Business Model Generation Flipbook

You’re holding a handbook for visionaries, game changers, and challengers striving to defy outmoded business models and design tomorrow’s enterprises. It’s a book for the . . . written by Alexander Osterwalder & Yves Pigneur co-created by An amazing crowd of 470 practitioners from 45 countries designed by Alan Smith, The Movement Disruptive new business models are emblematic of our generation. Yet they remain poorly understood, even as they transform competitive landscapes across industries. Business Model Generation offers you powerful, simple, tested tools for understanding, designing, reworking, and implementing business models. Business Model Generation is a practical, inspiring handbook for anyone striving to improve a business model — or craft a new one. change the way you think about business models Business Model Generation will teach you powerful and practical innovation techniques used today by leading companies worldwide. You will learn how to systematically understand, design, and implement a new business model — or analyze and renovate an old one. co-created by 470 strategy practitioners Business Model Generation practices what it preaches. Coauthored by 470 Business Model Canvas practitioners from forty-five countries, the book was financed and produced independently of the traditional publishing industry. It features a tightly integrated, visual, lie-flat design that enables immediate hands-on use. designed for doers Business Model Generation is for those ready to abandon outmoded thinking and embrace new, innovative models of value creation: executives, consultants, entrepreneurs — and leaders of all org anizations. $34.95 USA/$41.95 CAN 2/C: PANTONE PMS COOL GRAY 11 M + PROCESS BLACK

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Business Model Generation bmgen_final.indd 3 6/15/10 5:31 PM

This book is printed on acid-free paper. o Copyright © 2010 by Alexander Osterwalder. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. ISBN: 978-0470-87641-1 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 bmgen_final.indd 4 6/15/10 5:31 PM

Written by Alexander Osterwalder and Yves Pigneur Design Alan Smith, The Movement Editor and Contributing Co-Author Tim Clark Production Patrick van der Pijl Co-created by an amazing crowd of 470 practitioners from 45 countries Business Model Generation A Handbook for Visionaries, Game Changers, and Challengers John Wiley & Sons, Inc. bmgen_final.indd 5 6/23/10 12:56 AM

Ellen Di Resta Michael Anton Dila Remko Vochteloo Victor Lombardi Matthew Milan Ralf Beuker Sander Smit Norbert Herman Karen Hembrough Ronald Pilot Yves Claude Aubert Wim Saly Frank Camille Lagerveld Andres Alcalde Alvaro Villalobos M Bernard Racine Peter Froberg Lino Piani Eric Jackson Indrajit Datta Chaudhuri Jeroen de Jong Gertjan Verstoep Steven Devijver Jana Thiel Jeremy Hayes Alf Rehn Jeff De Cagna Andrea Mason Jan Ondrus Simon Evenblij Chris Walters Caspar van Rijnbach benmlih Rodrigo Miranda Saul Kaplan Lars Geisel Simon Scott Dimitri Lévita Johan √ñrneblad Craig Sadler Praveen Singh Livia Labate Kristian Salvesen Daniel Egger Diogo Carmo Marcel Ott Atanas Zaprianov Linus Malmberg Deborah Mills-Scofield Peter Knol Jess McMullin Marianela Ledezma Ray Guyot Martin Andres Giorgetti Geert van Vlijmen Rasmus Rønholt Tim Clark Richard Bell Erwin Blom Frédéric Sidler John LM Kiggundu Robert Elm Ziv Baida Andra Larin-van der Pijl Eirik V Johnsen Boris Fritscher Mike Lachapelle Albert Meige Woutergort Fanco Ivan Santos Negrelli Amee Shah Lars Mårtensson Kevin Donaldson JD Stein Ralf de Graaf Lars Norrman Sergey Trikhachev Thomas Alfred Herman Bert Spangenberg Robert van Kooten Hans Suter Wolf Schumacher Bill Welter Michele Leidi Asim J. Ranjha Peter Troxler Ola Dagberg Wouter van der Burg Artur Schmidt Pekka Matilainen Bas van Oosterhout Gillian Hunt Bart Boone Michael Moriarty Mike Design for Innovation Tom Corcoran Ari Wurmann Antonio Robert Wibe van der Pol paola valeri Michael Sommers Nicolas Fleury Gert Steens Jose Sebastian Palazuelos Lopez jorge zavala Harry Heijligers Armand Dickey Jason King Kjartan Mjoesund Martin Fanghanel Michael Sandfær Niall Casey John McGuire Vivian Vendeirinho Martèl Bakker Schut Stefano Mastrogiacoo Mark Hickman Dibrov Reinhold König Marcel Jaeggi John O'Connell Javier Ibarra Lytton He Marije Sluis David Edwards Martin Kuplens-Ewart Jay Goldman Isckia Nabil Harfoush Yannick Raoef Hussainali Walter Brand Stephan Ziegenhorn Frank Meeuwsen Colin Henderson Danilo Tic Marco Raaijmakers Marc Sniukas Khaled Algasem Jan Pelttari Yves Sinner Michael Kinder Vince Kuraitis Teofilo Asuan Santiago IV Ray Lai Brainstorm Weekly Huub Raemakers Peter Salmon Philippe Khawaja M. Jille Sol Renninger, Wolfgang Daniel Pandza Guilhem Bertholet Thibault Estier Stephane Rey Chris Peasner Jonathan Lin Cesar Picos Florian Armando Maldonado Eduardo Míguez Anouar Hamidouche Francisco Perez Nicky Smyth Bob Dunn Carlo Arioli Pablo M. Ramírez Jean-Loup Colin Pons Vacherand Guillermo Jose Aguilar Adriel Haeni Lukas Prochazka Kim Korn Abdullah Nadeem Rory O'Connor Hubert de Candé Frans Wittenberg Jonas Lindelöf Gordon Gray Slabber Peter Jones Sebastian Ullrich Andrew Pope Fredrik Eliasson Bruce MacVarish Göran Hagert Markus Gander Marc Castricum Nicholas K. Niemann Christian Labezin Claudio D'Ipolitto Aurel Hosennen Adrian Zaugg Louis Rosenfeld Ivo Georgiev Donald Chapin Annie Shum Valentin Crettaz Dave Crowther Chris J Davis Frank Della Rosa Christian Schüller Luis Eduardo de Carvalho Patrik Ekström Greg Krauska Giorgio Casoni Stef Silvis ronald van den hoff Melbert Visscher Manfred Fischer Joe Chao Carlos Meca Mario Morales Paul Johannesson Rob Griffitts Marc-Antoine Garrigue Wassili Bertoen Bart Pieper Bruce E. Terry Michael N. Wilkens Himikel - TrebeA Robin Uchida Pius Bienz Ivan Torreblanca Berry Vetjens David Crow Helge Hannisdal Maria Droujkova Leonard Belanger Fernando Saenz-Marrero Susan Foley Vesela Koleva Martijn Eugen Rodel Edward Giesen Co-created by: bmgen_final.indd 6 6/15/10 5:31 PM

Marc Faltheim Nicolas De Santis Antoine Perruchoud Bernd Nurnberger Patrick van Abbema Terje Sand Leandro Jesus Karen Davis Tim Turmelle Anders Sundelin Renata Phillippi Martin Kaczynski Frank Ricardo Dorado John Smith Rod Eddie Jeffrey Huang Terrance Moore nse_55 Leif-Arne Bakker Edler Herbert Björn Kijl Chris Finlay Philippe Rousselot Rob Schokker Stephan Linnenbank Liliana Jose Fernando Quintana Reinhard Prügl Brian Moore Gabi Marko Seppänen Erwin Fielt Olivier Glassey Francisco Conde Fernández Valérie Chanal Anne McCr ossan Jose Alfonso Lopez Eric Schreurs Donielle Buie Adilson Chicória Asanka Warusevitane Jacob Ravn Hampus Jakobsson Adriaan Kik Julián Domínguez Laperal Marco W J Derksen Dr. Karsten Willrodt Patrick Feiner Dave Cutherell Edwin Beumer Dax Denneboom Mohammed Mushtaq Gaurav Bhalla Silvia Adelhelm Heather McGowan Phil Sang Yim Noel Barry Vishwanath Edav ayyanamath Rob Manson Rafael Figueiredo Jeroen Mulder Manuel Toscano John Sutherland Remo Knops Juan Marquez Chris Hopf Marc Faeh Urquhart Wood Lise Tormod Curtis L. Sippel Abdul Razak Manaf George B. Steltman Karl Burrow Mark McKeever Bala Vaddi Andrew Jenkins Dariush Ghatan Marcus Ambrosch Jens Hoffmann Steve Thomson Eduardo M Morgado Rafal Dudkowski António Lucena de Faria Knut Petter Nor Ventenat Vincent Peter Eckrich Shridhar Lolla Wouter Verwer Jan Schmiedgen Ugo Merkli Jelle Dave Gray Rick le Roy Ravila White David G Luna Arellano Joyce Hostyn Thorwald Westmaas Jason Theodor Sandra Pickering Trond M Fflòvstegaard Larsen Fred Collopy Jana Görs Patrick Foran Edward Osborn Greger Hagström Alberto Saavedra Remco de Kramer Lillian Thompson Howard Brown Emil Ansarov Frank Elbers Horacio Alvaro Viana Di Prisco D arlene Goetzman Mohan Nadarajah Fabrice Delaye Sunil Malhotra Jasper Bouwsma Ouke Arts Alexander Troitzsch Brett Patching Clifford Thompson Jorgen Dahlberg Christoph Mühlethaler Ernest Buise Emilio De Giacomo Franco Gasperoni Michael Weiss Francisco Andrade Arturo Herrera Sapunar Vincent de Jong Kees Groeneveld Henk Bohlander Sushil Chatterji Tim Parsey Georg E. A. Stampfl Markus Kreutzer Iwan Schneider Linda Bryant Jeroen Hinfelaar Dan Keldsen Damien Roger A. Shepherd Morten Povlsen Lars Zahl Elin Mørch Langlo Xuemei Tian Harry Verwayen Riccardo Bonazzi André Johansen Colin Bush Jens Larsson David Sibbet Mihail Krikunov Edwin Kruis Roberto Ortelli Shana Ferrigan Bourcier Jeffrey Murphy Lonnie Sanders III Arnold Wytenburg David Hughes Paul Ferguson Frontier Service Design, LLC Pet er Noteboom Jeaninne Horowitz Gassol Lukas Feuerstein Nathalie Magniez Giorgio Pauletto Martijn Pater Gerardo Pagalday Eraña Haider Raza Ajay Ailawadhi Adriana Ieraci Daniël Giesen Erik Dejonghe Tom Winstanley Heiner P. Kaufmann Edwin Lee Ming Jin Markus Schroll Hylke Zeijlstra Cheenu Srinivasan Cyril Durand Jamil Aslam Oliver Buecken John Wesner Price Axel Friese Gudmundur Kristjansson Rita Shor Jesus Villar Espen Figenschou- Skotterud James C lark Alfonso Mireles Richard Zandink Fraunhofer IAO Tor Rolfsen Grønsund David M. Weiss Kim Peiter Jørgensen Stephanie Diamond Stefan Olsson Anders Stølan Edward Koops Prasert Thawat- chokethaw ee Pablo Azar Melissa Withers Michael Schuster Ingrid Beck Antti Äkräs EHJ Peet Ronald Poulton Ralf Weidenhammer Craig Rispin Nella van Heuven Ravi Sodhi Dick Rempt Rolf Mehnert Luis Stabile Enterprise Consulting Aline Frankfort Alexander Korbee J Bartels Steven Ritchey Clark Golestani Leslie Cohen Amanda Smith Benjamin De Pauw Andre Macieira Wiebe de Jager Raym Crow Mark Evans DM Susan Schaper bmgen_final.indd 7 6/15/10 5:31 PM

Are you an entrepreneurial spirit? yes _______ no _______ Are you constantly thinking about how to create value and build new businesses, or how to improve or transform your organization? yes _______ no _______ Are you trying to find innovative ways of doing business to replace old, outdated ones? yes _______ no _______ bmgen_final.indd 2 6/15/10 5:31 PM

If you ’ve answered “yes” to any of these questions, welcome to our group! You’re holding a handbook for visionaries, game changers, and challengers striving to defy outmoded business models and design tomorrow’s enterprises. It’s a book for the business model generation. bmgen_final.indd 3 6/15/10 5:31 PM

Today countless innovative business models are emerging. Entirely new industries are forming as old ones crumble. Upstarts are challenging the old guard, some of whom are struggling feverishly to reinvent themselves. How do you imagine your organization’s business model might look two, five, or ten years from now? Will you be among the dominant players? Will you face competitors brandishing formidable new business models? bmgen_final.indd 4 6/15/10 5:31 PM

This book will give you deep insight into the nature of business models. It describes traditional and bleeding-edge models and their dynamics, innovation techniques, how to position your model within an intensely competitive landscape, and how to lead the redesign of your own organi- zation’s business model. Certainly y ou’ve noticed that this is not the typical strategy or man- agement book. We designed it to convey the essentials of what you need to know, quickly, simply, and in a visual format. Examples are presented pictorially and the content is complemented with exercises and workshop scenarios you can use immediately. Rather than writing a conventional book about business model innovation, we’ve tried to design a practical guide for visionaries, game changers, and challengers eager to design or reinvent business models. We’ve also worked hard to create a beautiful book to enhance the pleasure of your “consumption.” We hope you enjoy using it as much as we’ve enjoyed creating it. An online community c omplements this book (and was integral to its creation, as you will discover later). Since business model innovation is a rapidly evolving field, you may want to go beyond the essentials in Business Model Generation and discover new tools online. Please consider joining our worldwide community of business practitioners and research- ers who have co-created this book. On the Hub you can participate in discussions about business models, learn from others’ insights, and try out new tools provided by the authors. Visit the Business Model Hub at www.BusinessModelGeneration.com/hub. Business model innov ation is hardly new. When the founders of Diners Club introduced the credit card in 1950, they were practicing business model innovation. The same goes for Xerox, when it introduced photo- copier leasing and the per-copy payment system in 1959. In fact, we might trace business model innovation all the way back to the fifteenth century, when Johannes Gutenberg sought applications for the mechanical printing device he had invented. But the scale and speed at which innovativ e business models are transforming industry landscapes today is unprecedented. For entre- preneurs, executives, consultants, and academics, it is high time to understand the impact of this extraordinary evolution. Now is the time to understand and to methodically address the challenge of business model innovation. Ultimately, busines s model innovation is about creating value, for companies, customers, and society. It is about replacing outdated models. With its iPod digital media player and iTunes.com online store, Apple created an innovative new business model that transformed the company into the dominant force in online music. Skype brought us dirt-cheap global calling rates and free Skype-to-Skype calls with an innovative business model built on so-called peer-to-peer technology. It is now the world’s largest carrier of international voice traffic. Zipcar frees city dwell- ers from automobile ownership by offering hourly or daily on-demand car rentals under a fee-based membership system. It’s a business model response to emerging user needs and pressing environmental concerns. Grameen Bank is helping alleviate poverty through an innovative business model that popularized microlending to the poor. But how can we systematically invent, design, and implement these powerful new business models? How can we question, challenge, and transform old, outmoded ones? How can we turn visionary ideas into game-changing business models that challenge the establishment—or rejuvenate it if we ourselves are the incumbents? Business Model Generation aims to give you the answers. Sin ce practicing is better than preaching, we adopted a new model for writing this book. Four hundred and seventy members of the Business Model Innovation Hub contributed cases, examples, and critical com- ments to the manuscript—and we took their feedback to heart. Read more about our experience in the final chapter of Business Model Generation . bmgen_final.indd 5 6/15/10 5:31 PM

Seven Faces of Business Model Innovation The Senior Executive Jean-Pierre Cuoni, Chairman / EFG International Focus: Establish a new business model in an old industry Jean-Pierre Cuoni is chairman of EFG International, a private bank with what may be the industry’s most innovative business model. With EFG he is profoundly transforming the traditional relationships between bank, clients, and client relationship managers. Envisioning, crafting, and executing an innovative business model in a conservative industry with established players is an art, and one that has placed EFG International among the fastest growing banks in its sector. The Intrapreneur Dagfi nn Myhre, Head of R&I Business Models / Telenor Focus: Help exploit the latest techno- logical developments with the right business models Dagfi nn leads a business model unit at Telenor, one of the world’s ten larg- est mobile telephone operators. The telecom sector demands continuous innovation, and Dagfi nn’s initiatives help Telenor identify and understand sustainable models that exploit the potential of the latest technological developments. Through deep analysis of key industry trends, and by develop- ing and using leading-edge analytical tools, Dagfi nn’s team explores new business concepts and opportunities. The Entrepreneur Mariëlle Sijgers, Entrepreneur / CDEF Holding BV Focus: Address unsatisfi ed customer needs and build new business models around them Marielle Sijgers is a full-fl edged entrepreneur. Together with her business partner, Ronald van den Hoff, she’s shaking up the meeting, congress, and hospitality industry with innovative business models. Led by unsatisfi ed customer needs, the pair has invented new concepts such as Seats2meet.com, which allows on-the-fl y booking of meetings in untraditional locations. Together, Sijgers and van den Hoff constantly play with new business model ideas and launch the most promising concepts as new ventures. bmgen_final.indd 6 6/15/10 5:31 PM

The Investor Gert Steens, President & Investment Analyst / Oblonski BV Focus: Invest in companies with the most competitive business models Gert makes a living by identifying the best business models. Investing in the wrong company with the wrong model could cost his clients millions of euros and him his reputation. Understanding new and innovative business models has become a crucial part of his work. He goes far beyond the usual fi nancial analytics and compares business models to spot strategic differences that may impart a competitive edge. Gert is constantly seeking business model innovations. The Consultant Bas van Oosterhout, Senior Consultant / Capgemini Consulting Focus: Help clients question their business models, and envision and build new ones Bas is part of Capgemini’s Business Innovation Team. Together with his clients, he is passionate about boosting performance and renewing competitiveness through innovation. Business Model Innovation is now a core component of his work because of its high relevance to client projects. His aim is to inspire and assist clients with new business models, from ideation to implementation. To achieve this, Bas draws on his understanding of the most powerful business models, regardless of industry. The Designer Trish Papadakos, Sole Proprietor / The Institute of You Focus: Find the right business model to launch an innovative product Trish is a talented young designer who is particularly skilled at grasp- ing an idea’s essence and weaving it into client communications. Currently she’s working on one of her own ideas, a service that helps people who are transitioning between careers. After weeks of in-depth research, she’s now tackling the design. Trish knows she’ll have to fi gure out the right business model to bring her service to market. She understands the client-facing part—that’s what she works on daily as a designer. But, since she lacks for- mal business education, she needs the vocabulary and tools to take on the big picture. The Conscientious Entrepreneur Iqbal Quadir, Social Entrepreneur / Founder of Grameen Phone Focus: Bring about positive social and economic change through innovative business models Iqbal is constantly on the lookout for innovative business models with the potential for profound social impact. His transformative model brought telephone service to over 100 million Bangladeshis, utilizing Grameen Bank’s microcredit network. He is now searching for a new model for bringing affordable electricity to the poor. As the head of MIT’s Legatum Center, he promotes technological empowerment through innovative businesses as a path to economic and social development. bmgen_final.indd 7 6/15/10 5:31 PM

Table of Contents Canvas Outlook Afterword Process Design Patterns Strategy The book is divided into five sections: 1 The Busi- ness Model Canvas, a tool for describing, analyzing, and designing business models, 2 Business Model Patterns, based on concepts from leading business thinkers, 3 Techniques to help you design business models, 4 Re-interpreting strategy through the business model lens, and 5 A generic process to help you design innovative business models, tying together all the concepts, techniques, and tools in Business Model Generation . } The last section offers an outlook on five business model topics for future exploration. Finally, the afterword provides a peek into “the making of” Business Model Generation . bmgen_final.indd 8 6/15/10 5:31 PM

1 Canvas 14 Definition of a Business Model 16 T he 9 Building Blocks 44 The Business Model Canvas 2 Patterns 56 Unbundling Business Models 66 The Long Tail 76 Multi-Sided Platforms 88 FREE as a Business Model 108 Open Business Models 3 Design 126 Customer Insights 134 Ideation 146 Visual Thinking 160 Prototyping 170 Storytelling 180 Scenarios 4 Strategy 200 Business Model Environment 212 Evaluating Business Models 226 Business Model Perspectiv e on Blue Ocean Strategy 232 Managing Multiple Business Models 5 Process 244 Business Model Design Process } Outlook 262 Outlook Afterword 274 Where did this book come fr om? 276 References bmgen_final.indd 9 6/15/10 5:31 PM

Canvas bmgen_final.indd 10 6/15/10 5:31 PM

Canvas bmgen_final.indd 11 6/15/10 5:31 PM

A shared language for describing, visualizing, assessing, and changing business models The Business Model Canvas bmgen_final.indd 12 6/15/10 5:31 PM

14 Definition of a Business Model 16 The 9 Building Blocks 44 The Business Model Canvas Template bmgen_final.indd 13 6/15/10 5:31 PM

14 A business model describes the rationale of how an organization creates, delivers, and captures value Def_ Business Model bmgen_final.indd 14 6/15/10 5:31 PM

15 The starting point for any good discussion, meeting, or workshop on business model innovation should be a shared understanding of what a business model actually is. We need a business model concept that everybody understands: one that facilitates descrip- tion and discussion. We need to start from the same point and talk about the same thing. The challenge is that the concept must be simple, relevant, and intui- tively understandable, while not oversimplifying the complexities of how enterprises function. In the following pages we oΩer a concept that allows you to describe and think through the business model of your organization, your competitors, or any other enterprise. This concept has been applied and tested around the world and is already used in organizations such as IBM, Ericsson, Deloitte, the Public Works and Government Services of Canada, and many more. This concept can become a shared language that allows you to easily describe and manipulate business models to create new strategic alternatives. Without such a shared language it is diΩicult to systematically challenge assumptions about one’s business model and innovate successfully. We believe a business model can best be described through nine basic building blocks that show the logic of how a company intends to make money. The nine blocks cover the four main areas of a business: customers, oΩer, infrastructure, and financial viability. The business model is like a blueprint for a strategy to be implemented through organizational structures, processes, and systems. bmgen_final.indd 15 6/15/10 5:31 PM

[ Customer Segments An organization serves one or several Customer Segments. Value Propositions It seeks to solve customer problems and satisfy customer needs with value propositions. Channels Value propositions are delivered to customers through communication, distribution, and sales Channels. Customer Relationships Customer relationships are established and maintained with each Customer Segment. [ The 9 Building Blocks CS VP CH Cr 1 2 3 4 bmgen_final.indd 16 6/15/10 5:31 PM

17 Revenue Streams Revenue streams result from value propositions successfully oΩered to customers. Key Resources Key resources are the assets required to oΩer and deliver the previously described elements . . . Key Activities . . . by performing a num- ber of Key Activities. Key Partnerships Some activities are outsourced and some resources are acquired outside the enterprise. Cost Structure The business model elements result in the cost structure. r$ Kr KA KP C$ 5 6 7 8 9 bmgen_final.indd 17 6/15/10 5:31 PM

18 Kr Key Resources KP Key Partners KA Key Activities C$ Cost Structure bmgen_final.indd 18 6/15/10 5:31 PM

19 CS Customer Segments Cr Customer Relationships VP Value Propositions CH Channels r$ Revenue Streams bmgen_final.indd 19 6/15/10 5:31 PM

The Customer Segments Building Block defi nes the diΩerent groups of people or organizations an enterprise aims to reach and serve Customers comprise the heart of any business model. Without (profi table) customers, no company can survive for long. In order to better satisfy customers, a company may group them into distinct segments with common needs, common behaviors, or other attributes. A business model may defi ne one or several large or small Customer Segments. An organization must make a conscious decision about which segments to serve and which segments to ignore. Once this decision is made, a business model can be carefully designed around a strong understanding of specifi c customer needs. Customer groups represent separate segments if: • Their needs require and justify a distinct oΩer • They are reached through diΩerent Distribution Channels • They require diΩerent types of relationships • They have substantially diΩerent profi tabilities • They are willing to pay for diΩerent aspects of the oΩer Customer Segments CS 1 bmgen_final.indd 20 6/15/10 5:32 PM

21 There are diΩerent types of Customer Segments. Here are some examples: Mass market Business models focused on mass markets don’t distinguish between diΩerent Customer Segments. The Value Propositions, Distribution Channels, and Customer Relationships all focus on one large group of customers with broadly similar needs and problems. This type of business model is often found in the consumer electronics sector. Niche market Business models targeting niche markets cater to specific, specialized Customer Segments. The Value Propositions, Distribution Channels, and Customer Relationships are all tailored to the specific require- ments of a niche market. Such business models are often found in supplier-buyer relationships. For example, many car part manufacturers depend heavily on purchases from major automobile manufacturers. Segmented Some business models distinguish between market segments with slightly diΩerent needs and problems. The retail arm of a bank like Credit Suisse, for example, may distinguish between a large group of customers, each possessing assets of up to U.S. $100,000, and a smaller group of aΩluent clients, each of whose net worth exceeds U.S. $500,000. Both segments have similar but varying needs and problems. This has implications for the other building blocks of Credit Suisse’s business model, such as the Value Proposi- tion, Distribution Channels, Customer Relationships, and Revenue streams. Consider Micro Precision Systems, which specializes in providing outsourced micromechanical design and manufacturing solutions. It serves three diΩerent Customer Segments—the watch industry, the medical industry, and the industrial automation sector—and oΩers each slightly diΩerent Value Propositions. Diversified An organization with a diversified customer business model serves two unrelated Customer Segments with very diΩerent needs and problems. For example, in 2006 Amazon.com decided to diversify its retail business by selling “cloud computing” services: online storage space and on-demand server usage. Thus it started catering to a totally diΩerent Customer Segment—Web companies—with a totally diΩerent Value Proposition. The strategic rationale behind this diversification can be found in Amazon.com’s powerful IT infrastructure, which can be shared by its retail sales operations and the new cloud computing service unit. Multi-sided platforms (or multi-sided markets) Some organizations serve two or more interdepen- dent Customer Segments. A credit card company, for example, needs a large base of credit card holders and a large base of merchants who accept those credit cards. Similarly, an enterprise oΩering a free news- paper needs a large reader base to attract advertisers. On the other hand, it also needs advertisers to finance production and distribution. Both segments are required to make the business model work (read more about multi-sided platforms on p. 76). For whom are we creating value? Who are our most important customers? bmgen_final.indd 21 6/15/10 5:32 PM

The Value Propositions Building Block describes the bundle of products and services that create value for a specifi c Customer Segment The Value Proposition is the reason why customers turn to one company over another. It solves a customer problem or satisfi es a customer need. Each Value Proposition consists of a selected bundle of products and/or services that caters to the requirements of a specifi c Customer Segment. In this sense, the Value Proposi- tion is an aggregation, or bundle, of benefi ts that a company oΩers customers. Some Value Propositions may be innovative and represent a new or disruptive oΩer. Others may be similar to existing market oΩers, but with added features and attributes. Value Propositions 2 of a specifi c Customer Segment. In this sense, the Value Proposi- tion is an aggregation, or bundle, of benefi ts that a company oΩers customers. Some Value Propositions may be innovative and represent a new or disruptive oΩer. Others may be similar to existing market oΩers, but with added features and attributes. VP bmgen_final.indd 22 6/15/10 5:32 PM

23 A Value Proposition creates value for a Customer Segment through a distinct mix of elements cater- ing to that segment’s needs. Values may be quan- titative (e.g. price, speed of service) or qualitative (e.g. design, customer experience). Elements from the following non-exhaustive list can contribute to customer value cr eation. Newness Some Value Propositions satisfy an entirely new set of needs that customers previously didn’t perceive because there was no similar oΩering. This is often, but not always, technology related. Cell phones, for instance, created a whole new industry around mobile telecommunication. On the other hand, products such as ethical investment funds have little to do with new technology. Performance Improving product or service performance has traditionally been a common way to create value. The PC sector has traditionally relied on this factor by bringing more powerful machines to market. But improved performance has its limits. In recent years, for example, faster PCs, more disk storage space, and better graphics have failed to produce corresponding growth in customer demand. What value do we deliver to the customer? Which one of our customer’s problems are we helping to solve? Which customer needs are we satisfying? What bundles of products and services are we oΩering to each Customer Segment? Customization Tailoring products and services to the specific needs of individual customers or Customer Segments creates value. In recent years, the concepts of mass customization and customer co-creation have gained importance. This approach allows for customized products and services, while still taking advantage of economies of scale. bmgen_final.indd 23 6/15/10 5:32 PM

“Getting the job done” Value can be created simply by helping a customer get certain jobs done. Rolls-Royce understands this very well: its airline customers rely entirely on Rolls- Royce to manufacture and service their jet engines. This arrangement allows customers to focus on running their airlines. In return, the airlines pay Rolls-Royce a fee for every hour an engine runs. Design Design is an important but diΩicult element to mea- sure. A product may stand out because of superior design. In the fashion and consumer electronics industries, design can be a particularly important part of the Value Proposition. Brand/status Customers may fi nd value in the simple act of using and displaying a specifi c brand. Wearing a Rolex watch signifi es wealth, for example. On the other end of the spectrum, skateboarders may wear the latest “underground” brands to show that they are “in.” Price OΩering similar value at a lower price is a common way to satisfy the needs of price-sensitive Cus- tomer Segments. But low-price Value Propositions have important implications for the rest of a busi- ness model. No frills airlines, such as Southwest, easyJet, and Ryanair have designed entire business models specifi cally to enable low cost air travel. Another example of a price-based Value Proposi- tion can be seen in the Nano, a new car designed and manufactured by the Indian conglomerate Tata. Its surprisingly low price makes the automobile aΩordable to a whole new segment of the Indian population. Increasingly, free oΩers are starting to permeate various industries. Free oΩers range from free newspapers to free e-mail, free mobile phone services, and more (see p. 88 for more on FREE). 2 bmgen_final.indd 24 6/15/10 5:32 PM

25 Cost reduction Helping customers reduce costs is an important way to create value. Salesforce.com, for example, sells a hosted Customer Relationship management (CRM) application. This relieves buyers from the expense and trouble of having to buy, install, and manage CRM software themselves. Risk reduction Customers value reducing the risks they incur when purchasing products or services. For a used car buyer, a one-year service guarantee reduces the risk of post-purchase breakdowns and repairs. A service-level guarantee partially reduces the risk undertaken by a purchaser of outsourced IT services. Accessibility Making products and services available to custom- ers who previously lacked access to them is another way to create value. This can result from business model innovation, new technologies, or a combina- tion of both. NetJets, for instance, popularized the concept of fractional private jet ownership. Using an innovative business model, NetJets oΩers individu- als and corporations access to private jets, a service previously unaΩordable to most customers. Mutual funds provide another example of value creation through increased accessibility. This innovative financial product made it possible even for those with modest wealth to build diversified investment portfolios. Convenience/usability Making things more convenient or easier to use can create substantial value. With iPod and iTunes, Apple oΩered customers unprecedented conve- nience searching, buying, downloading, and listen- ing to digital music. It now dominates the market. bmgen_final.indd 25 6/15/10 5:32 PM

