Every couple of weeks somebody sends me an email writing that I’m missing a building block in the Business Model Canvas. Often, they point out that competition is missing. They’re wrong. “Competition” is not a business model building block, it’s part of the environment in which you design your business model.

Though I believe we’re too obsessed with competition, it would obviously be naive not to take into account existing or potential competitors when you design your business model. Competition is, however, only one of several elements that are part of your Business Model Design Environment: the environment in which you design your business model, just like an architect designs a building in a particular environment.

The architect’s environment is land use, legal restrictions (e.g. safety regulation, etc.), innovation in materials, the city context, or even societal trends that influence “building tastes”. A business model designer’s environment is characterized by technology trends, competitors, customer jobs and needs, and many, many more, as illustrated in the video below:





Designing business models is a constant interaction between the nine building blocks of the Business Model Canvas, which you control, and the environment in which you are designing it. If you want to learn more about the environmental model my co-author and I came up with, check out page 200+ of our best selling book Business Model Generation.

We came up with this environmental model, because there was no concept out there that looked at the Business Model Design Environment in a simple, holistic, and visual way.

At every talk and workshop I try out something new to see if it sticks with the audience. An image that resonated a lot was describing the Business Model Canvas as a theater with a front stage and a backstage.

What creates value in a theater is the action that takes place on the front stage. It’s what people came for and what they are paying for. The backstage, however, is what makes the front stage possible, it enables the front stage.

The Business Model Canvas is similar. The right-hand side of the Canvas is the front stage. The left-hand side of the Canvas is the backstage. Check out my little sketch outlining the front stage and back stage of the Business Model Theater:

This guestpost tells the special story of how Sebastián Salinas Claro and Joshua Bicknel connected across the globe on the Business Model Hub. They joined efforts in their aim to defeat poverty by teaching entrepreneurship. The results are amazing.

By Sebastián Salinas Claro (with Douglas Cochrane and Joshua Bicknell):

My recent journey illustrates the power of social networks and how linkedin and the Business Model Hub brought me to Kenya – all the way from Chile. It was a fascinating experience that all started when I contacted Alex on Linkedin. I told him how I was teaching the Business Model Canvas to disadvantaged youth in the South of Chile with excellent results. He suggested that I post my story on Business Model Hub, which I did. That’s where the journey starts.

In August Joshua Bicknel browsed the pages of the Business Model Hub and came across my post. He read about the exciting experience I went through introducing the Canvas in Chile. He decided to contact me, keen to hear more. After a few hours on Skype, I declared my intention to travel to Kenya to work with him on a pilot project. It was quite a commitment from me. Few Chileans travel to Kenya, and it was an even bigger leap considering we had never met. But I took the leap and joined his team in Nakuru, East Africas fastest growing City, in October 2011.










Since then we have been working with unemployed youth supporting them to imagine and design innovative new businesses that create employment and defeat poverty. I want to use this blogpost to discuss some of the insights from this experience, in particular the power of the Canvas as a great leveler. We worked with 4th year Commerce students from Egerton University and unemployed young men and women who never finished high school. Both grasped the Canvas equally fast and applied it to imagine impressive new businesses. In fact, on a number of occasions the non-university students actually impressed us more.








One such occasion was in a session with the Salgaa Sparks youth group. In Salgaa there is no rubbish collection. All waste is either dumped on the streets or burnt. It is a fast growing town and a popular nightspot for transit truckers, so the area is becoming increasingly dirty and unsanitary. Sparks came to us seeking help to develop a solution to this problem. Initially, they didn’t imagine starting a business, instead believing the solution to be a volunteer community-cleaning programme. By using the Business Model Canvas we helped them discover a more interesting opportunity altogether.








Firstly, they mapped their idea on the canvas, imagining it as a profitable business, and came up with a rubbish collection scheme. Not a wholly radical idea. A similar schemes exist in other Kenyan settlements. However, they then began to question whether there was any value in the collected waste and soon realized that they could turn the organic materials into fertilizer and sell it to the farmers at $10 a bag. Then they came up with another profitable idea: to rent out their work carts on days when they were not collecting rubbish.





Using the canvas they envisioned, imagined, developed, and refined a very exciting business model with three potential revenue streams. A business that achieves two goals at a time. It cleans-up the environment and provides unskilled youth with jobs. They are currently applying to the Kenyan Youth Enterprise Fund and project that their business will break even in its second month!





Throughout their lives these youth have been excluded because of their social and economic background. By using the Canvas they have, with no formal business training and sometimes not even a high school diploma, produced a very attractive business proposal. This speaks volumes for the capacity of the Canvas as a tool for profound change, empowering communities to start businesses that tackle the current structures of inequality.





