Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers

In “Business Model Generation,” Alexander Osterwalder and Yves Pigneur deliver an invaluable handbook for anyone eager to innovate, improve, or transform organizations by designing better business models. This groundbreaking book, co-created by a global community of practitioners and researchers, transcends traditional strategy texts, offering a highly visual, practical, and comprehensive guide. It’s a call to action for visionaries and game changers to defy outdated models and construct the enterprises of tomorrow. This summary will meticulously break down every important idea, example, and insight from the book, ensuring comprehensive coverage in clear, accessible language.

Canvas

This foundational section introduces the Business Model Canvas as a shared language for describing, visualizing, assessing, and changing business models. It aims to provide a universally understandable concept that is simple, relevant, and intuitive, yet capable of capturing the complexities of enterprise functioning.

Definition of a Business Model

A business model is defined as the rationale of how an organization creates, delivers, and captures value. It acts as a blueprint for a strategy that is then implemented through organizational structures, processes, and systems. The authors emphasize that a common understanding of this concept is crucial for any productive discussion or workshop on business model innovation, allowing everyone to start from the same point and talk about the same thing.

The 9 Building Blocks

The core of the Business Model Canvas lies in its nine basic building blocks, which systematically show how a company intends to make money. These blocks cover four main areas of a business: customers, offer, infrastructure, and financial viability.

• Customer Segments (CS): This block defines the specific groups of people or organizations an enterprise aims to reach and serve. Without profitable customers, no company can survive. Customers are grouped into distinct segments based on common needs, behaviors, or other attributes, with a conscious decision made about which segments to serve. Different types of customer segments include mass market, niche market, segmented, diversified, and multi-sided platforms.
• Value Propositions (VP): This describes the bundle of products and services that create value for a specific Customer Segment. It’s the reason customers choose one company over another, solving a customer problem or satisfying a need. Value Propositions can be innovative or similar to existing offers with added features, and can create value through newness, performance, customization, “getting the job done,” design, brand/status, price (including free offers), cost reduction, risk reduction, accessibility, and convenience/usability.
• Channels (CH): These describe how a company communicates with and reaches its Customer Segments to deliver a Value Proposition. Channels are customer touch points that play a vital role in the customer experience, serving functions like raising awareness, helping evaluation, enabling purchase, delivering the Value Proposition, and providing post-purchase support. Channels can be direct (e.g., in-house sales force, website) or indirect (e.g., retail stores, wholesale distribution, partner-owned websites), and owned or partner-based.
• Customer Relationships (CR): This block describes the types of relationships a company establishes and maintains with specific Customer Segments. These relationships can range from personal to automated and are driven by motivations such as customer acquisition, customer retention, or boosting sales (upselling). Categories include personal assistance, dedicated personal assistance, self-service, automated services, communities, and co-creation.
• Revenue Streams (R$): These represent the cash a company generates from each Customer Segment. A company must understand what value each customer segment is truly willing to pay for. Revenue Streams can be transaction revenues (one-time payments) or recurring revenues (ongoing payments for value delivery or support). Ways to generate revenue include asset sale, usage fee, subscription fees, lending/renting/leasing, licensing, brokerage fees, and advertising. Each stream may have different pricing mechanisms, categorized as fixed menu pricing (list price, product feature dependent, customer segment dependent, volume dependent) or dynamic pricing (negotiation, yield management, real-time-market, auctions).
• Key Resources (KR): These are the most important assets required to make a business model work, enabling the creation and delivery of a Value Proposition, market reach, customer relationship maintenance, and revenue generation. Key resources can be physical, financial, intellectual, or human, and can be owned, leased, or acquired from partners.
• Key Activities (KA): This describes the most important things a company must do to make its business model work. Like Key Resources, they are essential for Value Proposition creation, market reach, relationship maintenance, and revenue generation. Key Activities can be categorized as production (designing, making, delivering products), problem solving (new solutions to individual customer problems, typical for consultancies), and platform/network (management, service provisioning, promotion for businesses built on platforms).
• Key Partnerships (KP): This block describes the network of suppliers and partners that make the business model work. Companies form partnerships to optimize business models, reduce risk, or acquire resources. Motivations include optimization and economy of scale (e.g., outsourcing, sharing infrastructure), reduction of risk and uncertainty (e.g., strategic alliances between competitors), and acquisition of particular resources and activities (e.g., licensing, access to customers).
• Cost Structure (C$): This describes all costs incurred to operate a business model, resulting from the elements defined in Key Resources, Key Activities, and Key Partnerships. Costs should be minimized, but their importance varies by business model type. Two broad classes are cost-driven (focus on minimizing costs, e.g., low-frills airlines) and value-driven (focus on value creation, e.g., luxury hotels). Cost Structures can have fixed costs, variable costs, economies of scale, and economies of scope.

The Business Model Canvas Template

The Business Model Canvas itself is a tool designed to resemble a painter’s canvas, preformatted with the nine blocks. It’s best used on a large surface, allowing groups to collaboratively sketch and discuss business model elements using Post-it® notes or board markers. This hands-on, visual approach fosters understanding, discussion, creativity, and analysis. The example of Apple’s iPod/iTunes business model perfectly illustrates how the combination of device, software, and online store (a superior business model) disrupted the music industry, not just a better product. Apple’s Value Proposition centered on easy search, purchase, and enjoyment of digital music, backed by deals with record companies and profiting mainly from iPod sales while protecting market share through the online store. Various practitioners share their experiences, emphasizing how the Canvas helps them to visualize, clarify, and innovate business models, from start-ups to large corporations and non-profits, translating business plans into actionable processes.

Patterns

This section delves into business model patterns, which are similarities in characteristics, arrangements of building blocks, or behaviors across different business models. These patterns offer insights into business model dynamics and serve as inspiration for innovation. The book translates five key business concepts—Unbundling, the Long Tail, Multi-Sided Platforms, FREE, and Open Business Models—into the standardized language of the Business Model Canvas, making them comparable and applicable.

Unbundling Business Models

The Unbundling Business Model is based on the idea that corporations fundamentally comprise three distinct business types: Customer Relationship businesses, product innovation businesses, and infrastructure businesses. Each type has unique economic, competitive, and cultural imperatives, and ideally, they should be “unbundled” into separate entities to avoid conflicts and undesirable trade-offs.