The Channels Building Block describes how a company communicates with and reaches its Customer Segments to deliver a Value Proposition Communication, distribution, and sales Channels comprise a company's interface with customers. Channels are customer touch points that play an important role in the customer experience. Channels serve several functions, including: • Raising awareness among customers about a company’s products and services • Helping customers evaluate a company’s Value Proposition • Allowing customers to purchase specifi c products and services • Delivering a Value Proposition to customers • Providing post-purchase customer support Channels 3 CH bmgen_final.indd 26 6/15/10 5:32 PM

27 Through which Channels do our Customer Segments want to be reached? How are we reaching them now? How are our Channels integrated? Which ones work best? Which ones are most cost-eΩicient? How are we integrating them with customer routines? Channels have five distinct phases. Each channel can cover some or all of these phases. We can distinguish between direct Channels and indirect ones, as well as between owned Channels and partner Channels. Finding the right mix of Channels to satisfy how customers want to be reached is crucial in bringing a Value Proposition to market. An organization can choose between reaching its customers through its own Channels, through partner Channels, or through a mix of both. Owned Channels can be direct, such as an in-house sales force or a Web site, or they can be indirect, such as retail stores owned or operated by the organization. Partner Channels are indirect and span a whole range of options, such as wholesale distribution, retail, or partner-owned Web sites. Partner Channels lead t o lower margins, but they allow an organization to expand its reach and benefit from partner strengths. Owned Channels and particu- larly direct ones have higher margins, but can be costly to put in place and to operate. The trick is to find the right balance between the diΩerent types of Channels, to integrate them in a way to create a great customer experience, and to maximize revenues. Channel Types Channel Phases Sales force 1. Awareness How do we raise aware- ness about our company’s products and services? 2. Evaluation How do we help custom- ers evaluate our organiza- tion’s Value Proposition? 3. Purchase How do we allow custom- ers to purchase specific products and services? 4. Delivery How do we deliver a Value Proposition to customers? 5. After sales How do we provide post-purchase customer support? Web sales Own stores Partner stor es Wholesaler Indirect Direct Own Partner bmgen_final.indd 27 6/15/10 5:32 PM

The Customer Relationships Building Block describes the types of relationships a company establishes with specifi c Customer Segments A company should clarify the type of relationship it wants to establish with each Customer Segment. Relationships can range from personal to automated. Customer relationships may be driven by the following motivations: • Customer acquisition • Customer retention • Boosting sales (upselling) Customer Relationships In the early days, for example, mobile network operator Customer Relationships were driven by aggressive acquisition strategies involving free mobile phones. When the market became saturated, operators switched to focusing on customer retention and increas- ing average revenue per customer. The Customer Relationships called for by a company’s business model deeply infl uence the overall customer experience. Cr 4 bmgen_final.indd 28 6/15/10 5:32 PM

29 We can distinguish between several categories of Customer Relationships, which may co-exist in a company’s relationship with a particular Customer Segment: Personal assistance This relationship is based on human interaction. The customer can communicate with a real customer representative to get help during the sales process or after the purchase is complete. This may happen on- site at the point of sale, through call centers, by e-mail, or through other means. Dedicated personal assistance This relationship involves dedicating a customer representative specifically to an individual client. It represents the deepest and most intimate type of relationship and normally develops over a long period of time. In private banking services, for example, dedi- cated bankers serve high net worth individuals. Similar relationships can be found in other businesses in the form of key account managers who maintain personal relationships with important customers. Self-service In this type of relationship, a company maintains no direct relationship with customers. It provides all the necessary means for customers to help themselves. Automated services This type of relationship mixes a more sophisti- cated form of customer self-service with automated processes. For example, personal online profiles give customers access to customized services. Automated services can recognize individual customers and their characteristics, and oΩer information related to orders or transactions. At their best, automated services can simulate a personal relationship (e.g. oΩering book or movie recommendations). Communities Increasingly, companies are utilizing user communities to become more involved with customers/prospects and to facilitate connections between community members. Many companies maintain online com- munities that allow users to exchange knowledge and solve each other’s problems. Communities can also help companies better understand their customers. Pharmaceutical giant GlaxoSmithKline launched a private online community when it introduced alli , a new prescription-free weight-loss product. Gla xoSmithKline wanted to increase its under- standing of the challenges faced by overweight adults, and thereby learn to better manage customer expectations. Co-creation More companies are going beyond the traditional customer-vendor relationship to co-create value with customers. Amazon.com invites customers to write reviews and thus create value for other book lovers. Some companies engage customers to assist with the design of new and innovative products. Others, such as YouTube.com, solicit customers to create content for public consumption. What type of relationship does each of our Customer Segments expect us to establish and maintain with them? Which ones have we established? How costly are they? How are they integrated with the rest of our business model? bmgen_final.indd 29 6/15/10 5:32 PM

The Revenue Streams Building Block represents the cash a company generates from each Customer Segment (costs must be subtracted from revenues to create earnings) If customers comprise the heart of a business model, Revenue Streams are its arteries. A company must ask itself, For what value is each Customer Segment truly willing to pay? Successfully answering that question allows the fi rm to generate one or more Revenue Streams from each Customer Segment. Each Revenue Stream may have diΩerent pricing mechanisms, such as fi xed list prices, bargaining, auctioning, market dependent, volume depen- dent, or yield management. Revenue Streams A business model can involve two diΩerent types of Revenue Streams: 1. Transaction revenues resulting from one-time customer payments 2. Recurring revenues resulting from ongoing payments to either deliver a Value Proposition to customers or provide post-purchase customer support r$ 5 bmgen_final.indd 30 6/15/10 5:32 PM

31 There are several ways to generate Revenue Streams: Asset sale The most widely understood Revenue Stream derives from selling ownership rights to a physical product. Amazon.com sells books, music, consumer electron- ics, and more online. Fiat sells automobiles, which buyers are free to drive, resell, or even destroy. Usage fee This Revenue Stream is generated by the use of a particular service. The more a service is used, the more the customer pays. A telecom operator may charge customers for the number of minutes spent on the phone. A hotel charges customers for the number of nights rooms are used. A package delivery service charges customers for the delivery of a parcel from one location to another. Subscription fees This Revenue Stream is generated by selling continu- ous access to a service. A gym sells its members monthly or yearly subscriptions in exchange for access to its exercise facilities. World of Warcraft Online, a Web-based computer game, allows users to play its online game in exchange for a monthly sub- scription fee. Nokia’s Comes with Music service gives users access to a music library for a subscription fee. Lending/Renting/Leasing This Revenue Stream is created by temporar- ily granting someone the exclusive right to use a particular asset for a fixed period in return for a fee. For the lender this provides the advantage of recurring revenues. Renters or lessees, on the other hand, enjoy the benefits of incurring expenses for only a limited time rather than bearing the full costs For what value are our customers really willing to pay? For what do they currently pay? How are they currently paying? How would they prefer to pay? How much does each Revenue Stream contribute to overall revenues? of ownership. Zipcar.com provides a good illustration. The company allows customers to rent cars by the hour in North American cities. Zipcar.com’s service has led many people to decide to rent rather than purchase automobiles. Licensing This Revenue Stream is generated by giving customers permission to use protected intellectual property in exchange for licensing fees. Licensing allows rights- holders to generate revenues from their property with- out having to manufacture a product or commercialize a service. Licensing is common in the media industry, where content owners retain copyright while selling usage licenses to third parties. Similarly, in technology sectors, patentholders grant other companies the right to use a patented technology in return for a license fee. bmgen_final.indd 31 6/15/10 5:32 PM

Brokerage fees This Revenue Stream derives from intermediation services performed on behalf of two or more parties. Credit card providers, for example, earn revenues by taking a percentage of the value of each sales transaction executed between credit card merchants and customers. Brokers and real estate agents earn a commission each time they successfully match a buyer and seller. Advertising This Revenue Stream results from fees for advertising a particular product, service, or brand. Traditionally, the media industry and event organizers relied heavily on revenues from advertising. In recent years other sectors, including software and services, have started relying more heavily on advertising revenues. Each Revenue Stream might have diΩerent pricing mechanisms. The type of pricing mechanism chosen can make a big diΩerence in terms of revenues gener- ated. There are two main types of pricing mechanism: fi xed and dynamic pricing. 5 bmgen_final.indd 32 6/15/10 5:32 PM

33 Fixed Menu Pricing Predefined prices are based on static variables Dynamic Pricing Prices change based on market conditions List price Fixed prices for individual products, services, or other Value Propositions Negotiation (bargaining) Price negotiated between two or more partners depending on negotiation power and/or negotiation skills Product feature dependent Price depends on the number or quality of Value Proposition features Yield management Price depends on inventory and time of purchase (normally used for perishable resources such as hotel rooms or airline seats) Customer segment dependent Price depends on the type and characteristic of a Customer Segment Real-time-market Price is established dynamically based on supply and demand Volume dependent Price as a function of the quantity purchased Auctions Price determined by outcome of competitive bidding Pricing Mechanisms bmgen_final.indd 33 6/15/10 5:32 PM

34 The Key Resources Building Block describes the most important assets required to make a business model work Every business model requires Key Resources. These resources allow an enterprise to create and oΩer a Value Proposition, reach markets, maintain relationships with Customer Segments, and earn revenues. DiΩerent Key Resources are needed depending on the type of business model. A microchip manufacturer requires capital-intensive production facilities, whereas a microchip designer focuses more on human resources. Key resources can be physical, fi nancial, intellectual, or human. Key resources can be owned or leased by the company or acquired from key partners. Key Resources Kr 6 bmgen_final.indd 34 6/15/10 5:32 PM

35 Key Resources can be categorized as follows: Physical This category includes physical assets such as manufacturing facilities, buildings, vehicles, machines, systems, point-of-sales systems, and distribution networks. Retailers like Wal-Mart and Amazon.com rely heavily on physical resources, which are often capital-intensive. The former has an enormous global network of stores and related logistics infrastructure. The latter has an extensive IT, warehouse, and logistics infrastructure. Intellectual Intellectual resources such as brands, proprietary knowledge, patents and copyrights, partnerships, and customer databases are increasingly important components of a strong business model. Intellectual resources are diΩicult to develop but when success- fully created may oΩer substantial value. Consumer goods companies such as Nike and Sony rely heavily on brand as a Key Resource. Microsoft and SAP depend on software and related intellectual property developed over many years. Qualcomm, a designer and supplier of chipsets for broadband mobile devices, built its business model around patented microchip designs that earn the company substantial licensing fees. Human Every enterprise requires human resources, but people are particularly prominent in certain business models. For example, human resources are crucial in knowledge-intensive and creative industries. A phar- maceutical company such as Novartis, for example, relies heavily on human resources: Its business model is predicated on an army of experienced scientists and a large and skilled sales force. Financial Some business models call for financial resources and/or financial guarantees, such as cash, lines of credit, or a stock option pool for hiring key employ- ees. Ericsson, the telecom manufacturer, provides an example of financial resource leverage within a business model. Ericsson may opt to borrow funds from banks and capital markets, then use a portion of the proceeds to provide vendor financing to equipment customers, thus ensuring that orders are placed with Ericsson rather than competitors. What Key Resources do our Value Propositions require? Our Distribution Channels? Customer Relationships? Revenue Streams? bmgen_final.indd 35 6/15/10 5:32 PM

The Key Activities Building Block describes the most important things a company must do to make its business model work Every business model calls for a number of Key Activities. These are the most important actions a company must take to operate successfully. Like Key Resources, they are required to create and oΩer a Value Proposition, reach markets, maintain Customer Relationships, and earn revenues. And like Key Resources, Key Activities diΩer depending on business model type. For software maker Microsoft, Key Activities include software development. For PC manufacturer Dell, Key Activities include supply chain management. For consultancy McKinsey, Key Activities include problem solving. Key Activities Relationships, and earn revenues. And like Key Resources, Key Activities diΩer depending on business model type. For software maker Microsoft, Key Activities include software development. For PC manufacturer Dell, Key Activities include supply chain management. For consultancy McKinsey, Key Activities include problem solving. KA 7 bmgen_final.indd 36 6/15/10 5:32 PM

37 Key Activities can be categorized as follows: Production These activities relate to designing, making, and delivering a product in substantial quantities and/or of superior quality. Production activity dominates the business models of manufacturing firms. Problem solving Key Activities of this type relate to coming up with new solutions to individual customer problems. The operations of consultancies, hospitals, and other service organizations are typically dominated by problem solving activities. Their business models call for activities such as knowledge management and continuous training. Platform/network Business models designed with a platform as a Key Resource are dominated by platform or network- related Key Activities. Networks, matchmaking platforms, software, and even brands can function as a platform. eBay’s business model requires that the company continually develop and maintain its plat- form: the Web site at eBay.com. Visa’s business model requires activities related to its Visa® credit card transaction platform for merchants, customers, and banks. Microsoft’s business model requires managing the interface between other vendors’ software and its Windows® operating system platform. Key Activi- ties in this category relate to platform management, service provisioning, and platform promotion. What Key Activities do our Value Propositions require? Our Distribution Channels? Customer Relationships? Revenue streams? bmgen_final.indd 37 6/15/10 5:32 PM

The Key Partnerships Building Block describes the network of suppliers and partners that make the business model work Companies forge partnerships for many reasons, and partnerships are becoming a cornerstone of many business models. Companies create alliances to optimize their business models, reduce risk, or acquire resources. We can distinguish between four diΩerent types of partnerships: 1. Strategic alliances between non-competitors 2. Coopetition: strategic partnerships between competitors 3. Joint ventures to develop new businesses 4. Buyer-supplier relationships to assure reliable supplies Key Partnerships 1. Strategic alliances between non-competitors 2. Coopetition: strategic partnerships between competitors 3. Joint ventures to develop new businesses 4. Buyer-supplier relationships to assure reliable supplies KP 8 bmgen_final.indd 38 6/15/10 5:32 PM

39 It can be useful to distinguish between three motivations for creating partnerships: Optimization and economy of scale The most basic form of partnership or buyer-supplier relationship is designed to optimize the allocation of resources and activities. It is illogical for a company to own all resources or perform every activity by itself. Optimization and economy of scale partnerships are usually formed to reduce costs, and often involve outsourcing or sharing infrastructure. Reduction of risk and uncertainty Partnerships can help reduce risk in a competitive environment characterized by uncertainty. It is not unusual for competitors to form a strategic alliance in one area while competing in another. Blu-ray, for example, is an optical disc format jointly developed by a group of the world’s leading consumer electron- ics, personal computer, and media manufacturers. The group cooperated to bring Blu-ray technology to market, yet individual members compete in selling their own Blu-ray products. Acquisition of particular resources and activities Few companies own all the resources or perform all the activities described by their business models. Rather, they extend their own capabilities by relying on other firms to furnish particular resources or perform certain activities. Such partnerships can be motivated by needs to acquire knowledge, licenses, or access to customers. A mobile phone manufacturer, for example, may license an operating system for its handsets rather than developing one in-house. An insurer may choose to rely on independent brokers to sell its policies rather than develop its own sales force. Who are our Key Partners? Who are our key suppliers? Which Key Resources are we acquiring from partners? Which Key Activities do partners perform? bmgen_final.indd 39 6/15/10 5:32 PM

The Cost Structure describes all costs incurred to operate a business model This building block describes the most important costs incurred while operating under a particular business model. Creating and de- livering value, maintaining Customer Relationships, and generating revenue all incur costs. Such costs can be calculated relatively easily after defi ning Key Resources, Key Activities, and Key Partnerships. Some business models, though, are more cost-driven than others. So-called “no frills” airlines, for instance, have built business models entirely around low Cost Structures. Cost Structure C$ 9 bmgen_final.indd 40 6/15/10 5:32 PM

41 Naturally enough, costs should be minimized in every business model. But low Cost Structures are more important to some business models than to others. Therefore it can be useful to distinguish between two broad classes of business model Cost Structures: cost-driven and value-driven (many business models fall in between these two extremes): Cost-driven Cost-driven business models focus on minimizing costs wherever possible. This approach aims at creating and maintaining the leanest possible Cost Structure, using low price Value Propositions, maximum automation, and extensive outsourcing. No frills airlines, such as Southwest, easyJet, and Ryanair typify cost-driven business models. Value-driven Some companies are less concerned with the cost implications of a particular business model design, and instead focus on value creation. Premium Value Propositions and a high degree of personalized service usually characterize value-driven business models. Luxury hotels, with their lavish facilities and exclusive services, fall into this category. Cost Structures can have the following characteristics: Fixed costs Costs that remain the same despite the volume of goods or services produced. Examples include salaries, rents, and physical manufacturing facilities. Some businesses, such as manufacturing companies, are characterized by a high proportion of fixed costs. Variable costs Costs that vary proportionally with the volume of goods or services produced. Some businesses, such as music festivals, are characterized by a high proportion of variable costs. Economies of scale Cost advantages that a business enjoys as its output expands. Larger companies, for instance, benefit from lower bulk purchase rates. This and other factors cause average cost per unit to fall as output rises. Economies of scope Cost advantages that a business enjoys due to a larger scope of operations. In a large enterprise, for example, the same marketing activities or Distribution Channels may support multiple products. What are the most important costs inherent in our business model? Which Key Resources are most expensive? Which Key Activities are most expensive? bmgen_final.indd 41 6/15/10 5:32 PM

VP CR CH CS KP KA KR R$ C$ The nine business model Building Blocks form the basis for a handy tool, which we call the Business Model Canvas. This tool resembles a painter’s canvas—preformat- ted with the nine blocks—which allows you to paint pictures of new or existing business models. The Business Model Canvas works best when printed out on a large surface so groups of people can jointly start sketching and discussing business model elements with Post-it® notes or board markers. It is a hands-on tool that fosters understanding, discussion, creativity, and analysis. The Business Model Canvas bmgen_final.indd 42 6/15/10 5:32 PM

43 43 } bmgen_final.indd 43 6/15/10 5:33 PM

44 The Business Model Canvas Cost Structure Key Partners Key Resources Channels Key Activities Value Proposition Customer Relationships Customer Segments Revenue Streams bmgen_final.indd 44 6/15/10 5:33 PM

45 bmgen_final.indd 45 6/15/10 5:33 PM

46 VP CR CH CS KP KA KR R$ C$ 46 VP CR CH CS KP KA KR R$ C$ bmgen_final.indd 46 6/15/10 5:33 PM

47 In 2001 Apple launched its iconic iPod brand of por- table media player. The device works in conjunction with iTunes software that enables users to transfer music and other content from the iPod to a computer. The software also provides a seamless connection to Apple’s online store so users can purchase and download content. This potent combination of device, software, and online store quickly disrupted the music industry and gave Apple a dominant market position. Yet Apple was not the first company to bring a portable media player to market. Competitors such as Diamond Multimedia, with its Rio brand of portable media players, were suc- cessful until they were outpaced by Apple. Example: Apple iPod/iTunes Business Model How did Apple achieve such dominance? Because it competed with a better business model. On the one hand, it oΩered users a seamless music experience by combining its distinctively designed iPod devices with iTunes software and the iTunes online store. Apple’s Value Proposition is to allow customers to easily search, buy, and enjoy digital music. On the other hand, to make this Value Proposition possible, Apple had to negotiate deals with all the major record companies to create the world’s largest online music library. The twist? Apple earns most of its music-related revenues from selling iPods, while using integration with the online music store to protect itself from competitors. bmgen_final.indd 47 6/15/10 5:33 PM

left brain logic right brain emotion bmgen_final.indd 48 6/15/10 5:33 PM

VP CR CH CS KP KA KR R$ C$ VP CR CH CS KP KA KR R$ C$ left canvas effi ciency bmgen_final.indd 49 6/15/10 5:33 PM

The public sector is often challenged to implement private sector principles. I have used the Canvas to help a department view itself as a service- oriented business, establishing externalized as-is and to-be business models. It has created a whole new conversa- tion around describing and innovating the business. Mike Lachapelle, Canada I consult with small companies on using the freemium business model. This model involves giving core products away for free, which is very counterin- tuitive to most businesspeople. Thanks to the Business Model Canvas, I can easily illustrate how it makes financial sense. Peter Froberg, Denmark I help business owners plan their transi- tion and exit from their companies. Success depends on sustaining long- term company viability and growth. Key to this is a business model innovation program. The Canvas helps us identify and innovate their business models. Nicholas K. Niemann, United States I’m using the Business Model Canvas in Brazil to help artists, cultural producers, and game designers to envision innova- tive business models for the Cultural and Creative Industries. I apply it in the Cultural Production MBA at FGV and in the Innovation Games Lab at COPPE/ UFRJ Business Incubator. Claudio D'Ipolitto, Brazil When you typically think of a business model, the conclusion is that it is a 'for profit' business. However, I found that the Canvas is also very effective in the non-profit sector. We used it to DESIGN + ALIGN members of the leadership team during the formation of a new non-profit program. The Canvas was flexible enough to take into account the goals of this social entrepreneurial venture, and bring clarity to the true Value Proposition of the business and how to make it sustainable. Kevin Donaldson, United States I wish I had known the Canvas years ago! With a particular tough and complicated print-to-digital project within the publishing industry it would have been so helpful to show all project members in this visual way both the big picture, their (important) own roles in it and the inter- dependencies. Hours of explaining, arguing, and mis- understanding could have been saved. Jille Sol, Netherlands A close friend was looking for a new job. I used the Business Model Canvas in order to assess her personal business model. Her core competences and Value Proposition were outstanding but she failed to leverage her strategic partners and develop appropriate Customer Relationships. This adjusted focus opened new opportunities. Daniel Pandza, Mexico HO W DO YOU USE THE CA n VA S ? 50 bmgen_final.indd 50 6/15/10 5:33 PM

Imagine 60 first-year students, knowing nothing about entrepreneurship. In less than five days, thanks to the Business Model Canvas, they were able to pitch a viable idea with conviction and clarity. They used it as a tool to cover all the startup-building dimensions. Guilhem Bertholet, France I use the Business Model Canvas to teach early stage entrepreneurs across a wide range of industries as a much better way to translate THEIR BUSI n ESS PLANS I n TO THE BUSI n ESS PRO CE SSES that they (will) need to operate their businesses and to ensure that they are focused properly on being customer- centric in a way that makes the business as highly profitable as it can be. Bob Dunn, United States I have used the Canvas with a co-founder to design a business plan for a national level contest held by The Economic Times, India . The Canvas enabled me to think through all the aspects of the startup and put together a plan that VCs might find well thought out and attractive to fund. Praveen Singh, India We were asked to redesign the language service of an international n GO. The Business Model Canvas was especially help ful to show the links between the needs of people’s day-to-day work and a service that was felt too specialized, considered only as an afterthought, and far away from their priorities. Paola Valeri, Spain As a startup coach I support teams to create new products and design their businesses. The Business Model Canvas does a great job assisting me to remind the teams to think holistically about their business and prevents them from getting stuck on details. This helps to make their new venture a success. Christian Schüller, Germany The Business Model Canvas has allowed me to establish a common language and framework with colleagues. I've used the Canvas to explore new growth opportunities, assess uses of new business models by competitors, and to communicate across the organization how we could accelerate technology, market, and business model innovations. Bruce MacVarish, United States The Business Model Canvas has helped several health care organizations in the n etherlands t o make the move from a budget driven governmental institution to an entrepreneurial value-adding organization. Huub Raemakers, Netherlands I used the Canvas with senior managers of a public company to help them restructure their value chain due to changes in sector regulation. The key success factor was to understand which new Value Propositions could be offered to their clients and then translated into internal operations. Leandro Jesus, Brazil We used 15,000 post-its and more than 100 meters of bro W n paper to design a future organizational struc- ture in a global manufacturing company. The key of all activities was, however, the Business Model Canvas. It con- vinced us by its practical applicability, simplicity, and logical cause-and-effect relationships. Daniel Egger, Brazil I used the Canvas to do a reality check for my new startup Mupps, a platform where artists can make their own music apps for iPhone and Android phones in minutes. You know what? The Canvas made me even surer of the possible success! So I gotta go, work to do! Erwin Blom, Netherlands The Business Model Canvas has proven to be a very useful tool for capturing ideas and solutions for e-commerce projects. Most of my clients are SMEs and the Canvas helps them to clarify their current business models and understand and focus on the impact of e-commerce on their organizations. Marc Castricum, Netherlands I applied the Canvas to help a company align key staff in order to determine shared goals and strategic priorities, which were used during the planning process and incorporated with the BSC. It also ensured that the chosen initia- tives were clearly driven by the new strategic priorities. Martin Fanghanel, Bolivia 51 bmgen_final.indd 51 6/15/10 5:33 PM

Patterns bmgen_final.indd 52 6/15/10 5:33 PM

Patterns bmgen_final.indd 53 6/15/10 5:33 PM

“Pattern in architecture is the idea of capturing architectural design ideas as archetypal and reusable descriptions.” Christopher Alexander, Architect bmgen_final.indd 54 6/15/10 5:33 PM

This section describes business models with similar characteristics, similar arrangements of business model Building Blocks, or similar behaviors. We call these similarities business model patterns. The patterns described in the following pages should help you understand business model dynamics and serve as a source of inspiration for your own work with business models. We’ve sketched out five business model patterns built on important concepts in the business literature. We’ve “translated” these into the language of the Business Model Canvas to make the concepts comparable, easy to understand, and applicable. A single business model can incorporate several of these patterns. Concepts upon which our patterns are based include Unbundling, the Long Tail, Multi-Sided Platforms, FREE, and Open Business Models. New patterns based on other business concepts will certainly emerge over time. Our goal in defining and describing these business model patterns is to recast well-known business concepts in a standardized format—the Business Model Canvas—so that they are immediately useful in your own work around business model design or invention. Patterns 56 Unbundling Business Models 66 The Long Tail 76 Multi-Sided Platforms 88 FREE as a Business Model 108 Open Business Models bmgen_final.indd 55 6/15/10 5:33 PM

Un- Bundling Business Models bmgen_final.indd 56 6/15/10 5:33 PM

patterns 57 unbundling b usi ness p att erns The concept of the “unbundled” corpora- tion holds that there are three fundamentally diΩerent types of businesses: Customer Rela- tionship businesses, product innovation busi- nesses, and infrastructure businesses. • Each type has diΩerent economic, competitive, and cultural imperatives. • The three types may co-exist within a single corporation, but ideally they are “unbundled” into separate entities in order to avoid conflicts or undesirable trade-oΩs. Def_ Pattern No. 1 [ ref·er·ences ] 1 • “Unbundling the Corporation. ” Harvard Business Review. Hagel, John, Singer, Marc. March–April 1999. 2 • The Discipline of M arket Leaders: Choose Your Customers, Narrow Your Focus, Dominate Your Market. Treacy, Michael, Wiersema, Fred. 1995. [ ex·am·ples ] mobile telecom industry, private banking industry bmgen_final.indd 57 6/15/10 5:33 PM

paTTerns 58 John Hagel and Marc Singer, who coined the term “unbundled corporation,” believe that companies are composed of three very diΩerent types of businesses with diΩerent economic, competitive, and cultural imperatives: Customer Relationship businesses, product innovation businesses, and infrastructure businesses. Similarly, Treacy and Wiersema suggest that companies should focus on one of three value disciplines: operational excellence, product leader- ship, or customer intimacy. On the following pages we show how the idea of unbundling applies to business models. In the fi rst example, we describe the confl icts and undesirable trade-oΩs created by a “bundled” business model within the private banking industry. In the second example we show how mobile telecom operators are unbundling and focusing on new core businesses. Bundled Unbundling Unbundled! 1 3 2 Hagel and Singer describe the role of Customer Relationship businesses as fi nding and acquiring customers and building relationships with them. Similarly, the role of product innovation businesses is to develop new and attractive products and services, while the role of infrastructure businesses is to build and manage platforms for high volume, repetitive tasks. Hagel and Singer argue that companies should separate these businesses and focus on only one of the three internally. Because each type of business is driven by diΩerent factors, they can confl ict with each other or produce undesirable trade-oΩs within the same organization. unbundling business Models bmgen_final.indd 58 6/15/10 5:33 PM

pa TT erns 59 unbundling b usi ness p a TT ern s Product Innovation Customer Relationship Management Infrastructure Management Economics Early market entry enables charging premium prices and acquiring large market share; speed is key High cost of customer acquisition makes it imperative to gain large wallet share; economies of scope are key High fixed costs make large volumes essential to achieve low unit costs; economies of scale are key Culture Battle for talent; low barriers to entry; many small players thrive Battle for scope; rapid consolidation; a few big players dominate Battle for scale; rapid consolidation; a few big players dominate Competition Employee centered; coddling the creative stars Highly service oriented; customer- comes-first mentality Cost focused; stresses standardization, predictability, and eΩiciency THREE CORE BUSINESS TYPES Source: Hagel and Singer, 1999. bmgen_final.indd 59 6/15/10 5:33 PM

Swiss private banking, the business of provid- ing banking services to the very wealthy, was long known as a sleepy, conservative industry. Yet over the last decade the face of the Swiss private banking industry changed consider- ably. Traditionally, private banking institutions were vertically integrated and performed tasks ranging from wealth management to brokerage to fi nancial product design. There were sound reasons for this tight vertical integration. Out- sourcing was costly, and private banks preferred keeping everything in-house due to secrecy and confi dentiality concerns. But the environment changed. Secrecy became less of an issue with the demise of the mystique surrounding Swiss banking practices, and outsourcing became attractive with the breakup of the banking value chain due to the emergence of specialty service providers such as transaction banks and fi nancial product bou- tiques. The former focus exclusively on handling banking transactions, while the latter concen- trate solely on designing new fi nancial products. Zurich-based private banking institution Maerki Baumann is an example of a bank that has unbundled its business model. It spun oΩ its transaction-oriented platform business into a separate entity called Incore Bank, which oΩers banking services to other banks and securities dealers. Maerki Baumann now focuses solely on building Customer Relationships and advising clients. On the other hand, Geneva-based Pictet, the largest Swiss private bank, has preferred to remain integrated. This 200-year-old institution develops deep Customer Relationships, handles many client transactions, and designs its own fi nancial products. Though the bank has been successful with this model, it has to carefully manage trade-oΩs between three fundamentally diΩerent types of businesses. Private Banking: Three Businesses in One The fi gure opposite depicts the traditional private banking model, describes trade-oΩs, and unbundles it into three basic businesses: relationship management, product innovation, and infrastructure management. patterns 60 unbundling business Models bmgen_final.indd 60 6/15/10 5:33 PM

61 patterns Trade Offs 1 The bank serves two diΩerent markets with very diΩerent dynamics. Advising the wealthy is a long-term, relationship-based business. Selling fi nancial products to private banks is a dynamic, fast-changing business. 2 The bank aims to sell its products to competing banks in order to increase revenues—but this creates a confl ict of interest. 3 The bank’s product division pressures advi- sors to sell the bank’s own products to clients. This confl icts with client interest in neutral advice. Clients want to invest in the best products on the market, regardless of origin. 4 The cost- and eΩiciency-focused transaction platform business confl icts with the remuneration- intensive advisory and fi nancial products business, which needs to attract costly talent. 5 The transaction platform business requires scale to drive down costs, which is diΩicult to achieve within a single bank. 6 The product innovation business is driven by speed and quick market entry, which is at odds with the long-term business of advising the wealthy. other product providers advise product r&d marketing platform management custom-tailored wealth manage- ment services fi nancial products transaction management intimate personal relationship key account management wealthy individuals & families private banks private banks independent fi nancial advisors brand/trust product ip transaction platform personal networks sales force transaction platform platform management hr: r&d hr: private bankers management & advisory fees product & performance fees transaction fees The Private Banking Model • Relationship Business • Product Innovation Business • Infrastructure Business 1 2 3 4 5 6 unbundling business patterns bmgen_final.indd 61 6/15/10 5:33 PM