We are excited to expand this programme next year. We will take graduates to both Kenya and Chile to work with hundreds of unemployed youth to develop new businesses as we seek to build a global generation of young people with a commitment to defeating poverty through entrepreneurship and not aid. And everywhere we go we will pack the Canvas as the key tool in our arsenal!

Check out our website in www.balloonkenya.com and www.emprediem.com

Signed, Douglas Cochrane, Joshua Bicknell & Sebastian Salinas Claro

The Business Model Canvas is continuing to spread across the business world. However, some people and organizations use it in more sophisticated ways than others. So I came up with four levels of strategic mastery as to competing on business models.

At the lowest level of mastery, level 0 strategies, people focus on products, technologies, and value propositions mainly. They aren’t even aware that it is often the business model that makes the difference between success and failure. At the highest level of mastery, level 3 strategies, companies disrupt themselves with new and innovative business models, while their existing business models are still successful and make money.

I played around with a new video tool, educrations, to outline my thoughts. Check out why focusing on products and technology alone is like competing with training wheels, while you could be riding a Ducati Monster:





In the video I describe four levels of mastery:

• Level 0 Strategy – The Oblivious: Focus on products/value propositions alone rather than the value proposition AND the business model.
• Level 1 Strategy – The Beginners: Use the Business Model Canvas as a checklist.
• Level 2 Strategy – The Masters: Outcompete others with a superior business model where every one of the business model building blocks reinforce each other (e.g. Nintendo Wii, Nespresso, Dell).
• Level 3 Strategy – The Invincible: Continuously disrupt themselves while their business models are still successful (e.g. Apple, Amazon.com).

Business models that outperform others do so in various ways, for example by…

• disrupting the existing market (e.g. Dell).
• creating a hard-to-copy competitive advantage (e.g. Apple appstore ecosystem).
• establishing game-changing cost and/or profitability structures (e.g. Nintendo Wii)
• creating entirely new markets (e.g. Nespresso).

As a complement to this post you might also want to have a look at my post on the characteristics of a good business model, 7 Questions to Assess Your Business Model Design
.


If you carefully watched the video you probably noticed that I messed up the Gary Kasparov quote, which should have been: “Success is the enemy of future success”. Good that I can blame the jet lag from my trip to New Orleans

Last week I had the honor to speak at the DFJ Entrepreneurial Thought Leaders Seminar at Stanford. During my stay I also had the opportunity to work and chat intensively with Steve Blank to advance with the alignment/integration of our methods.

I very much enjoyed my stay in the Bay Area and had a lot of fun sharing the stage and class room with Steve Blank five times at Stanford, Berkeley, and the exciting California College of the Arts CCA. Watch my Stanford talk:




I’d also like to remind the world what makes this place so special with a little video excerpt of an interview with Steve Blank by Om Malik of GigaOM:





During my stay I also ran one of our public enrollment workshops in San Francisco. It was excellent to have Rachel Smith and Laurie Durnell, two visual facilitators/recorders of The Grove at the workshop. They did an amazing job. Rachel sketched out a visual memory of my intro on he iPad. Have a look at the result below:





More ideas came out of my two weeks in the Bay Area, which will certainly fill some more blogposts. Stay tuned!

I’ve been thinking about “plug-ins” that complement the Business Model Canvas for a while. One concept that I’ve been looking at more closely over the last few weeks is the invaluable “jobs-to-be-done” approach. I tried to turn it into a visual approach like the Business Model Canvas (BMC). The result is a prototype conceptual tool, the Customer Value Canvas v.0.8., that I present in this blogpost.

Originally, I set out to design an ultra applicable, simple, and visual Canvas for the (customer) jobs-to-be-done concept. My motivation was to create a dedicated and complementary Canvas that helps organizations sketch out and analyze the fit between their value propositions and the customers they target in a more granular way than the Business Model Canvas mapping does.

The result of my endeavor is a prototype conceptual tool, the Customer Value Canvas v.0.8. It’s the outcome of several iterations of prototype concepts, test runs with workshop participants, try-outs students, applications with my own team, and several conversations with my #bmgen co-author Yves Pigneur (who is also a concept geek like myself). While the initial idea was to design a JOBS Canvas, the result turned out to become a mash-up of several approaches from various different thinkers.

Relationship between BM Canvas and Customer-Value Canvas v.0.8

To explain the Customer-Value Canvas bit by bit and show how it relates to and complements the Business Model Canvas I used a series of annotated screenshots of our upcoming Business Model Web App called Strategyzer.com.