• Conflicts in Bundled Models: Historically, industries like private banking integrated all three types, leading to conflicts such as serving markets with different dynamics (long-term relationships vs. fast-changing product sales), conflicts of interest (selling own products vs. neutral advice), and cost structure mismatches (remuneration-intensive advisory vs. cost-driven transaction platforms).
• The Unbundled Telco: Mobile telecommunications firms, traditionally competing on network quality, are unbundling by outsourcing network operations (infrastructure) to equipment manufacturers like Ericsson and Nokia Siemens Networks. This allows telcos to sharpen their focus on branding and segmenting customers (Customer Relationship business), leveraging their key asset: the customer base and subscriber trust. Simultaneously, they partner with smaller, creative firms (product innovation) for content and service development.
• Unbundled Patterns in Action: The unbundled Customer Relationship business model focuses on customer acquisition and retention, building strong relationships, and generating revenue from a broad scope of products based on customer trust. The product innovation business emphasizes R&D, creative talent, and high premiums for novelty. The infrastructure business focuses on delivering infrastructure services, characterized by high fixed costs leveraged through scale and low margins on high volume.

The Long Tail

Long Tail Business Models are about “selling less of more,” concentrating on offering a vast number of niche products, each selling infrequently. The aggregate sales of these niche items can be as lucrative as, or even exceed, the traditional model where bestsellers drive most revenues. This model requires low inventory costs and robust platforms to make niche content easily available.

• Economic Triggers: Chris Anderson, who coined the term, attributes the rise of the Long Tail to the democratization of production tools (falling technology costs enable amateurs), the democratization of distribution (Internet lowers inventory, communication, and transaction costs), and falling search costs (powerful search/recommendation engines connect supply with demand).
• Transformation of Publishing: The traditional book publishing model is bestseller-centric, rejecting less promising authors due to high printing and promotion costs. Lulu.com revolutionized this by enabling anyone to publish, offering self-service tools for crafting, printing, and distributing work through an online marketplace. Books are printed on demand, incurring no costs if a title doesn’t sell. Lulu.com acts as a multi-sided platform connecting authors and readers with user-generated niche content.
• LEGO®’s New Long Tail: LEGO introduced LEGO Factory, allowing customers to design and order their own LEGO kits using software. This moved beyond mass customization into Long Tail territory by selling user-designed sets online. While a small portion of revenue, it expands the product line beyond best-selling kits and transforms passive users into active participants.
• Long Tail Pattern Characteristics: Key partners are niche content providers (professional or user-generated). The platform is the key resource, with activities focused on its development, maintenance, and content acquisition. Main costs are platform-related. The Value Proposition offers a wide scope of “non-hit” items, often facilitating user-generated content. Revenue streams (advertising, sales, subscriptions) aggregate small revenues from many items. It targets niche customers, often relying on the Internet for customer relationships and transactions.

Multi-Sided Platforms

Multi-Sided Platforms bring together two or more distinct but interdependent groups of customers. Their value proposition to one group is dependent on the presence of other groups, creating value by facilitating interactions. These platforms grow in value as more users join, a phenomenon known as the network effect.

• Interdependence and Value Creation: Examples include Visa (merchants and cardholders), Microsoft Windows (hardware manufacturers, developers, users), and Google (Web surfers, advertisers, content owners). The platform must attract all groups simultaneously.
• The “Chicken and Egg” Dilemma: Platforms often subsidize one customer segment with inexpensive or free offers to attract them, subsequently drawing the “other side” of the platform. Metro, a free newspaper, attracted readers with free content to attract advertisers. Microsoft offered its Windows SDK for free to encourage application development. Sony’s Playstation 3, however, showed a backfiring strategy by subsidizing the console heavily without sufficient game royalties.
• Google’s Business Model: Google’s core is providing targeted text advertising (AdWords) globally. This offers distinct Value Propositions to three interdependent segments: advertisers, Web surfers (with free search, Gmail, Maps), and third-party content owners (AdSense, earning money by showing Google ads). Google makes money from advertisers bidding on keywords, subsidizing the other two segments. Its key resource is the search platform, with activities focused on infrastructure, service management, and promotion.
• Wii versus PSP/Xbox: Video game consoles are double-sided platforms. Sony and Microsoft targeted “hardcore gamers” with expensive, subsidized consoles, making profits from proprietary games and third-party royalties. Nintendo’s Wii disrupted this by targeting casual gamers with less technologically advanced but motion-controlled (fun factor) consoles. This allowed Nintendo to profit from both console sales and game royalties, breaking from the industry norm of subsidizing hardware.
• Apple’s Evolution: Apple transitioned from the iPod (standalone device) to a powerful platform business model. The iPod & iTunes Music Store connected music rightsholders with buyers, leading to Apple’s dominance in online music. The iPhone & App Store solidified this by allowing third-party application sales, with Apple taking a 30% royalty, demonstrating a robust multi-sided platform strategy.
• Multi-Sided Platform Pattern Characteristics: The platform is the key resource, with management, service provisioning, and promotion as key activities. Main costs are platform development and maintenance. The Value Proposition attracts user groups, facilitates matchmaking, and reduces transaction costs. It features two or more interdependent customer segments, each with its own Value Proposition and Revenue Stream. Subsidizing one segment is a crucial pricing decision.

FREE as a Business Model

The FREE business model enables at least one substantial Customer Segment to continuously benefit from a free-of-charge offer, with non-paying customers financed by another part of the business model or another Customer Segment. This model has exploded with the rise of digital products and services, where marginal replication and distribution costs are near zero.