Unbundling the Mobile Telco Mobile telecommunication fi rms have started unbundling their businesses. Traditionally they competed on network quality, but now they are striking network sharing deals with competitors or outsourcing network operations altogether to equipment manufacturers. Why? Because they realize that their key asset is no longer the network—it is their brand and their Customer Relationships. telecom equipment suppliers network maintenance services provisioning marketing voice data content acquisition retention installed customer base network brand customer base retail network maintenance marketing voice data service revenues Product Innovation Infrastructure Management Customer Relationship patterns 62 unbundling business Models bmgen_final.indd 62 6/15/10 5:33 PM

patterns 63 Equipment Manufacturers Telcos such as France Telecom, KPN, and Vodafone have outsourced operation and maintenance of some of their networks to equipment manufacturers such as Nokia Siemens Networks, Alcatel-Lucent, and Ericsson. Equipment manufac- turers can run the networks at lower cost because they service several telcos at a time and thus benefi t from economies of scale. Unbundled Telco After unbundling its infrastructure business, a telco can sharpen its focus on branding and segmenting customers and services. Customer relationships comprise its key asset and its core business. By concentrating on customers and increasing share of wallet with current subscribers, it can leverage invest- ments made over the years acquiring and retaining customers. One of the fi rst mobile telcos to pursue strategic unbundling was Bharti Airtel, now one of India’s leading telcos. It outsourced network operations to Ericsson and Nokia Siemens Networks and IT infrastructure to IBM, allowing the company to focus on its core competency: building Customer Relationships. Content Providers For product and service innovation, the unbundled telco can turn to smaller, creative fi rms. Innovation requires creative talent, which smaller and more dynamic organizations typically do a better job of attracting. Telcos work with multiple third-parties that assure a constant supply of new technologies, services, and media content such as mapping, games, video, and music. Two examples are Mobilizy of Austria and Sweden’s tat. Mobilizy focuses on location-based service solutions for smartphones (it developed a popular mobile travel guide), and tat concentrates on creating advanced mobile user interfaces. r&d new products & services telcos intel- lectual property licensing fees network operators voice data content acquisition retention installed customer base brand customer base retail marketing service revenues network maintenance services provisioning network infrastruc- ture operation & maintenance telcos network economies of scale Customer Relationship unbundling business patterns bmgen_final.indd 63 6/15/10 5:33 PM

64 Unbundled Patterns μ3 unbundling business Models KP C$ VP CR CH CS KP KA KR R$ C$ Everything in this model is tailored to understanding and serving customers, or building strong Customer Relationships key assets and resources are the customer base and subscriber trust acquired over time Product and service innova- tion, infrastructure acquired from third parties This model aims at generating revenues with a broad scope of products built upon customer trust—the goal is to win a large “share of wallet” Customer acquisition and retention comprise main costs , which include brand- ing and marketing expenses patterns bmgen_final.indd 64 6/15/10 5:34 PM

patterns 65 unbundling business Models w VP CR CH CS KA KR R$ Products and services can be brought to market directly, but are usually delivered through B2B intermediaries focused on customer relationships High cost base due to the battle over creative talent, the key resource in this model activity is focused on lever- aging research and develop- ment to bring new products and services to market Services are usually deliv- ered to business customers The activities and oΩer are focused on delivering infrastructure services revenues are based on low margins and high volume Platform is characterized by high fi xed costs , which are leveraged through scale and large volume patterns patterns patterns patterns VP CR CH CS KP KA KR R$ C$ High premium chargeable because of novelty factor bmgen_final.indd 65 6/15/10 5:35 PM

The Long Tail bmgen_final.indd 66 6/15/10 5:35 PM

patterns 67 the long tail long tail business models are about selling less of more: They focus on oΩering a large number of niche products, each of which sells relatively infrequently. • Aggregate sales of niche items can be as lucrative as the traditional model whereby a small number of bestsellers account for most revenues. • Long Tail business models require low inventory costs and strong plat- forms to make niche content readily available to interested buyers. [ ref·er·ences ] 1 • The Long Tail: Why the F uture of Business Is Selling Less of More. Anderson, Chris. 2006. 2 • “The Long Tail.” W ired Magazine. Anderson, Chris. October 2004. [ ex·am·ples ] Netflix, eBay, YouTube, Facebook, Lulu.com Def_ Pattern No. 2 bmgen_final.indd 67 6/15/10 5:35 PM

The Long Tail concept was coined by Chris Anderson to describe a shift in the media business from selling a small number of “hit” items in large volumes toward selling a very large number of niche items, each in relatively small quantities. Anderson described how many infrequent sales can produce aggregate revenues equivalent to or even exceeding revenues produced by focusing on “hit” products. Anderson believes three economic triggers gave rise to this phenomenon in the media industry: 1. Democratization of tools of production: Falling technology costs gave individuals access to tools that were prohibitively expensive just a few years ago. Millions of passionate amateurs can now record music, produce short fi lms, and design simple software with professional results. 2. Democratization of distribution: The Internet has made digital content distribution a commod- ity, and dramatically lowered inventory, commu- nications, and transaction costs, opening up new markets for niche products. 3. Falling search costs to connect supply with demand: The real challenge of selling niche content is fi nding interested potential buyers. Powerful search and recommendation engines, user ratings, and communities of interest have made this much easier. # of Sales TOP 20% Focus on a small number of products, each selling in high volume bmgen_final.indd 68 6/15/10 5:35 PM

THe long Tail paTTerns 69 Anderson’s research focuses primarily on the media industry. For example, he showed how online video rental company Netfl ix moved toward licensing a large number of niche movies. While each niche movie is rented relatively infrequently, aggregate revenue from Netfl ix’s vast niche fi lm catalog rivals that from the rental of blockbuster movies. But Anderson demonstrates that the Long Tail concept applies outside the media industry as well. The success of online auction site eBay is based on a huge army of auctioneers selling and buying small quantities of “non-hit” items. LONG TAIL Focus on a large number of products, each selling in low volumes # of Products bmgen_final.indd 69 6/15/10 5:35 PM

patterns 70 the long tail The Transformation of the Book Publishing Industry Old Model We’ve all heard about aspiring authors who carefully craft and submit manuscripts to publishing houses in the hope of seeing their work in print—and face constant rejection. This stereotypical image of publishers and authors holds much truth. The traditional book publishing model is built on a process of selection whereby publishers screen many authors and manuscripts and select those that seem most likely to achieve mini- mum sales targets. Less promising authors and their titles are rejected because it would be unprofi table to copyedit, design, print, and promote books that sell poorly. Publishers are most interested in books they can print in quantity for sale to large audiences. - content acquisition publishing sales broad content (ideally "hits") – broad audience publishing knowledge content retail network publishing / marketing wholesale revenues bmgen_final.indd 70 6/15/10 5:35 PM

the long tail patterns 71 A New Model Lulu.com turned the traditional bestseller-centric publishing model on its head by enabling anyone to publish. Lulu.com’s business model is based on helping niche and amateur authors bring their work to market. It eliminates traditional entry barriers by providing authors the tools to craft, print, and distribute their work through an online marketplace. This contrasts strongly with the traditional model of selecting “market-worthy” work. In fact, the more authors Lulu.com attracts, the more it succeeds, because authors become customers. In a nutshell, Lulu.com is a multi- sided platform (see p. 76) that serves and connects authors and readers with a Long Tail of user-generated niche content. Thousands of authors use Lulu.com’s self-service tools to publish and sell their books. This works because books are printed only in response to actual orders. The failure of a particular title to sell is irrelevant to Lulu.com, because such a failure incurs no costs. - platform development logistics self-publish- ing services marketplace for niche content communities of interest online profi le niche authors niche audiences platform print-on- demand infrastruc- ture lulu.com platform management & development sales commissions (low) publishing service fees bmgen_final.indd 71 6/15/10 5:35 PM

72 the long tail patterns The Danish toy company LEGO started manu- facturing its now famous interlocking bricks in 1949. Generations of children have played with them, and LEGO has released thousands of kits around a variety of themes, including space stations, pirates, and the Middle Ages. But over time, intensifying competition in the toy industry forced LEGO to seek innovative new paths to growth. It started licensing the rights to use characters from blockbuster movies such as Star Wars , Batman , and Indiana Jones . While such licensing is expensive, it proved to be an impressive revenue generator. In 2005 LEGO started experimenting with user-generated content. It introduced LEGO Factory, which allows customers to assemble their very own LEGO kits and order them online. Using software called LEGO Digital Designer, customers can invent and design their own buildings, vehicles, themes, and characters, choosing from thousands of components and dozens of colors. Customers can even design the box containing the customized kit. With LEGO Factory, LEGO turned passive users into active participants in the LEGO design experience. This requires transforming the supply chain infrastructure, and because of low volumes LEGO has not yet fully adapted its support infrastructure to the new LEGO Factory model. Instead, it simply tweaked existing resources and activities. In terms of a business model, though, LEGO took a step beyond mass customization by enter- ing Long Tail territory. In addition to helping users design their own LEGO sets, LEGO Fac- tory now sells user-designed sets online. Some sell well; some sell poorly or not at all. What’s important for LEGO is that the user-designed sets expand a product line previously focused on a limited number of best-selling kits. Today this aspect of LEGO’s business accounts for only a small portion of total revenue, but it is a fi rst step towards implementing a Long Tail model as a complement—or even alternative—to a traditional mass-market model. LEGO ® ’s New Long Tail Customers who build new LEGO designs and post them online become key partners generating content and value LEGO has to provide and manage the platform and logistics that allow packaging and delivery of custom- made LEGO sets LEGO Factory substan- tially expands the scope of the oΩ-the-shelf kit oΩering by giving LEGO fans the tools to build, showcase, and sell their own custom- designed kits LEGO Factory builds a Long Tail community around customers who are truly interested in niche content and want to go beyond oΩ-the- shelf retail kits Thousands of new, customer-designed kits perfectly complement LEGO’s standard sets of blocks. LEGO Factory connects customers who create customized designs with other cus- tomers, thus becoming a customer match- making platform and increasing sales LEGO has not yet fully adapted its resources and activities, which are optimized primarily for the mass market LEGO Factory’s existence depends heavily on the Web channel LEGO Factory leverages production and logistics costs already incurred by its traditional retail model LEGO Factory aims to generate small revenues from a large number of customer-designed items. This represents a valuable addition to traditional high-volume retail revenues LEGO + LEGO users can make their own designs and order them online = LEGO Factory + LEGO allows users to post and sell their designs online = LEGO Users Catalog bmgen_final.indd 72 6/15/10 5:35 PM

the long tail patterns 73 Customers who build new LEGO designs and post them online become key partners generating content and value LEGO has to provide and manage the platform and logistics that allow packaging and delivery of custom- made LEGO sets LEGO Factory substan- tially expands the scope of the oΩ-the-shelf kit oΩering by giving LEGO fans the tools to build, showcase, and sell their own custom- designed kits LEGO Factory builds a Long Tail community around customers who are truly interested in niche content and want to go beyond oΩ-the- shelf retail kits Thousands of new, customer-designed kits perfectly complement LEGO’s standard sets of blocks. LEGO Factory connects customers who create customized designs with other cus- tomers, thus becoming a customer match- making platform and increasing sales LEGO has not yet fully adapted its resources and activities, which are optimized primarily for the mass market LEGO Factory’s existence depends heavily on the Web channel LEGO Factory leverages production and logistics costs already incurred by its traditional retail model LEGO Factory aims to generate small revenues from a large number of customer-designed items. This represents a valuable addition to traditional high-volume retail revenues VP CR CH CS KP KA KR R$ C$ LEGO Factory: Customer-Designed Kits bmgen_final.indd 73 6/15/10 5:35 PM

patterns 74 the long tail Long Tail Pattern bmgen_final.indd 74 6/15/10 5:35 PM

patterns 75 the long tail VP CR CH CS KP KA KR R$ C$ The value proposition of a Long Tail business model is characterized by oΩering a wide scope of “non-hit” items that may co-exist with “hit” products. Long Tail business models may also facilitate and build on user-generated content. This model is based on aggregating small revenues from a large number of items. revenue streams vary; they may come from advertising, product sales, or subscriptions. The main costs incurred cover platform development and maintenance The key resource is the platform; key activities include platform develop- ment and maintenance and niche content acquisition and production. Niche content providers (professional and/or user-generated) are the key partners in this pattern. A Long Tail business model can serve both profes- sional and amateur content producers, and may create a multi-sided platform (see p. 76) catering to users and producers alike. Long Tail business models focus on niche customers . Long Tail business models usually rely on the Internet as a customer relationship and/or transaction channel. bmgen_final.indd 75 6/15/10 5:35 PM

Multi- Sided Platforms bmgen_final.indd 76 6/15/10 5:35 PM

patterns 77 Multi- s ided p lat for M s multi-sided platforms bring together two or more distinct but interdependent groups of customers. • Such platforms are of value to one group of customers only if the other groups of customers are also present. • The platform creates value by facilitating interactions between the diΩerent groups. • A multi-sided platform grows in value to the extent that it attracts more users, a phenomenon known as the network eΩect. [ ref·er·ences ] 1 • “Str ategies for Two-Sided Markets.” Harvard Busi- ness Review . Eisenmann, Parker, Van Alstyne. October 2006. 2 • Invisible E ngines: How Software Platforms Drive Innovation and Transform Industries. Evans, Hagiu, Schmalensee. 2006. 3 • “Managing the M aze of Multisided Markets.” Strategy & Business. Evans, David. Fall 2003. [ ex·am·ples ] Visa, Google, eBay, Microsoft Windows, Financial Times Def_ Pattern No. 3 bmgen_final.indd 77 6/15/10 5:35 PM

paTTerns 78 MulTi-sided plaTForMs Multi-sided platforms, known by economists as multi- sided markets, are an important business phenomenon. They have existed for a long time, but proliferated with the rise of information technology. The Visa credit card, the Microsoft Windows operating system, the Financial Times , Google, the Wii game console, and Facebook are just a few examples of successful multi-sided platforms. We address them here because they represent an increasingly important business model pattern. What exactly are multi-sided platforms? They are platforms that bring together two or more distinct but interdependent groups of customers. They create value as intermediaries by connecting these groups. Credit cards, for example, link merchants with cardholders; computer operating systems link hardware manufac- turers, application developers, and users; newspapers link readers and advertisers; video gaming consoles link game developers with players. The key is that the platform must attract and serve all groups simultane- ously in order to create value. The platform’s value for a particular user group depends substantially on the number of users on the platform’s “other sides.” A video game console will only attract buyers if enough games are available for the platform. On the other hand, game developers will develop games for a new video console only if a substantial number of gamers already use it. Hence multi-sided platforms often face a “chicken and egg” dilemma. One way multi-sided platforms solve this problem is by subsidizing a Customer Segment. Though a platform operator incurs costs by serving all customer groups, it often decides to lure one segment to the platform with an inexpensive or free Value Proposition in order to subsequently attract users of the platform’s “other side.” One diΩiculty multi-sided platform operators face is understanding which side to subsidize and how to price correctly to attract customers. Customer Segment A Segments ≥ 2 bmgen_final.indd 78 6/15/10 5:35 PM

paTTerns 79 MulTi-sided plaTForMs One example is Metro , the free daily newspaper that originated in Stockholm and can now be found in many large cities worldwide. It launched in 1995 and immediately attracted a large readership because it was distributed free of charge to urban commuters in train and bus stations throughout Stockholm. This allowed it to attract advertisers and rapidly become profi table. Another example is Microsoft, which gave its Windows software development kit (SDK) away for free to encourage development of new applications for its operating system. The larger number of applica- tions attracted more users to the Windows platform and increased Microsoft’s revenues. Sony’s Playstation 3 game console, on the other hand, is an example of a multi-sided platform strategy that backfi red. Sony subsidized each console purchased in hopes of later collecting more game royalties. This strategy performed poorly because fewer Playstation 3 games sold than Sony initially estimated. Operators of multi-sided platforms must ask them- selves several key questions: Can we attract suΩicient numbers of customers for each side of the platform? Which side is more price sensitive? Can that side be enticed by a subsidized oΩer? Will the other side of the platform generate suΩicient revenues to cover the subsidies? The following pages outline three examples of multi- sided platform patterns. First, we sketch Google’s multi-sided platform business model. Then we show how Nintendo, Sony, and Microsoft compete with slightly diΩerent multi-sided platform patterns. Finally, we describe how Apple has slowly evolved into an operator of a powerful multi-sided platform. Segment B FACILITATE FACILITATE FACILITATE FACILITATE FACILITATE FACILITATE FACILITATE FACILITATE FACILITATE FACILITATE FACILITATE FACILITATE INTERACTION Segment N Segment N Segment N etc. etc. bmgen_final.indd 79 6/15/10 5:35 PM

80 patterns Multi-sided platforMs The heart of Google’s business model is its Value Proposition of providing extremely targeted text advertising globally over the Web. Through a service called AdWords, advertisers can publish advertisements and sponsored links on Google’s search pages (and on an aΩiliated content network as we will later see). The ads are displayed alongside search results when people use the Google search engine. Google ensures that only ads relevant to the search term are displayed. The service is attractive to advertisers because it allows them to tailor online campaigns to specifi c searches and particular demo- graphic targets. The model only works, though, if many people use Google’s search engine. The more people Google reaches, the more ads it can display and the greater the value created for advertisers. Google’s Value Proposition to advertisers depends heavily on the number of customers it attracts to its Web site. So Google caters to this second group of consumer customers with a powerful search engine and a growing num- ber of tools such as Gmail (Web based e-mail), Google maps, and Picasa (an online photo album) among others. To extend its reach even further, Google designed a third service that enables its ads to be displayed on other, non- Google Web sites. This service, called AdSense, allows third parties to earn a portion of Google's advertising revenue by showing Google ads on their own sites. AdSense automatically analyzes a participating Web site’s content and displays relevant text and image ads to visitors. The Value Proposition to these third party Web site owners, Google’s third Customer Segment, is to enable them to earn money from their content. Google’s Business Model targeted ads advertisers targeted ads free search monetizing content advertisers web surfers content creators VP VP CR CR CH CH CS CS KP KP KA KA KR KR R$ R$ C$ C$ Google oΩers distinct Value Propositions to three interdependent Customer Segments targeted ads advertisers targeted ads advertisers free search web surfers free search web surfers content creators monetizing content content creators bmgen_final.indd 80 6/15/10 5:35 PM

Multi-sided platforMs patterns 81 platform management, managing services, expanding reach targeted ads free search monetizing content advertisers web surfers content owners search platform platform costs keyword auctions free KA VP CR CH CS KP KR R$ C$ targeted ads content owners content web surfers content advertisers content R$ monetizing content targeted ads free search monetizing targeted ads targeted ads keyword auctions free search monetizing content free search advertisers web surfers content owners keyword auctions advertisers keyword auctions As a multi-sided platform Google has a very distinct revenue model. It makes money from one Customer Segment, advertisers, while subsidizing free oΩers to two other segments: Web surfers and content owners. This is logi- cal because the more ads it displays to Web surfers, the more it earns from advertisers. Increased advertising earnings, in turn, motivates even more content owners to become AdSense partners. Advertisers don’t directly buy advertising space from Google. They bid on ad-related keywords associated with either search terms or content on third party Web sites. The bidding occurs through an AdWords auction service: the more popular a keyword, the more an advertiser has to pay for it. The substantial revenue that Google earns from AdWords allows it to continuously improve its free oΩers to search engine and AdSense users. Google’s Key Resource is its search platform, which powers three diΩerent services: Web search (Google.com), advertising (AdWords), and third-party content monetization (AdSense). These services are based on highly complex proprietary search and matchmaking algorithms supported by an extensive IT infrastructure. Google’s three Key Activities can be defi ned as follows: (1) building and maintaining the search infrastructure, (2) managing the three main services, and (3) promoting the platform to new users, content owners, and advertisers. targeted ads free search monetizing content advertisers web surfers content owners keyword auctions free VP CR CH CS KP KA KR R$ targeted ads content owners content web surfers content advertisers content R$ monetizing content targeted ads free search monetizing targeted ads targeted ads keyword auctions free search monetizing content free search advertisers web surfers content owners keyword auctions keyword auctions Google has one main Revenue Stream that subsidizes other oΩers (Revenue Stream is replaced by “free”) bmgen_final.indd 81 6/15/10 5:35 PM

82 patterns Multi-sided platforMs Wii versus PSP/ Xbox Same Pattern, DiΩerent Focus PSP/Xbox Focus Video game consoles, today a multi-billion dollar business, provide good examples of double-sided platforms. On one hand, a console manufacturer has to draw as many players as possible to attract game developers. On the other hand, players only buy the hardware if there is a suΩicient number of interesting games available for that console. In the game industry, this has led to a fi erce battle between three main competitors and their respec- tive devices: the Sony Playstation series, the Microsoft Xbox series, and the Nintendo Wii. All three are based on double-sided platforms, but there are substantial diΩerences between the Sony/Microsoft business model and Nintendo’s approach, demonstrating that there is no “proven” solution for a given market. Sony and Microsoft dominated the game console market until Nin- tendo’s Wii swept the sector with a fresh approach to technology and an astonishingly diΩerent business model. Before launching the Wii, Nintendo was spiraling downward, rapidly losing market share, and tee- tering on the edge of bankruptcy. The Wii console changed all that and catapulted the company to the market leader position. Traditionally, video console manufacturers targeted avid gamers and competed on console price and performance. For this audience of “hardcore gamers” graphics and game quality and processor speed were the main selection criteria. As a consequence, manufacturers developed extremely sophisticated and expensive consoles and sold them at a loss for years, subsidizing the hardware with two other revenue sources. First, they developed and sold their own games for their own consoles. Second, they earned royalties from third party developers who paid for the right to create games for specifi c consoles. This is the typical pattern of a double-sided platform business model: one side, the consumer, is heavily subsidized to deliver as many consoles as possible to the market. Money is then earned from the other side of the platform: game developers. high per- formance console console audience hardcore gamers game developers hardware sales at a loss royalties VP CR CH CS KP KA KR R$ C$ gamers developers hardware sales at a loss hardcore gamers console high per- formance console sales at a loss royalties audience developers hardware sales at a loss game developers sales at a loss hardware sales at a loss bmgen_final.indd 82 6/15/10 5:36 PM

Multi-sided platforMs patterns 83 Same pattern, but diΩerent business model: Nintendo’s Wii Wii Focus Nintendo’s Wii changed all this. Like its competitors, the Wii is based on a double-sided platform business, but with substantially diΩerent elements. Nintendo aimed its consoles at the huge audience of casual gamers rather than the smaller “traditional” market of avid gamers. It won the hearts of casual gamers with relatively inexpensive machines equipped with a special remote control device that allows players to control the action with physical gestures. The novelty and fun of motion-controlled games such as Wii Sports, Wii Music, and Wii Fit attracted enormous numbers of casual gamers. This diΩerentiator is also the basis for the new type of double-sided platform that Nintendo created. Sony and Microsoft competed with costly, proprietary, state-of-the-art technology aimed at avid gamers and subsidized it in order to gain market share and keep hardware prices aΩordable. Nintendo, on the other hand, focused on a market segment that was far less sensitive to technological performance. Instead, it lured customers with its motion-controlled “fun factor.” This was a much cheaper technological innovation compared to new, more powerful chipsets. Thus, the Nintendo Wii was less costly to produce, allowing the company to forego commercialization subsi- dies. This is the main diΩerence between Nintendo and rivals Sony and Microsoft: Nintendo earns money from both sides of its double-sided Wii platform. It generates profi ts on each console sold to consumers and pockets royalties from game developers. To summarize, three interlinked business model factors explain the commercial success of the Wii: (1) low-cost diΩerentiation of the prod- uct (motion control), (2) focus on a new, untapped market that cares less about technology (casual gamers), and (3) a double-sided platform pattern that generates revenues from both “sides” of the Wii. All three represent clean breaks from past game sector traditions. "family" console access to console users & cheap game develop- ment costs casual gamers game developers profi table hardware sales royalties VP CR CH CS KA KR R$ gamers game developers casual gamers access to profi table profi table hardware sales console access to develop- ment costs profi table hardware sales royalties cheap game develop- profi table hardware sales game developers hardware sales hardware sales KP C$ bmgen_final.indd 83 6/15/10 5:36 PM

patterns 84 Multi-sided platforMs The evolution of Apple’s product line from the iPod to the iPhone high- lights the company’s transition to a powerful platform business model pattern. The iPod was initially a stand-alone device. The iPhone, on the contrary, evolved into a powerful multi-sided platform for which Apple controls third party applications through its App Store. Apple’s Evolution into a Platform Operator bmgen_final.indd 84 6/15/10 5:36 PM

Multi-sided platforMs patterns 85 Apple introduced the iPod in 2001 as a stand- alone product. Users could copy their CDs and download music from the Internet onto the device. The iPod represented a technology plat- form for storing music from various sources. At this point, though, Apple was not exploiting the platform aspect of the iPod in its business model. In 2003 Apple introduced the iTunes Music Store, which was closely integrated with the iPod. The store allowed users to buy and down- load digital music in an extremely convenient way. The store was Apple’s fi rst attempt at exploiting platform effects. iTunes essentially connected “music rightsholders” directly with buyers. This strategy catapulted Apple to its position today as the world’s largest online music retailer. In 2008 Apple consolidated its platform strat- egy by launching its App Store for the highly popular iPhone. The App Store allows users to browse, buy, and download applications directly from the iTunes Store and install them on their iPhones. Application developers must channel sales of all applications through the App Store, with Apple collecting a 30 percent royalty on each application sold. Switch to multi-sided platform business model Consolidation of platform business model 2001 ipod 2003 ipod & iTunes 2008 iphone & appstore bmgen_final.indd 85 6/15/10 5:36 PM

patterns 86 M ulti-sided platfor M s Multi-Sided Platform Pattern bmgen_final.indd 86 6/15/10 5:36 PM

patterns 87 Multi-sided platforMs VP CR CH CS KP KA KR R$ C$ The value proposition usually creates value in three main areas: First, attracting user groups (i.e. Customer Segments); Second, matchmaking between Customer Seg- ments; Third, reducing costs by channeling transactions through the platform. The main costs incurred under this pattern relate to maintaining and developing the platform. The key resource required for this business model pattern is the platform. The three Key Activities are usually platform manage- ment, service provisioning, and platform promotion. Business models with a multi-sided platform pattern have a distinct structure. They have two or more customer segments , each of which has its own Value Proposition and associated Revenue Stream. Moreover, one Customer Segment can- not exist without the others. Each Customer Segment produces a diΩerent revenue stream . One or more segments may enjoy free oΩers or reduced prices subsidized by revenues from other Customer Segments. Choosing which segment to subsidize can be a crucial pricing decision that determines the success of a multi-sided platform business model. bmgen_final.indd 87 6/15/10 5:36 PM

FREE as a Business Model bmgen_final.indd 88 6/15/10 5:36 PM

patterns 89 free as a b usi ness Model free • In the free business model at least one substantial Customer Segment is able to continuously benefit from a free-of-charge offer. • DiΩerent patterns make the free offer possible. • Non-paying customers are financed by another part of the business model or by another Customer Segment. [ ref·er·ences ] 1 • “ Free! Why $0.00 is the Future of Business.” Wired Magazine. Anderson, Chris. February 2008. 2 • “ How about Free? The Price Point That Is Turn- ing Industries on Their Heads.” Knowledge@ Wharton. March 2009. 3 • Free: The Future of a Radical Price. Anderson, Chris. 2008. [ ex·am·ples ] Metro (free paper), Flickr, Open Source, Skype, Google, Free Mobile Phones Def_ Pattern No. 4 bmgen_final.indd 89 6/15/10 5:36 PM

90 pa TT erns F ree as a b usi ness Model Receiving something free of charge has always been an attractive Value Proposition. Any marketer or economist will confirm that the demand generated at a price of zero is many times higher than the demand generated at one cent or any other price point. In recent years free offers have exploded, particularly over the Internet. The ques- tion, of course, is how can you systematically offer something for free and still earn substantial revenues? Part of the answer is that the cost of producing certain giveaways, such as online data storage capacity, has fallen dramatically. Yet to make a profit, an organization offering free products or services must still generate revenues somehow. There are several patterns that make integrating free products and services into a business model possible. Some of the tra- ditional FREE patterns are well known, such as advertising, which is based on the previously discussed pattern of multi-sided platforms (see p. 76). Others, such as the so-called freemium model, which provides basic services free of charge and premium services for a fee, have become popular in step with the increasing digitization of goods and services offered via the Web. Chris Anderson, whose Long Tail concept we discussed previously (see p. 66), has helped the concept of FREE gain widespread recognition. Anderson shows that the rise of new free-of-charge offers is closely related to the fundamentally different econom- ics of digital products and services. For example, creating and recording a song costs an artist time and money, but the cost of digitally replicating and distributing the work over the Internet is close to zero. Hence, an artist can promote and deliver music to a global audience over the Web, as long as he or she finds other Revenue Streams, such as concerts and merchandis- ing, to cover costs. Bands and artists who have experimented successfully with free music include Radiohead and Trent Reznor of Nine Inch Nails. In this section we look at three different patterns that make FREE a viable business model option. Each has different underlying economics, but all share a common trait: at least one Customer Segment continuously benefits from the free-of-charge offer. The three patterns are (1) free offer based on multi-sided platforms (advertising-based), (2) free basic services with optional premium services (the so-called “freemium” model), (3) and the “bait & hook” model whereby a free or inexpensive initial offer lures customers into repeat purchases. bmgen_final.indd 90 6/15/10 5:36 PM

paTTerns 91 Free as a business Model (How) can you set it free? bmgen_final.indd 91 6/15/10 5:36 PM