The first screenshot simply illustrates how I started to map out a business model, notably by adding sticky notes to the Customer Segment and Value Proposition part of the Business Model Canvas.





In the second screenshot the annotations highlight how a Value Proposition targets a specific Customer Segment (or several segments) aiming to create value by addressing a customer’s needs.

However, the Canvas does not make the details of the Value Proposition (VP), nor its fit with a Customer Segment’s (CS) needs, explicit, because it focuses on the big picture. The annotations in the second screenshot describe which characteristics behind the VP and CS could be interesting to study in order to understand and analyze their relationship and fit in more detail. This would allow us to map what value precisely is created and with regard to which customer needs. That’s where the Customer-Value Canvas comes in. It describes:

• (A) For each Customer Segment: which jobs a customer is trying to get done, and all the related customer pains and customer gains
• (B) For each Value Proposition: the bundle of products & services targeted at the customer and how they are expected to create gains or relieve pains

In the third screenshot the annotations introduce the first – customer-focused – part of the Customer-Value Canvas and they describe how this helps adding more detail to a specific Customer Segment in the Business Model Canvas.

• (1) Select a specific Customer Segment in the Canvas
• (2) That Segment will become the one you outline in more detail on the right hand side of the Customer-Value Canvas
• (3) Specify the specific job(s) that Customer Segment is trying to get done. For a digital music player, for example, the job(s) would be buying, downloading, transferring, and listing to music on the go
• (4) Now outline all the things that represent a gain to the customer for the outlined job. For the previous example that might be convenience, having all one’s music available at any time, the ability to buy new music, automatically playing music according to your mood, etc.
• (5) Finally, outline all the things that represent a pain to the customer for the outlined job. For the digital music player this might be the weight of a device, its learning curve, its battery life, etc.

In the fourth screenshot the annotations introduce the second – value focused – part of the Customer-Value Canvas and they describe how it helps adding more detail to the Value Proposition that targets the Customer Segment outlined above.

• (6) Select the Value Proposition aimed at the Customer Segment outlined on the right-hand side of the Customer-Value Canvas
• (7) That’s the Value Proposition you outline in more detail on the left hand side of the Customer-Value Canvas
• (8) Specify the specific bundle of products and services targeted at the selected Customer Segment. For the digital music player, for example, the bundle of products and services might consist of a device, a software, and an online store… does that ring a bell? I’m talking about the iPod, of course
• (9) Now outline how exactly that bundle of products and services should create gains. For the iPod that would be by offering “thousand songs in a pocket” (remember that sentence Steve jobs repeated over and over when he launched the iPod?), by offering access to an online store with content from all major recording companies, etc.
• (10) Finally, outline how exactly the bundle of products and services should relieve the customer’s pain regarding the outlined job. For the iPad that would be the reduction of the learning curve through seamless integration of hardware and software, the elimination of constantly having to copy songs back-and-forth due to tiny storage capacity (before the iPod digital music players could hold one album of approximately 24 songs)

The next image connects the two pieces described above. The resulting Customer-Value Canvas now allows you to map out and analyze how the Value Proposition you designed fits the Customer Segment’s job and the customer’s pains and gains. While the right hand side of the Customer-Value Canvas (customer-side) is something you observe in the market (= studying the customer), the left-hand side (value-side) is something you design (= make choices).

This is where the Customer-Value Canvas connects with Steve Blank’s Customer Development Process (outlined in his invaluable book The Four Steps). Steve invites people to “get out of the building” and talk to customers. Now you have another tool besides the Business Model Canvas to map the outcomes of those customer conversations.

Example

As mentioned above, I tried out several iterations of the concept with my executive workshop participants and university students. I also tested the final Customer-Value Canvas 0.8 presented in this blogpost in my own business. Together with Alan Smith, #bmgen designer and co-founder of my software business, we mapped out the Customer Segments and Value Propositions for our upcoming Web App.

In the images below I illustrate how the Customer-Value Canvas helped us visualize and structure our conversation about the Value Proposition of our Web App for consultancy clients (who apply the #bmgen concept to help their own clients innovate their business models).

The next image outlines the jobs we are trying to help our consultancy clients get done. There are two main types of jobs we are interested in helping our consultancy clients with. On the one hand they advise clients on business models by running workshops and delivering results and communications. On the other hand they have to continuously acquire clients, retain clients and demonstrate credibility in their consulting domain. I used color-coding to distinguish the different type of jobs.





The following image outlines some of the consultancy client’s most important pains related to the described job. This includes the risk of giving clients bad advice, the difficulty to manage client follow-up and communication, the time-consuming production of PowerPoint slides, and the risk of defecting clients .