• Patterns of FREE: The book explores three main patterns: advertising-based (multi-sided platform), freemium (free basic, paid premium services), and bait & hook (free/inexpensive initial offer leading to repeat purchases).
• Advertising: A Multi-Sided Platform Model: This is a well-established pattern where one side of the platform attracts users with free content/services, and the other generates revenue by selling ad space. Metro, the free newspaper, achieved high circulation by distributing for free in high-traffic commuter zones, allowing it to attract advertisers. However, mass users don’t guarantee ad revenue, as Facebook initially demonstrated, where user responsiveness to ads was low.
• Newspapers: Free or Not Free?: The newspaper industry struggles as free online content and free papers (like Metro) erode traditional revenue sources (sales, subscriptions, advertising). High fixed costs of journalism remain, while digital ad revenues haven’t compensated for declining print revenues. Many papers fail to charge for online content when similar news is free elsewhere.
• Freemium: Get the Basics for Free, Pay for More: This model, popular in Web-based services, blends free basic services with paid premium ones. A large user base benefits from free offers, with a small percentage (typically <10%) subscribing to premium services and subsidizing free users. Key metrics are the average cost of serving a free user and conversion rates to premium. Flickr offers a free basic account with limited storage, and a “pro” account for unlimited uploads and features for an annual fee.
• Open Source: Freemium with a Twist: Companies like Red Hat disrupt traditional enterprise software. Instead of charging per-user licenses for proprietary software, Red Hat builds its product on free open-source software (e.g., Linux). They charge subscriptions for stable, tested, service-ready versions, unlimited support, and legal ownership, appealing to companies worried about responsibility for free software. The open-source community continuously improves the software, reducing Red Hat’s development costs.
• Skype’s Disruption: Skype offered free voice calling services over the Internet using peer-to-peer technology, drastically lowering its cost structure compared to traditional telcos (no need to manage its own network). Users pay only for premium services like SkypeOut (calling landlines/mobiles) at very low rates, subsidizing the free Skype-to-Skype calls. This model disrupted the telecommunications industry, eating into lucrative international call revenues.
• The Insurance Model: Freemium Upside Down: In contrast to freemium, a large base of customers pay small regular fees to protect themselves from unlikely, financially devastating events. This large paying base subsidizes a small group with actual claims. REGA, a Swiss non-profit, is financed by over two million “patrons” who are exempt from costly mountain rescue fees, protecting them from accident costs.
• Bait & Hook: Also known as “loss leader” or “razor & blades,” this pattern uses an attractive, inexpensive, or free initial offer to encourage continuous future purchases of related products/services. Mobile network operators offer free telephone handsets with service subscriptions, covering the loss through subsequent monthly fees. King C. Gillette popularized this by selling razor handles cheaply to drive demand for high-margin disposable blades. Inkjet printers are another example, sold cheap with high-margin ink cartridges. Success depends on controlling the “lock-in” (e.g., through patents).

Open Business Models

Open Business Models, coined by Henry Chesbrough, involve systematically collaborating with outside partners to create and capture value. This can be “outside-in” (exploiting external ideas within the firm) or “inside-out” (providing external parties with idle internal ideas or assets).

• “Outside-In” Innovation: An organization brings external ideas, technology, or intellectual property into its development and commercialization processes. This can shorten time-to-market and increase R&D productivity. Procter & Gamble’s “Connect & Develop” strategy aimed to create 50% of its innovations with outside partners by building “bridges” to technology entrepreneurs, Internet platforms, and retirees. This led to soaring R&D productivity.
• “Inside-Out” Innovation: Organizations license or sell their intellectual property or technologies, particularly unused assets, to outside parties. GlaxoSmithKline’s “patent pool” strategy made intellectual property relevant to understudied diseases accessible to other researchers. While it helped make drugs more accessible in poorer countries and facilitated research, it also monetized internal assets that might otherwise lie idle due to the company’s focus on blockbuster drugs.
• The Connector: InnoCentive: This company acts as an independent intermediary connecting “seekers” (organizations with research problems) and “solvers” (researchers eager to solve challenges). Seekers offer cash prizes for successful solutions. InnoCentive’s Value Proposition is aggregating and connecting these two sides, embodying a multi-sided platform pattern that reduces search costs for open innovation.
• Open Business Model Patterns Overview:
  • Outside-In: External organizations are key partners. Costs are incurred for acquiring innovation, but internal R&D productivity increases. Key activities connect external entities with internal processes. Requires specific resources to build external network gateways. Well-suited for companies with strong brands and channels to leverage existing customer relationships.
  • Inside-Out: Unusable internal R&D outputs (knowledge, technology, IP) that are valuable to other industries generate “easy” additional revenue streams. Organizations with substantial internal R&D often have unutilized intellectual assets due to a sharp focus on core businesses, making them good candidates for this model.

Design

This section focuses on design techniques and tools that can help create better and more innovative business models. It posits that businesspeople, unknowingly, practice design daily when shaping organizations, strategies, and processes. Design, in this context, is about relentlessly inquiring into the best way to create new, discover unexplored, and achieve functional value for users, particularly in unfamiliar territory. The goal is to extend the boundaries of thought and generate new options.

Customer Insights

Customer Insights emphasizes building business models from a deep understanding of customers, avoiding the common error of neglecting the customer perspective despite heavy investment in market research. This approach can reveal completely new opportunities, guiding choices in Value Propositions, Channels, Customer Relationships, and Revenue Streams.

• Deep Understanding: Successful innovation requires understanding customers’ environment, daily routines, concerns, and aspirations. Apple’s iPod success stemmed from understanding that customers wanted a seamless way to search, find, download, and listen to digital content, even if they wouldn’t explicitly ask for a “digital media player.”
• Beyond Stated Needs: As Henry Ford famously noted, asking customers “what they wanted” would have yielded “a faster horse.” Innovators must develop deeper understanding, sometimes involving social scientists as Intel, Nokia, and Telenor do.
• Targeting New Segments: Innovators should not exclusively focus on existing customer segments, but also look to new or unreached ones. easyJet made air travel accessible to lower-income customers, and Zipcar freed city dwellers from car ownership burdens by offering hourly rentals.
• The Empathy Map: This tool, developed by XPLANE, helps go beyond demographics to understand a customer’s environment, behavior, concerns, and aspirations. It involves asking six questions to build a profile:
  • What does she SEE? (Environment, offers, problems)
  • What does she HEAR? (Influences from friends, spouse, media)
  • What does she REALLY THINK AND FEEL? (Important beliefs, emotions, fears, dreams)
  • What does she SAY AND DO? (Attitude, public behavior, conflicts between words and thoughts)
  • What is the customer’s PAIN? (Frustrations, obstacles, feared risks)
  • What does the customer GAIN? (True wants/needs, success metrics, strategies)
• B2B Application: The Empathy Map can be applied to B2B customers, like understanding a Chief Information Officer (CIO)‘s needs for Microsoft’s online Office applications. This continuous customer viewpoint helps question business model assumptions and guide design.