92 patterns free as a business Model Advertising is a well-established revenue source that enables free offers. We recognize it on television, radio, the Web, and in one of its most sophisticated forms, in targeted Google ads. In business model terms, FREE based on adver- tising is a particular form of the multi-sided platform pattern (see p. 76). One side of the platform is designed to attract users with free content, products, or services. Another side of the platform generates revenue by selling space to advertisers. One striking example of this pattern is Metro , the free newspaper that started in Stockholm and is now available in dozens of cities around the world. The genius of Metro lies in how it modifi ed the traditional daily newspaper model. First, it offered the paper for free. Second, it focused on distributing in high-traffi c com- muter zones and public transport networks by hand and with self-service racks. This required Metro to develop its own distribution network, but enabled the company to quickly achieve broad circulation. Third, it cut editorial costs to produce a paper just good enough to entertain younger commuters during their short rides to and from work. Competitors using the same model soon followed, but Metro kept them at bay with a couple of smart moves. For example, it controlled many of the news racks at train and bus stations, forcing rivals to resort to costly hand distribution in important areas. Advertising: A Multi-Sided Platform Model Metro distribution agreements with public transport networks write & produce a daily paper distribution ad space in high circulation free paper free city-wide commuter paper acquisition retention advertisers commuters brand distribution net- work & logistics ad sales force public transport, train stations, bus stops content, design & print of a daily paper distribution free newspaper fees for ad space in paper VP CR CH CS KP KA KR R$ C$ Assures high circulation through free offer and by focusing on distributing in high-traffi c commuter zones and public transport networks Minimizes costs by cutting editorial team to produce a daily paper just “good enough” for a commute read bmgen_final.indd 92 6/15/10 5:36 PM

free as a business Model patterns 93 One industry crumbling under the impact of FREE is newspaper publishing. Sandwiched between freely available Internet content and free newspapers, several traditional papers have already fi led for bankruptcy. The U.S. news industry reached a tipping point in 2008 when the number of people obtaining news online for free outstripped those paying for newspapers or news magazines, according to a study by the Pew Research Center. Traditionally, newspapers and magazines relied on revenues from three sources: newsstand sales, subscription fees, and advertising. The fi rst two are rapidly declining and the third is not increasing quickly enough. Though many newspapers have increased online readership, they’ve failed to achieve correspondingly greater advertising revenues. Meanwhile, the high fi xed costs that guarantee good journal- ism—news gathering and editorial teams— remained unchanged. Several newspapers have experi- mented with paid online subscriptions, with mixed results. It is diffi cult to charge for articles when readers can view similar con- tent for free on Web sites such as CNN.com or MSNBC.com. Few newspapers have succeeded in motivating readers to pay for access to pre- mium content online. On the print side, traditional newspapers are under attack from free publications such as Metro . Though Metro offers a completely different format and journalistic quality and focuses primarily on young readers who previ- ously ignored newspapers, it is ratcheting up the pressure on fee-for-service news providers. Charging money for news is an increasingly diffi cult proposition. Some news entrepreneurs are experiment- ing with novel formats focused on the online space. For example, news provider True/Slant (trueslant.com) aggregates on one site the work of over 60 journalists, each an expert in a specifi c fi eld. The writers are paid a share of the advertising and sponsorship revenues gener- ated by True/Slant. For a fee, advertisers can publish their own material in pages paralleling the news content. Mass � automatic ad $ A large number of users does not automati- cally translate into an El Dorado of advertising revenues, as the social networking service Facebook has demonstrated. The company claimed over 200 million active users as of May 2009, and said more than 100 million log on to its site daily. Those fi gures make Facebook the world’s largest social network. Yet users are less responsive to Facebook advertising than to traditional Web ads, according to industry experts. While advertising is only one of several potential Revenue Streams for Facebook, clearly a mass of users does not guarantee huge adver- tising revenues. At this writing, privately held Facebook did not disclose revenue data. ad space on high traffi c social network free social network mass customized advertisers global web audience ad sales force facebook.com free accounts fees for ad space on facebook Facebook Newspapers: Free or Not Free? bmgen_final.indd 93 6/15/10 5:36 PM

94 patterns fre e as a b usi ness Model Free Advertising: Pattern of Multi-Sided Platforms bmgen_final.indd 94 6/15/10 5:36 PM

patterns 95 free as a business Model VP CR CH CS KP KA KR R$ C$ With the right product or service and high traffi c, the platform becomes interesting to advertisers, which in turn allows charging fees to subsidize free products and services. Main costs relate to developing and maintaining the platform; traffi c- generation and retention costs may also arise. Free products or services generate high platform traffi c and increase attractiveness to advertisers. bmgen_final.indd 95 6/15/10 5:37 PM

patterns 96 free as a business Model The term “freemium” was coined by Jarid Lukin and popularized by venture capitalist Fred Wilson on his blog. It stands for business models, mainly Web-based, that blend free basic services with paid premium services. The freemium model is characterized by a large user base benefi ting from a free, no-strings-attached offer. Most of these users never become paying customers; only a small portion, usually less than 10 percent of all users, subscribe to the paid premium services. This small base of paying users subsidizes the free users. This is possible because of the low marginal cost of serving addi- tional free users. In a freemium model, the key metrics to watch are (1) the average cost of serv- ing a free user, and (2) the rates at which free users convert to premium (paying) customers. Flickr, the popular photo-sharing Web site acquired by Yahoo! in 2005, provides a good example of a freemium business model. Flickr users can subscribe for free to a basic account that enables them to upload and share images. The free service has certain constraints, such as limited storage space and a maximum number of uploads per month. For a small annual fee users can purchase a “pro” account and enjoy unlim- ited uploads and storage space, plus additional features. Freemium: Get the Basics for Free, Pay for More yahoo! platform management free basic photo sharing premium photo sharing mass customized switching costs casual users high-volume users fl ickr platform brand fl ickr.com yahoo.com platform development storage costs free limited basic accounts annual subscription pro account Flickr free limited basic accounts VP CR CH CS KP KA KR R$ C$ Large base of basic accounts for casual users Small base of paying “pro” users Variable cost depending on number of photos stored Fixed and sunk costs related to platform development free limited basic accounts free limited basic accounts sharing premium photo R$ free basic photo sharing annual subscription pro account high-volume users annual subscription pro account annual subscription pro account annual subscription pro account premium photo sharing bmgen_final.indd 96 6/15/10 5:37 PM

free as a business Model patterns 97 Business models in the enterprise software industry are usually characterized by two traits: First, the high fi xed cost of supporting an army of expert software developers who build the product; Second, a revenue model based on selling multiple per-user licenses and regular upgrades of the software. Red Hat, a U.S. software company, turned this model upside down. Rather than creating software from scratch, it builds its product on top of so-called open source software developed voluntarily by thousands of software engineers around the world. Red Hat understood that companies were interested in robust, licens- ing fee-free open source software, but were reluctant to adopt it due to concerns that no single entity was legally responsible for provid- ing and maintaining it. Red Hat fi lled this gap by offering stable, tested, service-ready versions of freely available open source software, particu- larly Linux. Each Red Hat release is supported for seven years. Customers benefi t from this approach because it allows them to enjoy the cost and stability advantages of open source software, while protecting them from the uncertainties surrounding a product not offi cially “owned” by anyone. Red Hat benefi ts because its software kernel is continuously improved by the open source community free of charge. This substan- tially reduces Red Hat’s development costs. Naturally, Red Hat also has to earn money. So rather than charging clients for each major new release—the traditional software revenue model—it sells subscriptions. For an annual fee, each client enjoys continuous access to the latest Red Hat release, unlimited service support, and the security of interacting with the legal owner of the product. Companies are willing to pay for these benefi ts despite the free availability of many versions of Linux and other open source software. Open Source: Freemium with a Twist (linux) open source development community software support services software versioning & testing free (linux) open source based software continuously upgraded, serviced, & guaranteed software self-service & direct access to engineers self-service users enterprise clients red hat (linux) software redhat.com red hat global branches cost structure contains elements of a service company professional subscription free software Red Hat software professional subscription professional subscription VP CR CH CS KP KA KR R$ C$ clients professional subscription enterprise clients professional subscription professional subscription professional subscription R$ professional subscription professional subscription users free software self-service users free software continuously free software free software free software continuously upgraded, serviced, & guaranteed software free (linux) open source based software bmgen_final.indd 97 6/15/10 5:37 PM

98 patterns free as a business Model Skype offers an intriguing example of a free- mium pattern that disrupted the telecommuni- cations sector by enabling free calling services via the Internet. Skype developed software by the same name that, when installed on comput- ers or smartphones, enables users to make calls from one device to another free of charge. Skype can offer this because its Cost Structure is completely different from that of a telecom carrier. Free calls are fully routed through the Internet based on so-called peer-to-peer technology that employs user hardware and the Internet as communications infrastructure. Hence, Skype does not have to manage its own network like a telco and incurs only minor costs to support additional users. Skype requires very little of its own infrastructure besides backend software and the servers hosting user accounts. Users pay only for calling landlines and mobile phones through a premium service called SkypeOut, which offers very low rates. In fact, users are charged only slightly more than the termination costs that Skype itself incurs for calls routed through wholesale carriers such as iBasis and Level 3, which handle the company’s network traffi c. Skype claims it has over 400 million reg- istered users who have made more than 100 billion free calls since the company was founded in 2004. Skype reported revenues of U.S. $550 million in 2008, though the company and its owner, eBay, do not release detailed fi nancial data including information on profi tability. We may soon know more as eBay has announced plans to list Skype through an initial public offering (IPO). Skype payment providers distribution partners telco partners software development free internet & video calling cheap calls to phones (skypeout) mass customized web users globally people who want to call phones software developers software skype.com headset partnerships software development complaint management free skypeout pre-paid or subscription hardware sales Skype VP CR CH CS KP KA KR R$ C$ Over 90 percent of Skype users subscribe to the free service Paid SkypeOut calls account for less than 10 percent of total usage bmgen_final.indd 98 6/15/10 5:37 PM

free as a business Model patterns 99 Skype is a voice calling services company operat- ing under the economics of a software company Skype disrupted the telecommunications industry and helped drive voice communica- tion costs close to zero. Telecom operators initially didn’t understand why Skype would offer calls for free and didn’t take the company seriously. What’s more, only a tiny fraction of the traditional carriers’ customers used Skype. But over time more and more customers decided to make their international calls with Skype, eating into one of the most lucrative carrier revenue sources. This pattern, typical of a disruptive business model, severely affected the traditional voice communication business, and today Skype is the world’s largest provider of cross-border voice communication services, according to telecommunications research fi rm Telegeography. maximum outsourcing software devel- opment and no network mainte- nance roughly similar voice oΩer automated mass customization global reach without the limitations of a network no infrastructure software distribution 100% low cost chan- nels cost structure of a software company 90% free usage 10% paying Skype versus Telco Giving away software and allowing customers to make free Skype-to- Skype calls costs the company little 5+ years old 400 million+ users 100 billion+ free calls generated 2008 revenues of U.S. $550 million VP CR CH CS KP KA KR R$ C$ bmgen_final.indd 99 6/15/10 5:37 PM

free as a business Model 100 patterns In the freemium model a small base of customers paying for a premium service subsidizes a large base of non-paying customers. The insurance model is actually the opposite—it’s the freemium model turned on its head. In the insurance model, a large base of customers pay small regu- lar fees to protect themselves from unlikely— but fi nancially devastating—events. In short, a large base of paying customers subsidizes a small group of people with actual claims—but any one of the paying customers could at any time become part of the benefi ciary group. Let’s look at REGA as an example. REGA is a Swiss non-profi t organization that uses helicopters and airplanes to transport medical staff to the scene of accidents, notably in the mountainous areas of Switzerland. Over two million so-called “patrons” fi nance the organiza- tion. In return, patrons are exempt from paying any costs arising from being rescued by REGA. Mountain rescue operations can be extremely expensive, so REGA patrons fi nd the service attractive in protecting them against the high cost of accidents during skiing vacations, sum- mer hikes, or mountain drives. The Insurance Model: Freemium Upside Down insurance companies sponsoring patrons rescue operations rescue "insurance" rescue operations patron membership sponsoring patrons other rescue victims fl eet of helicopters and planes web publications fl eet of helicopters & planes rescuing sponsorship fee payments from insurance companies free rescue operations REGA fl eet of helicopters & planes VP CR CH CS KP KA KR R$ C$ Many paying users cover the costs of a few claims payments from insurance companies other rescue victims payments from insurance companies payments from insurance companies R$ payments from insurance companies payments from insurance companies other rescue victims sponsorship fee sponsoring patrons operations sponsorship fee R$ sponsorship fee sponsorship fee sponsorship fee sponsorship fee rescue operations free rescue operations free rescue operations "insurance" other rescue victims payments from insurance companies free rescue operations payments from insurance companies patrons free rescue operations free rescue operations bmgen_final.indd 100 6/15/10 5:37 PM

free as a business Model patterns 101 “The demand you get at a price of zero is many times higher than the demand you get at a very low price.” —— Kartik Hosanagar Assistant Professor, Wharton “Google’s not a real company. It’s a house of cards.” —— Steve Ballmer CEO, Microsoft “Every industry that becomes digital eventually becomes free.” —— Chris Anderson Editor-in-Chief, Wired Magazine “We can no longer stand by and watch others walk oΩ with our work under misguided legal theories.” —— Dean Singleton Chairman, Associated Press bmgen_final.indd 101 6/15/10 5:37 PM

patterns 102 free as a business Model Freemium Pattern The platform is the most important asset in the freemium pattern, because it allows free basic services to be offered at low marginal cost. VP CR CH CS KP KA KR R$ C$ The cost structure of this pattern is tripartite: usually with substantial fi xed costs, very low marginal costs for services to free accounts, and (separate) costs for premium accounts customer relationship must be automated and low cost in order to handle large numbers of free users. An important metric to follow is the rate at which free accounts convert to premium accounts users describes how many users a company with a freemium business model can attract fi xed costs a company incurs to run its business model (e.g. systems costs) bmgen_final.indd 102 6/15/10 5:37 PM

patterns 103 free as a b usi ness Model cost of service indicates the average cost the company incurs to deliver a free or premium service to a free or premium user. The freemium model is characterized by a large base of free service users subsidized by a small base of paying users. Users enjoy a fr ee basic service and can pay for a premium service that offers additional benefits. percent of premium & free users specifies how many of all users are premium paying users or free users. growth & churn rate specifies how many users defect/respectively join the user base. price of premium service indicates the average cost the company incurs to deliver a premium service to a premium paying user. customer acquisition costs total expenses a company incurs to acquire new users. bmgen_final.indd 103 6/15/10 5:38 PM

104 patterns free as a business Model “Bait & hook” refers to a business model pattern characterized by an attractive, inexpensive, or free initial offer that encourages continuing future purchases of related products or services. This pattern is also known as the “loss leader” or “razor & blades” model. “Loss leader” refers to a subsidized, even money-losing initial offer with the intention of generating profi ts from subsequent purchases. “Razor & blades” refers to a business model popularized by an American businessman, King C. Gillette, inventor of the disposable razor blade (see p. 105). We use the term bait & hook pattern to describe the general idea of luring customers with an initial offering, while earning from follow-up sales. The mobile telecommunications industry provides a good illustration of the bait & hook pattern with a free offer. It is now standard practice for mobile network operators to offer free telephone handsets bundled with service subscriptions. Operators initially lose money by giving away mobile phones for free, but they easily cover the loss through subsequent monthly service fees. Operators provide instant gratifi cation with a free offer that later gener- ates recurring income. Bait & Hook device manufacturers services free phones subscription contractual lock-in customers network network phones services n x monthly subscription 1 x free Bait & Hook of Free Mobile Phones n x monthly subscription n x monthly subscription VP CR CH CS KP KA KR R$ C$ n x monthly subscription n x monthly subscription n x monthly subscription n x monthly subscription R$ n x monthly subscription n x monthly subscription customers customers 1 x free free phones subscription 1 x free 1 x free 1 x free free phones subscription bmgen_final.indd 104 6/15/10 5:38 PM

free as a business Model patterns 105 The form of the bait & hook pattern known as the razor and blades model derives from the way the fi rst disposable razors were sold. In 1904 King C. Gillette, who commercialized the fi rst disposable razor blade system, decided to sell razor handles at a steep discount or even give them away with other products in order to create demand for his disposable blades. Today Gillette is still the preeminent brand in shaving products. The key to this model is the close link between the inexpensive or free initial product and the follow-up item—usually disposable—on which the company earns a high margin. Con- trolling the “lock-in” is crucial to this pattern’s success. Through blocking patents, Gillette ensured that competitors couldn’t offer cheaper blades for the Gillette razor handles. In fact, today razors are among the world’s most heavily patented consumer products, with more than 1,000 patents covering everything from lubricat- ing strips to cartridge-loading systems. This pattern is popular in the business world and has been applied in many sectors, includ- ing inkjet printers. Manufacturers such as HP, Epson, and Canon typically sell printers at very low prices, but they generate healthy margins on subsequent sales of ink cartridges. manufacturers retailers marketing r&d logistics razor handle blades built-in "lock-in" customers brand patents retail marketing manufacturing logistics, r&d 1 x handle purchase frequent blade replacements Razor & Blades : Gillette VP CR CH CS KP KA KR R$ C$ 1 x handle purchase 1 x handle purchase frequent blade replacements customers customers 1 x handle purchase frequent blade replacements bmgen_final.indd 105 6/15/10 5:38 PM

patterns 106 Bait & Hook Pattern free as a b usi ness Model bmgen_final.indd 106 6/15/10 5:38 PM

patterns 107 free as a business Model VP CR CH CS KP KA KR R$ C$ Cheap or free “bait” lures customers—and is closely linked to a (disposable) follow-up item or service. Important cost structure elements include subsidization of the initial product and the costs of producing follow-up products or services. Bait & hook patterns usually require a strong brand . The initial one-time pur- chase generates little or no revenue , but is made up for through repeat follow-up purchases of high-margin products or services. Focuses on delivery of follow-up products or services. This pattern is characterized by a tight link or “lock-in” between the initial product and the follow-up products or services. customers are attracted by the instant gratifi cation of a cheap or free initial product or service. bmgen_final.indd 107 6/15/10 5:38 PM

Open Business Models bmgen_final.indd 108 6/15/10 5:38 PM

patterns 109 open b usiness Models open business models can be used by compa- nies to create and capture value by systemati- cally collaborating with outside partners. • This may happen from the “outside-in” by exploit- ing external ideas within the firm, or from the “inside-out” by providing external parties with ideas or assets lying idle within the firm. [ ref·er·ences ] 1 • Open Business Models: How to Thrive in the New Innovation Landscape. Chesbrough, Henry. 2006. 2 • “The Era of Open Innovation.” MIT Sloan Management Review. Chesbrough, Henry. Nº 3, 2003. [ ex·am·ples ] P&G, GlaxoSmithKilne, Innocentive Def_ Pattern No. 5 bmgen_final.indd 109 6/15/10 5:38 PM

paTTerns 110 open business Models Open innovation and open business models are two terms coined by Henry Chesbrough. They refer to open- ing up a company’s research process to outside parties. Chesbrough argues that in a world characterized by distributed knowledge, organizations can create more value and better exploit their own research by integrating outside knowledge, intellectual property, and products into their innovation processes. In addition, Chesbrough shows that products, technologies, knowledge, and intellectual property lying idle inside a company can be monetized by making them available to outside parties through licensing, joint ventures, or spin-oΩs. Ches- brough distinguishes between "outside-in" innovation and “inside-out” innovation. “Outside-in” innovation occurs when an organization brings external ideas, technology, or intellectual property into its development and commercialization processes. The table opposite illustrates how companies increasingly rely on outside sources of technology to strengthen their business models. “Inside-out” innovation occurs when orga- nizations license or sell their intellectual property or technologies, particularly unused assets. In this section we describe the business model patterns of fi rms that practice open innovation. External Technology Base Technology Base Technology Internal Technology Base Technology Base Technology Our CURRENT market Our NEW market Other fi rm's market bmgen_final.indd 110 6/15/10 5:38 PM

pa TT erns 111 open b usiness Models Closed Open The smart people in our field work for us. We need to work with smart people both inside and outside our company. To profit from research and development (R&D), we must discover it, develop it, and ship it ourselves. External R&D can create significant value; internal R&D is needed to claim some por- tion of that value. If we conduct most of the best research in the industry, we will win. We don't have to originate the research to benefit from it. If we create the most or the best ideas in the industry, we will win. If we make the best use of internal and external ideas, we will win. We should control our innovation process, so that competitors don't profit from our ideas. We should profit from others' use of our innovations, and we should buy others' intellectual property (IP) whenever it advances our own interests. Source: Adapted from Chesbrough, 2003 and Wikipedia, 2009. PRINCIPLES OF INNOVATION bmgen_final.indd 111 6/15/10 5:38 PM

112 patterns open business Models In June of 2000, amid a continuing slide in Procter & Gamble’s share price, longtime P&G executive A.G. Lafl ey got the call to become the consumer product giant’s new CEO. To rejuve- nate P&G, Lafl ey resolved to put innovation back at the company’s core. But instead of boosting R&D spending, he focused on structuring a new innovation culture: one that moved from an internally focused R&D approach to an open R&D process. A key element was a “Connect & Develop” strategy aimed at exploiting internal research through outside partnerships. Lafl ey set an ambitious goal: create 50 percent of P&G’s innovations with outside partners at a time when that fi gure was closer to 15 percent. The com- pany surpassed that goal in 2007. Meanwhile, R&D productivity had soared 85 percent, even though R&D spending was only modestly higher compared to when Lafl ey took over as CEO. In order to link its internal resources and R&D activities with the outside world, Procter & Gamble built three “bridges” into its busi- ness model: technology entrepreneurs, Internet platforms, and retirees. Procter & Gamble: Connect & Develop other company's ip external scientists retired scientists internal r&d internal r&d leveraging internal r&d technology entrepreneurs internet platforms your-encore 1 Technology entrepreneurs are senior scien- tists from P&G business units who systemati- cally develop relationships with researchers at universities and other companies. They also act as “hunters” who scan the outside world for solutions to internal P&G challenges. 2 Through Internet platforms, P&G connects with expert problem-solvers around the world. Platforms such as InnoCentives (see p. 114) allow P&G to expose some of its research prob- lems to non-P&G scientists around the globe. Respondents earn cash prizes for developing successful solutions. 3 P&G solicits knowledge from retirees through YourEncore.com, a platform the com- pany launched specifi cally to serve as an open innovation “bridge” to the outside world. Outside-In bmgen_final.indd 112 6/15/10 5:38 PM

open business Models patterns 113 GlaxoSmithKline’s Patent Pools The inside-out approach to open innova- tion ordinarily focuses on monetizing unused internal assets, primarily patents and technol- ogy. In the case of GlaxoSmithKline’s “patent pool” research strategy, though, the motivation was slightly diΩerent. The company’s goal was to make drugs more accessible in the world’s poorest countries and to facilitate research into understudied diseases. One way to achieve this was to place intellectual property rights relevant to developing drugs for such diseases into a patent pool open to exploration by other researchers. Since pharmaceutical companies focus mainly on developing blockbuster drugs, intellectual property related to less-studied diseases often lies idle. Patent pools aggregate intellectual property from diΩerent rights- holders and makes it more accessible. This helps prevent R&D advances from being blocked by a single rights-holder. ip for underserved diseases acquisition retention outside researchers patent pools license fees Inside-Out Unused internal ideas, R&D, and intellectual property related to diseases in poor nations have substantial value when “pooled” bmgen_final.indd 113 6/15/10 5:38 PM

114 patterns open business Models Companies seeking insights from external researchers incur substantial costs when trying to attract people or organizations with knowl- edge that could solve their problems. On the other hand, researchers who want to apply their knowledge outside their own organizations also incur search costs when seeking attractive opportunities. That is where a company called InnoCentive saw opportunity. InnoCentive provides connections between organizations with research problems to solve and researchers from around the world who are eager to solve challenging problems. Origi- nally part of drug maker Eli Lilly, InnoCentive now functions as an independent intermediary listing non-profi ts, government agencies, and commercial organizations such as Procter & Gamble, Solvay, and the Rockefeller Founda- tion. Companies who post their innovation challenges on InnoCentive’s Web site are called “seekers.” They reward successful problem- solvers with cash prizes that can range from $5,000 to $1,000,000. Scientists who attempt to fi nd solutions to listed problems are called “solvers.” InnoCentive’s Value Proposition lies in aggregating and connecting “seekers” and “solvers.” You may recognize these qualities as characteristic of the multi-sided platform business model pattern (see p. 76). Companies with open business model patterns often build on such platforms to reduce search costs. The Connector: Innocentive major "seekers" platform management acquire solvers & seekers access to a broad network of scientist "solvers" connect "seek- ers" & "solvers" access to scientifi c challenges with cash rewards online profi les "seekers" (company) "solvers" (scientists) innocentive platform with base of "solvers" & "seekers" innocentive.com platform management acquisition of "solvers" & "seekers" free access to challenges fee to list challenges to solve commissions on awards free access to challenges "solvers" (scientists) free access to challenges free access to challenges free access to challenges free access to challenges "seekers" fee to list challenges to "seekers" (company) fee to list challenges to solve commissions on awards connect "seek- ers" & "solvers" challenges with cash rewards fee to list challenges to fee to list challenges to solve commissions on awards fee to list challenges to solve commissions on awards "solvers" access to scientifi c challenges with cash rewards access to a broad network of scientist "solvers" "solvers" Innocentive bmgen_final.indd 114 6/15/10 5:38 PM

open business Models patterns 115 “Open Innovation is fundamen- tally about operating in a world of abundant knowledge, where not all the smart people work for you, so you better go find them, connect to them, and build upon what they can do.” —— Henry Chesbrough Executive Director, Center for Open Innovation Haas School of Business, UC Berkeley “Long known for a preference to do everything in-house, we began to seek out innovation from any and all sources, inside, outside the company.” —— A.G. Lafl ey Chairman & CEO, P&G “Nestlé clearly recognizes that to achieve its growth objective it must extend its internal capabilities to establish a large number of strategic partnering relationships. It has embraced open innovation and works aggressively with strate- gic partners to co-create significant new market and product opportunities.” —— Helmut Traitler Head of Innovation Partnerships, Nestlé bmgen_final.indd 115 6/15/10 5:38 PM

patterns 116 open business Models VP CR CH CS KP KA KR C$ Outside-In Pattern It costs money to acquire innovation from outside sources. But by building on externally-created knowl- edge and advanced research programs, a company can shorten time-to-market and increase its internal R&D productivity. Building on external knowl- edge requires dedicated activities that connect external entities with inter- nal business processes and R&D groups. external organizations, sometimes from completely diΩerent industries, may be able to oΩer valuable insights, knowledge, patents, or ready-made products to internal R&D groups. Taking advantage of outside innovation requires specifi c resources to build gateways to external networks. Established companies with strong brands, strong Distribution Channels, and strong Customer Relationships are well suited to an outside-in open business model. They can leverage existing Customer Relationships by building on outside sources of innovation. bmgen_final.indd 116 6/15/10 5:39 PM

patterns 117 open business Models VP CR CH CS KA KR R$ Organizations with substantial internal R&D operations typically possess much unutilized knowledge, technology, and intellectual property. Due to sharp focus on core businesses, some of these otherwise valuable intellectual assets sit idle. Such businesses are good candidates for an "inside- out" open business model. By enabling others to exploit unused internal ideas, a company adds “easy” additional revenue streams . Inside-Out Pattern Some R&D outputs that are unusable internally—for strategic or operational reasons—may be of high value to organizations in other industries. bmgen_final.indd 117 6/15/10 5:39 PM

patterns 118 oVerVieW Patterns Overview Unbundling Business Models The Long Tail Multi-Sided Platforms FREE as a Business Model Open Business Models context (before) An integrated model combines infrastructure management, product innovation, and Customer Relationships under one roof. The Value Proposition targets only the most profi table clients. One Value Proposition targets one Customer Segment. A high-value, high-cost Value Proposition is offered to paying customers only. R&D Resources and Key Activities are concentrated in-house: • Ideas are invented “inside” only • Results are exploited “inside” only challenge Costs are too high. Several confl icting organizational cultures are combined in a single entity, resulting in undesirable trade-offs. Targeting less profi table segments with specifi c Value Propositions is too costly. Enterprise fails to acquire potential new cus- tomers who are interested in gaining access to a company’s existing customer base (e.g. game developers who want to reach console users) The high price dissuades customers. R&D is costly and/or productivity is falling. solution (after) The business is unbundled into three separate but complementary models dealing with • Infrastructure management • Product innovation • Customer relationships The new or additional Value Proposition targets a large number of historically less profi table, niche Customer Segments—which in aggregate are profi table. A Value Proposition “giving access” to a com- pany’s existing Customer Segment is added (e.g. a game console manufacturer provides software developers with access to its users) Several Value Propositions are offered to different Customer Segments with different Revenue Streams, one of them being free- of-charge (or very low cost). Internal R&D Resources and Activities are leveraged by utilizing outside partners. Internal R&D results are transformed into a Value Proposition and offered to interested Customer Segments. rationale IT and management tool improvements allow separating and coordinating different business models at lower cost, thus eliminating undesir- able trade-offs. IT and operations management improvements allow delivering tailored Value Propositions to a very large number of new customers at low cost. An intermediary operating a platform between two or more Customer Segments adds Revenue Streams to the initial model. Non-paying Customer Segments are subsidized by paying customers in order to attract the maximum number of users. Acquiring R&D from external sources can be less expensive, resulting in faster time- to-market. Unexploited innovations have the potential to bring in more revenue when sold outside. examples Private Banking Mobile Telco Publishing Industry (Lulu.com) LEGO Google Video game consoles from Nintendo, Sony, Microsoft Apple iPod, iTunes, iPhone Advertising and newspapers Metro Flickr Open Source Red Hat Skype (versus Telco) Gillette Razor and blades Procter & Gamble GlaxoSmithKline Innocentive bmgen_final.indd 118 6/15/10 5:39 PM

oVerVieW patterns 119 Unbundling Business Models The Long Tail Multi-Sided Platforms FREE as a Business Model Open Business Models context (before) An integrated model combines infrastructure management, product innovation, and Customer Relationships under one roof. The Value Proposition targets only the most profi table clients. One Value Proposition targets one Customer Segment. A high-value, high-cost Value Proposition is offered to paying customers only. R&D Resources and Key Activities are concentrated in-house: • Ideas are invented “inside” only • Results are exploited “inside” only challenge Costs are too high. Several confl icting organizational cultures are combined in a single entity, resulting in undesirable trade-offs. Targeting less profi table segments with specifi c Value Propositions is too costly. Enterprise fails to acquire potential new cus- tomers who are interested in gaining access to a company’s existing customer base (e.g. game developers who want to reach console users) The high price dissuades customers. R&D is costly and/or productivity is falling. solution (after) The business is unbundled into three separate but complementary models dealing with • Infrastructure management • Product innovation • Customer relationships The new or additional Value Proposition targets a large number of historically less profi table, niche Customer Segments—which in aggregate are profi table. A Value Proposition “giving access” to a com- pany’s existing Customer Segment is added (e.g. a game console manufacturer provides software developers with access to its users) Several Value Propositions are offered to different Customer Segments with different Revenue Streams, one of them being free- of-charge (or very low cost). Internal R&D Resources and Activities are leveraged by utilizing outside partners. Internal R&D results are transformed into a Value Proposition and offered to interested Customer Segments. rationale IT and management tool improvements allow separating and coordinating different business models at lower cost, thus eliminating undesir- able trade-offs. IT and operations management improvements allow delivering tailored Value Propositions to a very large number of new customers at low cost. An intermediary operating a platform between two or more Customer Segments adds Revenue Streams to the initial model. Non-paying Customer Segments are subsidized by paying customers in order to attract the maximum number of users. Acquiring R&D from external sources can be less expensive, resulting in faster time- to-market. Unexploited innovations have the potential to bring in more revenue when sold outside. examples Private Banking Mobile Telco Publishing Industry (Lulu.com) LEGO Google Video game consoles from Nintendo, Sony, Microsoft Apple iPod, iTunes, iPhone Advertising and newspapers Metro Flickr Open Source Red Hat Skype (versus Telco) Gillette Razor and blades Procter & Gamble GlaxoSmithKline Innocentive bmgen_final.indd 119 6/15/10 5:39 PM