The next image outlines some of the consultancy’s gains related to the job. This includes (specialist) support that helps them advise clients on BMs, easy monitoring of client progress, an easy way to acquire clients, switching costs that prevent customers from leaving, and growing and recurring revenues.





The next images shows which products and services are targeted at the customer. In the case of our example this is simply a cloud-based business Model Web App and dedicated teamspaces for clients or teams.





The following image shows how the Value Proposition is expected to relieve pain. This includes simplified production of business model documents and documentation, decreased risk of having various versions of the same business model document circulating, and a collaborative platform that makes working together easier.





The last image shows how the Value Proposition is expected to create gains. This includes the support for business model consulting, tools that just work, customization, smooth and continuous client communication and follow-up, and lastly, the fact that it creates switching costs for a consultancy’s clients.





How it all started

The JOBS concept is an approach that I read first about from Tony Ulwick of Strategyn (cf. Understand Customer Needs) and then from renowned Harvard Professor Clayton Christensen’s consulting firm Innosight (cf. Generating Breakthrough Solutions Using Jobs to Be Done).

I now frequently use the JOBS concept in my workshops because it helps business model innovators look at Value Propositions from a totally new perspective. Check out how Clayton Christensen explains and illustrates the JOBS concept in the video below:





The idea for a visual JOBS Canvas came up when I met with Mark Johnson last fall. Mark is co-founder of Innosight and author of the excellent business model book Seizing the Whitespace. In our conversation we chatted about the fact that the JOBS concept is tested and proven, but that there is no visual template for it like for the Business Model Canvas. That is a pity, since I have come to learn how powerful visual templates can be to foster strategic conversations and innovation. Hence, I set out to design a JOBS Canvas.

The JOBS Canvas would be like a plug-in that complements the Business Model Canvas. I started using the term “plug-in” for methods that either allow going into more detail for a specific building block of the BMC or allow mapping another strategic aspect that is not directly covered by the BM Canvas.

While iterating through several conceptual designs I quickly realized the value of mashing-up the JOBS concept with other approaches. I threw other concepts into the mix, notably the Customer Empathy Map (outlined in #bmgen, but coined by XPLANE, which is now part of Dachis Group), the problem-solution fit (a lean start-up concept), a working paper from 1996 by NYU on Reinventing Value Propositions (pdf), and Steve Blank’s Customer Development Process (outlined in his invaluable book The Four Steps).

If you found this blogpost interesting, don’t hesitate to test the Customer-Value Canvas v.0.8 and provide me with some feedback. I’ve already seen how it works for several people and groups, but I’d be curious how it works for you!

I deliberately left the Customer-Value Canvas v.0.8. in a raw form so you realize it’s still a prototype concept

Visual Thinking is central to designing, testing, and building business models. So I was really excited when Dan Roam accepted to write a guest post on the Business Model Alchemist. His brand new book “Blah Blah Blah: What to Do When Words Don’t Work.” is THE reference book to have better conversations and effective meetings.

At the heart of a business.

At the heart of every business beat two essential elements: an idea and a plan. An idea without a plan is just a dream. A plan without an idea is just a list. For a business to grow and thrive, it must have both.

Sometimes the idea comes first: “How about we make a computer screen you can touch?” Add a plan (design + manufacturing + marketing) and you’ve got the iPad. Sometimes the plan comes first: “What would happen if we sold something other than books the way Amazon sells books?” Add an idea (online shoes!) and you’ve got Zappos.

The first reason I think Alex Osterwalder’s “Business Model Canvas” is the greatest business modeling tool of the decade is because it gives us a place to quickly translate any business idea into a testable plan – and vice-versa.

I’ve got a model. Now what?

But once we’ve developed and tested business model, there’s still one more critical step towards making a living business: we need to sell it to partners, investors, and customers. And that’s the second reason I love the “Business Model Canvas”: it provides us with the basis of the Vivid Story we’ll need to crystallize and communicate our idea. When I say “Vivid” I mean something very specific: a Visual-Verbal-Interdependent idea; an idea made absolutely clear because it is expressed with both words and pictures.

Let me show you. A word-only description of a complex idea is hard to “get” and equally remember. Because words always proceed in a single line, when they are finished we usually forget where they started. That’s a terrible way to describe a business.

A “Vivid” idea weaves together both words and pictures to create a visual+verbal image we can see, understand, and remember. And that is a great way to describe a business.