Ideation

Ideation is the creative process for generating a large number of business model ideas and successfully isolating the best ones. It’s crucial for designing viable new business models, especially as traditional industry boundaries blur.

• Overcoming Status Quo Bias: The challenge is to ignore the status quo and operational constraints to generate truly new ideas. Business model innovation isn’t about looking back, copying competitors, or benchmarking; it’s about challenging orthodoxies to meet unsatisfied, new, or hidden customer needs.
• Two Phases: Ideation has two main phases: idea generation (quantity over quality) and synthesis (discussion, combination, and narrowing down to viable options). Innovations can expand existing models or be disruptive.
• Epicenters of Business Model Innovation: Ideas can originate from any of the nine building blocks, with transformative innovations affecting multiple blocks. Four epicenters are identified:
  • Resource-Driven: Originates from an organization’s existing infrastructure or partnerships (e.g., Amazon Web Services leveraging Amazon.com’s retail infrastructure).
  • Offer-Driven: Creates new Value Propositions affecting other blocks (e.g., Cemex transforming its business by promising 4-hour cement delivery).
  • Customer-Driven: Based on customer needs, access, or convenience (e.g., 23andMe bringing personalized DNA testing to individuals).
  • Finance-Driven: Driven by new revenue streams, pricing, or cost structures (e.g., Xerox leasing photocopiers at a low monthly fee plus per-copy charges).
  • Multiple-Epicenter Driven: Significant impact on several building blocks (e.g., Hilti moving from selling tools to renting sets).
• The Power of “What If” Questions: Challenging conventional assumptions with “what if” questions helps break free from current model constraints. These questions provoke thought and explore what might be possible, even if seemingly impossible (e.g., “What if furniture buyers assembled products themselves?” – IKEA; “What if voice calls were free worldwide?” – Skype). They are starting points to discover the business model that could make the supposition work.
• The Ideation Process: A general approach involves five steps:
  1. Team Composition: Assemble a diverse team (seniority, age, experience, business unit, customer knowledge, expertise) to ensure fresh ideas.
  2. Immersion: Research and study relevant knowledge (customers, technology, environment), lasting from weeks to brief workshop exercises (e.g., Empathy Map).
  3. Expanding: Generate as many ideas as possible for each building block, focusing on quantity, not quality. Brainstorming rules (defer judgment, one conversation, quantity, visual, wild ideas) are crucial.
  4. Criteria Selection: Define criteria (e.g., implementation time, revenue potential, customer resistance, competitive advantage) to narrow down ideas.
  5. “Prototyping”: Sketch and discuss shortlisted ideas as business model prototypes using the Business Model Canvas.
• Brainstorming Rules: To maximize useful ideas: Stay focused on the problem; Enforce rules (defer judgment, one conversation, quantity, visual, wild ideas); Think visually (Post-its, sketches); Prepare with immersion experiences. The Silly Cow Exercise is a warm-up to disconnect from orthodoxies and foster creativity.

Visual Thinking

Visual Thinking is indispensable for working with business models, involving the use of pictures, sketches, diagrams, and Post-it™ notes to construct and discuss meaning. It makes complex business models tangible, facilitating clearer discussions and changes by depicting elements and their interrelationships as a system.

• Value of Visualization: It turns tacit assumptions into explicit information, giving “life” to a business model and facilitating co-creation. It serves as a conceptual anchor for discussions, shifting discourse from abstract to concrete. It helps unearth logical gaps in existing models and explore options for new ones.
• Visualizing with Post-it™ Notes: An indispensable tool, Post-it™ notes act as idea containers easily added, removed, or shifted between blocks. Guidelines: use thick markers, one element per note, few words per note. The discussion around placement and influence is as important as the final picture.
• Visualizing with Drawings: Drawings are powerful because they instantly convey messages and emotions, often more effectively than words. Even crude drawings make concepts tangible and understandable (e.g., stick figures for emotions, money bags for proportions). They trigger constructive discussion and new ideas.
• Four Processes Improved by Visual Thinking:
  • Understand the Essence: Visual grammar (Canvas as a conceptual map), capturing the big picture (right amount of information, simplifies reality), and seeing relationships (interdependencies between elements, e.g., low-cost airline’s homogenous fleet).
  • Enhance Dialogue: Provides a collective reference point (makes implicit assumptions explicit), shared language (vocabulary and grammar for focused discussion), and joint understanding (experts drawing together gain shared understanding of components and relationships).
  • Explore Ideas: Acts as an idea trigger (“I begin with an idea and then it becomes something else” – Picasso), and allows for “play” (discussing impacts of removing/adding elements).
  • Improve Communication: Creates company-wide understanding (shared strategic direction), selling internally (powerful visual stories for pitches), and selling externally (strong visuals for investors/collaborators).
• Different Types of Visualization: Visual representations can vary in detail. A simple sketch of Skype’s business model highlights key differences from traditional telcos. A more detailed drawing of Sellaband (crowd-funding for artists) paints the big picture for investors and partners.
• Telling a Visual Story: A powerful way to explain a business model is to tell a story image by image, either by drawing on the spot or using pre-drawn Post-it™ notes. This allows the audience to follow the build-up of the model.
• Visual Storytelling Activity:
  1. Map Your Business Model: Create a simple, text-based version on individual Post-it™ notes.
  2. Draw Each Business Model Element: Replace each note with a simple drawing.
  3. Define the Storyline: Decide the order of notes to tell your story, starting anywhere.
  4. Tell the Story: Narrate using one drawn Post-it™ at a time. The SuperToast, Inc. example is given as an exercise to practice this.

Prototyping

Prototyping is a powerful tool for developing new, innovative business models by making abstract concepts tangible and facilitating idea exploration. Originating from design and engineering, it is gaining traction in business for process, service, and strategy design.