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Design bmgen_final.indd 122 6/15/10 5:39 PM

Design bmgen_final.indd 123 6/15/10 5:39 PM

“Businesspeople don’t just need to understand designers better; they need to become designers.” Roger Martin, Dean, Rotman School of Management bmgen_final.indd 124 6/15/10 5:39 PM

This section describes a number of techniques and tools from the world of design that can help you design better and more innovative business models. A designer’s business involves relentless inquiry into the best pos- sible way to create the new, discover the unexplored, or achieve the func- tional. A designer’s job is to extend the boundaries of thought, to generate new options, and, ultimately, to create value for users. This requires the ability to imagine “that which does not exist.” We are convinced that the tools and attitude of the design profession are prerequisites for success in the business model generation. Businesspeople unknowingly practice design every day. We design orga- nizations, strategies, business models, processes, and projects. To do this, we must take into account a complex web of factors, such as competitors, technology, the legal environment, and more. Increasingly, we must do so in unfamiliar, uncharted territory. This is precisely what design is about. What businesspeople lack are design tools that complement their business skills. The following pages explore six business model design techniques: Customer Insights, Ideation, Visual Thinking, Prototyping, Storytelling, and Scenarios. We introduce each technique with a story, then demonstrate how the technique applies to business model design. Here and there we've added exercises and suggestions for workshop activities that show you specifically how the design technique can be applied. Book references are provided at the end for those interested in exploring each technique in more depth. Design 126 Customer Insights 134 Ideation 146 Visual Thinking 160 Prototyping 170 Storytelling 180 Scenarios bmgen_final.indd 125 6/15/10 5:39 PM

Technique_ No. 1 Customer Insights bmgen_final.indd 126 6/15/10 5:39 PM

Customer InsIghts desIgn 127 127 Va l e n t i n e ’s D ay, 2 0 0 8 Outside an o≈ce building on the outskirts of Oslo, four Norwegian teenagers wearing American- style “letter” jackets and baseball caps are engaged in a lively discussion with a man in his 50s . . . Va l e n t i n e ’s D ay, 2 0 0 8 Outside an o≈ce building on the outskirts of Oslo, four Norwegian teenagers wearing American- style “letter” jackets and baseball caps are engaged in a lively discussion with a man in his 50s . . . . . . The teenagers are young, hip snowboarders answering questions posed by Richard Ling, a senior sociologist working for Telenor, the world’s seventh largest mobile operator. Ling is interviewing the group as part of a study to gain insights into the use of photos and photo sharing over social networks. Now that nearly every mobile phone sports a camera, photo sharing is of keen interest to cellular operators. Ling’s research will help Telenor capture the “big picture” of photo sharing. He focuses not just on existing and potential new mobile photo sharing services, but on broader issues, such as the role photo-sharing plays with respect to trust, secrecy, group identity, and the social fabric linking these young men. Ultimately, his work will enable Telenor to design and deliver better services. bmgen_final.indd 127 6/15/10 5:39 PM

Customer Ins I ght s des I gn 128 Companies invest heavily in market research, yet often wind up neglecting the customer perspective when designing products, services—and business models. Good business model design avoids this error. It views the business model through customers' eyes, an approach that can lead to the discovery of completely new opportunities. This does not mean that customer thinking is the only place from which to start an innovation initiative, but it does mean that we should include the customer perspective when evaluating a business model. Successful innovation requires a deep understanding of customers, including environment, daily routines, concerns, and aspirations. Apple’s iPod media player provides an example. Apple understood that people were uninterested in digital media players per se. The company perceived that consumers wanted a seamless way to search, find, download, and listen to digital content, including music, and were willing to pay for a successful solution. Apple’s view was unique at a time when illegal downloading was rampant and most companies argued that nobody would be willing to pay for digital music online. Apple dismissed these views and created a seamless music experience for customers, integrating the iTunes music and media software, the iTunes online store, and the iPod media player. With this Value Proposition as the kernel of its business model, Apple went on to dominate the online digital music market The challenge is to develop a sound understanding of customers on which to base business model design choices. In the field of product and service design, several leading companies work with social scientists to achieve this understanding. At Intel, Nokia, and Telenor, teams of anthropologists and sociologists work to develop new and better products and services. The same approach can lead to new or better business models. Many leading consumer companies organize field trips for senior executives to meet customers, talk to sales teams, or visit outlets. In other industries, particularly those involving heavy capital investments, talking to customers is part of the daily routine. But the challenge of innovation is developing a deeper understand- ing of customers rather than just asking them what they want. Adopting the customer perspective is a guiding principle for the entire business model design process. Customer perspectives should inform our choices regarding Value Propositions, Distribution Channels, Customer Relationships, and Revenue Streams. Building Business Models on Customer Insights — ‹‹ bmgen_final.indd 128 6/15/10 5:39 PM

Customer Ins I ght s des I gn 129 you Organization-centric business model design What can we sell customers? h ow can w e reach customers most e≈ciently? What relationships do we need to establish with customers? h ow can w e make money from our customers? As pioneering automaker Henry Ford once said, “If I had asked my customers what they wanted, they would have told me ‘a faster horse.’” Another challenge lies in knowing which cus- tomers to heed and which customers to ignore. Sometimes tomorrow’s growth segments wait at the periphery of today’s cash cows. Therefore business model innovators should avoid focusing exclusively on existing Customer Segments and set their sights on new or unreached segments. A number of business model innovations have succeeded precisely because they satisfied the unmet needs of new customers. For example, Stelios Haji-Ioannou’s easyJet made air travel available to lower- and middle-income customers who rarely flew. And Zipcar allowed city dwellers to eliminate the hassles of metropolitan car owner- ship. Instead, customers who pay an annual fee can rent automobiles by the hour. Both are examples of new business models built on Customer Segments located at the periphery under incumbent models: traditional air travel and traditional car rentals. them Customer-centric business model design What job(s) do(es) our customer need to get done and how can we help? What are our customer’s aspirations and how can we help him live up to them? h ow do our cust omers prefer to be addressed? h ow do w e, as an enterprise, best fit into their routines? What relationship do our customers expect us to establish with them? f or what value(s ) are customers truly willing to pay? bmgen_final.indd 129 6/15/10 5:39 PM

130 Customer InsIghts desIgn 130 What does she say and do? attitude in public appearance behavior toward others What does she hear? what friends say what boss says what infl uencers say pain fears frustrations obstacles What does she think and feel? what really counts major preoccupations worries & aspirations What does she see? environment friends what the market oΩers gain wants/needs measures of success obstacles Source : Adapted from XPLANE bmgen_final.indd 130 6/15/10 5:39 PM

131 Customer InsIghts desIgn 131 1 what does she see? describe what the customer sees in her environment • What does it look like? • Who surrounds her? • Who are her friends? • What types of oΩers is she exposed to daily (as opposed to all market oΩers)? • What problems does she encounter? 2 what does she hear? describe how the environment infl u- ences the customer • What do her friends say? Her spouse? • Who really infl uences her, and how? • Which media Channels are infl uential? 3 what does she really think and feel? try to sketch out what goes on in your customer’s mind • What is really important to her (which she might not say publicly)? • Imagine her emotions. What moves her? • What might keep her up at night? • Try describing her dreams and aspirations. 4 what does she say and do? imagine what the customer might say, or how she might behave in public • What is her attitude? • What could she be telling others? • Pay particular attention to potential confl icts between what a customer might say and what she may truly think or feel. 5 what is the customer’s pain? • What are her biggest frustrations? • What obstacles stand between her and what she wants or needs to achieve? • Which risks might she fear taking? 6 what does the customer gain? • What does she truly want or need to achieve? • How does she measure success? • Think of some strategies she might use to achieve her goals. The Empathy Map Few of us enjoy the services of a full team of social scientists, but anybody examining a business model can sketch profi les of the Customer Segments addressed therein. A good way to start is by using the Empathy Map, a tool developed by visual thinking company XPLANE. This tool, which we also like to call the “really simple customer profi ler,” helps you go beyond a customer’s demographic characteristics and develop a better understanding of environment, behavior, concerns, and aspirations. Doing so allows you to devise a stronger business model, because a customer profi le guides the design of better Value Propositions, more convenient ways to reach customers, and more appropriate Customer Relationships. Ultimately it allows you to better understand what a customer is truly willing to pay for. How to Use the (Customer) Empathy Map Here’s how it works. First, brainstorm to come up with all the possible Customer Segments that you might want to serve using your business model. Choose three promising candidates, and select one for your fi rst profi ling exercise. Start by giving this customer a name and some demographic characteristics, such as income, marital status, and so forth. Then, referring to the diagram on the opposite page, use a fl ipchart or whiteboard to build a profi le for your newly-named customer by asking and answering the following six questions: bmgen_final.indd 131 6/15/10 5:39 PM

132 Customer InsIghts desIgn 132 29 CREATIVE PROBLEM SOLVING TOOLS 29 CREATIVE PROBLEM SOLVING TOOLS What does she say and do? attitude in public appearance behavior toward others What does she hear? what friends says what boss says what infl uencers pain fears frustrations obstacles What does she think and feel? what really counts major preoccupations worries & aspirations What does she see? environment friends what the market oΩers gain "wants"/needs measures of success obstacles Source : Adapted from XPLANE What does s he say and do? attitude in public appearance behavior toward others What does s he hear? what friends says what boss says what infl uencers pain fears frustrations obstacles What does s he think and feel? what really counts major preoccupations worries & aspirations gain What does s he see? environment friends what the market oΩers "wants"/needs measures of success obstacles Source : Adapted from XPLANE bmgen_final.indd 132 6/15/10 5:39 PM

133 Customer InsIghts desIgn 133 In October 2008, Microsoft announced plans to provide its entire suite of OΩice applications online. According to the announcement, customers will eventually be able to use Word, Excel, and all other OΩice applications through browsers. This will require Microsoft to signifi - cantly reengineer its business model. One starting point for this business model renovation could be to create a customer profi le for a key buying segment: chief informa- tion oΩicers (CIO), who defi ne IT strategy and make overarching purchasing decisions. What might a CIO customer profi le look like? The goal is to create a customer viewpoint for continu- ously questioning your business model assumptions. Customer profi ling enables you to generate better answers to questions such as: Does this Value Proposition solve real customer problems? Would she really be willing to pay for this? How would she like to be reached? Understanding a B2B customer using the Empathy Map bmgen_final.indd 133 6/15/10 5:39 PM

Technique_ No. 2 Ideation bmgen_final.indd 134 6/15/10 5:40 PM

desIgn 135 IdeatIon 135 M a r c h , 2 0 0 7 Elmar Mock is listening carefully as Peter elaborates excitedly on an idea amid a sea of Post-it™ notes smothering the walls . . . . . . Peter works for a pharmaceutical group that has hired Elmar’s innovation consultancy, Creaholic, to help with a breakthrough product. The two men are part of a six-person innovation team holding a three-day offsite meeting. The group is deliberately heterogeneous, a pastiche of differ- ent experience levels and backgrounds. Though all members are accomplished specialists, they joined the group not as technicians, but as consumers unsatisfi ed with the current state of affairs. Creaholic instructed them to leave their expertise at the door and carry it with them only as a “backpack” of distant memories. For three days the six form a consumer microcosm and unleash their imaginations to dream up potential breakthrough solutions to a problem, unbridled by technical or fi nancial constraints. Ideas collide and new thinking emerges, and only after generating a multitude of potential solutions are they asked to recall their expertise and pin down the three most promising candidates. Elmar Mock boasts a long track record of breakthrough inno- vation. He is one of two inventors of the legendary Swatch watch. Since then, he and his team at Creaholic have helped companies such as BMW, Nestlé, Mikron, and Givaudan innovate success- fully. Elmar knows how diffi cult it is for established companies to innovate. Such fi rms require predictability, job descriptions, and fi nancial projections. Yet real innovations emerge from something better described as systematic chaos. Creaholic has found a way to master that chaos. Elmar and his team are obsessed by innovation. bmgen_final.indd 135 6/15/10 5:40 PM

des I gn 136 Ideat I on Mapping an existing business model is one thing; designing a new and innovative business model is another. What’s needed is a creative process for generating a large number of business model ideas and successfully isolating the best ones. This process is called ideation. Mastering the art of ideation is crucial when it comes to designing viable new business models. Traditionally, most industries were characterized by a dominant business model. This has changed radically. Today we enjoy many more choices when designing new business models. Today, different business models compete in the same markets, and boundaries between industries are blurring—or disappearing altogether. One challenge we face when trying to create new business model options is ignoring the status quo and suspending concerns over operational issues so that we can generate truly new ideas. Business model innovation is not about looking back, because the past indicates little about what is possible in terms of future business models. Business model innovation is not about looking to competitors, since business model innovation is not about copying or benchmarking, but about creating new mechanisms to create value and derive revenues. Rather, business model inno- vation is about challenging orthodoxies to design original models that meet unsatisfied, new, or hidden customer needs. To come up with new or better options, you must dream up a grab bag of ideas before narrowing them down to a short list of conceivable options. Thus, ideation has two main phases: idea generation, where quantity matters, and synthesis, in which ideas are discussed, combined, and narrowed down to a small number of viable options. Options do not necessarily have to represent disruptive business models. They may be innovations that expand the boundaries of your current business model to improve competitiveness. You can generate ideas for innovative business models from several different starting points. We will look at two: epicenters of business model innovation using the Business Model Canvas, and “what if” questions. Generating n ew Bu siness Model Ideas — bmgen_final.indd 136 6/15/10 5:40 PM

desIgn 137 IdeatIon Ignore the status quo Forget the past Stop focusing on competitors Challenge orthodoxies bmgen_final.indd 137 6/15/10 5:40 PM

138 desIgn IdeatIon Epicenters of Business Model Innovation resource-driven resource-driven innovations originate from an organization’s existing infrastructure or partnerships to expand or transform the business model. Example: Amazon Web Services was built on top of Amazon.com’s retail infrastructure to offer server capacity and data storage space to other companies. offer-driven offer-driven innovations create new value propositions that affect other business model building blocks. Example: When Cemex, a Mexican cement maker, promised to deliver poured cement to job sites within four hours rather than the 48 hour industry standard, it had to transform its business model. This innovation helped change Cemex from a regional Mexican player into the world’s second largest cement producer. Ideas for business model innovation can come from anywhere, and each of the nine business model building blocks can be a starting point. Transformative business model innovations affect multiple building blocks. We can distinguish four epicenters of business model innovation: resource-driven, offer-driven, customer-driven, and fi nance-driven. Each of the four epicenters can serve as the starting point for a major business model change, and each can have a powerful impact on the other eight building blocks. Sometimes, business model innovation can emerge from several epicenters. Also, change often originates in areas identifi ed through a SWOT analysis: an investigation of a business model’s strengths, weaknesses, opportunities, and threats (see p. 216). 138 bmgen_final.indd 138 6/15/10 5:40 PM

139 desIgn 139 IdeatIon multiple-epicenter driven Innovations driven by multiple epicenters can have signifi cant impact on several other building blocks. Example: Hilti, the global manufacturer of professional construction tools, moved away from selling tools out- right and toward renting sets of tools to customers. This was a substantial change in Hitli’s Value Proposition, but also in its Revenue Streams, which shifted from one- time product revenues to recurring service revenues. Customer-driven Customer-driven innovations are based on customer needs, facilitated access, or increased convenience. Like all innovations emerging from a single epicenter, they affect other business model building blocks. Example: 23andMe brought personalized DNA testing to individual clients—an offer previously available exclu- sively to health professionals and researchers, This had substantial implications for both the Value Proposition and the delivery of test results, which 23andMe accom- plishes through mass-customized Web profi les. Finance-driven Innovations driven by new revenue streams, pricing mechanisms, or reduced Cost structures that affect other business model building blocks. Example: When Xerox invented the Xerox 914 in 1958— one of the fi rst plain paper copiers—it was priced too high for the market. So Xerox developed a new business model. It leased the machines at $95 per month, includ- ing 2,000 free copies, plus fi ve cents per additional copy. Clients acquired the new machines and started making thousands of copies each month. bmgen_final.indd 139 6/15/10 5:40 PM

140 desIgn IdeatIon We often have trouble conceiving innovative business models because we are held back in our thinking by the status quo. The status quo stifl es imagination. One way to overcome this problem is to challenge conventional assumptions with “what if” questions. With the right business model ingredients, what we think of as impos- sible might be just doable. “What if” questions help us break free of constraints imposed by current models. They should provoke us and challenge our thinking. They should disturb us as intriguing, diffi cult-to-execute propositions. Managers of a daily newspaper might ask themselves: What if we stopped our print edition and went to entirely digital distribution, through Amazon’s Kindle e-book reader or through the Web? This would allow the newspaper to drastically reduce production and logistics costs, but would require making up lost print advertising revenues and transitioning readers to digital Channels. “What if” questions are merely starting points. They challenge us to discover the business model that could make their suppositions work. Some “what if” questions may remain unanswered because they are too provoca- tive. Some may simply need the right business model to become reality. The Power of “What If” Questions 140 bmgen_final.indd 140 6/15/10 5:40 PM

141 desIgn 141 IdeatIon . . . furniture buyers picked up components in fl at pack form from a large warehouse and assembled the products themselves in their homes? What is common practice today was unthinkable until IKEA introduced the concept in the 1960s. . . . airlines didn’t buy engines for their airplanes, but paid for every hour an engine runs? That is how Rolls-Royce transformed itself from a money-losing British manufacturer into a service fi rm that today is the world’s second biggest provider of large jet engines. . . . voice calls were free worldwide? In 2003 Skype launched a service that allowed free voice calling via the Internet. After fi ve years Skype had acquired 400 million registered users who collectively had made 100 billion free calls. . . . car manufacturers didn’t sell cars, but provided mobility services? In 2008 Daimler launched car2go, an experimental business in the German city of Ulm. Car2go’s fl eet of vehicles allows users to pick up and drop off cars anywhere in the city, paying by- the-minute fees for mobility services. . . . individuals could lend money to each other rather than borrowing from banks? In 2005, U.K.-based Zopa launched a peer-to-peer lending platform on the Internet. . . . every villager in Bangladesh had access to a telephone? That is what Grameenphone set out to achieve under a partnership with micro-fi nance institution Grameen Bank. At the time, Bangladesh still had the world’s lowest tele-density. Today Grameenphone is Bangladesh’s largest taxpayer. bmgen_final.indd 141 6/15/10 5:40 PM

142 desIgn IdeatIon The Ideation Process The ideation process can take several forms. Here we outline a general approach to producing innovative business model options: 1. team composition Key question: Is our team suffi ciently diverse to generate fresh business model ideas? Assembling the right team is essential to generating effective new business model ideas. Members should be diverse in terms of seniority, age, experience level, business unit represented, customer knowledge, and professional expertise. 2. immersion Key question: Which elements must we study before generating business model ideas? Ideally the team should go through an immersion phase. which could include general research, studying customers or prospects, scrutinizing new technologies, or assessing existing business models. Immersion could last several weeks or could be as short as a couple of workshop exercises (e.g. the Empathy Map). 3. expanding Key question: What innovations can we imagine for each business model building block? During this phase the team expands the range of possible solutions, aiming to generate as many ideas as possible. Each of the nine business model building blocks can serve as a starting point. The goal of this phase is quantity, not quality. Enforcing brainstorming rules will keep people focused on generating ideas rather than on critiquing too early in the process (see p. 144). 4. criteria selection Key question: What are the most important criteria for prioritizing our business model ideas? After expanding the range of possible solutions, the team should defi ne criteria for reducing the number of ideas to a manageable few. The criteria will be specifi c to the context of your business, but could include things such as estimated implementa- tion time, revenue potential, possible customer resistance, and impact on competitive advantage. 5. “prototyping” Key question: What does the complete business model for each shortlisted idea look like? With criteria defi ned, the team should be able to reduce the number of ideas to a prioritized shortlist of three to fi ve potential business model innovations. Use the Business Model Canvas to sketch out and discuss each idea as a business model prototype (see p. 160). 142 bmgen_final.indd 142 6/15/10 5:40 PM

143 desIgn 143 IdeatIon The task of generating new ideas should not be left exclusively to those typically con- sidered to be “creative types.” Ideation is a team exercise. In fact, by its very nature business model innovation requires the participation of people from across the entire organization. Business model innovation is about seeking to create value by exploring new business model building blocks and forging innovative links between blocks. This can involve all nine blocks of the canvas, whether Distribution Channels, Revenue Streams, or Key Resources. Thus it requires input and ideas from people representing multiple areas. That’s why assembling the right task force is a critical prerequisite for generating new business model ideas. Thinking about business model innovation should not be confi ned to the R&D unit or the strategic planning offi ce. Business model innova- tion teams should have a diverse membership. The diversity will help you generate, discuss, and select new ideas. Consider adding outsiders, or even children. Diversity works. But make sure to teach people how to listen actively, and consider engaging a neutral facilitator for key meetings. The task of generating new ideas should not be left exclusively to those typically con- sidered to be “creative types.” Ideation is a team exercise. In fact, by its very nature business model innovation requires the participation of people from across the entire organization. Business model innovation is about seeking to create value by exploring Assemble a Diverse Team A diverse business model innovation team has members . . . • from various business units • of different ages • with different areas of expertise • of differing levels of seniority • with a mixture of experiences • from different cultural backgrounds bmgen_final.indd 143 6/15/10 5:40 PM

144 desIgn 144 IdeatIon Brainstorming Rules Stay focused Start with a well-honed statement of the problem at hand. Ideally, this should be articulated around a customer need. Don’t let the discussion stray too far; always bring it back to the problem statement. Enforce rules Clarify the brainstorming rules upfront and enforce them. The most important rules are "defer judgment," "one conversation at a time," "go for quantity," "be visual," and "encourage wild ideas." Facilitators should enforce the rules. Think visually Write ideas down or sketch them out on a surface everyone can see. A good way to collect ideas is to jot them down on Post-it™ notes and stick these to a wall. This allows you to move ideas around and regroup them. Prepare Prepare for brainstorming with some sort of immersion experience related to the problem at hand. This could be a fi eld trip, discussions with customers, or any other means of immersing the team in issues related to your problem statement. Adapted from an interview with Tom Kelley of IDEO in Fast Company magazine: "Seven Secrets to Good Brainstorming" Successful brainstorming requires following a set of rules. Enforcing these rules will help you maximize the number of useful ideas generated. bmgen_final.indd 144 6/15/10 5:40 PM

145 aCtIVIty desIgn 145 Warm-Up: The Silly Cow Exercise To get your team’s creative juices fl owing, it can be helpful to start an ideation ses- sion with a warm-up such as the Silly Cow exercise. Here’s how it works: Instruct participants to sketch out three different business models using a cow. Ask them to fi rst defi ne some characteristics of a cow (produces milk, eats all day, makes a mooing sound, etc.). Tell them to use those characteristics to come up with an innovative business model based on a cow. Give them three minutes. Keep in mind that this exercise can backfi re, as it is indeed quite silly. But it has been tested with senior executives, accountants, risk managers, and entrepreneurs, and usually is a great success. The goal is to take people out of their day-to-day business routines and show them how readily they can generate ideas by disconnecting from orthodoxies and letting their creativity fl ow. desIgn 145 to fi rst defi ne some characteristics of a cow (produces milk, eats all day, makes a mooing sound, etc.). Tell them to use those characteristics to come up with an innovative business model based on a cow. Give them three minutes. Keep in mind that this exercise can backfi re, as it is indeed quite silly. But it has been tested with senior executives, accountants, risk managers, and entrepreneurs, and usually is a great success. The goal is to take people out of their day-to-day business routines and show them how readily they can generate ideas by disconnecting from orthodoxies and bmgen_final.indd 145 6/15/10 5:40 PM

Technique_ No. 3 Visual Thinking bmgen_final.indd 146 6/15/10 5:40 PM

VIsuaL thInKIng desIgn 147 O c t o b e r , 2 0 0 6 The meeting room walls are plastered with large posters on which a group of 14 people are assiduously sketching drawings and pasting Post-it™ notes. Though the scene almost has the atmosphere of an art class, it’s taking place at the headquarters of Hewlett-Packard, the technology products and services giant . . . O c t o b e r , 2 0 0 6 The meeting room walls are plastered with large posters on which a group of 14 people are assiduously sketching drawings and pasting Post-it™ notes. Though the scene almost has the atmosphere of an art class, it’s taking place at the headquarters of Hewlett-Packard, the technology products and services giant . . . . . . The 14 participants hail from throughout HP, but all are involved in information management. They’ve gathered here for a one-day workshop to literally draw a picture of how a global enterprise should manage information fl ows. Dave Gray, founder and chairman of consultancy XPLANE, is facilitating the meeting. XPLANE uses visual thinking tools to help clients clarify problems involving everything from corporate strategy to operational implementations. Together with an XPLANE artist, Dave helps the 14 HP specialists gain a better understanding of the big picture of information sharing in a global enterprise. The group uses the posted sketches to discuss information sharing, to identify relationships between elements, to fi ll in missing pieces, and to develop a joint understanding of multiple issues. With a knowing smile, Dave talks about a common miscon- ception: that one shouldn’t draw something until one under- stands it. On the contrary, he explains, sketches—however rudimentary or amateurish—help people better describe, discuss, and understand issues, particularly those of a complex nature. For the 14 Hewlett-Packard collaborators, XPLANE’s visualization approach has worked beautifully. They gathered as 14 specialists with deeply individual understandings, but parted with a simple one-page image of how a global enterprise should manage infor- mation. XPLANE’s client roster, which reads like a who’s who of the world’s most successful companies, testifi es to the growing number of organizations that understand the value of this type of visual thinking. bmgen_final.indd 147 6/15/10 5:40 PM

VIsuaL thInKIng desIgn 148 desIgn Visual thinking is indispensable to working with business models. By visual thinking we mean using visual tools such as pictures, sketches, diagrams, and Post-it™ notes to construct and discuss meaning. Because business models are complex concepts composed of various building blocks and their interrelationships, it is diffi cult to truly understand a model without sketching it out. A business model really is a system where one element infl uences the other; it only makes sense as a whole. Capturing that big picture without visualizing it is diffi cult. In fact, by visually depict- ing a business model, one turns its tacit assumptions into explicit information. This makes the model tangible and allows for clearer discussions and changes. Visual techniques give “life” to a business model and facilitate co-creation. Sketching a model transforms it into a persistent object and a conceptual anchor to which discussions can always return. This is critical because it shifts discourse from the abstract toward the concrete and greatly improves the quality of debate. Typically, if you aim to improve an existing business model, visually depicting it will unearth logical gaps and facilitate their discussion. Similarly, if you are designing a completely new business model, drawing it will allow you to discuss different options easily by adding, removing, or moving pictures around. Businesses already make frequent use of visual techniques such as diagrams and charts. Such elements are used extensively to clarify messages within reports and plans. But visual techniques are used less frequently to discuss, explore, and defi ne business issues. When was the last time you attended a meeting where executives were drawing on the walls? Yet it is in the strategic process where visual thinking can add tremendous value. Visual thinking enhances strategic inquiries by making the abstract concrete, by illuminating relationships between elements, and by simplifying the complex. In this section we describe how visual thinking can help you throughout the process of defi ning, discussing, and changing business models. We refer to two techniques: the use of Post-it™ notes and the use of sketches in combination with the Business Model Canvas. We also discuss four processes improved by visual thinking: understanding, dialogue, exploration, and communication. The Value of Visual Thinking — bmgen_final.indd 148 6/15/10 5:40 PM

VIsuaL thInKIng desIgn 149 bmgen_final.indd 149 6/15/10 5:40 PM

150 VIsuaL thInKIng desIgn 150 A set of Post-it™ notes is an indispensable tool that everyone refl ecting on business models should keep handy. Post-it™ notes function like idea containers that can be added, removed, and easily shifted between business model building blocks. This is important because during business model discussions, people frequently do not immediately agree on which elements should appear in a Business Model Canvas or where they should be placed. During exploratory discussions, some elements might be removed and replaced multiple times to explore new ideas. Here are three simple guidelines: (1) use thick marking pens, (2) write only one element per Post-it™ note, and (3) write only a few words per note to capture the essential point. Using thick markers is more than a detail: it prevents you from putting too much informa- tion on a single Post-it™, and makes for easier reading and overview. Keep in mind, too, that the discussion leading to the fi nal business model picture created by all the Post-it™ notes is just as important as the outcome. Discussion around which notes to place on or remove from the Canvas and debate over how one element infl uences others give participants a deep understanding of the business model and its dynamics. Consequently, a Post-it™ note becomes more than just a piece of sticky paper represent- ing a business model building block; it becomes a vector for strategic discussion. Visualizing with Post-it ™ notes bmgen_final.indd 150 6/15/10 5:40 PM

151 VIsuaL thInKIng desIgn 151 Visualizing with Drawings Drawings can be even more powerful than Post-it™ notes because people react more strongly to images than to words. Pictures deliver messages instantly. Simple drawings can express ideas that otherwise require many words. It’s easier than we think. A stick fi gure with a smiling face conveys emo- tion. A big bag of money and a small bag of money convey proportions. The problem is that most of us think we can’t draw. We’re embarrassed lest our sketches appear unsophisticated or childish. The truth is that even crude drawings, sincerely rendered, make things tangible and understand- able. People interpret simple stick fi gures far more easily than abstract concepts expressed in text. Sketches and drawings can make a difference in several ways. The most obvious one is explaining and communicating your business model based on simple drawings, something we explain how to do at the end of this chapter. Another is sketching out a typical client and her environment to illustrate one of your Customer Segments. This will trigger a more con- crete, intensive discussion compared to outlining that person’s character- istics in writing. Finally, sketching out a Customer Segment’s needs and jobs-to-get-done is a powerful way to exploit visual techniques. Such drawings will likely trigger constructive discussion from which new business model ideas will emerge. Now let’s examine four processes improved by visual thinking. Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Visualizing with Drawings Drawings can be even more powerful than Post-it™ notes because people react more strongly to images than to words. Pictures deliver messages instantly. Simple drawings can express ideas that otherwise require many Sketches and drawings can make a difference in several ways. The most obvious one is explaining and communicating your business model based on simple drawings, something we explain how to do at the end of this bmgen_final.indd 151 6/15/10 5:41 PM

152 VIsuaL thInKIng desIgn 152 visual grammar The Business Model Canvas poster is a concep- tual map that functions as a visual language with corresponding grammar. It tells you which pieces of information to insert in the model, and where. It provides a visual and text guide to all the informa- tion needed to sketch out a business model. capturing the big picture By sketching out all the elements of the Canvas you immediately give viewers the big picture of a busi- ness model. A sketch provides just the right amount of information to allow a viewer to grasp the idea, yet not too much detail to distract him. The Business Model Canvas visually simplifi es the reality of an enterprise with all its processes, structures, and sys- tems. In a business model like Rolls-Royce’s, where jet engine units are leased by the hour rather than sold, it is the big picture, rather than the individual pieces, that is compelling. seeing relationships Understanding a business model requires not only knowing the compositional elements, but also grasping the interdependencies between elements. This is easier to express visually than through words. This is even more true when several elements and relationships are involved. In describing the business model of a low-cost airline, for example, drawings can effectively show why a homogenous fl eet of airplanes is crucial to keeping maintenance and training costs low. Understand the Essence bmgen_final.indd 152 6/15/10 5:41 PM