—

Dan Roam is the author of the international bestseller “The Back of the Napkin”, the most popular visual-thinking business book of all time, named by Fast Company, BusinessWeek, and The Times of London #1 creativity and innovation book of the year. For more insights on the power of power of Vivid Thinking look at Dan’s new book, “Blah Blah Blah: What to Do When Words Don’t Work.”

More on Dan at www.danroam.com.

Ultimately, customers are the only relevant judges of your business model. However, even before you test your model in the market, you can assess its design with 7 questions that go well beyond the conventional focus on products and market segments.

First things first. In order to assess your business model you should sketch it out on the Business Model Canvas outlined in the video below. If you want to know more about the Canvas and how to use it you can read Business Model Generation of which 70 pages are available for free on our website.





Assessing the basics

Every business model has a product and/or service at its center that focuses on a customer’s job-to-be-done. I call this the Value Proposition. So before even turning to your business model as a whole, you need to ask yourself some basic questions related to your Value Proposition and the Customer Segments that you are targeting.

• First, ask yourself how well your Value Proposition is getting your target customer’s job done. For example, if a user of a search engine is trying to find and purchase the latest Nike running shoe, the measure of success will be how well the search engine helps the user get this job done.
• Secondly, ask yourself how many people or companies there are with a similar job-to-be-done. This will give you the market size.
• Thirdly, ask yourself how important this job really is for the customer and if she actually has a budget to spend on it.

That’s it as to the basics. However, even the greatest products are having an increasingly hard time to achieve a long-term competitive advantage. That is the reason why you need to shift your focus away from a pure product/market segment oriented approach towards a more holistic business model approach. Below are eight questions to assess your business model design. Rank your business model’s performance on a scale of 0 (bad) to 10 (excellent) for each question.

1. How much do switching costs prevent your customers from churning?

The time, effort, or budget a customer has to spend to switch from one product or service provider to another is called “switching costs”. The higher the switching costs, the likelier a customer is to stick to one provider rather than to leave for the products or services of a competitor.

A great example of designing switching costs into a business model is Apple’s introduction of the iPod in 2001. Do you remember how Steve Jobs heralded his new product with the catchphrase “thousand songs in a pocket”? Well, that was more than a product innovation focusing on storage. It was a business model strategy to get customers to copy all their music into iTunes and their iPod, which would make it more difficult for them to switch to competing digital music players. In a time when little more than brand preferences were preventing people from switching from one player to another this was a smart move and laid the foundation for Apple’s subsequent stronghold on music and later innovations.

2. How scalable is your business model?

Scalability describes how easy it is to expand a business model without equally increasing its cost base. Of course software- and Web-based business models are naturally more scalable than those based on bricks and mortar, but even among digital business models there are large differences.

An impressive example of scalability is Facebook. With only a couple of thousand of engineers they create value for hundreds of millions of users. Only few other companies in the world have such a ratio of users per employee. A company that has pushed the limits even further is the social gaming company Zynga. By building games like Farmville or Cityville on the back Facebook, the world’s largest social network, they could benefit from Facebook’s reach (and scale) without having to build it themselves.

A company that quickly learned its lessons regarding scalability was peer-to-peer communication company Skype in its early days. Their customer relationship collapsed under the weight of large numbers, when they were signing up ten thousands of users per day. They quickly had to adapt their business model to become more scalable.

3. Does your business model produce recurring revenues?

Recurring revenues are best explained through a simple example. When a newspaper earns revenues from the sales at a newsstand they are transactional, while revenues from a subscription are recurring. Recurring revenues have two major advantages. Firstly, the costs of sales incur only once for repetitive revenues. Secondly, with recurring revenues you have a better idea of how much you will earn in the future.

A nice example of recurring revenues is Redhat, which provides open source software and support to enterprises based on a continuous subscription basis. In this model clients don’t pay for new software versions because it is continuously updated. In the world of Software as a Service (Saas) these types of subscriptions are now the norm. This contrasts with Microsoft, which sells most of its software in the form of licenses for every major release.

However, there is another aspect to recurring revenues, which are additional revenues generated from an initial sales. For example, when you buy a printer, you continue to spend on cartridges, or when you buy a game console, you’ll continue to spend on games. Or have a look at Apple. While they still earn most of their revenues from hardware sales, the recurring revenues from content and apps is steadily growing.

4. Do you earn before you spend?

This one goes without saying. The more you can earn before spending, the better.

Dell pioneered this model in the computer hardware manufacturing industry. By assembling on order after selling directly they managed to escape the terrible inventory depreciation costs of the hardware industry. Results showed how powerful it is to earn before spending.

5. How much do you get others to do the work?

This is probably one of the least publicized weapons of mass destruction in business model design. What could be more powerful than getting others to do the work while you earn the money?

