The starting point for any good discussion, meeting, or workshop on business model innovation should be a shared understanding of what a business model actually is. We need a business model concept that everybody understands: one that facilitates description and discussion. We need to start from the same point and talk about the same thing. The challenge is that the concept must be simple, relevant, and intuitively understandable, while not oversimplifying the complexities of how enterprises function.
A business model describes the value an organization offers to various customers and portrays the capabilities and partners required for creating, marketing, and delivering this value and relationship capital with the goal of generating profitable and sustainable revenue streams. The business model is like a blueprint for a strategy to be implemented through organizational structures, processes, and systems. The business model design and ecosystem articulation depends on answering some basic questions of a business. The business model canvas help to identify the questions and ways to address these questions.
It is a visual chart with elements describing a firm’s or product’s value proposition, infrastructure, customers, and finances. It assists firms in aligning their activities by illustrating potential trade-offs.
The nine “building blocks” of the business model design template as in the the canvas that came to be called the Business Model Canvas were initially proposed in 2005 by Alexander Osterwalder. These nine business model building blocks can be captured in a single diagram as below.
The 9 Building Blocks: Business development model generation can be explained by using 9 building blocks. The 9 building blocks describes different components, players and functional correlation among these. These model based on 9 building blocks developed by Canvas. The model shows like…
1. Customer Segments
The Customer Segments Building Block defines the different groups of people or organizations an enterprise aims to reach and serve Customers comprise the heart of any business model. Without (profitable) customers, no company can survive for long. In order to better satisfy customers, a company may group them into distinct segments with common needs, common behaviors, or other attributes. A business model may define one or several large or small Customer Segments. An organization must make a conscious decision about which segments to serve and which segments to ignore. Once this decision is made, a business model can be carefully designed around a strong understanding of specific customer needs.
Customer groups represent separate segments if:
- Their needs require and justify a distinct offer
- They are reached through different Distribution Channels
- They require different types of relationships
- They have substantially different profitabilities
- They are willing to pay for different aspects of the offer
2. Value Propositions
The Value Propositions Building Block describes the bundle of products and services that create value for a specific Customer Segment. The Value Proposition is the reason why customers turn to one company over another. It solves a customer problem or satisfies a customer need. Each Value Proposition consists of a selected bundle of products and/or services that caters to the requirements of a specific Customer Segment. In this sense, the Value Proposition is an aggregation, or bundle, of benefits that a company offers customers.
Some Value Propositions may be innovative and represent a new or disruptive power. Others may be similar to existing market offers, but with added features and attributes.
The Channels Building Block describes how a company communicates with and reaches its Customer Segments to deliver a Value Proposition Communication, distribution, and sales Channels comprise a company’s interface with customers. Channels are customer touch points that play an important role in the customer experience.
Channels serve several functions, including:
- Raising awareness among customers about a company’s products and services
- Helping customers evaluate a company’s Value Proposition
- Allowing customers to purchase specific products and services
- Delivering a Value Proposition to customers
- Providing post-purchase customer support
4. Customer Relationships
The Customer Relationships Building Block describes the types of relationships a company establishes with specific Customer Segments A company should clarify the type of relationship it wants to establish with each Customer Segment. Relationships can range from personal to automated. Customer relationships may be driven by the following motivations:
- Customer acquisition
- Customer retention
- Boosting sales (up-selling)
In the early days, for example, mobile network operator Customer Relationships were driven by aggressive acquisition strategies involving free mobile phones. When the market became saturated, operators switched to focusing on customer retention and increasing average revenue per customer. The Customer Relationships called for by a company’s business model deeply influence the overall customer experience.
5. Revenue Streams
The Revenue Streams Building Block represents the cash a company generates from each Customer Segment (costs must be subtracted from revenues to create earnings). If customers comprise the heart of a business model, Revenue Streams are its arteries. A company must ask itself, For what value is each Customer Segment truly willing to pay? Successfully answering that question allows the firm to generate one or more Revenue Streams from each Customer Segment. Each Revenue Stream may have different pricing mechanisms, such as fixed list prices, bargaining, auctioning, market dependent, volume dependent, or yield management.
A business model can involve two different types of Revenue Streams:
- Transaction revenues resulting from one-time customer payments
- Recurring revenues resulting from ongoing payments to either deliver a Value Proposition to customers or provide post-purchase customer support
6. Key Resources
The Key Resources Building Block describes the most important assets required to make a business model work. Every business model requires Key Resources. These resources allow an enterprise to create and oΩer a Value Proposition, reach markets, maintain relationships with Customer Segments, and earn revenues. Different Key Resources are needed depending on the type of business model. A microchip manufacturer requires capital-intensive production facilities, whereas a microchip designer focuses more on human resources.
Key resources can be physical, financial, intellectual, or human. Key resources can be owned or leased by the company or acquired from key partners.
7. Key Activities
The Key Activities Building Block describes the most important things a company must do to make its business model work. Every business model calls for a number of Key Activities. These are the most important actions a company must take to operate successfully. Like Key Resources, they are required to create and offer a Value Proposition, reach markets, maintain Customer Relationships, and earn revenues. And like Key Resources, Key Activities differ depending on business model type. For software maker Microsoft, Key Activities include software development.
For PC manufacturer Dell, Key Activities include supply chain management. For consultancy McKinsey, Key Activities include problem solving.
8. Key Partnerships
The Key Partnerships Building Block describes the network of suppliers and partners that make the business model work. Companies forge partnerships for many reasons, and partnerships are becoming a cornerstone of many business models. Companies create alliances to optimize their business models, reduce risk, or acquire resources.