153 VIsuaL thInKIng desIgn 153 joint understanding Visualizing business models as a group is the most effective way to achieve shared understanding. People from different parts of an organization may deeply understand parts of a business model but lack a solid grasp of the whole. When experts jointly draw a business model, everybody involved gains an understanding of the individual components and develops a shared understanding of the relation- ships between these components. collective reference point We all hold tacit assumptions in our heads, and posting an image that turns those implicit assump- tions into explicit information is a powerful way to improve dialogue. It makes a business model into a tangible and persistent object, and provides a refer- ence point to which participants can always return. Given that people can hold only a limited number of ideas in short-term memory, visually portraying business models is essential to good discussion. Even the simplest models are composed of several building blocks and interrelationships. shared language The Business Model Canvas is a shared visual language. It provides not only a reference point, but also a vocabulary and grammar that helps people better understand each other. Once people are familiar with the Canvas, it becomes a powerful enabler of focused discussion about business model elements and how they fi t together. This is particu- larly valuable in organizations with matrix reporting structures where individuals in a working group or task force may know little about each other’s functional areas. A shared visual business model language powerfully supports idea exchange and increases team cohesiveness. Enhance Dialogue bmgen_final.indd 153 6/15/10 5:41 PM

154 VIsuaL thInKIng desIgn 154 Explore Ideas play A visual business model also provides opportunity for play. With the elements of a model visible on a wall in the form of individual Post-it™ notes, you can start discussing what happens when you remove certain elements or insert new ones. For example, what would happen to your busi- ness model if you eliminated the least profi table Customer Segment? Could you do that? Or do you need the unprofi table segment to attract profi table customers? Would eliminating unprofi table cus- tomers enable you to reduce resources and costs and improve services to profi table customers? A visual model helps you think through the systemic impact of modifying one element or another. idea trigger The Business Model Canvas is a bit like an artist’s canvas. When an artist starts painting, he often has a vague idea—not an exact image—in mind. Rather than starting in one corner of a canvas and executing sequentially, he starts wherever his muse dictates and builds the painting organically. As Pablo Picasso said, “I begin with an idea and then it becomes something else.” Picasso saw ideas as nothing more than points of departure. He knew they would evolve into something new during their explication. Crafting a business model is no different. Ideas placed in the Canvas trigger new ones. The Canvas becomes a tool for facilitating the idea dialogue—for individuals sketching out their ideas and for groups developing ideas together. Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas Explore Ideas play A visual business model also provides opportunity for play. With the elements of a model visible on idea trigger The Business Model Canvas is a bit like an artist’s canvas. When an artist starts painting, he often bmgen_final.indd 154 6/15/10 5:41 PM

155 VIsuaL thInKIng desIgn 155 selling externally Just as employees must “sell” ideas internally, entrepreneurs with plans based on new business models must sell them to other parties, such as investors or potential collaborators. Strong visuals substantially increase chances of success. create company-wide understanding When it comes to communicating a business model and its most important elements, a picture is truly worth a thousand words. Everybody in an organization needs to understand its business model, because everybody can potentially contrib- ute to its improvement. At the very least, employees need a shared understanding of the model so they can move in the same strategic direction. Visual depiction is the best way to create such a shared understanding. selling internally In organizations, ideas and plans often must be “sold” internally at various levels to garner support or obtain funding. A powerful visual story reinforc- ing your pitch can increase your chances of winning understanding and backing for your idea. Using images rather than just words to tell the story makes your case even stronger, because people identify immediately with images. Good imagery readily communicates your organization’s current status, what needs doing, how it can be done, and what the future might look like. Improve Communication Improve Communication Improve Communication Improve Communication Improve Communication Improve Communication Improve Communication Improve Communication Improve Communication Improve Communication Improve Communication Improve Communication Improve Communication Improve Communication Improve Communication Improve Communication Improve Communication Improve Communication Improve Communication Improve Communication bmgen_final.indd 155 6/15/10 5:42 PM

156 VIsuaL thInKIng desIgn Different Types of Visualization for Different needs • From day one, Skype was a global voice carrier because its service is deliv- ered through the Internet, unrestricted by traditional telecommunications net- works. Its business is highly scalable. Visual representations of business models call for differ- ent levels of detail depending on one's goal. The sketch of Skype’s business model on the right drives home the key differences between its business model and that of a traditional telecommunications carrier. The goal is to point out the striking differences between Skype’s business model building blocks and those of a traditional carrier, even though both offer similar services. The right-hand page sketch depicting the young Dutch company Sellaband has a different goal and is there- fore more detailed. It aims to paint the big picture of a completely new music industry business model: that of a platform enabling crowd-funding of independent musical artists. Sellaband uses the drawing to explain its innovative business model to investors, partners, and employees. Sellaband’s combination of images and text has proven to be far more effective than words alone at accomplishing this task. • Though it provides a telecommunications service, Skype's business model features the economics of a software company rather than a telecommunications network operator. • Ninety percent of Skype users never pay. Only an estimated 10 percent of users are paying customers. Unlike traditional telecommunication carriers, Skype's Channels and Relationships are highly automated. They require almost no human intervention and are therefore relatively inexpensive. • Skype’s Key Resources and Activities resemble those of a software company, because its service is based on software that uses the Internet to carry calls. Given its 400 million+ user base, the company enjoys very low infrastructure costs. In fact, it does not own or operate a telecommunications network at all. 156 bmgen_final.indd 156 6/15/10 5:42 PM

157 VIsuaL thInKIng desIgn 157 157 bmgen_final.indd 157 6/15/10 5:42 PM

158 VIsuaL thInKIng desIgn 158 A powerful way to explain a business model is to tell a story one image at a time. Presenting a full description within the Business Model Canvas can overwhelm an audience. It’s better to introduce the model piece by piece. You could do this by drawing one piece after another, or by using PowerPoint. An appealing alternative is to pre-draw all the elements of a business model on Post-it™ notes, then put them up one after another as you explain the model. It allows the audience to follow the build-up of the model, and the visuals complement your explanation. Telling a Visual Story bmgen_final.indd 158 6/15/10 5:42 PM

159 aCtIVIty desIgn 159 Visual Storytelling Activity 1 map your business model • Begin by mapping out a simple, text- based version of your business model. • Write each business model element on an individual Post-it™ note. • Mapping can be done individually or with a group. 2 draw each business model element • One at a time, take each Post-it™ note and replace it with a drawing representing the content. • Keep the images simple: omit detail. • Drawing quality is unimportant as long as the message is conveyed. 3 defi ne the storyline • Decide which Post-it™ notes you will put up fi rst when telling your story. • Try different paths. You might start with Customer Segments, or maybe the Value Proposition. • Basically, any starting point is possible if it effectively supports your story. 4 tell the story • Tell your business model story one drawn Post-it™ picture at a time. Note: Depending on the context and your personal preferences, you may want to use PowerPoint or Keynote. Slideware, though, is unlikely to produce the positive surprise effect of the Post-it™ approach. bmgen_final.indd 159 6/15/10 5:42 PM

Technique_ No. 4 Prototyping bmgen_final.indd 160 6/15/10 5:43 PM

PrototyPIng desIgn 161 161 S u m m e r , 2 0 0 0 With a look bordering on panic, Weatherhead School of Management Professor Richard Boland Jr. watched as Matt Fineout, an architect with Gehry & Associates, casually tore up plans for a new school building . . . . . . Boland and Fineout had been struggling for two full days to remove some 5,500 square feet from the fl oor plan designed by star architect Frank Gehry, while leaving room needed for meeting spaces and offi ce equipment. At the end of the marathon planning session, Boland had breathed a sigh of relief. “It’s fi nally done,” he thought. But at that very moment, Fineout rose from his chair, ripped the document apart, and tossed the scraps into a trash bin, not bothering to retain a single trace of the pair’s hard labor. He responded to Professor Boland's shocked expression with a gentle shrug and a soft remark. “We’ve shown we can do it; now we need to think of how we want to do it.” Looking back, Boland describes the incident as an extreme example of the relentless approach to inquiry he experienced while working with the Gehry group on the new Weatherhead building. During the design phase, Gehry and his team made hun- dreds of models with different materials and of varying sizes, sim- ply to explore new directions. Boland explains that the goal of this prototyping activity was far more than the mere testing or proving of ideas. It was a methodology for exploring different possibilities until a truly good one emerged. He points out that prototyping, as practiced by the Gehry group, is a central part of an inquiry pro- cess that helps participants gain a better sense of what is missing in the initial understanding of a situation. This leads to completely new possibilities, among which the right one can be identifi ed. For Professor Boland, the experience with Gehry & Associates was transformative. He now understands how design techniques, including prototyping, contribute to fi nding better solutions for the entire spectrum of business problems. Together with fellow professor Fred Collopy and other colleagues, Boland is now spear- heading the concept of Manage by Designing: the integration of design thinking, skills, and experiences into Weatherhead’s MBA curriculum. Here, students use tools of design to sketch alterna- tives, follow through on problem situations, transcend traditional boundaries, and prototype ideas. bmgen_final.indd 161 6/15/10 5:43 PM

Prototy PI ng de s I gn 162 Prototyping is a powerful tool for developing new, innovative business models. Like visual thinking, it makes abstract concepts tangible and facilitates the exploration of new ideas. Prototyp- ing comes from the design and engineering disciplines, where it is widely used for product design, architecture, and interaction design. It is less common in business management because of the less tangible nature of organizational behavior and strategy. While prototyping has long played a role at the intersection of business and design, for example in manufactured product design, in recent years it has gained traction in areas such as process design, service design, and even organization and strategy design. Here we show how prototyping can make an important contribu- tion to business model design. Although they use the same term, product designers, architects, and engineers all have different understandings of what consti- tutes a "prototype." We see prototypes representing potential future business models: as tools that serve the purpose of discus- sion, inquiry, or proof of concept. A business model prototype can take the form of a simple sketch, a fully thought-through concept described with the Business Model Canvas, or a spreadsheet that simulates the financial workings of a new business. It is important to understand that a business model prototype is not necessarily a rough picture of what the actual business model will actually look like. Rather, a prototype is a thinking tool that helps us explore different directions in which we could take our business model. What does it mean for the model if we add another client segment? What are the consequences of removing a costly resource? What if we gave away something for free and replaced that Revenue Stream with something more innovative? Making and manipulating a business model prototype forces us to address issues of structure, relationship, and logic in ways unavailable through mere thought and discussion. To truly understand the pros and cons of different possibilities, and to further our inquiry, we need to construct multiple prototypes of our business model at different levels of refinement. Interaction with prototypes produces ideas far more readily than discussion. Prototype business models may be thought-provoking—even a bit crazy—and thus help push our thinking. When this hap- pens, they become signposts pointing us in as-yet unimagined directions rather than serving as mere representations of to-be-implemented business models. “Inquiry” should signify a relentless search for the best solution. Only after deep inquiry can we effectively pick a prototype to refine and execute—after our design has matured. Prototyping’s Value — bmgen_final.indd 162 6/15/10 5:43 PM

PrototyPIng desIgn 163 Businesspeople are likely to display one of two reactions to this process of business model inquiry. Some might say, "Well, that is a nice idea, if we only had the time to explore different options." Others might say that a market research study would be an equally good way to come up with new business models. Both reactions are based on dangerous preconceptions. The fi rst supposes that “business as usual” or incremental improvements are suffi cient to survive in today’s competitive environment. We believe this path leads to mediocrity. Businesses that fail to take the time to develop and prototype new, ground- breaking business model ideas risk being sidelined or overtaken by more dynamic competitors—or by insurgent challengers appearing, seemingly, from nowhere. The second reaction assumes that data is the most important consideration when designing new strategic options. It is not. Market research is a single input in the long and laborious process of prototyping powerful new business models with the potential to outperform competitors or develop entirely new markets. Where do you want to be? At the top of the game, because you’ve taken the time to prototype powerful new business models? Or on the sidelines, because you were too busy sustaining your existing model? We're convinced that new, game-changing business models emerge from deep and relentless inquiry. old thinking few business models dominate an industry outside-in: industry defi nes business models linear thinking early choice of business model implementation-focused effi ciency-focused new thinking multiple business models in and across industries inside-out: business models transform industries opportunistic thinking exploratory search for business model design-focused Value- and effi ciency-focused old old old thinking old thinking thinking thinking thinking thinking old old thinking thinking thinking thinking thinking old thinking thinking thinking thinking thinking thinking thinking thinking thinking thinking thinking thinking thinking thinking thinking thinking thinking old old old thinking old old thinking thinking thinking old old old thinking thinking thinking old old old thinking thinking old old thinking thinking thinking thinking old old thinking thinking thinking old old thinking thinking thinking thinking old old old old old old old old thinking old old old old old old old old thinking thinking thinking thinking thinking thinking thinking thinking thinking thinking thinking thinking thinking thinking old old thinking old old old thinking thinking old thinking old old thinking thinking old thinking old thinking thinking thinking thinking thinking thinking thinking thinking thinking thinking thinking thinking thinking few business models dominate an industry dominate an industry few business models dominate an industry dominate an industry dominate an industry outside-in: industry defi nes business models business models outside-in: industry defi nes business models outside-in: industry defi nes linear thinking linear thinking linear thinking linear thinking linear thinking early choice of business early choice of business model implementation-focused implementation-focused implementation-focused implementation-focused implementation-focused effi ciency-focused effi ciency-focused effi ciency-focused effi ciency-focused effi ciency-focused bmgen_final.indd 163 6/15/10 5:43 PM

164 PrototyPIng desIgn 164 Design Attitude As businesspeople, when we see a prototype we tend to focus on its physical form or its representation, viewing it as something that models, or encapsulates the essence of, what we eventually intend to do. We perceive a prototype as something that simply needs to be refi ned. In the design profession, prototypes do play a role in pre-implementation visualization and testing. But they also play another very important role: that of a tool of inquiry. In this sense they serve as thinking aids for exploring new possibilities. They help us develop a better understanding of what could be. This same design attitude can be applied to business model innovation. By making a prototype of a business model we can explore particular aspects of an idea: novel Revenue Streams, for example. Participants learn about the elements of a prototype as they construct and discuss it. As previously discussed , business model prototypes vary in terms of scale and level of refi nement. We believe it is important to think through a number of basic business model possibilities before developing a business case for a specifi c model. This spirit of inquiry is called design attitude, because it is so central to the design professions, as Professor Boland discovered. The attributes of design attitude include a willingness to explore crude ideas, rapidly discard them, then take the time to exam- ine multiple possibilities before choosing to refi ne a few—and accepting uncertainty until a design direction matures. These things don’t come naturally to businesspeople, but they are requirements for generating new business models. Design attitude demands changing one’s orienta- tion from making decisions to creating options from which to choose. “If you freeze an idea too quickly, you fall in love with it. If you refi ne it too quickly, you become attached to it and it becomes very hard to keep exploring, to keep looking for better. The crudeness of the early models in particular is very deliberate.” Jim Glymph, Gehry Partners bmgen_final.indd 164 6/15/10 5:43 PM

165 PrototyPIng desIgn napkin sketch outline and pitch a rough idea draw a simple business model canvas. describe the idea using only key elements. • Outline the idea • Include the Value Proposition • Include the main Revenue Streams elaborated canvas explore what it would take to make the idea work develop a more elabo- rate canvas to explore all the elements needed to make the business model work. • Develop a full Canvas • Think through your business logic • Estimate the market potential • Understand the relationships between Building Blocks • Do some basic fact-checking business case examine the viability of the idea turn the detailed canvas into a spread- sheet to estimate your model’s earning potential. • Create a full Canvas • Include key data • Calculate costs and revenues • Estimate profi t potential • Run fi nancial scenarios based on different assumptions fi eld-test investigate customer acceptance and feasibility you’ve decided on a potential new business model, and now want to fi eld- test some aspects. • Prepare a well-justifi ed business case for the new model • Include prospective or actual customers in the fi eld test • Test the Value Proposi- tion, Channels, pricing mechanism, and/or other elements in the marketplace In architecture or product design, it is easy to understand what is meant by prototyping at different scales, because we are talking about physical artifacts. Architect Frank Gehry and product designer Philippe Starck construct countless prototypes during a project, ranging from sketches and rough models to elaborate, full-featured prototypes. We can apply the same scale and size varia- tions when prototyping business models, but in a more conceptual way. A business model prototype can be anything from a rough sketch of an idea on a napkin to a detailed Business Model Canvas to a fi eld-testable busi- ness model. You may wonder how all of this is any differ- ent from simply sketching out business ideas, something any businessperson or entrepreneur does. Why do we need to call it “prototyping”? There are two answers. First, the mindset is different. Second, the Business Model Canvas provides structure to facilitate exploration. Business model prototyping is about a mindset we call “design attitude.” It stands for an uncompromising commitment to discovering new and better business models by sketching out many prototypes —both rough and detailed—representing many strategic options. It’s not about outlining only ideas you really plan to imple- ment. It’s about exploring new and perhaps absurd, even impossible ideas by adding and removing elements of each prototype. You can experiment with prototypes at different levels. Prototypes at Different Scales 165 bmgen_final.indd 165 6/15/10 5:43 PM

166 PrototyPIng desIgn 166 Eight Business Model Prototypes for Publishing a Book Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes Eight Business Model Prototypes for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book for Publishing a Book Here are eight different business model prototypes outlining possible ways to publish a book. Each prototype highlights different elements of its model. bmgen_final.indd 166 6/15/10 5:43 PM

167 PrototyPIng desIgn 167 167 A prototype rarely describes all the elements of a “real” business model. It focuses instead on illuminating particular aspects of the model and thus indicating new directions for exploration. bmgen_final.indd 167 6/15/10 5:43 PM

168 PrototyPIng desIgn 168 design decide execute inquiry provoke prototype bmgen_final.indd 168 6/15/10 5:43 PM

169 aCtIVIty desIgn 169 John, 55 Founder & CEO Strategy Consultancy 210 employees 1 outline big issues • Think of a typical strategy- consulting client. • Pick the Customer Segment and industry of your choice. • Describe fi ve of the biggest issues related to strategy consulting. Refer to the Empathy Map (see p. 131). 2 generate possibilities • Take another close look at the fi ve customer issues you selected. • Generate as many consulting business model ideas as you can. • Pick the fi ve ideas you think are best (not necessarily the most realistic). Refer to the Ideation Process (see p. 134). 3 prototype the business model • Choose the three most diverse ideas of the fi ve generated. • Develop three conceptual business model prototypes by sketching the elements of each idea on different Business Model Canvases. • Annotate the pros and cons of each prototype. Wanted: A new Consulting Business Model John Sutherland needs your help. John is the founder and CEO of a midsized global consulting fi rm that focuses on advising companies on strategy and organizational issues. He is looking for a fresh, outside perspective on his company because he believes that his business needs to be re-envisioned. John built his company over two decades and now employs 210 people worldwide. The focus of his consultancy is helping executives develop effective strategies, improve their strategic management, and realign their organizations. He competes directly with McKinsey, Bain, and Roland Berger. One problem he faces is being smaller than his top-tier competitors, yet much larger than the typical niche-focused strategy con- sultancy. But John is not preoccupied with this issue, since his company is still doing reasonably well. What really troubles him is the strategic consulting profession’s poor reputation in the marketplace, and growing client perception that the prevalent hourly and project-based billing model is outdated. Though his own fi rm’s reputation remains good, he has heard from several clients that they think consultants overcharge, under- deliver, and show little genuine commitment to client projects. Such comments alarm John, because he believes his industry employs some of the brightest minds in business. After much thought, he has con- cluded that this reputation results from an outdated business model, and he now wants to transform his own company’s approach. John aims to make hourly and project billing a thing of the past, but isn’t quite sure how to do so. Help John by providing him with some fresh per- spectives on innovative consulting business models. John built his company over two decades and now employs 210 people worldwide. The focus of his consultancy is helping executives develop effective strategies, improve their strategic management, and realign their organizations. He competes directly with McKinsey, Bain, and Roland Berger. One problem he faces is being smaller than sultancy. But John is not preoccupied with this issue, since his company is still doing and project-based billing model is outdated. Though his own fi rm’s reputation remains good, he has heard from several clients that they think consultants overcharge, under- bmgen_final.indd 169 6/15/10 5:43 PM

Technique_ No. 5 Storytelling bmgen_final.indd 170 6/15/10 5:43 PM

storyteLLIng desIgn 171 171 S p r i n g , 2 0 0 7 It is already far past midnight as Anab Jain watches the latest video footage she shot during the day . . . S p r i n g , 2 0 0 7 It is already far past midnight as Anab Jain watches the latest video footage she shot during the day . . . . . . She’s working on a series of small fi lms for Colebrook Bosson Saunders, a designer and manufacturer of award-winning oΩice furniture accessories. Anab is a storyteller and designer, and the fi lms she is working on are part of a project to help Colebrook Bosson Saunders make sense of how the future of work and the work- place could look. To make this future tangible, she invented three protagonists and projected them into 2012. She gave them new jobs based on research into new and emerging technologies and the impact of demographics and environmental risks on our future lives. The fi lms then show this near future. But rather than describing 2012, Anab takes the role of the storyteller, visiting this future environment and interviewing the three protagonists. They each explain their work and show objects they use. The fi lms are real enough to cause viewers to suspend their disbelief and become intrigued by the diΩerent environment. That is exactly what companies that hire Anab Jain, like Microsoft and Nokia, are looking for: stories to make potential futures tangible. bmgen_final.indd 171 6/15/10 5:43 PM

storyteLLIng desIgn 172 desIgn 172 As parents, we read stories to our kids, sometimes the same ones we heard as children ourselves. As colleagues, we share the latest organizational gossip. And as friends, we tell one another stories of our personal lives. Somehow, it is only in our roles as business- people that we avoid using stories. This is unfortunate. When was the last time you heard a story used to introduce and discuss a business issue? Storytelling is an undervalued and underused art in the world of business. Let’s examine how storytelling can serve as a powerful tool to make new business models more tangible. By their very nature, new or innovative business models can be diffi cult to describe and understand. They challenge the status quo by arranging things in unfamiliar ways. They force listeners to open their minds to new possibilities. Resistance is one likely reaction to an unfamiliar model. Therefore, describing new busi- ness models in a way that overcomes resistance is crucial. Just as the Business Model Canvas helps you sketch and analyze a new model, storytelling will help you effectively communicate what it is all about. Good stories engage listeners, so the story is the ideal tool to prepare for an in-depth discussion of a business model and its underlying logic. Storytelling takes advantage of the explanatory power of the Business Model Canvas by suspending disbelief in the unfamiliar. Storytelling’s Value — bmgen_final.indd 172 6/15/10 5:43 PM

173 storyteLLIng desIgn Why Storytelling? Introducing the New New business model ideas can pop up anywhere in an organization. Some ideas may be good, some may be mediocre, and some may be, well, completely useless. But even outstanding business model ideas can have a tough time getting past layers of management and fi nding their way into an organization’s strategy. So effectively pitching your business model ideas to management is crucial. This is where stories can help. Ultimately, manag- ers are interested in numbers and facts, but having the right story can win their attention. A good story is a com- pelling way to quickly outline a broad idea before getting caught up in the details. Engaging Employees When an organization transitions from an existing busi- ness model to a new business model, it must convince collaborators to follow. People need a crystal clear under- standing of the new model and what it means for them. In short, the organization needs to powerfully engage its employees. That is where traditional text-based Power- Point presentations usually fail. Introducing a new business model through an engaging story-based presentation (delivered with PowerPoint, drawings, or other techniques) is far more likely to connect with listeners. Capturing people’s attention and curiosity paves the way for in-depth presentations and discussions of the unfamiliar. Pitching to Investors If you are an entrepreneur, chances are you will pitch your idea or business model to investors or other potential shareholders (and you already know that investors stop listening the instant you tell them how you will become the next Google). What investors and other shareholders want to know is: How will you create value for customers? How will you make money doing so? That’s the perfect setting for a story. It’s the ideal way to introduce your venture and business model before getting into the full business plan. Engaging People People are moved more by stories than by logic. Ease listeners into the new or unknown by building the logic of your model into a compelling narrative. Clarifi cation Telling a story that illustrates how your business model solves a customer problem is a clear way to introduce listeners to the idea. Stories give you the “buy-in” needed to subsequently explain your model in detail. Make the New Tangible Explaining a new, untested business model is like explaining a painting with words alone. But telling a story of how the model creates value is like applying bright colors to canvas. It makes things tangible. 173 bmgen_final.indd 173 6/15/10 5:43 PM

174 storyteLLIng desIgn 174 Making Business Models Tangible? The goal of telling a story is to introduce a new business model in an engaging, tangible way. Keep the story simple and use only one protagonist. Depending on the audience, you can use a different protagonist with a different perspective. Here are two possible starting points. Employee Observer Explain the business model in the form of a story told from an employee’s perspective. Use the employee as the protagonist who demonstrates why the new model makes sense. This may be because the employee frequently observes customer problems that the new business model solves. Or it may be that the new model makes better or different use of resources, activities, or partnerships com- pared to the old model (e.g. cost reduction, productivity improvement, new revenue sources, etc.). In such a story, the employee embodies the inner workings of an organiza- tion and its business model and shows the reasons for transitioning to a new model. Customer Jobs The customer perspective provides a powerful starting point for a story. Cast a customer as the protagonist and tell the tale from her point of view. Show the challenges she faces and which jobs she must get done. Then outline how your organization creates value for her. The story can describe what she receives, how it fi ts into her life, and what she is willing to pay for. Add some drama and emotion to the story, and describe how your organization is making her life easier. Ideally, weave in how your organization gets these jobs done for the customer, with which resources and through which activities. The biggest challenge with stories told from a customer perspective is keeping them authentic and avoiding a facile or patronizing tone. customer perspective company perspective bmgen_final.indd 174 6/15/10 5:43 PM

175 storyteLLIng desIgn 175 Making the Future Tangible Stories offer a wonderful technique for blurring the lines separating reality and fi ction. Thus stories provide a powerful tool for imparting tangibility to different versions of the future. This can help you challenge the status quo or justify adopting a new business model. what future business model? current business model planned future business model Provoke Ideas Sometimes a story’s sole purpose is to challenge the organizational status quo. Such a story must bring vividly to life a future competitive environment in which the current business model is severely challenged or even obsolete. Telling a story like this blurs the lines between reality and fi ction and catapults listeners into the future. This suspends disbelief, instills a sense of urgency, and opens the audience’s eyes to the need to generate new business models. Such a story can be told from either an organization or a customer perspective. Justify Change Sometimes an organization has strong ideas about how its competitive landscape will evolve. In this context, a story’s purpose is to show how a new business model is ideally suited to help an organization compete in the new landscape. Stories temporarily suspend disbelief and help people imagine how the current business model should evolve to remain effective in the future. The story’s protagonist could be a customer, an employee, or a top manager. bmgen_final.indd 175 6/15/10 5:43 PM

176 storyteLLIng desIgn 176 Developing the Story The goal of telling a story is to introduce a new business model in an engaging, tangible way. Keep the story simple and use only one protagonist. Depending on the audience, you can use a different protagonist with a different perspective. Here are two possible starting points. Company Perspective Ajit, 32, Senior IT Manager, Amazon.com Ajit has worked for Amazon.com as an IT manager for the past nine years. He and his colleagues have pulled countless all-nighters over the years to deliver the world-class IT infrastructure that serves and maintains the company’s e-commerce business. Ajit is proud of his work. Along with its fulfi llment excellence ( 1 , 6 ), Amazon.com’s powerful IT infrastruc- ture and software development capabilities ( 2 , 3 ) form the heart of its success at selling everything from books to furniture online ( 7 ). Amazon.com ( 8 ) delivered over half a billion page impressions to online shoppers ( 9 ) in 2008, and spent over a billion dollars for technology and content ( 5 ), notably to run its e-commerce operations. But now Ajit is even more excited, because Amazon. com is traveling far beyond its traditional retail offers. It’s in the process of becoming one of the most important infrastructure providers in e-commerce. With a service called Amazon Simple Storage Systems (Amazon S3) ( 11 ) the company is now using its own IT infrastructure to provide online storage to other companies at rock-bottom prices. This means that an online video hosting service can store all customer vid- eos on Amazon’s infrastructure rather than buying and maintaining its own servers. Similarly, Amazon Elastic Computing Cloud (Amazon EC2) ( 11 ) offers Amazon. com’s own computing capability to outside clients. Ajit knows that outsiders might view such services as distracting Amazon.com from its core retail opera- tions. From the inside, though, the diversifi cation makes perfect sense. Ajit remembers that four years ago, his group spent much time coordinating the efforts of the network engi- neering groups, which managed IT infrastructure, and the applications programming groups, which managed Amazon.com’s many Web sites. So they decided to build so-called application programming interfaces (APIs) ( 12 ) between these two layers, which would allow the latter to easily build on the former. Ajit also remembers exactly when they started to realize that this would be useful to external as well as internal customers. So under Jeff Bezos’s leadership, Amazon.com decided to create a new business with the potential to generate a signifi cant revenue source for the company. Amazon.com opened up its infrastructure APIs to provide what it calls Amazon Web Services to outside parties on a fee-for-service basis ( 14 ). Since Amazon.com had to design, create, imple- ment, and maintain this infrastructure anyway, offering it to third parties was hardly a distraction. amazon web services: s3, ec2, sqs, other web services companies and developers aPIs utility computing fees fulfi llment it infrastruc- ture & software development & maintenance it infrastruc- ture & software fulfi llment infrastructure technology & content fulfi llment (marketing) online retail shop consumer market amazon.com sales margins 1 2 3 4 5 6 bmgen_final.indd 176 6/15/10 5:43 PM

177 storyteLLIng desIgn 177 Customer Perspective Randy, 41, Web Entrepreneur Randy is a passionate Web entrepreneur. After 18 years in the software industry he is now running his second startup, providing enterprise software through the Web. He spent 10 years of his career in large software companies and eight years in start-ups. Throughout his career, one constant struggle has been getting infrastructure investments right. To him, running servers to provide services was basically a commodity business, but a tricky one due to the enor- mous costs involved. Tight management was crucial; when you’re running a start-up you can’t invest millions in a server farm. But when serving the enterprise market, you’d better have a robust IT infrastructure in place. That’s why Randy was intrigued when a friend at Amazon.com told him about the new IT infrastructure services his company was launching. That was the answer to one of Randy’s most important in-house jobs: running his services on a world-class IT infrastructure, being able to scale quickly, and all the while paying only for what his company was actually using. That was exactly what Amazon’s Web Services ( 11 ) promised. With Amazon Simple Storage Systems (Amazon S3), Randy could plug into Amazon’s infrastructure through a so-called application program- ming interface (API)( 12 ) and store all the data and appli- cations for his own services on Amazon.com’s servers. The same went for Amazon’s Elastic Computing Cloud (Amazon EC2). Randy didn’t have to build and maintain his own infrastructure to crunch the numbers for his enterprise application service. He could simply plug into Amazon and use its computing power in return for hourly usage fees ( 14 ). He immediately understood why the value was coming from the giant e-tailer rather than from IBM or Accenture. Amazon.com was providing and maintaining IT infrastructure ( 2 , 3 , 5 ) to serve its online retail busi- ness ( 7 ) every day on a global scale. This was its core competency. Taking the step to offer the same infrastruc- ture services to other companies ( 9 ) was not much of a stretch. And since Amazon.com was in retail, a business with low margins ( 11 ), it had to be extremely cost- effi cient ( 5 ), which explained the rock-bottom prices of its new Web Services. amazon web services: s3, ec2, sqs, other web services companies and developers aPIs utility computing fees fulfi llment it infrastruc- ture & software development & maintenance it infrastruc- ture & software fulfi llment infrastructure technology & content fulfi llment (marketing) online retail shop consumer market amazon.com sales margins 7 8 9 10 11 12 14 13 E-commerce Infrastructure bmgen_final.indd 177 6/15/10 5:43 PM

