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.
When we are building business models, most of the time, there’s some disagreement and confusion about what the business model actually is. This is because everybody has a different vision in their heads. Words that mean something to one person don’t mean, exactly the same to another.
When we start talking about strategy or changes to the strategy, this gets even more confusing. There are a couple of ways of solving this problem and getting everyone to start from the same place.
The first is to write it all out. This has a couple of problems. Writing is quite slow, and not everyone likes reading. Fewer people still like the editing process. It’s too hard for most companies and takes too much time for the rest.
The alternative is to use some pictures. An image, after all, is worth a thousand words as Leonardo da Vinci, and then Henrik Ibsen wrote. When we get into the world of strategy, it’s pretty easy to come up with drawings that convey what you want to say, but often, the image is specific to the exact situation and doesn’t allow us to use the same image at different times and places without starting all over again. It also means that we have to explain the image, over and over.
Are Blueprints Similar to Business Model Canvas?
This is one reason why architects and engineers like blueprints. The blueprint explains clearly, for anyone who knows the rules, exactly what is being built and implicitly how it needs to be constructed.
When we look at business models, we have a way of creating blueprints so that we can quickly and easily compare business models. This is called the business model canvas. It was developed, by some Dutch Academics and is the primary tool that we are going to use through the rest of the book to help us understand the business models that we are creating.
The Business Model Canvas (or BMC) is a single sheet of paper. It is divided into 9 segments. These segments, or parts, correspond to important parts of a business, any business.
A business offers its customers a value proposition to solve their problems. The customers pay the business for this solution its revenue. The business reaches the customers through marketing channels and keeps them as customers through its customer relationship. To create the value proposition the business uses key resources and undertakes key activities. It may do this itself or engage key partners to do them for it. This all costs money. If the company creates more revenue than it has cost it makes a profit.
We can quickly describe the essential features of any business model using this template.
Business Model Canvas and Its Value
Vale offers copper mills (its customers) a range of copper ores (value proposition) to allow them to make copper sheet and wire (solve their problem). The customers pay Vale for this solution its revenue. The Vale reaches the customers through ongoing contractual relationships and trading on commodities platforms (marketing channels) and keeps them as customers through focusing on timely delivery, managing quality, and major account managers (its customer relationship). To create the value proposition, Vale mines copper (key activities), its mines in South America (key resources). It does this itself and licenses mineral-rich land from Governments and other landowners (key partners) to do them for it. The setting up of the mines with their ore processing facilities and the mining of the copper order costs money. When Vale sells more copper ore than it costs to extract it, then it has made a profit.
Directors at Vale would say that’s a bit simplified Denis. It doesn’t describe what we really do.
I agree. A business model is like a map. When I look at a map of all the countries in the world, I don’t expect to see my street or local supermarket on it. As I zoom in, I expect to see more detail.
We are also not creating a map of the entire company. Typically large companies run multiple business models. Vale, for example, has a least the following business models.
- Iron ore
- Iron ore pellets
- Manganese ore
- Ferroalloys
- Copper
- Nickel
- Coal
- Fertilizers
Each of those has a different business model. When we look at the business model of a company, we are simplifying what the company does, condensing it down into the essentials.
Business Model Canvas and SME
In contrast, when we look at the business model of a startup or an SME, then the business model is much likely to be the same as a company.
When a large company wants to change its business model, it will often create new subsidiaries with new business models that it hopes will grow. When a startup or SME changes its business model, the focus is much more often one of major organisational change to shift from the old to the new business model.
Before we move on, there is one important point to make. When we are in the process of designing new business models, everything that we are putting on the canvas is a bit of wish fulfillment.
I went to a party a while back. It was a costume party. So I picked up the Persian ax, that I had bought in Esfahan many years ago and tried to make a costume that made me look like a 4th Century Sassanid warrior. I had a picture in my head, based on what I had seen in some books. I then tried to fit what I could actually make costume-wise to those mental images.
When we put these mental images down on paper in a business model, we call them hypotheses. What works in our head can often look great, but it does need to be tested against reality – or my sewing and art and craft skills – to see if we can execute on them.
With the business model canvas, you are capturing your image of how reality should be. You then need to carefully test and execute to make it so. A hypothesis is a testable belief about how the business should work. It is these that we capture on the business model canvas.
As to my costume, someone asked me why I’d come as a fisherman. That was a bummer.
What we are going to do next is to dive into each of these business models and help you understand them as they are our building blocks for the rest of the book. You can also buy and read the excellent Business Model Generation book by Alexander Osterwalder, which describes how to draw these architectural blueprints in more detail.
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
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