We can distinguish between four different types of partnerships:
- Strategic alliances between non-competitors
- Co-operation: strategic partnerships between competitors
- Joint ventures to develop new businesses
- Buyer-supplier relationships to assure reliable supplies
9. Cost Structure
The Cost Structure describes all costs incurred to operate a business model. This building block describes the most important costs incurred while operating under a particular business model. Creating and delivering value, maintaining Customer Relationships, and generating revenue all incur costs. Such costs can be calculated relatively easily after defining Key Resources, Key Activities, and Key Partnerships. Some business models, though, are more cost-driven than others. So-called “no frills” airlines, for instance, have built business models entirely around low Cost Structures.
The business model can be understood with some real life examples onward. However, there are few argument placed against the model saying that it excludes a lot of key factors for creating a thriving business mostly the external factors. Fundamentally, the main purpose of the Business Model Canvas is to visually represent how you intend to build or develop a successful business and providing a concise overview of how your operational processes link up with one another.
Benefits of Using the Business Model Canvas
The nine business model Building Blocks form the basis for a handy tool that may help to identify the key factors to design a implementable suitableness model. The Business Model Canvas encourage discussion, investigation and innovation to help business create, evolve or change the model responding market situation or competitor changeling. The benefits of Business Model Canvas can be outlined as below –
1. Visual Representation
The design of the canvas directly illustrates the way elements are connected and provides a clear understanding of the impact the building blocks have on each other. It provides an easy, visual representation to enable decision-makers to model business strategies and changes. Due to its visual nature, it’s easy to conceptualize and to share.
2. Ability to Adopt Change and Advancement
The BMC is meant to be a living document that’s always changing and evolving. It allows businesses to systematically model changes to the business and to analyze the impacts and potential trade-offs of proposed changes. It’s especially useful for teams to use when analyzing different ideas and options.
3. Holistic View of Business
The model consider a holistic view of business from partner selection to customer, cost to revenue, resource allocation to channel management. And at the center of all, its Value Proportion – the core of a business. It’s a backbone, a bearing wall that separates the front stage and backstage of your business theater.
4. Cross Functional Alignment
Business is complex cross functional ecosystem, where alignment among the teams and functional units is must. The canvas enables a leadership team to better understand how the building blocks relate to each other and how these relationships can be changed. It provide a transparent communication between people and teams that help business to ensure better alignment of the functional units and teams.
To ensure the continuity of business, it is must to be prepared and effective in the ever-changing market is to stay dynamic and ready to act. The idle way is to start by mapping out business at a very high level only with the most important information. Then, after analyzing the information linking among the blocks can be created to plot the business functions and resources effectively.
Stay in touch. Hope will bring more for you………….
Also Read: Fill In A Business Model Canvas: Learn through Real Life Examples
Also Read: Lean Canvas Business Model for Start Ups: Basics with Hypothetical Examples
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This is a great organizing tool to use before and/or during board meetings to reflect on performance and plan ahead for sustainability and effectiveness.
Yes, indeed. The Business Model Canvas is a really good tool to help entrepreneurs building the global vision of their business. Its simplicity helps to focus on the big picture. It lacks though of some dynamic to test financial consequences.
Very enriching and motivational to remap business mission especially for cost management and revenue maximization.
Even though the canvas and its application process are easy to understand the context of application may be complex and wicked. Thus, easiness of the business model development project is eventually case specific.
The developed canvas, most importantly, enables developing a business plan which is truly based on customer value. It also can also be used as a rapid prototype tool of a new business model and as a thinking and communication tool. If used in workshops with various manager and employee groups of the company, the new canvas can also function as a tool for creating a more customer-centred business culture. It enables placing the customer in the centre of all the elements of a business model. The modified canvas highlights the importance of deep customer insight, and it is designed to be applied to each customer profile separately, if several customer profiles are targeted.
The business model canvas is a great tool to help you sketch out your social enterprise idea. It evolves along with every round of testing and iteration your idea goes through – make sure to keep it up to date.
There are few variations on the business model canvas, specifically for social entrepreneurs and mission-driven businesses namely Social Lean Canvas and Mission Model Canvas by Alexander Osterwalder. These are great resources and I highly recommend playing around with them to see which language works best for you. At the end of the day, you should be able to fill in any version of the canvas and arrive at the same conclusions.
As a tool it is useful to some extend. However, it does not focus on analyzing your competition, nor does it guide you in terms of marketing and communicating your product or service – all of which inform your strategy. The canvas captures the key factors of your potential business; it’s up to you to complement elements that are crucial to YOUR business’ success.
I manage the continuous improvement department for a supply chain global business unit in a large technology corporation. The projects that we develop are focused in improving internal processes and are not intended to generate revenue most of the time. The customer segment are the employees that benefit from these projects. I get the feeling that this Mission Model Canvas is a better fit than a Business Model Canvas. Can be focus on the variations of this model to explore more.
This is helpful, but in the non-profit mission world, we still need a revenue stream because we need to raise money from donors, funders, government and others. The beneficiaries – deployment features work well, but the achievement or outcome segments are better positioned as value propositions. An example I am working on is an anti-poverty organization. Is there any non-profit canvas?
Is business model canvas is applicable for starups, since the business development environment will not similar for established business and starup business?
For startup business Lean Canvas is more applicable, I believe. The Lean Canvas is the adoption of the Business Model Canvas for startups and entrepreneurs. Where the Business Model Canvas tries to provide a complete model which encapsulates many types of business, the Lean Canvas focuses more on customer problems and solutions.
Thanks for your great explanation of business model. Could you give some example of successful business model?
I’m glad you liked it! I am working on it, the examples are coming soon! Be in touch!
Very informative article. Really liked the way you mapped the elements with each other, which further helped in better understanding of the concept.
Thanks. I’m glad you liked it!
The Canvas does one job well: encapsulating a focal view of your assumptions/hypothesis/point of view on the business model. How you arrive at those requires different tools.