178 storyteLLIng desIgn 178 Talk & Image Video Clip Role Play Text & Image Comic Strip description Tell the story of a protago- nist and his environment using one or several images Tell the story of a protago- nist and his environment using video to blur lines between reality and fi ction Have people play the roles of a story’s protagonists to make the scenario real and tangible Tell the story of a protago- nist and his environment using text and one or several images Use a series of cartoon images to tell the story of a protagonist in a tan- gible way when? Group or conference presentation Broadcast to large audi- ences or in-house use for decisions with important fi nancial implications Workshops where par- ticipants present newly developed business model ideas to each other Reports or broadcasts to large audiences Reports or broadcasts to large audiences time & cost Low Medium to high Low Low Low to medium Techniques Telling an engaging story can be done in different ways. Each technique has advantages and disadvantages and is better suited for certain situations and audiences. Choose a suitable technique after you understand who your audience will be and the context in which you will present. bmgen_final.indd 178 6/15/10 5:43 PM

179 aCtIVIty desIgn 179 Talk & Image Video Clip Role Play Text & Image Comic Strip description Tell the story of a protago- nist and his environment using one or several images Tell the story of a protago- nist and his environment using video to blur lines between reality and fi ction Have people play the roles of a story’s protagonists to make the scenario real and tangible Tell the story of a protago- nist and his environment using text and one or several images Use a series of cartoon images to tell the story of a protagonist in a tan- gible way when? Group or conference presentation Broadcast to large audi- ences or in-house use for decisions with important fi nancial implications Workshops where par- ticipants present newly developed business model ideas to each other Reports or broadcasts to large audiences Reports or broadcasts to large audiences time & cost Low Medium to high Low Low Low to medium SuperToast, Inc. Business Model Start practicing your business model storytelling skills with this simple, slightly silly exercise: The business model of SuperToast, Inc. outlined in the Canvas below. You can start anywhere you like: with Customers, the Value Proposition, Key Resources, or elsewhere. Invent your own story. The only constraints are the nine images that outline SuperToast Inc.’s business model. Try telling the story several times, starting from different Building Blocks. Each starting point will give the story a slightly different twist and emphasize different aspects of the model. By the way, this is a wonderful approach to introducing the Business Model Canvas to the “uninitiated” in a simple and engaging way—with a story. ©XPLANE 2008 constraints are the nine images that outline SuperToast Inc.’s business model. Try telling the story several times, starting from different Building Blocks. Each starting point will give the story a slightly different twist and emphasize different aspects By the way, this is a wonderful approach to introducing the Business Model Canvas to the “uninitiated” in a simple and constraints are the nine images that outline SuperToast Inc.’s business model. Try telling the story several times, starting from different Building Blocks. Each starting point will give the story a slightly different twist and emphasize different aspects By the way, this is a wonderful approach to introducing the Business Model Canvas to the “uninitiated” in a simple and bmgen_final.indd 179 6/15/10 5:43 PM

Technique_ No. 6 Scenarios bmgen_final.indd 180 6/15/10 5:44 PM

sCenarIos desIgn 181 181 F e b r u a r y, 2 0 0 0 Professor JeΩrey Huang and Muriel Waldvogel seem lost in thought as they ponder scale models of the Swisshouse, the new Swiss consulate facility to be built in Boston, Massachusetts . . . . . . Huang and Waldvogel were brought in to conceive the architectural design of the building, which, rather than issuing visas, will serve as a networking and knowledge exchange hub. The two are studying several scenarios of how people will use the Swisshouse, and have constructed both physical models and screenplay-like texts designed to make tangible the purpose of this unprecedented government facility. One scenario describes Nicolas, a brain surgeon who has just moved to Boston from Switzerland. He visits the Swisshouse to meet likeminded scientists and other members of the Swiss-American community. A second scenario tells the story of a Professor Smith, who uses the Swisshouse to present his MIT Media Lab research to Boston’s Swiss community and to academics at two Swiss universities, using a high-speed Internet connection. These scenarios, while simple, are the result of intensive research into roles the new type of consulate might play. The stories illustrate the Swiss government’s intentions and serve as think- ing tools to guide the building’s design. Ultimately, the new facility effectively accommodated the applications imagined and fulfi lled its objectives. Today, almost a decade after its conception, the Swisshouse enjoys an outstanding reputa- tion for helping build stronger international ties in greater Boston’s science and technology communities. Under the banner of the Swiss Knowledge Network, or swissnex, the Swisshouse has inspired “colleague” facilities in Bangalore, San Francisco, Shanghai, and Singapore. F e b r u a r y, 2 0 0 0 Professor JeΩrey Huang and Muriel Waldvogel seem lost in thought as they ponder scale models of the Swisshouse, the new Swiss consulate facility to be built in Boston, Massachusetts . . . bmgen_final.indd 181 6/15/10 5:44 PM

sCenarIos desIgn 182 sCenarIos 182 Scenarios can be useful in guiding the design of new business models or innovating around existing models. Like visual thinking (p. 146), prototyping (p. 160), and storytelling (p. 170), scenarios render the abstract tangible. For our purposes, their primary function is to inform the business model development process by making the design context specifi c and detailed. Here we discuss two types of scenarios. The fi rst describes differ- ent customer settings: how products or services are used, what kinds of customers use them, or customer concerns, desires, and objectives. Such scenarios build on customer insights (p. 126), but go a step further by incorporating knowledge about custom- ers into a set of distinct, concrete images. By describing a specifi c situation, a customer scenario makes customer insights tangible. A second type of scenario describes future environments in which a business model might compete. The goal here is not to predict the future, but rather to imagine possible futures in concrete detail. This exercise helps innova- tors refl ect on the most appropriate business model for each of several future environ- ments. The strategy literature discusses this practice in detail under the topic of “scenario planning.” Applying scenario planning techniques to business model innovation forces refl ection on how a model might have to evolve under certain conditions. This sharpens understanding of the model, and of potentially necessary adaptations. Most important, it helps us prepare for the future. Scenario-Guided Business Model Design — bmgen_final.indd 182 6/15/10 5:44 PM

183 sCenarIos desIgn 183 informed design make tangible Directions bmgen_final.indd 183 6/15/10 5:44 PM

184 sCenarIos desIgn 184 Explore Ideas the wine farmer Alexander inherited vineyards from his father, who in turn inherited them from Alexander’s grandfather, who emigrated from Switzerland to California to grow wine. Carrying on this family history is hard work, but Alexan- der enjoys adding small innovations to his family’s long wine-growing tradition. His latest discovery is a simple land management application that now resides on his mobile phone. Though not aimed at vintners, it was designed in such a way that Alexander was easily able to customize it for his own particular needs. The application integrates with his task list, which means he now has a GPS-based to-do list that reminds him when and where to check soil or grape quality. Now he’s pondering how to share the application with all of his managers. After all, the tool makes sense only if everyone on the management team updates the soil and grape quality database. the tourists Dale and Rose are traveling to Paris for an extended weekend. They are excited because they haven’t visited Europe since their honeymoon 25 years ago. The couple organized this mini-escape from everyday work and family life just two weeks before departure, leaving their three kids with parents back in Portland. Lacking time and energy to plan the trip in detail, they decided to “wing it.” As a consequence, they were intrigued to read an article in the infl ight magazine about a new GPS- based tourist service that uses mobile phones. Dale and Rose, both technology fans, rented the recommended handset upon arrival at Charles de Gaulle airport. Now they’re happily strolling around Paris on a customized tour proposed by the compact device—all without having consulted a single traditional tourist guide. They par- ticularly appreciate the built-in audio guide that suggests various story and background information options as they approach particular sites. On the return fl ight, Dale and Rose muse about relocating to Paris after retiring. Laugh- ing to themselves, they wonder whether the handy device would be enough to help them adapt to French culture. Customer scenarios guide us during business model design. They help us address issues such as which Channels are most appropriate, which relationships would be best to establish, and which problem solutions customers would be most willing to pay for. Once we’ve generated scenarios for different Customer Segments, we can ask ourselves whether a single business model is suffi cient to serve them all—or if we need to adapt the model to each segment. Here are three different scenarios describing loca- tion-based services that make use of Global Positioning Systems (GPS). They inform the business model design, but are deliberately left open to allow for specifi c ques- tions around the Value Proposition, Distribution Chan- nels, Customer Relationships, and Revenue Streams. The scenarios are written from the standpoint of a mobile telephone service operator working to develop innovative new business models. the home delivery service Tom has always dreamed of running his own small busi- ness. He knew it would be diffi cult, but earning a living by living his passion was defi nitely worth working more and earning less. Tom is a fi lm buff whose knowledge of movies is encyclopedic, and that’s what customers of his home- delivery DVD movie service appreciate. They can query him about actors, production techniques, and just about anything else fi lm-related before ordering movies for delivery to their doorsteps. Given the formidable online competition, it’s hardly an easy business. But Tom’s been able to boost his productivity and improve customer service with a new GPS-based delivery planner acquired from his mobile phone operator. For a small fee he equipped his phone with software that easily integrated with his Customer Relationship management program. This software won back much of Tom’s time by helping him better plan delivery routes and avoid traffi c. It even integrated with the cell phones used by two aides who help out on week- ends when demand for his service peaks. Tom knows his little business will never make him rich, but wouldn’t trade his situation for any corporate job. bmgen_final.indd 184 6/15/10 5:44 PM

185 sCenarIos desIgn 185 VP CR CH CS KP KA KR R$ C$ the tourists • Should the service be based on a proprietary device or on an application that can be downloaded to customer handsets? • Could airlines serve as Channel partners to distribute the service/device? • Which prospective content partners would be interested in being part of the service? • Which Value Propositions would customers be most willing to pay for? the home delivery service • Is the value added suffi cient to motivate delivery services to pay monthly fees? • Through which Channels could such Customer Segments most easily be reached? • With what other devices and/or software would this service need to be integrated? the wine farmer • Is the value added suffi cient to motivate a landowner to pay a monthly service fee? • Through which Channels could such Customer Segments most easily be reached? • With what other devices and/or software would this service need to be integrated? Could we create resource, activity, or Channel synergies by simultaneously serving all three Customer Segments? questions regarding the business model Could one model serve all three Customer Segments? Does each segment need a separate, specifi c Value Proposition? Should we serve one or more Customer Segments at low or no cost in order to attract other, high-value customers? KR CH KA CS CR CS CS R$ ( bmgen_final.indd 185 6/15/10 5:44 PM

186 sCenarIos desIgn tion is driven in part by pharmacogenomics, in part by advances in diagnostics, and in part by renewed cost- consciousness amid growing awareness that prevention is less expensive than hospitalization and treatment. These two drivers suggest trends that may or may not materialize and thus provide four scenarios illustrated in the fi gure opposite. These are: • business as usual: Personal medicine fails to materialize despite its technological feasibility (e.g. for privacy reasons, etc.) and treatment remains the core revenue generator. • my.medicine: Personal medicine materializes, but treatment remains the core revenue generator. • the healthy patient: The shift toward preventive medicine continues, but personal medicine remains a fad despite technological feasibility. • reinventing pharma: Personal and preventive medicine comprise the new growth areas of the drug industry. Future Scenarios The scenario is another thinking tool that helps us refl ect on business models of the future. Scenarios kick-start our creativity by providing concrete future contexts for which we can invent appropriate business models. This is usually easier and more productive than free brain- storming about possible future business models. It does require, however, developing several scenarios, which can be costly depending on their depth and realism. One sector under strong pressure to devise innovative new business models is the pharmaceutical industry. There are a number of reasons for this. Major player research productivity has declined in recent years, and these companies face enormous challenges discovering and marketing new blockbuster drugs—traditionally the core of their businesses. At the same time, patents on many of their cash cow drugs are expiring. This means revenues from those drugs are likely to be lost to generic drug manufacturers. This combination of empty product pipelines and evaporating revenue are just two head- aches plaguing incumbent pharmaceutical makers. In this turbulent context, combining business model brainstorming with the development of a set of future scenarios can be a powerful exercise. The scenarios help trigger out-of-the-box thinking, which is not always easy when trying to develop innovative business models. Here’s an overview of how such an exercise might be conducted. First, we must devise a set of scenarios that paint pictures of the future of the pharmaceutical industry. This is best left to scenario planning specialists equipped with the right tools and methodology. To illustrate, we developed four bare bones scenarios based on two crite- ria that may shape the evolution of the pharma industry over the next decade. There are, of course, several other drivers and many different scenarios that could be crafted based on deeper research into the industry. The two drivers we’ve selected are (1) the emergence of personalized medicine and (2) the shift from treatment toward prevention. The former is based on advances in pharmacogenomics, the science of identifying underlying causes of diseases based on a person’s DNA structure. Someday, this may result in completely personalized treatment, using customized drugs based on a person’s genetic structure. The shift from treatment to preven- 186 bmgen_final.indd 186 6/15/10 5:44 PM

187 sCenarIos desIgn 187 Pharma Business Models of the Future A) Business as Usual • How will our business model look in the future if these two drivers don’t change? B) My.medicine • What kinds of relationships will we have to establish with patients? • Which Distribution Channels are most appropriate for personalized medicine? • Which resources and activities, such as bioinformatics and gene sequencing, do we need to develop? C) The Healthy Patient: • What kind of Customer Relationship does effective preventive medicine require? • Who are the main partners we should involve in developing our business model for preventive medicine? • What does the shift toward preventive medicine imply about the relationship between doctors and our salespeople? D) Reinventing pharma: • What does our Value Proposition look like in this new landscape? • What roles will Customer Segments play under our new business model? • Should we develop relevant activities, such as bioinformatics and gene sequencing, in-house or through partnerships? prevention becomes the main revenue generator treatment remains the main revenune generator personalized medicine becomes a market mainstay personalized medicine remains a fad bmgen_final.indd 187 6/15/10 5:44 PM

188 sCenarIos desIgn Scenario D: Reinventing Pharma VP CR CH CS KP KA KR R$ C$ CR CH KA KR CS The landscape of the pharmaceutical industry has completely changed. Pharmacogenomic research has fulfi lled its promise and is now a core part of the indus- try. Personalized drugs tailored to individual genetic profi les account for a large portion of industry revenues. All this has increased the importance of prevention—and is partially replacing treatment, thanks to substantially improved diagnostic tools and a better understanding of the links between diseases and individual genetic profi les. These two trends—the rise of personalized drugs and the increasing importance of prevention—have completely transformed the traditional pharmaceutical manufacturing business model. The twin trends have had a dramatic impact on pharma’s Key Resources and Activities. They’ve transformed the way drug makers approach customers and provoked substantial changes in how revenue is generated. The new pharma landscape has taken a heavy toll on incumbents. A number were unable to adapt quickly enough and disappeared or were acquired by more agile players. At the same time, upstarts with innovative business models were able to acquire signifi cant market share. Some were themselves acquired and integrated into the operations of larger but less nimble companies. What are the attributes of a competitive Value Proposition under the new landscape? What new Key Resources and Key Activities will pro- vide a competitive advan- tage when personalized drugs and prevention are the industry’s main focus? How will revenues be generated when the focus is on personalized drugs and prevention? How will the Cost Structure of a pharmaceutical compa- ny’s business model change under this new landscape? Which partnerships will maximize the effectiveness of a drug company’s new business model? What roles will Customers and Customer Relation- ships play when personal- ized drugs are an industry mainstay? KP VP R$ 188 bmgen_final.indd 188 6/15/10 5:44 PM

189 aCtIVIty desIgn 189 Future Scenarios and new Business Models 1 develop a set of future scenarios based on two or more main criteria. 2 describe each scenario with a story that outlines the main elements of the scenario 3 workshop develop one or more appropriate business models for each scenario The goal of combining scenarios with business model innovation efforts is to help your organization prepare for the future. This process engenders meaning- ful discussion about a diffi cult topic, because it forces participants to project themselves into concrete “futures” underpinned by hard (though assumed) facts. When participants describe their business models they must be able to make a clear case for their choices within the context of the specifi c scenario. Scenarios should be developed before the business model workshop begins. The sophistication of the “screenplays” will vary depending on your budget. Keep in mind that once you develop scenarios, they may be usable for other purposes as well. Even simple scenarios help jumpstart creativity and project participants into the future. Ideally you should develop between two and four different scenarios based on two or more criteria in order to run a good business model scenario workshop. Each scenario should be titled and described with a short, specifi c narrative outlining the main elements. Begin the workshop by asking participants to review the scenarios, then develop an appropriate business model for each. If your objective is to maximize a group’s understanding of all the potential futures, you might want everyone to participate in a single group and let them collectively develop different business models for each scenario. If you are more interested in generating a set of very diverse future business models, you might decide to organize participants into different groups that work in parallel on separate solutions for the various scenarios. bmgen_final.indd 189 6/15/10 5:44 PM

190 desIgn Further readIngs Design Attitude Managing as Designing by Richard Boland Jr. and Fred Collopy (Stanford Business Books, 2004) A Whole New Mind: Why Right-Brainers Will Rule the Future by Daniel H. Pink (Riverhead Trade, 2006) The Ten Faces of Innovation: Strategies for Heightening Creativity by Tom Kelley (Profi le Business, 2008) Customer Insights Sketching User Experiences: Getting the Design Right and the Right Design by Bill Buxton (Elsevier, 2007) Designing for the Digital Age: How to Create Human-Centered Products and Services by Kim Goodwin (John Wiley & Sons, Inc. 2009) Ideation The Art of Innovation: Lessons in Creativity from IDEO, America's Leading Design Firm by Tom Kelley, Jonathan Littman, and Tom Peters (Broadway Business, 2001) IdeaSpotting: How to Find Your Next Great Idea by Sam Harrison (How Books, 2006) Visual Thinking The Back of the Napkin: Solving Problems and Selling Ideas with Pictures by Dan Roam (Portfolio Hardcover, 2008) Brain Rules: 12 Principles for Surviving and Thriving at Work, Home, and School by John Medina (Pear Press, 2009) (pp. 221–240) Prototyping Serious Play: How the World's Best Companies Simulate to Innovate by Michael Schrage (Harvard Business Press, 1999) Designing Interactions by Bill Moggridge (MIT Press, 2007) (ch. 10) Storytelling The Leader's Guide to Storytelling: Mastering the Art and Discipline of Business Narrative by Stephen Denning (Jossey-Bass, 2005) Made to Stick: Why Some Ideas Survive and Others Die by Chip Heath and Dan Heath (Random House, 2007) Scenarios The Art of the Long View: Planning for the Future in an Uncertain World by Peter Schwartz (Currency Doubleday, 1996) Using Trends and Scenarios as Tools for Strategy Development by Ulf Pillkahn (Publicis Corporate Publishing, 2008) Further Reading on Design and Business 190 bmgen_final.indd 190 6/15/10 5:44 PM

191 bmgen_final.indd 191 6/15/10 5:44 PM

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Do you have the guts to start from scratch? bmgen_final.indd 193 6/15/10 5:44 PM

In my work with non-profit organiza- tions, the biggest obstacles to business model innovation are 1. inability to understand the existing business model, 2. lack of a language to talk about business model innovation, and 3. counterproductive constraints on imagining the design of new business models. Jeff De Cagna, United States The management of an SME (wood manufacturing industry-WMI) did not begin changing its business model until the bank no longer wanted to give them credit. The biggest obstacle to business model innovation (in the WMI case and likely every case) is the people who resist any changes until problems appear and need corrective actions. Danilo Tic, Slovenia Ev E ry o NE L ov ES INN ov A t I o N u N t IL I t A ff E ct S th E m. The biggest obstacle to business model innovation is not technology: it is we humans and the institutions we live in. Both are stubbornly resistant to experimentation and change. Saul Kaplan, United States I have found that the management and key employees in many SME companies lack a common framework and language for discussing business model innovation. They do not have the theoretical background, but they are essential to the process because they are the ones who know the business. Michael N. Wilkens, Denmark METRICS OF SUCCESS: They can direct the scope and ambition of behavior. At best they can allow for the agility that brings truly disruptive innovation; at worst they reduce vision to near term iterative cycles of evolution that fail to take opportunity from changing environments. Nicky Smyth, U.K. Fear to take risks. As a CEO you need courage to take a business model innovation decision. In 2005, Dutch telecom provider KP n decided to migr ate proactively to IP and thus to cannibalize its traditional business. KP n is now int ernationally recognized as an outperformer in the telco industry. Kees Groeneveld, Netherlands In my experience with a large archive, the biggest hurdle was to make them understand that even an archive has a business model. We overcame this by starting a small project and showed them this would affect their current model. Harry Verwayen, Netherlands GET EVERYBODY in V ol V ed and keep up the speed of change. For our disruptive meeting concept Seats- 2meet.com we trained the staff almost daily for a period of four months just on communicating this new business model to all stakeholders. Ronald van Den Hoff, Netherlands 1. Organizational antibodies that attack a project as resources drawn from their area conflict with their business objectives. 2. Project management processes that can’t deal with risks/ uncertainties associated with bold ideas so leaders decline or claw ideas back to existing comfort zones. John Sutherland, Canada The biggest obstacle is a belief that models must contain every detail— experience shows that clients ask for a lot but settle for simplicity once they have insight into their business. David Edwards, Canada W HAT STA n DS I n YOUR WAY ? 194 bmgen_final.indd 194 6/15/10 5:44 PM

1. n ot knowing: What is a business model? What is business model innova- tion? 2. n ot able: How to innovate a business model? 3. n ot willing: Why should I innovate my business model? Is ther e a sense of urgency? 4. Combinations of the above. Ray Lai, Malaysia In my experience, the biggest obstacle is failure to change the thinking process from the traditional linear way to holistic and systemic. Entrepreneurs need to make a concerted effort to develop the capability to envi- sion the model as a system whose parts interact with each other and affect each other in a holistic and non-linear manner. Jeaninne Horowitz Gassol, Spain As an Internet marketer for 15 years I’ve seen new business models live and die. The key for the winners was that the major stakeholders completely understood and advanced the model. Stephanie Diamond, United States THE MENTAL MODELS of executives and the board. The lack of candor and fear of deviating from the status quo sets in groupthink. Executives are comfortable with exploit phase and not ‘explore’ phase, which is unknown and hence risky. Cheenu Srinivasan, Australia In my experience as an Internet entrepreneur and investor, the biggest obstacles are lack of vision and bad governance. Without good vision and governance a company will miss the emerging industry paradigm and avoid reinventing the business model in time. Nicolas De Santis, U.K. Within large multinationals it is key to create cross-functional understanding and synergies. Business model innova- tion does not hold itself to the organiza- tional constraints that the people in it experience. For successful execution it is key to have all disciplines on board and interconnected! Bas van Oosterhout, Netherlands FUG: F EA r, u NCE r TAINT y & gr EED of the people vested in the current business model. . . Frontier Service Design, LLC, United States A lack of entrepreneurship in the organization. Innovation is about taking risks, wisely. If there is no room for creative insights or if people can’t think and act outside the boundaries of the existing model, don’t even try to innovate: you will fail. Ralf de Graaf, Netherlands On an organizational level, the biggest obstacle for a large, successful company is a reluctance to risk doing anything that may jeopardize their current model. On a leader/personal level, their very success was likely a product of the current business model... Jeffrey Murphy, United States “If it ain’t broke, don't fix it” thinking. Established companies stick to current ways of doing business until it is obvious that the customers want something else. Ola Dagberg, Sweden S tr ENG th OF LEADERSHIP can be an obstacle. Risk management and due diligence color the perceived purpose of many boards. Where innova- tion is assessed as a risk issue it's easy to relegate it to tokenism, especially within cultural institutions that tend not to have championing cultures. Here innovation often dies the death of a thousand cuts inflicted by entrenched critical business processes, instead of being placed front and center as the fuel for future strategy. Anne McCrossan, U.K. Oftentimes, companies design an innovative business model, but do a poor job of constructing a compensation structure that is properly aligned with the model and its objectives. Andrew Jenkins, Canada C urr ENT SUCCESS prevents companies from asking them- selves how their business model could be innovated. Organizational structures are not typically designed for new busi- ness models to emerge. Howard Brown, United States The companies that are the most successful in continuously improving the efficiency of their current business model often get blinded by “this is the way things are done in our business" and fail to see the emergence of innovative business models. Wouter van der Burg, Netherlands 195 bmgen_final.indd 195 6/15/10 5:44 PM

Strategy bmgen_final.indd 196 6/15/10 5:44 PM

Strategy bmgen_final.indd 197 6/15/10 5:44 PM

“There’s not a single business model . . . Ther e are really a lot of opportunities and a lot of options and we just have to discover all of them.” Tim O’Reilly, CEO, O’Reilly bmgen_final.indd 198 6/15/10 5:44 PM

In previous sections we taught you a language for describing, discussing, and designing business models, described business model patterns, and explained techniques that facilitate the design and invention of new business models. This next section is about re-interpreting strategy through the lens of the Business Model Canvas. This will help you constructively question established business models and strategically examine the environment in which your own business model functions. The following pages explore four strategic areas: the Business Model Environment, Evaluating Business Models, a Business Model Perspective on Blue Ocean Strategies, and how to Manage Multiple Business Models within an enterprise. Strategy 200 Business Model Environment 212 Evaluating Business Models 226 Business Model Perspective on Blue Ocean Strategy 232 Managing Multiple Business Models bmgen_final.indd 199 6/15/10 5:44 PM

200 business model environment: context, design drivers, and constraints Business models are designed and executed in specific environments. Developing a good understanding of your organization’s environment helps you conceive stronger, more competitive business models. Continuous environmental scanning is more important than ever because of the growing complexity of the economic landscape (e.g. net- worked business models), greater uncertainty (e.g. technology innovations) and severe market disruptions (e.g. economic turmoil, disruptive new Value Propositions). Understanding changes in the environment helps you adapt your model more effectively to shifting external forces. You may fi nd it helpful to conceive of the external environment as a sort of “design space.” By this we mean thinking of it as a context in which to conceive or adapt your business model, taking into account a number of design drivers (e.g. new customer needs, new technologies, etc.) and design constraints (e.g. regulatory trends, dominant competitors, etc.). This environment should in no way limit your creativity or predefi ne your business model. It should, however, infl uence your design choices and help you make more informed decisions. With a breakthrough business model, you may even become a shaper and transformer of this environment, and set new standards for your industry. To get a better grasp on your business model “design space,” we suggest roughly mapping four main areas of your environment. These are (1) market forces, (2) industry forces, (3) key trends, and (4) macroeconomic forces. If you’d like to deepen your analysis of the landscape beyond the simple mapping we propose, each of these four areas is backed by a large body of literature and specifi c analytical tools. In the following pages, we describe the key external forces that infl uence business models and categorize them using the four areas just mentioned. The pharmaceutical industry, introduced in the previous chapter, is used to illustrate each external force. The pharma sector is likely to undergo substan- tial transformation in coming years, though it is unclear how the changes will play out. Will biotechnology companies, which are currently copying the pharmaceutical sector’s blockbuster drug model, come up with new, disrup- tive business models? Will technological change lead to transformation? Will consumers and market demand force changes? We strongly advocate mapping your own business model environment and refl ecting on what trends mean for the future of your enterprise. A good understanding of the environment will allow you to better evaluate the differ- ent directions in which your business model might evolve. You may also want to consider creating scenarios of future business model environments (see p. 186). This can be a valuable tool for jumpstarting business model innovation work or simply preparing your organization for the future. bmgen_final.indd 200 6/15/10 5:44 PM

201 technology trends socioeconomic trends regulatory trends societal and cultural trends market issues market segments switching costs revenue attractiveness needs and demands technology trends socioeconomic trends regulatory trends societal and cultural trends market issues market segments switching costs revenue attractiveness needs and demands VP CR CH CS KP KA KR R$ C$ stakeholders suppliers and other value chain actors competitors (incumbents) new entrants (insurgents) substitute products and services key trends global market conditions economic infrastructure capital markets commodities and other resources market forces industry forces macro- economic forces — macroeconomics — —foresight — — competitive analysis — — market analysis — global market conditions global market conditions global market conditions capital markets capital markets capital markets capital markets economic infrastructure economic infrastructure commodities and other resources commodities and other resources commodities and other resources commodities and other resources regulatory trends regulatory trends technology trends technology trends KP KP societal and cultural trends societal and cultural trends societal and cultural trends societal and cultural trends socioeconomic trends socioeconomic trends suppliers and other value suppliers and other value suppliers and other value suppliers and other value chain actors chain actors stakeholders stakeholders stakeholders stakeholders competitors competitors (incumbents) (incumbents) new entrants new entrants new entrants new entrants new entrants (insurgents) (insurgents) substitute products substitute products KR KR CS CS switching costs switching costs switching costs switching costs revenue attractiveness revenue attractiveness market segments market segments market segments market segments needs and demands needs and demands market issues market issues bmgen_final.indd 201 6/15/10 5:44 PM

202 Main Qs Pharmaceutical Industry Landscape market issues Identifi es key issues driving and transforming your market from Customer and Offer perspectives What are the crucial issues affecting the customer landscape? Which shifts are underway? Where is the market heading? • Skyrocketing healthcare costs • Emphasis shifting from treatment to prevention • Treatments, diagnostics, devices, and support services are converging • Emerging markets becoming more important market segments Identifi es the major market segments, describes their attractiveness, and seeks to spot new segments What are the most important Customer Segments? Where is the biggest growth potential? Which segments are declining? Which peripheral segments deserve attention? • Doctors and healthcare providers • Governments/regulators • Distributors • Patients • Strong potential in emerging markets • U.S. remains the predominant global market needs and demands Outlines market needs and analyzes how well they are served What do customers need? Where are the biggest unsatisfi ed customer needs? What do customers really want to get done? Where is demand increasing? Declining? • Strong, with dispersed need for niche treatments • Need to manage exploding cost of health care • Large, unsatisfi ed health care needs in emerging markets and developing countries • Consumers are better informed switching costs Describes elements related to customers switching business to competitors What binds customers to a company and its offer? What switching costs prevent customers from defecting to competitors? Is it easy for customers to fi nd and purchase similar offers? How important is brand? • Monopoly on patent-protected drugs • Low switching costs for patent-expired drugs replaceable by generic versions • Growing amount of quality information available online • Deals with governments, large-scale healthcare providers increase switching costs revenue attractiveness Identifi es elements related to revenue attractiveness and pricing power What are customers really willing to pay for? Where can the largest margins be achieved? Can customers easily fi nd and purchase cheaper products and services? • High margins on patent-protected drugs • Low margins on generic drugs • Healthcare providers, governments enjoy growing infl uence over prices • Patients continue to have little infl uence over prices 202 market issues Identifi es key issues driving and transforming your market from Customer and Offer perspectives needs and demands Outlines market needs and analyzes how well they are served switching costs Describes elements related to customers switching business to competitors revenue attractiveness Outlines market needs and analyzes how well Outlines market needs and analyzes how well Outlines market needs and analyzes how well they are served they are served Describes elements related to customers switching Describes elements related to customers switching Describes elements related to customers switching Describes elements related to customers switching Describes elements related to customers switching business to competitors business to competitors attractiveness attractiveness attractiveness attractiveness Identifi es key issues driving and transforming your Identifi es key issues driving and transforming your Identifi es key issues driving and transforming your Identifi es key issues driving and transforming your market from Customer and Offer perspectives market from Customer and Offer perspectives market from Customer and Offer perspectives market from Customer and Offer perspectives — market analysis — market forces Identifi es the major market segments, describes their attractiveness, and seeks to spot new segments What are the most important Customer Segments? Where is the biggest growth potential? Which segments are declining? Which peripheral segments deserve attention? market segments Identifi es the major market segments, describes their attractiveness, and seeks to spot new segments Identifi es the major market segments, describes their Identifi es the major market segments, describes their attractiveness, and seeks to spot new segments attractiveness, and seeks to spot new segments attractiveness, and seeks to spot new segments attractiveness, and seeks to spot new segments bmgen_final.indd 202 6/15/10 5:44 PM