• Prototyping’s Value: A business model prototype can be a sketch, a detailed Canvas concept, or a financial spreadsheet. It’s not necessarily a rough picture of the final model but a thinking tool for exploring different directions. It forces addressing issues of structure, relationship, and logic not possible through mere thought. Multiple prototypes at different refinement levels are needed to truly understand pros/cons and advance inquiry.
• Design Attitude: This mindset, contrasted with the traditional “decision attitude,” emphasizes an uncompromising commitment to discovering new and better business models by sketching many prototypes—both rough and detailed. It’s about exploring absurd or impossible ideas, rapidly discarding them, and accepting uncertainty until a design matures. This leads to creating options, not just choosing between them.
• Prototypes at Different Scales: Similar to architecture and product design, business models can be prototyped at different conceptual scales:
  • Napkin Sketch: Outline and pitch a rough idea, including Value Proposition and main Revenue Streams.
  • Elaborated Canvas: Develop a full Canvas to explore all elements, business logic, market potential, and relationships between blocks.
  • Business Case: Turn the detailed Canvas into a spreadsheet to estimate earning potential, calculate costs/revenues, and run financial scenarios.
  • Field-Test: Investigate customer acceptance and feasibility of selected aspects (e.g., Value Proposition, Channels, pricing) in the market.
• Example: Publishing a Book: Eight different business model prototypes illustrate various ways to publish a book, each highlighting different elements of its model.
• Activity: New Consulting Business Model: An exercise is provided to help redesign a strategy consultancy’s business model, applying customer insights (Empathy Map), idea generation, and prototyping with the Canvas.

Storytelling

Storytelling is an undervalued and underused art in business that can serve as a powerful tool to make new business models more tangible. New or innovative business models are often difficult to describe and understand, challenging the status quo and inviting resistance. Stories help overcome this.

• Why Storytelling?:
  • Introducing the New: Compellingly pitches new business model ideas to management, quickly outlining broad ideas before details.
  • Make the New Tangible: Illustrates how the model creates value, like “applying bright colors to canvas.”
  • Pitching to Investors: Ideal for introducing a venture and business model to investors before diving into the full business plan.
  • Clarification: Clearly introduces how the business model solves a customer problem, gaining “buy-in.”
  • Engaging Employees: Powerfully engages employees during transitions, helping them understand the new model and its implications for them. People are moved more by stories than by logic.
• Making Business Models Tangible: Stories typically use a single protagonist to introduce the new model in an engaging way. Two possible starting points:
  • Employee Observer: Explains the business model from an employee’s perspective, demonstrating why the new model makes sense (e.g., solves customer problems, better use of resources). The employee embodies the organization’s inner workings.
  • Customer Jobs: Casts a customer as the protagonist, illustrating challenges and how the organization creates value for them, making their life easier. This should be authentic, not patronizing.
• Making the Future Tangible: Stories can blur reality and fiction to impart tangibility to different future versions, helping to challenge the status quo or justify adopting a new business model.
  • Provoke Ideas: Stories can vividly bring to life a future where the current model is obsolete, creating urgency and openness to new models.
  • Justify Change: Shows how a new business model is ideally suited for an evolving competitive landscape, helping people imagine necessary evolution.
• Developing the Story: Keep stories simple with one protagonist. The example of Amazon’s Web Services is told from both a “Company Perspective” (Ajit, Senior IT Manager) and a “Customer Perspective” (Randy, Web Entrepreneur) to illustrate how the same business model can be explained with different focal points and benefits.
• Techniques for Storytelling:
  • Talk & Image: Narrate with one or several images (low time/cost, good for group presentations).
  • Video Clip: Use video to blur reality and fiction (medium-high time/cost, for large audiences or critical decisions).
  • Role Play: Participants act out protagonists’ roles (low time/cost, for workshops).
  • Text & Image: Combine text with images (low time/cost, for reports or broadcasts).
  • Comic Strip: Series of cartoon images (low-medium time/cost, for reports or broadcasts).
• SuperToast, Inc. Exercise: A simple exercise using the SuperToast, Inc. business model Canvas to practice storytelling skills by inventing narratives and starting from different building blocks.

Scenarios

Scenarios are useful in guiding the design of new business models or innovating existing ones, making abstract concepts tangible. Their primary function is to inform the business model development process by providing specific and detailed design contexts.

• Two Types of Scenarios:
  • Customer Scenarios: Describe different customer settings, how products/services are used, customer types, concerns, desires, and objectives. They build on customer insights by creating distinct, concrete images of specific situations. Examples of location-based GPS services (Home Delivery, Tourists, Wine Farmer) illustrate how questions about Value Proposition, Channels, Relationships, and Revenue Streams emerge from these scenarios.
  • Future Scenarios: Imagine possible future environments in concrete detail, not to predict, but to help innovators reflect on appropriate business models. This practice, known as scenario planning, helps prepare for the future by understanding how a model might need to evolve under certain conditions.
• Pharma Business Models of the Future: The pharmaceutical industry is used as an example, facing declining R&D productivity and expiring patents. Four future scenarios are developed based on two criteria: emergence of personalized medicine and shift from treatment toward prevention. These create four distinct quadrants:
  • Business as Usual: No personalized medicine, treatment remains core.
  • My.Medicine: Personalized medicine emerges, treatment remains core.
  • The Healthy Patient: Shift to preventive medicine, personalized medicine is a fad.
  • Reinventing Pharma: Personalized and preventive medicine become new growth areas.
• Applying Scenarios in Workshops:
  1. Develop a Set of Future Scenarios: Based on two or more main criteria.
  2. Describe Each Scenario with a Story: Outlining main elements.
  3. Workshop: Develop one or more appropriate business models for each scenario, either collectively or in parallel groups.
• Goal of Combining Scenarios: To help organizations prepare for the future by forcing participants to project themselves into concrete “futures” and make clear cases for their business model choices within that context. This engenders meaningful discussion and jumpstarts creativity.

Strategy

This section re-interprets strategy through the lens of the Business Model Canvas, aiding in constructively questioning established business models and strategically examining the environment. It covers four key strategic areas: the Business Model Environment, Evaluating Business Models, a Business Model Perspective on Blue Ocean Strategies, and Managing Multiple Business Models.

