream unicorn story.

Business models thus let you challenge on a systematic basis. By making it clear that your value proposition is P and your key customer segment is Q you can ask the question “What evidence is there that P solves Q’s problem?”

In many cases, entrepreneurs make a mistake and assume that if they create a value proposition P, then there will be a customer segment Q that will need it. It may be R, S or T, or Nul. There are many ways that we can test for these.

The simplest is:

What if X is true. Here you vary some input or environmental conditions to see if the assumptions hold out.

Do Nothing. Here you say what would happen if we did nothing here r we didn’t have that resource. It is a subset of the above, and it helps parse the model down to what is critical.

So, challenging an entrepreneur’s assumptions is a super powerful part of the business tool. The biggest benefit of this is that it cuts away a lot of the fat. What is critical for success? What do we need to do? And what do I focus my very limited time and resources on?

In the words of Tim Ferriss, it is the “difference between being busy and being effective.”

Using business models like this has the wonderful effect of making your pitches more powerful. Many entrepreneurs when they start pitching launch into a stream of consciousness talk that quickly loses their listener.

A basic pitch strategy that is an improvement on this is to say

I solve problem X for Group Y by doing Z and making money by K

That gets the message across in fifteen to thirty seconds. Then they ask you more. That is perfect because the whole aim of a pitch is to capture interest. If they have control of the questions, there are plenty of rabbit holes that they can take you down. So, the next stage is to use the structure of a business model to structure the next two to five minutes.

Using the structure of the business model canvas, it goes something like this.

We offer this value proposition to this group of customers. We reach them using this channel, and we interact with them like this. To deliver value to our customers, we do these activities and need these resources. To do all this efficiently, we have a range of partners. Our costs are driven by spending in these categories, and we cover these costs and make a profit by generating revenue from this.

Uber’s Business Model

We offer fast and convenient urban transport to middle-class city dwellers. They book our cars using a smartphone app with no human interaction. To do this we need an IT system that allows customers to be instantly matched with drivers and which ensures that supply and demand are kept in balance. This is all powered by powerful city-by-city marketing, driver recruitment and retention, and product development teams. Our partners are the drivers who ‘freelance’ for us on a part-time basis providing us with their time and their cars. Most of our costs are incurred in paying the drivers for their time and in marketing to gain market share and local dominance/quasi-monopolies. We make money from the fees that customers pay for the journeys they take.

This provides a powerful framework for pitches and allows investors, clients, and staff to quickly grasp what you are about.

Business models are also exceptionally good at allowing business ideas or concepts to be challenged. When a business model is laid out simply, and clearly it can be understood. This allows co-founders and mentors to ask detailed questions about each aspect. How and why does this work?

Business Model as a Challenge

Flipping that on the head, a business model can be used to challenge existing ways of working. Heading back to the example of Uber. Before ride-sharing, there were several taxi companies in most cities. There was a big problem in finding a taxi at the right place, time and price. So the Uber founders mapped out the business models of different taxi companies and then started looking at how they could be challenged.

Alternatively, when you need to pivot, it’s a clear and powerful way of saying “This is what we were doing. This is what we are going to do. This is why”. That can create a compelling narrative for both staff and investors.

If You Want to Read More

September 3, 2021 By Denis Oakley

What is a Business Model?

This post is an extract of my forthcoming book on business model innovation. The innovation book looks at why business model innovation is needed and how it works. You can read more about it here. These posts are early drafts of planned content and I’m putting them out to get feedback. Please do comment below, or subscribe to these pages to get each new section as it is published. In today’s post, we will be looking at finding opportunities in this new world.

A business model is a way of quickly describing how a business works to make communication faster.

One of the memes of entrepreneurial pitches is to say that “We are the Uber for X” or the “Facebook for Y”. If you have familiarity with Uber or Facebook, you can quickly port the way they do business to a new situation, and understand the core of the idea in seconds.

When you look at a business model, you can break it down into its different parts. If you use a consistent way of describing all the different parts of your business, you have a shared language. Back when I did the first startup, I was advised to break my business plan into Marketing, Sales, Operations, and Finance.

In each section, I had to put down all the important information. But as we know, a business is far more than just those four sections. We have questions about how the operations impact finance and what impact sales have on operations etc. Trying to understand if those questions are answered or even addressed in a big business plan and walls of text is difficult.

How does a Business Model work?

So, a business model gives you a powerful way of communicating the important aspects of how the business works and how they relate to each other. In the process of communicating what you are doing more clearly, you invariably get far more understanding of what is involved.

This understanding is critical. Many entrepreneurs approach a new project and play to their strengths. We tend naturally to do what has worked before. When we do that, we have two choices; build a business around the strength or build a business around inappropriate use of the strength.
The strength: affiliate marketing, dev ops, partnerships may not be a fit for this business. Unless you recognize that, then your business model has a powerful flaw deep inside that will cause problems later.

A business model also helps you to prepare for the future. In my first startup, we entered a booming market and were initially very successful. When the great recession in 2008 hit, we saw our business model fail in so many areas as the market and the environment changed. Over the next 8 years, we moved through 27 major and minor versions of the business model. As we sought to identify new ways of doing business, pivots to finding new sources of revenue, and ways to maximize our strengths and minimize weaknesses.

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August 30, 2021 By Denis Oakley

Massive Customer Value

One of the most noticeable effects of business model innovation is the massive increase in customer value that it creates.

This can take several forms.

An increase in market size as new sources of value is unlocked
Shifting of value, from one part of the market to another

I realise that this chapter can be a bit tautological. We often know that we have a profound business model innovation because it creates massive customer value. You can have a lot of customer value created without business model innovation. This is why BMI is a subset of all innovation and strategy.