In the bricks and mortar world IKEA gets us to assemble the furniture we buy from them. We do the work. They save money. On the web Facebook gets us to post photos, create and participate in conversations, and “like” stuff. That’s the real value of Facebook, entirely created by users, while they simply provide the platform. We do the work. They earn the sky-high valuations of their shares.

Previously mentioned Redhat crafted another smart business model based on other people’s work. Their entire business model is built on top of software developed by the open source software development community. This allowed them to substantially reduce their development costs and compete head-on with larger companies like Microsoft.

A more malicious business model in which others do the work is the one practiced by so-called patent trolls. In this model patents are purchased with the sole intention of suing successful companies to extract payments from them.

6. Does your business model provide built-in protection from competition?

A great business model can provide you with a longer-term protection from competition than just a great product.

Apple’s main competitive advantage arises more from its powerful business model than purely from its innovative products. It’s easier for Samsung, for instance, to copy the iPhone than to build an ecosystem like Apple’s appstore, which caters to developers and users alike and hosts hundred thousands of applications.

7. Is your business model based on a game changing cost structure?

Cutting costs is a long practiced sport in business. Some business models, however, go beyond cost cutting by creating value based on a totally different cost structure.

Skype, for example, provides calls and communication almost like a conventional telecom company, but for free or for a very low cost. They can do this because their business model has a very different cost structure. In fact, Skype’s model is based on the economics of a software company, while a telecom provider’s model is based on the economics of a network company. The former’s costs are mainly people; while the latter’s cost include huge capital expenditures in infrastructure.

Similarly, Bharti Airtel, one of the world’s largest mobile network providers, has substantially modified its cost structure by getting rid of their entire network and IT. By buying in network capacity on a variable cost basis from a consortium around network equipment manufacturer Ericsson and IBM, they can now offer among the lowest prices for mobile telephony globally.

Redhat, which was mentioned previously, also built its business model on a game changing cost structure: by smartly building its own model on top of other people’s work.

How does your business model design perform?

Of course no business model design scores a perfect 10 as to every single one of the above questions. Some might even succeed in the market without scoring well at all. However, by asking yourself these questions and by scoring well on at least some of them you are very likely to substantially increase the long-term competitive advantage of your business.

Now all you need to do is test your business model with the real judge: the market. The best way to do that is by turning to Steve Blank’s Customer Development process, which fits perfectly with the Business Model Canvas.

Some more info on my workshops, speaking, and projects.

PS: I will be running a series of workshops you might be interested in. Sign-up or pre-sign-up here. In Paris (French: Sept 27/28), in Boston (Oct 27/28), and in Munich (German: Nov 24/25).

PS2: These days are your last chance to get your name into a book project that I’m involved in: Business Model You. Check it out here.

PS3: I wrote this post as a guest post for the Business of Software conference where I’ll be speaking in October.

I wrote about Computer Aided Design Tools (CAD) for business people years back in my doctoral dissertation. With the Business Model Toolbox for iPad we now made the first concrete steps towards a whole new breed of computer aided business design tools. The Toolbox combines the speed of a napkin sketch with the smarts of a spreadsheet. It enables you to map, test, and iterate your business ideas — fast.

It always struck me that we have relatively few good software tools in business to think through more strategic issues. We do have sophisticated business analytics tools to make sense of large amounts of quantitative data. We do have spreadsheets to simulate complicated financial scenarios. Yet, what do we have today to design and test strategies and business models? Little.

That’s exactly why the team behind the bestselling book Business Model Generation developed the Business Model Toolbox for iPad (V.1.0.) together with Geneva-based development firm Hortis le studio.

Watch my rough and improvised demo. It’s filmed with my iPhone in the middle of Berlin where I’m giving a keynote at Process World 2011 – more sophisticated product videos to come soon

The Toolbox V.1.0. focused on three core activities required to prototype business models:

• Sketch your business model using the practical methodology from the best-selling book, Business Model Generation.
• Add ballpark figures for market size, revenue streams, and costs — faster than any spreadsheet.
• Test the profitability of your ideas with a quick report and breakdowns by offer, customer segments, and costs.

Below are the screenshots of the simple example I sketched out in the video…

Starting a simple business model prototype (without costs)




Adding revenue streams: sales through the app store (and paying a Apple a 30% cut of your sales)




Playing with revenue stream ideas: what about a Web subscription?




Report view of a more complex business model




Obviously, many people asked us why just for the iPad. As soon as we launched they immediately asked for Android and Web versions. From a business perspective it might have indeed been smarter to start with a Web app because of its broader reach. This is particularly true, since we started developing the Toolbox when it was far from clear if anybody would buy an iPad.

