Many people have come across the business model canvas and how it can be used for business model innovation or generation. In this article, I want to go beyond the basics and talk about how the business model canvas can be extended to help address a number of business issues by bringing clarity to them. The focus is on business model performance and ways to measure it.
At the core of the business model canvas is the idea that all businesses are made up of 9 segments. These are
- customers
- value proposition
- customer relationships
- marketing and distribution channels
- key activities
- key resources
- key partners
- costs
- sales
Put another way.
“We create this value proposition for these customers and we reach them through these marketing channel, and support them through these customer relationships to generate sales. To deliver this we need these key resources and key partners to undertake these key activities and they come with these costs.
So far so good. Pretty much any business can be sketched out in a few minutes using this template. Once done it allows some fascinating discussions as to how and why the business makes money (or does not) and what to do about it.
The rest of the article is going to move beyond this and look at ways that you can use the basic business model canvas to change your business quickly and effectively.
Performance measurement using the business model canvas
Once you have your business model canvas sketched out have the CEO and/or the management team go through and give each segment (or each item within a segment) a score out of 10. If you feel you are selling 100% of the time to your ideal customer, mark it as a 10. However, if customers have moved on and the value proposition no longer resonates with them then perhaps a score of 4 for the value proposition is appropriate. Finally, if you have revenues with margins much better than the competition, give it a good score. You get the idea.
Then use the Net Promoter Score, scoring mechanism. Everything that is a 9 or 10 is green. Everything, 7 or 8 is yellow. The rest are red. Colour it in.
Voila. You have a powerful visual health check of your business model.
Going back to the phrasing that we looked at earlier
“We create this value proposition for these customers and we reach them through these marketing channel, and support them through these customer relationships to generate sales. To deliver this we need these key resources and key partners to undertake these key activities and they come with these costs”
Management thus has a very clear and easy way to consider the problems (or opportunities) that it is facing and a simple way to explain it to stakeholders.
This is based on manager’s subjective analysis, but can be linked to KPI’s and turned into a regular performance dashboard. This is similar to the balanced scorecard but focuses on the health of the business model and it’s ability to deliver profits.
Measuring Threats to the business model
When working with clients I use a 60-page threat assessment workbook. This takes us through each of the 9 segments looking at key metrics and the issues that are impacting them. When a company is in a market that is being disrupted there are often many threats occurring at multiple different levels. It’s easy to fall prey to information overload.
In the process above I described how you can measure the corporate business model performance. Here we look at ‘measuring’ how threatened the business model is by market forces and disruption. Again each segment gets given a score and you can identify which parts of the business model are redlining, and which are stable for now.
The twist here is it’s not as simple as highlighting the problem areas. That’s because often many parts of the business model will work in harmony, or have epicentres driving, them as Alexander Osterwalder puts it in Business Model Generation. The marketing channels you chose are ineluctably linked to the audience you are targeting, for example. If the channels are working but the customer base is under threat, you need to be thinking about the marketing channels as well. Once you change customers, you’ll need new channels or at least significant change.
Again the business model canvas does not solve the problems that you are facing. What it does do is layout the threats in an intuitively understandable way. It’s easy to get and explain. That saves time and gets everyone thinking the same way. In turn that opens up the field for more imaginative solutions.
Looking for ways to change your Business Model Performance
A business model can look absolutely wonderful on a piece of paper or sketched out on a whiteboard. The reality is that there are lots of reasons why changing it is going to be as hard as steering an oal tanker with a paddle from a canoe. Two of these issues are the innovative ability of the people within the company and the company’s architectural resistance to change. These can act as a big drag on your attempts to change the performance of your business model
I’m from an engineering background. Looking back at the railway industry over the last 30 years it seems that a lot of the innovative people are in the key partners and in the marketing parts of the business. The key engineering teams needed to deliver the trains on time are relatively stagnant.
Innovativeness Audits
Small businesses can quickly do innovativeness audits. Who are the most innovative people in the business? Which segments do they live in? Their numbers can be mapped onto the canvas. What this shows you is where the people willing and able to be changemakers and make change live. If there is no appetite for change in the people responsible for key segments, consider the value proposition for example, how can any business model change programme be successful?
Rigidity Audits
The second issue is the structural rigidity of the business model itself. Most managers are hired for their competence in reducing cost and improving efficiency and effectiveness. Over tim this means that processes and systems become more specialised and less flexible. This lack of flexibility can make it very hard to change a business model. Imagine for example the impact that a power station has on the balance sheet of an electricity company. They need to write it off or sell it in order to change the business model.
Again we can create a heat map of which parts of the business are easy to change, and which parts are rusted solid. Combining the people and the structural rigidity you then have a clear idea on how you can move forward, or at very least the problems that you are going to have to overcome in order to change your business model and get to where you want to be.
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