Business Model Environment

Understanding the Business Model Environment is crucial for conceiving stronger, more competitive business models. Continuous environmental scanning is essential due to increasing complexity, uncertainty, and market disruptions. The environment acts as a “design space” influencing design choices and informing decisions, with potential for breakthrough models to even reshape the industry.

• Mapping the Environment: Four main areas are proposed for mapping the external environment:
  • Market Forces: Identifies key issues driving and transforming the market from customer and offer perspectives (e.g., skyrocketing healthcare costs, shift to prevention, convergence of treatments, emerging markets).
  • Industry Forces: Identifies incumbent competitors, new entrants, substitute products/services, suppliers, and stakeholders (e.g., consolidation in pharma, generic drug companies as new entrants, prevention as substitute, influence of governments/regulators).
  • Key Trends: Identifies technology, regulatory, societal/cultural, and socioeconomic trends (e.g., pharmacogenomics, personalized medicine, direct-to-consumer marketing bans, aging society, growing middle class in emerging markets).
  • Macroeconomic Forces: Outlines global market conditions, capital markets, and commodities/resources (e.g., global recession, tight capital markets, battle for talent, fluctuating oil prices).
• Evolution in a Changing Environment: A competitive business model today might be obsolete tomorrow. Hypotheses about the future provide a “design space” for potential business model options. Business model scenarios are valuable tools for forecasting and preparing the organization for future challenges.

Evaluating Business Models

Regularly evaluating a business model is like an annual checkup, assessing the health of its market position and informing adaptations, from incremental improvements to full-scale innovation initiatives. Failing to do so can lead to a company’s demise, as seen in the automobile, newspaper, and music industries. This involves both a big picture assessment and a detailed SWOT analysis of each building block.

• Big Picture Assessment: Amazon.com: In 2005, Amazon’s strength was customer reach and product selection, but its weakness was weak margins from low-value products like books and music. To address this, Amazon pursued a two-pronged approach: continue growing online retail and launch new initiatives like Fulfillment by Amazon and Amazon Web Services. These leveraged existing strengths (fulfillment, IT expertise), targeted underserved markets, and promised higher margins than core retail, demonstrating strategic business model innovation.
• Detailed SWOT Assessment of Each Building Block: Combining classic SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) with the Business Model Canvas provides a focused assessment. SWOT asks four questions: What are your organization’s strengths (internal, helpful)? Weaknesses (internal, harmful)? Opportunities (external, helpful)? Threats (external, harmful)? These questions are applied to the overall business model and each of its nine building blocks.
  • Assessing Strengths: Questions about competitive advantages in each block (e.g., unique customer segments, strong brand, proprietary technology, low-cost structure).
  • Assessing Weaknesses: Questions about vulnerabilities (e.g., declining customer segment, weak channels, high costs, dependency on partners).
  • Assessing Opportunities: Questions about potential for growth or improvement (e.g., new customer segments, leveraging emerging technologies, new revenue streams).
  • Assessing Threats: Questions about external forces that could harm the model (e.g., new competitors, regulatory changes, shifting customer preferences).
• Using SWOT Results: The assessment yields a snapshot of the current state and suggests future trajectories, serving as valuable input for designing new business model options or prototypes that the enterprise can evolve towards.

Business Model Perspective on Blue Ocean Strategy

This section blends business model tools with the Blue Ocean Strategy concept by Kim and Mauborgne. The Business Model Canvas serves as a powerful extension for questioning incumbent business models and creating new, more competitive ones through fundamental differentiation, rather than competing in existing industries.

• Value Innovation: Blue Ocean Strategy emphasizes creating new, uncontested market space by simultaneously increasing value for customers (new benefits) and reducing costs (eliminating less valuable features). This rejects the traditional trade-off between differentiation and lower cost.
• Four Actions Framework: Kim and Mauborgne propose four key questions to challenge an industry’s strategic logic and established business model:
  1. Which factors should be eliminated?
  2. Which factors should be reduced well below industry standard?
  3. Which factors should be raised well above industry standard?
  4. Which factors should be created that the industry has never offered?
• Blending Approaches: The Business Model Canvas, with its right-hand (value/customer) and left-hand (cost/infrastructure) sides, perfectly complements Blue Ocean Strategy. Asking the Four Actions Framework questions about each building block allows systematic analysis of innovation and its impact across the entire model.
• Cirque du Soleil Example: This iconic example eliminated costly elements of traditional circus (animals, star performers) while creating new ones (theme, artistic atmosphere, refined music). This revamped Value Proposition attracted new customer segments (theatergoers, sophisticated adults), allowing for substantially higher ticket prices.
• Nintendo’s Wii Example: Nintendo differentiated from Sony/Microsoft by assuming consoles didn’t need leading-edge performance. It reduced console performance and created motion control technology, targeting casual gamers. This allowed Nintendo to reduce costs (off-the-shelf components) and eliminate console subsidies, profiting from every console sold.
• Questioning Your Canvas: The blended framework provides three starting points for questioning a business model using the Four Actions Framework:
  • Cost Impact Exploration: Identify high-cost infrastructure elements, evaluate consequences of eliminating/reducing them, and analyze value created by new investments.
  • Exploring Value Proposition Impact: Ask the Four Actions questions, considering simultaneous impact on the cost side and other value-side elements (Channels, Relationships, Revenue Streams, Customer Segments).
  • Exploring Customer Impact: Apply the framework to Channels, Relationships, and Revenue Streams, analyzing cost implications of serving new customer segments.

Managing Multiple Business Models

Visionaries and game changers face the challenge of designing and implementing new business models, while established organizations face the daunting task of implementing and managing new models alongside existing ones. This is the realm of ambidextrous organizations.