The reason we went for the iPad first is because I firmly believe that the touch interface and the relatively large screen of the iPad will allow us to demystify and democratize the prototyping of business models – just like the visual design of the Business Model Generation book helped demystify and democratize business model thinking and thus make it accessible to a larger audience than the usual business book readers.

By going for the iPad first and the Web second we wanted to show what’s really possible when it comes to prototyping business models. Using your fingers to pull in virtual sticky notes just feels so much more natural than using a computer mouse, doesn’t it? The iPad app allowed us to test and validate this theory.

Today there are about 19 million iPads in the market (read more) and there is no doubt that Apple is currently dominating the tablet market. More interestingly, a majority of the senior executives and entrepreneurs I work with have an iPad. Some of them even bought an iPad just to use the app. For all others we will have good news later this year. The Business Model Foundry will continue to develop breakthrough tools for the Business Model Generation.

Go get the Business Model Toolbox for iPad if you don’t have it yet and got curious after reading this post. It will help you build better business models at the price of a lunch. Is a better business model worth it?
read more…
buy it on the appstore…


PS: Here at Process World 2011 in Berlin where I currently am at I’ll give a keynote about bridging the gap between business strategy and processes through the Business Model Canvas. Already, Software AG, one of our partner companies and organizer of Process World, has integrated the Business Model Canvas into ARIS, their business process management tool (read more).

The Business Model Generation is about people who strive to defy outmoded business models. They are visionaries, game changers, and challengers who want to design tomorrow’s enterprises. To succeed on this journey they will require new tools, such as the Business Model Canvas and Steve Blank’s Customer Development. In this post I outline how they fit together.

This post comes mainly as a reaction to the various attempts by others to adapt and merge the Business Model Canvas with Customer Development for the entrepreneurial context. While it’s great and fascinating to see how people are tinkering with Steve’s and our method to adapt them for their start-ups, I am also worried that they lead young companies down the wrong path.

Steve and I have both already written about how our methods fit together here (Steve) and here (me). However, this time I took some time to sketch out a more detailed start-up process that merges the concepts and tools from Steve’s bestselling The Four Steps to the Epiphany and our globally bestselling Business Model Generation – A Handbook for Visionaries, Game Changers, and Challengers. Additional concepts and tools, such as Eric Ries’ Lean Start-up, may be added subsequently.

I will illustrate this process through the fictional story of Dave Sanburn, a former finance type based in Dallas, who decided to launch his own start-up. His entrepreneurial story all started with an unsatisfied customer need that gave him the idea for his start-up.

1) The Business Idea and Initial Stress Tests

Dave likes wearing tailor-made shirts, but sees shopping as a chore. He used to buy these kind of shirts during his business trips to London, but was never really satisfied, neither by the experience nor the price. When Dave realized that it was not so easy to conveniently find and buy tailor-mode shirts in Dallas he wondered if this could be a business idea worth pursuing.

Ideas for a business can have various origins. Sources could be:

• An unsatisfied customer need like Dave’s. In fact, many successful entrepreneurs launch a start-up because their own personal needs couldn’t be satisfied by the market.
• A technology (innovation) that allows doing business in a different or more efficient way. Think of how Skype started offering free phone calls because they used the readily available and free Internet as an infrastructure, rather than a proprietary network.
• A new product or service that the market hasn’t seen yet, or that is offered with a different or better value proposition. The Nespresso machine is an example of the former, while cheap flights by Southwest, easyJet or Ryanair are an example of the latter.

Let’s get back to Dave and help him run a first rough stress test of his business idea. Dave should look at four areas: customers, key trends (e.g. technology), competitors, and the macro environment. (These for areas are a simplification of the Business Model Environment outlined in Business Model Generation).

Dave should investigate a series of questions related to each of the four areas:

• Customers: Who could the customers for the business idea be? What jobs are they really trying to get done? Are there enough potential customers? Do they have buying power? Are they easy to reach?
• Trends: Could some of the key trends render the business idea obsolete in the future (e.g. tech trends, legal trends, etc.)? Are key trends going to boost the business idea in the future (e.g. socio-economic trends, etc.)?
• Competitors: Which other companies are already operating in this space? What are the substitute products and services? Which actors (competitors or partners) are key in this space?
• Macro environment: Which macro-factors must be in place to make the idea reality (e.g. infrastructure, talented employees, etc.)?

In the graphic below I added four of the concepts from Steve’s The Four Steps to the Epiphany, which I think can be of tremendous help at this stage (additions in red).