Business Model Innovation and Massive Customer Value Venn Diagram

As a rule of thumb, most companies are happy to be growing at 20% a year. This generally happens in new markets where the size of the market has yet to be determined, and most competent participants are growing, quickly. I mention this only to set an upper limit on what is normal growth. This is about the maximum that can be achieved without profound innovation. Or paper magic by the accountants and tax specialists.

Five years of growth like this will show a company that has grown [your preferred metric of success] by about 2.5 times.

Barriers of Entry

It’s possible that by hitting multiple innovation sweet spots at the right time, that a company could grow even faster than this, so let’s set the barrier to entry into the business model innovation club at 10X growth. Tat is 10X larger over five years, excluding organic growth, etc, etc. There are good arguments to push for 50X or 100x growth as these really focus on the goal that we want to achieve.

That is massive sustained value creation.

To increase the sales growth of 10X or 50X in any mature market either means starting with a lot of money and ending up with a lot less, or doing something very different. Changing the rules of the game.

Google, Apple, Amazon, Netflix, Microsoft, etc all changed the rules of the game. As they did, so they created massive customer value. Or which they received a small part in increased sales, profits share price, etc.

The winners are the consumer. Not the company.

Does Monopoly Create Customer Value?

There were some evil bastards a few years ago who decided to jack up the price of the EpiPen because they were a monopoly provider. The price increased by 5X over 3-4 years with no increase in customer value. I used to have one in my rucksack for when I went out into the jungle. I once got stung by some jungle bees, and after the pain subsided it felt like I’d downed 3 pints in a row at lunchtime (downing = raising the 600ml glass of beer to your lips and finishing it without removing your lips from the glass). Fortunately, I never needed to use my expired and rather, a talismanic EpiPen.

The second approach of shifting value within an industry or market is less obvious.

After MP3s and Napster had reaped havoc on the music industry, Apple shifted value from the music companies to itself through the combination of the iPod and the iTunes music store. It broke apart the album into 99c tracks. In doing so, shifted much of the value of the innovation to consumers. They got to listen to the music they liked rather than second-rate tracks that artists and labels bundled into LPs and CDs.

Apple benefited, of course, but for a number of years, this did not create much if any growth in the music industry. That came later with another business model innovation, with the shift to streaming and all-you-can-eat subscriptions from Spotify.

If You Want to Read More

August 26, 2021 By Denis Oakley

Competitor’s Business Models Weaknesses

When we look at competitor’s business models, I normally take the following approach.

What’s their value proposition – who are they selling to?

Those are normally easy to grab off their website. A quick scan of the internet will tell you how they make money and their marketing channels.

For key resources and key activities, looking at financial returns if they are a listed company is always useful – as is reviewing the jobs that they post and what people say about them on the glass door.

The other great source is to search ‘company name business model’. Often you will get a number of blog posts and articles that help clarify your thinking.

We do this quickly, and in 20-30 minutes, you should have something that is good enough. 80% rule works here. This is not going to be the same business model canvas that their senior management has – but with 20% of the time, you can get 80% of the value. That’s good enough.

What is the Emotional Base of the Company?

The first step is to consider what sort of epicenter they have. What is the emotional base of the company? Years ago, I did a lot of steel trading.

Our major supplier had a big warehouse full of steel in the Netherlands. I can stop there really, can’t I. 🙂 They were massively resource-driven.

Our office, in contrast, was quite different. The first thing that we did when we set up the company was to buy a Salesforce licence. This helped us to understand our customers and what they were thinking – a classic customer-focused epicenter.

We cover epicenters in a lot more detail in another chapter. Your goal here is to write down what you think the epicentre of the company is – maybe a couple of bullet points to justify it. That’s it. No rocket science – just how you feel about the data of the business as it lays in front of you on the canvas.

Once that’s done, start telling stories about the business model.

The classic entrepreneurial elevator pitch comes in handy here. Imagine if you like Elon Musk in an elevator and multiple drones like entrepreneurs saying:

“In X industry, people are unhappy because of y. We are going to do z to solve y. And we will make money because this group will pay us for doing z. This is going to work because of…”

The Elevator Pitch Model

Take that elevator pitch model, or any other one – and start applying it to what you have written down on the paper. Resist the temptation to not do this, because you know the company.

There is a big gap between what your mind thinks it knows and what it is able to articulate as it tells a story about how a business succeeds.

As you try and tell the story, you fight lots of burrs and inconsistencies in the business model. Things that just, don’t seem to make sense.

That is brilliant. You’ve either got the business model wrong, or there’s a problem with the business model. Go out do some more research, ask a few questions, mull it over (Does mulling – thinking things through deeply have anything to do with the mullet hairstyle? Is the lack of mullets the reason why rock music is far less philosophical today?) and see if you can resolve the anomaly.

That usually clears things up – if it doesn’t, there’s normally a deeper problem with the business model. This is where someone else is useful. Sometimes we just don’t get how business models work. Several times with blockchain business models, I’ve put my hands up after a few hours and said, ‘I just don’t get it, and then a few minutes later, after I’ve been talked through, I get it in a flash of light. If it still doesn’t work, then we have a really interesting situation.

Problems and the Management of the Company

What can I see as a problem and the management of this company can’t? What can I see that they can’t? And why? What can they see that I can’t? And guess what, why can they sit it? (there are a lot of whys in this)

Play with this problem and bullet out your thoughts on why it is a problem, what the causes and consequences are. Then put it aside.

If you are a fan of strumming, you’ll know that herrings don’t taste amazing raw. It’s only when you put them into a tin, let them mature and deliquesce that they reach the true pinnacle of gastronomy. It’s exactly the same for the problem with the business model that you’ve just spotted. Put it on one side, let it ferment.

We’ve spent some time telling stories about this business model.

The next step is to delve down into the patterns.

What You Learn from Drawing Out a Business Model?