• Integration vs. Separation: The decision on whether to integrate a new model into the existing structure or spin it off into a separate entity depends on:
  • Severity of Conflict: How much conflict exists between the new and old models.
  • Strategic Similarity: How strategically similar the new model is to the old.
  • Risk: The risk that the new model will negatively affect the established one (brand, earnings, legal).
• Evolution Over Time: Choices can evolve; initial separation might lead to later integration (e.g., e.Schwab).
• SMH’s Autonomous Model for Swatch: In the 1980s, the Swiss watch industry faced crisis. SMH (later Swatch Group) under Nicolas Hayek launched the low-cost Swatch to compete with Asian rivals, despite fears of cannibalizing higher-end brands. SMH chose integration but gave Swatch and other brands near-complete autonomy in product/marketing, while centralizing manufacturing, purchasing, and R&D for economies of scale.
• The Nespresso Success Model: Nestlé’s Nespresso (single-serve premium coffee) was initially developed in a research lab. After an unsuccessful initial market entry, Nestlé created Nespresso SA as a wholly-owned subsidiary, independent of the traditional Nescafé coffee business. This separation allowed Nespresso to focus on direct sales to high-income households, despite Nestlé’s mass-market retail focus. This distinct approach, with different logistics and resources, avoided direct cannibalization and allowed Nespresso to thrive (averaging >35% annual growth). Nestlé later launched Nescafé Dolce Gusto (complementary system) fully integrated into Nescafé’s mass-market model.
• Daimler’s car2go Business Model: Daimler’s car2go (citywide fleet of Smart cars for on-demand rental) is a service model complementing its core vehicle manufacturing. Daimler’s Business Innovation Department developed and piloted it in Ulm, Germany, then Austin, Texas. At the time of writing, Daimler had deferred the decision on whether to internalize or spin off car2go, choosing to design and test first, then decide on organizational structure based on the relationship to its core business. This phased approach allows for assessment before committing to integration or separation.

Process

This chapter synthesizes concepts and tools from the book to simplify the setup and execution of a business model design initiative. It proposes a generic, adaptable business model design process suitable for various organizational needs and objectives.

Business Model Design Process

Every business model design project is unique, driven by diverse objectives such as satisfying unmet market needs, bringing new technologies to market, improving/disrupting existing markets, or creating entirely new markets. For established organizations, motivations might include reacting to a crisis, adapting to change, launching new offerings, or proactively exploring future models.

• Design Attitude vs. Decision Attitude: Business model innovation is messy and unpredictable, requiring design attitude – dealing with ambiguity, exploring many possibilities, and accepting uncertainty until a good solution emerges. This contrasts with the decision attitude, which assumes alternatives are easy to come up with and focuses on analysis, decision, and optimization. The “Design Squiggle” illustrates the messy, opportunistic nature of design leading to clarity.
• Five Phases of the Business Model Design Process: The process is rarely linear, with “Understand” and “Design” phases often proceeding in parallel.
  • Phase 1: Mobilize:
    • Objective: Prepare for a successful business model design project.
    • Focus: Setting the stage.
    • Description: Frame objectives, test preliminary ideas, plan, assemble a diverse team. Establish the Business Model Canvas as a shared language. A key danger is overestimating initial ideas; “kill/thrill” sessions can mitigate this.
    • Established Company Perspective: Crucial for legitimacy (top management involvement), managing vested interests, building a cross-functional team, and orienting decision makers (practical, story-driven communication).
  • Phase 2: Understand:
    • Objective: Research and analyze elements needed for the business model design effort.
    • Focus: Immersion.
    • Description: Scan the environment (market research, customer study, expert interviews, competitor analysis), and collect ideas. Avoid over-researching (“analysis paralysis”) by prototyping early. Develop deep customer knowledge (e.g., Empathy Map). Question industry assumptions and look beyond the existing client base.
    • Established Company Perspective: Map and assess existing business models, look beyond the status quo, search beyond existing client bases, and demonstrate progress to senior management.
  • Phase 3: Design:
    • Objective: Generate and test viable business model options, and select the best.
    • Focus: Inquiry.
    • Description: Brainstorm, prototype, test, and select. Requires expansive thinking and the ability to abandon the status quo during ideation. Explore multiple ideas, partnerships, revenue streams, and channels. Test prototypes with outside experts or prospective clients, leveraging storytelling. Understand that initial resistance doesn’t mean an idea won’t work (e.g., Grameenphone).
    • Established Company Perspective: Prevent watering down bold ideas (use risk/reward profiles), encourage participatory design (cross-functional team), decide on integration vs. separation (Managing Multiple Business Models), and avoid short-term focus on revenue.
  • Phase 4: Implement:
    • Objective: Implement the business model prototype in the field.
    • Focus: Execution.
    • Description: Translate the design into an implementation plan (projects, milestones, budget, roadmap). Manage uncertainties and rapidly adapt to market feedback (e.g., Skype handling user complaints).
    • Established Company Perspective: Proactively manage roadblocks (buy-in from early participation), ensure sustained project sponsorship, choose the right organizational structure (Managing Multiple Business Models), and conduct a visible internal communication campaign (stories, visualizations).
  • Phase 5: Manage:
    • Objective: Adapt and modify the business model in response to market reaction.
    • Focus: Evolution.
    • Description: Continuously assess the model and scan the environment for external factors. Assign responsibility for business model evolution. Encourage all employees to think about business model improvement. Manage a “portfolio” of business models, proactively replacing cash-generating ones with future growth models. Avoid becoming a victim of success (e.g., Dell failing to rethink its model).
    • Established Company Perspective: Establish “business model governance” (orchestrate models, track evolution, manage master template), manage synergies and conflicts between models, proactively manage a business model portfolio, and maintain a beginner’s mindset to constantly reassess.

Outlook

The “Outlook” section offers a forward-looking perspective on five key topics that extend beyond the core discussions of the book, each meriting deeper exploration.

Beyond-Profit Business Models

The Business Model Canvas is not limited to for-profit corporations; it is equally applicable to non-profit organizations, charities, public sector entities, and for-profit social ventures. Every organization, to survive, must generate enough revenue to cover expenses, thus possessing an “enterprise model.” The distinction lies in the mission: maximizing earnings vs. ecological/social/public service mandates.