Regarding customers (right-hand side), Dave should start sketching out some first rough customer hypotheses and problem hypotheses. Steve’s book contains excellent worksheets with questions to develop the hypotheses. Regarding competition (left-hand side), Dave should add a first rough take on the market type hypothesis and competitive hypothesis.

Stress-testing the business idea is part desk-research (thank you Google) and part “getting out of the building”, to use Steve Blank’s terms. The goal of this phase is to figure out if a business idea is worth pursuing.

2) Business Model Prototyping – Generating Alternatives

After some initial research Dave decides to continue investigating his business idea. The question is: how can he offer tailor-made shirts in a viable way and how can he turn this into multi-million dollar business?

At this point many entrepreneurs fully focus on the product or service they are planning to offer. Big mistake. It’s far more illuminating to sketch out and think through several alternative business models for a product, service, or technology.

The same product, service, or technology may fail with one business model, but succeed with another. For example, few people know that Nespresso – today a 2+ billion USD business owned by Nestlé – almost failed in the late 80s because of an unsuccessful business model. With exactly the same product and technology (Nespresso machines and pods), but a very different business model, Nespresso started its global conquest of the espresso market.

I call this phase business model prototyping. It’s the one that business people and entrepreneurs struggle most with. Rather than sketching out 4-6 potential business model alternatives in 60 minutes, most people feel more comfortable merely discussing ideas or one single business model. Big mistake. It’s more valuable to have several business model alternatives on the table so you can discuss their strengths and weaknesses.

To compare the different potential business models you particularly want to play around with ballpark figures for each alternative. You can either do this with a spreadsheet or even more conveniently with our upcoming iPad app (don’t ask for the release date .

3) Selecting a Business Model: Plan A

After going through several alternatives and comparing them with a set of criteria Dave has selected the one he thinks looks most promising. It’s illustrated in the next three images.

This first Business Model Canvas below illustrates the basic model of offering tailor-made shirts that are manufactured in China to white-collar office workers in big US cities. The hundred million-dollar question is of course how to reach them, i.e. through which channels?

This is where Dave’s business model becomes special. He plans to operate no stores and no sales force. His intention is to generate sales through independent “style advisers” who will earn commissions of up to 25 percent on clothing they sell.

The second Canvas illustrates the value proposition that shall attract the “style advisers” who will essentially be recruited by other advisers. Like in most direct-sales companies, advisers will get a cut of the sales made by reps they recruit.

The last Canvas shows how Dave’s company is different from most other shirt retailers. For example, he operates no stores, no sales force, and only manufactures shirts that have already been sold.

4) Testing the Business Model – Customer Development

As attractive as this first business model might look, it’s nothing else than a set of guesses. Nobody knows if it’s really going to work? This is where the real value of Steve Blank’s Customer Development kicks in. Each post-it note in the Canvas should be turned into a hypothesis and then tested. In Steve’s 4-step methodology this is the first phase called Customer Discovery.

Visually this can be represented with three layers. A first (Canvas) layer represents the business model. This is what we just outlined above with Dave’s example of a tailor-mode shirt maker. The second (Canvas) layer outlines the underlying hypothesis for each post-it note. The third (Canvas) layer turns each hypothesis into a test, so that it can be verified and measured.

Let’s briefly go through these three layers with a simple example that Dave could put in practice:

• Business Model Layer: In the business model Dave might define a price point of 150.- USD for a shirt, because he thinks his shirts need to be about 50% cheaper than a similar shirt sold through traditional retail. The profitability of his business model is calculated based on this price.
• Hypothesis Layer: The underlying hypothesis for this price point is that customers would not buy if the shirts were more expensive, but wouldn’t buy many more shirts if they were cheaper (else Dave risks leaving money on the table).
• Test (and Measurement) Layer: A way to test the above hypothesis would be a field trial with different prices. Another way to test the hypothesis would be to set-up a different websites with different prices and analyze customers’ response rates.

The challenge for Dave is to develop the three layers for each business model building block and post-it note in the Canvas ranging from customers, over value proposition, all the way to resources, and cost structure.

When Dave tests the business model with customers he is likely to modify it in an iterative fashion every time he learns more from customers. Once he thinks he’s got it right, he can continue with the remaining 3 steps of Customer Development, notably Customer Validation, Customer Creation, and Company Building.

ps

• The fictional example of Dave is based on the real-world example of Dallas shirt-maker J. Hilburn, that combines direct sales with custom tailoring. I learned about the company in a Businessweek article.
• Pardon me the typos and mistakes in this post. It’s 2am after a long day, but I just wanted to get this post out (and I definitely didn’t have the energy to re-read it)!