• Third-Party Funded Models: Here, the product/service recipient is not the payer (e.g., government funding schools, donors funding Oxfam). The third party pays to fulfill a mission. A risk is misaligned incentives, where the financer becomes the main “customer,” potentially valuing contributions over recipient needs. However, for services like education or healthcare, direct payment by recipients may not always work, necessitating the exploration of optimal models.
• Triple Bottom Line Business Models: These models account for environmental and social costs and benefits, in addition to financial ones. Grameenphone is a powerful example: a for-profit model that provided universal telecommunications access in rural Bangladesh, simultaneously creating income-earning opportunities and raising social status for women. To accommodate this, the Canvas can be extended with blocks for negative and positive social/environmental impacts, seeking to minimize the former and maximize the latter.

Computer-Aided Business Model Design

The book explores how computer-aided tools can extend the paper-based Business Model Canvas approach, enabling more complex manipulation and analysis of business model elements.

• Improving the Process: While paper-based Canvas remains powerful, computer-aided design (CAD) systems can enhance creation, storage, manipulation, tracking, and communication of business models. The authors developed the Business Model Toolbox (Web and iPad-based) to combine the speed of a napkin sketch with the intelligence of a spreadsheet, supporting collaborative work for geographically dispersed teams.
• CAD’s Influence: Drawing parallels to architecture (e.g., CAD systems making 3D modeling easier), computer-aided systems for business models can offer speed, integration, improved collaboration, simulation, and better planning. They can visualize, store, manipulate layers, track, and annotate models. More complex functions might include dynamic element movement with real-time impact evaluation, critiquing systems, pattern repositories, and integration with other enterprise systems (ERP).

Business Models and Business Plans

The work of designing a business model provides a perfect foundation for writing a strong business plan. The book suggests a five-section structure for a business plan:

• The Team: Highlight the experience, knowledge, and connections of the management team to successfully execute the proposed business model, emphasizing their track record.
• The Business Model: Showcase the model’s attractiveness using the Canvas visually, illustrating elements with drawings. Describe the Value Proposition, customer need evidence, market reach, and Key Resources/Activities, using stories.
• Financial Analysis: Include pro forma calculations based on Canvas elements (breakeven, sales scenarios, operating costs, capital spending, funding requirements).
• External Environment: Describe the business model’s positioning relative to market forces, industry forces, key trends, and macroeconomic forces. Summarize competitive advantages.
• Implementation Roadmap: Outline all related projects, milestones, legal structures, detailed budget, and project roadmap (e.g., Gantt charts).
• Risk Analysis: Describe limiting factors, obstacles, and critical success factors, derived from a SWOT analysis of the business model.

Implementing Business Models in Organizations

Beyond design, successful implementation is critical. The book combines the Canvas with Jay Galbraith’s Star Model (Strategy, Structure, Processes, Rewards, People) to suggest aspects of organizational design for executing a business model. The business model acts as a “center of gravity” holding these five areas together.

• Strategy: Drives the business model (e.g., growth goals reflecting new customer segments or activities).
• Structure: Determined by business model characteristics (e.g., centralized/decentralized, integrated/spun off).
• Processes: Demanded by the business model (e.g., lean operations for low-cost, rigorous quality for high-value).
• Rewards: Aligned with the business model (e.g., performance-oriented for sales, customer satisfaction-focused).
• People: Possess particular mindsets required by the model (e.g., entrepreneurial free-thinkers for market-bringing mechanisms).

Aligning IT with Business

Aligning information systems (IT) with business goals is fundamental for success. The Business Model Canvas is a powerful tool for Chief Information Officers (CIOs) to quickly grasp how a business works and align IT with key business processes.

• Using the Canvas: CIOs can use the Canvas to guide the business perspective and then align it with the applications perspective (portfolio of applications, information requirements) and the technology perspective (technology infrastructure).
• Fundamental Questions for IT Alignment:
  • How can IT support the required processes and workflows?
  • What information is needed to capture, store, share, and manage?
  • How does the application portfolio leverage specific business model dynamics?
  • How will IT architecture, standards, and interface choices limit or leverage the business model?
  • Which technology infrastructure is crucial for success?
  • Where does security play an important role and how does it influence IT?
  • Are investments in IT training and education needed?
  • Could IT R&D improve the business model?

Key Takeaways

“Business Model Generation” empowers readers to understand, design, and innovate business models, moving beyond traditional strategic thinking. It democratizes complex concepts, making them accessible and actionable for entrepreneurs and established organizations alike.

The core lessons to remember are:

• Business models are blueprints for value creation: They systematically describe how an organization creates, delivers, and captures value through nine interconnected building blocks.
• Visual thinking is crucial: The Business Model Canvas, along with Post-it notes and simple drawings, makes abstract ideas tangible, fosters discussion, and enhances communication and understanding.
• Innovation stems from challenging orthodoxies: Truly new business models arise from questioning the status quo, exploring “what if” scenarios, and drawing inspiration from diverse patterns like Unbundling, Long Tail, Multi-Sided Platforms, FREE, and Open Business Models.
• Design attitude drives breakthrough: A relentless, iterative process of prototyping and inquiry, rather than quick decision-making, leads to the most powerful and competitive new business models.
• Context matters, but doesn’t define: Understanding the business model environment (market, industry, trends, macroeconomics) informs design choices, but does not limit creativity; breakthrough models can reshape the environment.
• Continuous adaptation is vital: Business models have shrinking lifespans, necessitating ongoing assessment, management, and proactive evolution to avoid crisis and maintain competitiveness.
• People and structure are key to implementation: Successfully deploying new models requires aligning organizational elements (strategy, structure, processes, rewards, people) with the business model, and carefully managing multiple models (integration vs. separation).

Next actions for readers should include:

• Get a large Business Model Canvas and Post-it notes: Start mapping your current business model to gain immediate clarity on its components and interdependencies.
• Use the Empathy Map: Profile your key customer segments to develop a deeper, more nuanced understanding of their needs, pains, and gains.
• Engage in “what if” exercises: Challenge your assumptions about your business model and industry with provocative questions to spark new ideas.
• Practice visual storytelling: Explain your business model ideas through simple drawings and narratives to enhance clarity and engage stakeholders.
• Start prototyping small: Don’t overthink; sketch out crude business model prototypes to explore multiple possibilities and gather early feedback.

Reflection prompt: What is one long-held assumption about your current business model or industry that you are now willing to challenge, and how might that challenge open up a new realm of possibilities for value creation?