203 Main Qs Pharmaceutical Industry Landscape market issues Identifi es key issues driving and transforming your market from Customer and Offer perspectives What are the crucial issues affecting the customer landscape? Which shifts are underway? Where is the market heading? • Skyrocketing healthcare costs • Emphasis shifting from treatment to prevention • Treatments, diagnostics, devices, and support services are converging • Emerging markets becoming more important market segments Identifi es the major market segments, describes their attractiveness, and seeks to spot new segments What are the most important Customer Segments? Where is the biggest growth potential? Which segments are declining? Which peripheral segments deserve attention? • Doctors and healthcare providers • Governments/regulators • Distributors • Patients • Strong potential in emerging markets • U.S. remains the predominant global market needs and demands Outlines market needs and analyzes how well they are served What do customers need? Where are the biggest unsatisfi ed customer needs? What do customers really want to get done? Where is demand increasing? Declining? • Strong, with dispersed need for niche treatments • Need to manage exploding cost of health care • Large, unsatisfi ed health care needs in emerging markets and developing countries • Consumers are better informed switching costs Describes elements related to customers switching business to competitors What binds customers to a company and its offer? What switching costs prevent customers from defecting to competitors? Is it easy for customers to fi nd and purchase similar offers? How important is brand? • Monopoly on patent-protected drugs • Low switching costs for patent-expired drugs replaceable by generic versions • Growing amount of quality information available online • Deals with governments, large-scale healthcare providers increase switching costs revenue attractiveness Identifi es elements related to revenue attractiveness and pricing power What are customers really willing to pay for? Where can the largest margins be achieved? Can customers easily fi nd and purchase cheaper products and services? • High margins on patent-protected drugs • Low margins on generic drugs • Healthcare providers, governments enjoy growing infl uence over prices • Patients continue to have little infl uence over prices what new key resources do we need to develop or acquire in light of the ongoing shift from treatment to prevention? how can our value proposition address the issue of exploding health costs? what would a greater focus on emerging markets mean for the other building blocks in our model? what kind of new revenue opportunities might be created by the shift in emphasis from treatment to prevention? how can we main- tain earnings while addressing the public struggle to cope with skyrocketing health- care costs? what does the conver- gence of treatment, diagnostics, devices, and support services mean for our key resources and activities? VP CR CH CS KP KA KR R$ C$ • Doctors and healthcare providers • Governments/regulators • Distributors • Patients • Strong potential in emerging markets • U.S. remains the predominant global market bmgen_final.indd 203 6/15/10 5:44 PM

204 Main Qs Pharmaceutical Industry Landscape competitors (incumbents) Identifi es incumbent competitors and their relative strengths Who are our competitors? Who are the dominant players in our particular sector? What are their competitive advantages or disadvantages? Describe their main offers. Which Customer Segments are they focusing on? What is their Cost Structure? How much infl uence do they exert on our Customer Segments, Revenue Streams, and margins? • Several large and medium size players compete in pharma • Most players are struggling with empty product pipelines and low R&D productivity • Growing trend toward consolidation through mergers and acquisitions • Major players acquire biotech, specialty drug developers to fi ll product pipeline • Several players starting to build on open innovation processes new entrants (insurgents) Identifi es new, insurgent players and determines whether they compete with a business model different from yours Who are the new entrants in your market? How are they different? What competitive advantages or disadvantages do they have? Which barriers must they overcome? What are their Value Propositions? Which Customer Segments are they focused on? What is their Cost Structure? To what extent do they infl uence your Customer Segments, Revenue Streams, and margins? • Little disruption of the pharmaceutical industry over the last decade • Main new entrants are generic drug companies, particularly from India substitute products and services Describes potential substitutes for your offers—including those from other markets and industries Which products or services could replace ours? How much do they cost compared to ours? How easy it is for customers to switch to these substitutes? What business model traditions do these substitute products stem from (e.g. high-speed trains versus airplanes, mobile phones versus cameras, Skype versus long-distance telephone companies)? • To a certain extent, prevention represents a substitution for treatment • Patent-expired drugs replaced by low-cost generics suppliers and other value chain actors Describes the key value chain incumbents in your market and spots new, emerging players Who are the key players in your industry value chain? To what extent does your business model depend on other players? Are peripheral players emerging? Which are most profi table? • Increasing use of research contractors • Biotech fi rms and specialty drug developers as important new product generators • Doctors and healthcare providers • Insurance companies • Bioinformatics providers growing in importance • Laboratories stakeholders Specifi es which actors may infl uence your organization and business model Which stakeholders might infl uence your business model? How infl uential are shareholders? Workers? The government? Lobbyists? • Shareholder pressure forces drug companies to focus on short term (quarterly) fi nancial results • Governments/regulators have a strong stake in the actions of pharmaceutical companies because of their pivotal role in healthcare services • Lobbyists, social enterprise groups and/or foundations, particularly those pursuing agendas such as low-cost treatments for developing countries • Scientists, who represent the core talent of the drug manufacturing industry 204 (incumbents) new entrants (insurgents) Identifi es new, insurgent players and determines whether they compete with a business model different from yours substitute products and services Describes potential substitutes for your offers—including those from other markets and industries stakeholders they compete with a business model different from yours (incumbents) (incumbents) (incumbents) (incumbents) (incumbents) (incumbents) (incumbents) Identifi es new, insurgent players and determines whether Identifi es new, insurgent players and determines whether Identifi es new, insurgent players and determines whether Identifi es new, insurgent players and determines whether they compete with a business model different from yours they compete with a business model different from yours they compete with a business model different from yours they compete with a business model different from yours they compete with a business model different from yours they compete with a business model different from yours Describes potential substitutes for your offers—including Describes potential substitutes for your offers—including Describes potential substitutes for your offers—including Describes potential substitutes for your offers—including Describes potential substitutes for your offers—including those from other markets and industries those from other markets and industries those from other markets and industries those from other markets and industries those from other markets and industries those from other markets and industries those from other markets and industries — competitive analysis — industry forces Describes the key value chain incumbents in your market and spots new, emerging players Who are the key players in your industry value chain? To what extent does your business model depend on other players? Are peripheral players emerging? Which are most profi table? suppliers and other value chain actors Describes the key value chain incumbents in your market and spots new, emerging players Describes the key value chain incumbents in your market Describes the key value chain incumbents in your market and spots new, emerging players and spots new, emerging players and spots new, emerging players and spots new, emerging players bmgen_final.indd 204 6/15/10 5:44 PM

205 Main Qs Pharmaceutical Industry Landscape competitors (incumbents) Identifi es incumbent competitors and their relative strengths Who are our competitors? Who are the dominant players in our particular sector? What are their competitive advantages or disadvantages? Describe their main offers. Which Customer Segments are they focusing on? What is their Cost Structure? How much infl uence do they exert on our Customer Segments, Revenue Streams, and margins? • Several large and medium size players compete in pharma • Most players are struggling with empty product pipelines and low R&D productivity • Growing trend toward consolidation through mergers and acquisitions • Major players acquire biotech, specialty drug developers to fi ll product pipeline • Several players starting to build on open innovation processes new entrants (insurgents) Identifi es new, insurgent players and determines whether they compete with a business model different from yours Who are the new entrants in your market? How are they different? What competitive advantages or disadvantages do they have? Which barriers must they overcome? What are their Value Propositions? Which Customer Segments are they focused on? What is their Cost Structure? To what extent do they infl uence your Customer Segments, Revenue Streams, and margins? • Little disruption of the pharmaceutical industry over the last decade • Main new entrants are generic drug companies, particularly from India substitute products and services Describes potential substitutes for your offers—including those from other markets and industries Which products or services could replace ours? How much do they cost compared to ours? How easy it is for customers to switch to these substitutes? What business model traditions do these substitute products stem from (e.g. high-speed trains versus airplanes, mobile phones versus cameras, Skype versus long-distance telephone companies)? • To a certain extent, prevention represents a substitution for treatment • Patent-expired drugs replaced by low-cost generics suppliers and other value chain actors Describes the key value chain incumbents in your market and spots new, emerging players Who are the key players in your industry value chain? To what extent does your business model depend on other players? Are peripheral players emerging? Which are most profi table? • Increasing use of research contractors • Biotech fi rms and specialty drug developers as important new product generators • Doctors and healthcare providers • Insurance companies • Bioinformatics providers growing in importance • Laboratories stakeholders Specifi es which actors may infl uence your organization and business model Which stakeholders might infl uence your business model? How infl uential are shareholders? Workers? The government? Lobbyists? • Shareholder pressure forces drug companies to focus on short term (quarterly) fi nancial results • Governments/regulators have a strong stake in the actions of pharmaceutical companies because of their pivotal role in healthcare services • Lobbyists, social enterprise groups and/or foundations, particularly those pursuing agendas such as low-cost treatments for developing countries • Scientists, who represent the core talent of the drug manufacturing industry for which parts of the industry value chain should key partnerships be built as opposed to develop- ing key resources and activities in-house? must the value proposition change to accommodate shifts in the industry (e.g. the growing importance of biotech fi rms)? which part of the pharma industry offers the greatest earnings potential? which of the key resources emerging among new actors in the value chain need to be developed in-house (e.g. bioinformatics)? is it necessary to acquire smaller fi rms to fi ll product pipelines? could suppliers such as research contractors turn into competitors? VP CR CH CS KP KA KR R$ C$ • Increasing use of research contractors • Biotech fi rms and specialty drug developers as important new product generators • Doctors and healthcare providers • Insurance companies • Bioinformatics providers growing in importance • Laboratories bmgen_final.indd 205 6/15/10 5:44 PM

206 Main Qs Pharmaceutical Industry Landscape technology trends Identifi es technology trends that could threaten your business model—or enable it to evolve or improve What are the major technology trends both inside and outside your market? Which technologies represent important opportunities or disruptive threats? Which emerging technologies are peripheral customers adopting? • Emergence of pharmacogenomics, declining cost of gene sequencing, and the immenent rise of personalized medicine • Major advances in diagnostics • Use of pervasive computing and nanotechnology for the injection/delivery of drugs regulatory trends Describes regulations and regulatory trends that infl uence your business model Which regulatory trends infl uence your market? What rules may affect your business model? Which regulations and taxes affect customer demand? • Heterogeneous global regulatory landscape in the pharma- ceutical industry • Many countries prohibit drug companies from marketing directly to consumers • Regulatory agency pressure to publish data on unsuccessful clinical trials societal and cultural trends Identifi es major societal trends that may infl uence your business model Describe key societal trends. Which shifts in cultural or societal values affect your business model? Which trends might infl uence buyer behavior? • Generally unfavorable image of big drug makers • Growing social consciousness among consumers • Customers increasingly conscious of global warming, sustainability issues, prefer “green” purchases • Customers are better informed about drug maker activity in developing countries (e.g. HIV/AIDS drugs) socioeconomic trends Outlines major socioeconomic trends relevant to your business model What are the key demographic trends? How would you characterize income and wealth distribution in your market? How high are disposable incomes? Describe spending patterns in your market (e.g. housing, health- care, entertainment, etc.). What portion of the popula- tion lives in urban areas as opposed to rural settings? • Aging society in many mature markets • Good but costly healthcare infrastructure in mature markets • Growing middle class in emerging markets • Large, unsatisfi ed healthcare needs in developing countries 206 technology trends Identifi es technology trends that could threaten your business model—or enable it to evolve or improve societal and cultural trends Identifi es major societal trends that may infl uence your business model socioeconomic trends Outlines major socioeconomic trends relevant to your business model Identifi es major societal trends that may infl uence your Identifi es major societal trends that may infl uence your business model business model business model business model business model Outlines major socioeconomic trends relevant to your Outlines major socioeconomic trends relevant to your Outlines major socioeconomic trends relevant to your Outlines major socioeconomic trends relevant to your business model business model business model business model business model Identifi es technology trends that could threaten your Identifi es technology trends that could threaten your Identifi es technology trends that could threaten your Identifi es technology trends that could threaten your business model—or enable it to evolve or improve business model—or enable it to evolve or improve business model—or enable it to evolve or improve business model—or enable it to evolve or improve — foresight — key trends Describes regulations and regulatory trends that infl uence your business model Which regulatory trends infl uence your market? What rules may affect your business model? Which regulations and taxes affect customer demand? regulatory trends Describes regulations and regulatory trends that infl uence your business model Describes regulations and regulatory trends that infl uence Describes regulations and regulatory trends that infl uence Describes regulations and regulatory trends that infl uence Describes regulations and regulatory trends that infl uence your business model your business model your business model your business model bmgen_final.indd 206 6/15/10 5:44 PM

207 Main Qs Pharmaceutical Industry Landscape technology trends Identifi es technology trends that could threaten your business model—or enable it to evolve or improve What are the major technology trends both inside and outside your market? Which technologies represent important opportunities or disruptive threats? Which emerging technologies are peripheral customers adopting? • Emergence of pharmacogenomics, declining cost of gene sequencing, and the immenent rise of personalized medicine • Major advances in diagnostics • Use of pervasive computing and nanotechnology for the injection/delivery of drugs regulatory trends Describes regulations and regulatory trends that infl uence your business model Which regulatory trends infl uence your market? What rules may affect your business model? Which regulations and taxes affect customer demand? • Heterogeneous global regulatory landscape in the pharma- ceutical industry • Many countries prohibit drug companies from marketing directly to consumers • Regulatory agency pressure to publish data on unsuccessful clinical trials societal and cultural trends Identifi es major societal trends that may infl uence your business model Describe key societal trends. Which shifts in cultural or societal values affect your business model? Which trends might infl uence buyer behavior? • Generally unfavorable image of big drug makers • Growing social consciousness among consumers • Customers increasingly conscious of global warming, sustainability issues, prefer “green” purchases • Customers are better informed about drug maker activity in developing countries (e.g. HIV/AIDS drugs) socioeconomic trends Outlines major socioeconomic trends relevant to your business model What are the key demographic trends? How would you characterize income and wealth distribution in your market? How high are disposable incomes? Describe spending patterns in your market (e.g. housing, health- care, entertainment, etc.). What portion of the popula- tion lives in urban areas as opposed to rural settings? • Aging society in many mature markets • Good but costly healthcare infrastructure in mature markets • Growing middle class in emerging markets • Large, unsatisfi ed healthcare needs in developing countries which new key resources and activities will prove advantageous when personalized drugs and diagnostics are widely used? which technologies are likely to improve value proposition competitiveness in the evolving pharma landscape? how are customers reacting to new tech- nological develop- ments in the pharma- ceutical industry? do advances in pharmacogenomics, diagnostics, pervasive computing, or nano- technology offer new revenue opportunities? how will technology such as pharmacoge- nomics, pervasive computing, and nano- technology affect the cost structure of a drug maker’s business model? which partnerships will become essential when pharmacoge- nomics is an integral part of the industry landscape? VP CR CH CS KP KA KR R$ C$ • Heterogeneous global regulatory landscape in the pharma- ceutical industry • Many countries prohibit drug companies from marketing directly to consumers • Regulatory agency pressure to publish data on unsuccessful clinical trials bmgen_final.indd 207 6/15/10 5:44 PM

208 Main Qs Pharmaceutical Industry Landscape global market conditions Outlines current overall conditions from a macroeconomic perspective Is the economy in a boom or bust phase? Describe general market sentiment. What is the GDP growth rate? How high is the unemployment rate? • Global recession • Negative GDP growth in Europe, Japan, and the United States • Slower growth rates in China and India • Uncertainty as to when recovery will occur capital markets Describes current capital market conditions as they relate to your capital needs What is the state of the capital markets? How easy is it to obtain funding in your particular market? Is seed capital, venture capital, public funding, market capital, or credit readily available? How costly is it to procure funds? • Tight capital markets • Credit availability restricted due to banking crisis • Little venture capital available • Risk capital availability extremely limited commodities and other resources Highlights current prices and price trends for resources required for your business model Describe the current status of markets for commodi- ties and other resources essential to your business (e.g. oil prices and labor costs). How easy is it to obtain the resources needed to execute your business model (e.g. attract prime talent)? How costly are they? Where are prices headed? • Fierce “battles” for prime talent • Employees seek to join pharmaceutical companies with positive public image • Commodity prices rising from recent lows • Demand for natural resources likely to pick up with economic recovery • Oil prices continue to fl uctuate economic infrastructure Describes the economic infrastructure of the market in which your business operates How good is the (public) infrastructure in your market? How would you characterize transportation, trade, school quality, and access to suppliers and customers? How high are individual and corporate taxes? How good are public services for organizations? How would you rate the quality of life? • Specifi c to the region in which a company operates 208 global market conditions Outlines current overall conditions from a macroeconomic perspective capital markets Describes current capital market conditions as they relate to your capital needs commodities and other resources Highlights current prices and price trends for resources required for your business model required for your business model required for your business model Outlines current overall conditions from a Outlines current overall conditions from a Outlines current overall conditions from a Outlines current overall conditions from a Outlines current overall conditions from a Outlines current overall conditions from a macroeconomic perspective macroeconomic perspective macroeconomic perspective macroeconomic perspective Describes current capital market conditions as they Describes current capital market conditions as they relate to your capital needs relate to your capital needs relate to your capital needs relate to your capital needs Highlights current prices and price trends for resources Highlights current prices and price trends for resources Highlights current prices and price trends for resources Highlights current prices and price trends for resources required for your business model required for your business model — macroeconomics — macro- economic forces Describes the economic infrastructure of the market in which your business operates How good is the (public) infrastructure in your market? How would you characterize transportation, trade, school quality, and access to suppliers and customers? How high are individual and corporate taxes? How good are public services for organizations? How would you rate the quality of life? economic infrastructure Describes the economic infrastructure of the market in which your business operates in which your business operates Describes the economic infrastructure of the market Describes the economic infrastructure of the market Describes the economic infrastructure of the market Describes the economic infrastructure of the market in which your business operates in which your business operates in which your business operates bmgen_final.indd 208 6/15/10 5:44 PM

209 Main Qs Pharmaceutical Industry Landscape global market conditions Outlines current overall conditions from a macroeconomic perspective Is the economy in a boom or bust phase? Describe general market sentiment. What is the GDP growth rate? How high is the unemployment rate? • Global recession • Negative GDP growth in Europe, Japan, and the United States • Slower growth rates in China and India • Uncertainty as to when recovery will occur capital markets Describes current capital market conditions as they relate to your capital needs What is the state of the capital markets? How easy is it to obtain funding in your particular market? Is seed capital, venture capital, public funding, market capital, or credit readily available? How costly is it to procure funds? • Tight capital markets • Credit availability restricted due to banking crisis • Little venture capital available • Risk capital availability extremely limited commodities and other resources Highlights current prices and price trends for resources required for your business model Describe the current status of markets for commodi- ties and other resources essential to your business (e.g. oil prices and labor costs). How easy is it to obtain the resources needed to execute your business model (e.g. attract prime talent)? How costly are they? Where are prices headed? • Fierce “battles” for prime talent • Employees seek to join pharmaceutical companies with positive public image • Commodity prices rising from recent lows • Demand for natural resources likely to pick up with economic recovery • Oil prices continue to fl uctuate economic infrastructure Describes the economic infrastructure of the market in which your business operates How good is the (public) infrastructure in your market? How would you characterize transportation, trade, school quality, and access to suppliers and customers? How high are individual and corporate taxes? How good are public services for organizations? How would you rate the quality of life? • Specifi c to the region in which a company operates does the economic infrastructure adequately support key activities? does the infrastruc- ture and trade envi- ronment adequately support channels? how will local and national taxes affect the business model? do universities and other educational institutions furnish a suffi cient amount of qualifi ed talent? VP CR CH CS KP KA KR R$ C$ • Specifi c to the region in which a company operates bmgen_final.indd 209 6/15/10 5:44 PM

210 how should your business model evolve in light of a changing environment? A competitive business model that makes sense in today’s environment might be outdated or even obsolete tomorrow. We all have to improve our understanding of a model’s environment and how it might evolve. Of course we can’t be certain about the future, because of the complexities, uncertainties, and potential disruptions inherent in the evolving business environment. We can, however, develop a number of hypotheses about the future to serve as guidelines for designing tomorrow’s business models. Assumptions about how market forces, industry forces, key trends, and macroeconomic forces unfold give us the “design space” to develop potential business model options or prototypes (see p. 160) for the future. The role of business model scenarios (see p. 186) in forecasting should also be evi- dent by now. Painting pictures of the future makes it much easier to generate potential business models. Depending on your own criteria (e.g. acceptable level of risk, growth potential sought, etc.) you may then select one option over another. bmgen_final.indd 210 6/15/10 5:44 PM

211 driving trends market forces industry forces macro- economic forces forces economic forces forces VPCR CH CS KPKA KR R$ C$ R$ VP CR CS KA KP KR C$ KP CS KP KP KP KP KR KR CS CS CS CS industry forces macro- economic forces Time Options driving trends market forces — present environment — — projected environment — bmgen_final.indd 211 6/23/10 1:15 AM

212 evaluating business models Like seeing the doctor for an annual exam, regularly assessing a business model is an important management activity that allows an organization to evaluate the health of its market position and adapt accord- ingly. This checkup may become the basis for incremental business model improvements, or it might trigger a serious intervention in the form of a business model innovation initiative. As the automobile, newspaper, and music industries have shown, failing to conduct regular checkups may prevent early detection of business model problems, and may even lead to a company’s demise. In the previous chapter on the business models environment (see p. 200), we evaluated the infl uence of external forces. In this chapter, we adopt the point of view of an existing business model and analyze external forces from the inside out. The following pages outline two types of assessment. First, we provide a big picture assessment of Amazon.com’s online retailing model circa 2005 and describe how the company has built strategically on that model since. Second, we provide a set of checklists for assessing your business model’s strengths, weaknesses, opportunities, and threats (SWOT) and to help you evaluate each Building Block. Keep in mind that assessing a business model from a big picture perspective and assessing it from a Building Block perspective are complementary activities. A weakness in one Building Block, for example, may have consequences for one or several other Building Blocks—or for the entire model. Business model assessment, therefore, alternates between individual elements and overall integrity. bmgen_final.indd 212 6/15/10 5:44 PM

213 — positive — — negative — — internal — — external — bmgen_final.indd 213 6/15/10 5:44 PM

214 logistics partners affi liates fulfi llment it infrastructure & software development & maintenance online retail shop customized online profi les & recommendations global consumer market (north america, europe, asia) it infrastructure & software global fulfi llment infrastructure amazon.com (& overseas sites) affi liates marketing technology & content fulfi llment sales margin VP CR CH CS KP KA KR R$ C$ Amazon.com provides a powerful illustration of implementing business model innova- tion based on an analysis of strengths and weaknesses. We’ve already described why it made sense for Amazon.com to launch a series of new service offers under the moniker Amazon Web Services (see p. 176). Now let’s examine how those new offers launched in 2006 related to Amazon.com’s strengths and weaknesses the previous year. Assessing the strengths and weaknesses of Amazon.com’s business model circa 2005 reveals an enormous strength and a dangerous weakness. Amazon.com’s strength was its extraordinary customer reach and huge selection of products for sale. The company’s main costs lay in the activities in which it excelled, namely fulfi llment ($745 million, or 46.3 percent of operating expenses) and technology and content ($451 million, or 28.1 percent of operating expenses). The key weakness of Amazon. com’s business model was weak margins, the result of selling primarily low-value, low- margin products such as books, music CDs, and DVDs. As an online retailer, Amazon. com recorded sales of $8.5 billion in 2005 with a net margin of only 4.2 percent. At the time, Google enjoyed a net margin of 23.9 percent on sales of $6.1 billion while eBay achieved a net margin of 23.7 percent on sales of $4.6 billion. Looking to the future, founder Jeff Bezos and his management team took a two- pronged approach to building on Amazon.com’s business model. First, they aimed to grow the online retail business through a continuing focus on customer satisfaction and effi cient fulfi llment. Second, they began growth initiatives in new areas. Manage- ment was clear on the requirements for these new initiatives. They had to (1) target underserved markets, (2) be scalable with potential for signifi cant growth, and (3) leverage existing Amazon.com capabilities to bring strong customer-facing differentia- tion to that marketplace. big picture assessment: amazon.com relatively low value items relatively capital sensitive low margins cost effi ciency economies of scope large reach fulfi llment excellency IT infra excellency large product range Amazon.com’s main strengths and weaknesses in 2005: bmgen_final.indd 214 6/15/10 5:44 PM

215 logistics partners affi liates fulfi llment it infrastructure & software development & maintenance online retail shop fulfi llment by amazon amazon web services: s3, ec2, sqs, other web services customized online profi les & recommendations global consumer market (north america, europe, asia) developers & companies individuals & companies that need fulfi llment it infrastructure & software global fulfi llment infrastructure amazon.com (& countries) affi liates aPIs marketing technology & content fulfi llment sales margin utility computing fees fulfi llment handling fees VP CR CH CS KP KA KR R$ C$ In 2006 Amazon.com focused on two new initiatives that satisfi ed the above require- ments and which promised to powerfully extend the existing business model. The fi rst was a service called Fulfi llment by Amazon, and the second was a series of new Amazon Web Services. Both initiatives built on the company’s core strengths—order fulfi llment and Web IT expertise—and both addressed underserved markets. What’s more, both initiatives promised higher margins than the company’s core online retailing business. Fulfi llment by Amazon allows individuals and companies to use Amazon.com’s fulfi llment infrastructure for their own businesses in exchange for a fee. Amazon.com stores a seller’s inventory in its warehouses, then picks, packs, and ships on the seller’s behalf when an order is received. Sellers can sell through Amazon.com, their own Chan- nels, or a combination of both. Amazon Web Services targets software developers and any party requiring high- performance server capability by offering on-demand storage and computing capacity. Amazon Simple Storage Systems (Amazon S3) allows developers to use Amazon.com’s massive data center infrastructure for their own data storage needs. Similarly, Amazon Elastic Compute Cloud (EC2), allows developers to “rent” servers on which to run their own applications. Thanks to its deep expertise and unprecedented experience scaling an online shopping site, the company can offer both at cutthroat prices, yet still earn higher margins compared to its online retail operations. Investors and investment analysts were initially skeptical about these new long-term growth strategies. Unconvinced that the diversifi cation made sense, they contested Amazon.com’s investments in even more IT infrastructure. Eventually, Amazon.com overcame their skepticism. Nonetheless, the true returns from this long-term strategy may not be known for several more years—and after even more investment in the new business model. Opportunities Amazon.com explored in 2006: synergies in the use of activities and resources for new offers two totally new customer segments which are underserved as to the proposed offer new revenue streams with higher margins than retail bmgen_final.indd 215 6/15/10 5:44 PM

216 Assessing your business model’s overall integrity is crucial, but looking at its components in detail can also reveal interesting paths to innovation and renewal. An effective way to do this is to combine classic strengths, weak- nesses, opportunities, and threats (SWOT) analysis with the Business Model Canvas. SWOT analysis provides four perspectives from which to assess the elements of a business model, while the Business Model Canvas provides the focus necessary for a structured discussion. SWOT analysis is familiar to many businesspeople. It is used to analyze an organization’s strengths and weaknesses and identify potential opportuni- ties and threats. It is an attractive tool because of its simplicity, yet its use can lead to vague discussions because its very openness offers little direc- tion concerning which aspects of an organization to analyze. A lack of useful outcomes may result, which has lead to a certain SWOT-fatigue among managers. When combined with the Business Model Canvas, though, SWOT enables a focused assessment and evaluation of an organization’s business model and its Building Blocks. SWOT asks four big, simple questions. The fi rst two—what are your organization’s strength and weaknesses?—assess your organization inter- nally. The second two—what opportunities does your organization have and what potential threats does it face?—assess your organization’s posi- tion within its environment. Of these four questions, two look at helpful areas (strengths and opportunities) and two address harmful areas. It is useful to ask these four questions with respect to both the overall business model and each of its nine Building Blocks. This type of SWOT analysis provides a good basis for further discussions, decision-making, and ultimately innovation around business models. detailed swot assessment of each building block What are your business model’s . . . strengths weaknesses opportunities threats — helpful — — harmful — — external — — internal — The following pages contain non-exhaustive sets of questions to help you assess the strengths and weaknesses of each of your business model Building Blocks. Each set can help jumpstart your own assessments. Results from this exercise can become the foundation for business model change and innovation in your organization. bmgen_final.indd 216 6/15/10 5:44 PM

217 Value Proposition Assessment Our Value Propositions are well aligned with customer needs 54321 12345 Our Value Propositions and customer needs are misaligned Our Value Propositions have strong network effects 54321 12345 Our Value Propositions have no network effects There are strong synergies between our products and services 54321 12345 There are no synergies between our products and services Our customers are very satisfi ed 54321 12345 We have frequent complaints Cost/Revenue Assessment We benefi t from strong margins 54321 12345 Our margins are poor Our revenues are predictable 54321 12345 Our revenues are unpredictable We have recurring Revenue Streams and frequent repeat purchases 54321 12345 Our revenues are transactional with few repeat purchases Our Revenue Streams are diversifi ed 54321 12345 We depend on a single Revenue Stream Our Revenue Streams are sustainable 54321 12345 Our revenue sustainability is questionable We collect revenues before we incur expenses 54321 12345 We incur high costs before we collect revenues We charge for what customers are really willing to pay for 54321 12345 We fail to charge for things customers are willing to pay for Our pricing mechanisms capture full willingness to pay 54321 12345 Our pricing mechanisms leave money on the table Our costs are predictable 54321 12345 Our costs are unpredictable Our Cost Structure is correctly matched to our business model 54321 12345 Our Cost Structure and business model are poorly matched Our operations are cost-effi cient 54321 12345 Our operations are cost-ineffi cient We benefi t from economies of scale 54321 12345 We enjoy no economies of scale certainty of evaluation 1-10 certainty of evaluation 1-10 importance to my b.m. 1–10 importance to my b.m. 1–10 bmgen_final.indd 217 6/15/10 5:44 PM

218 Infrastructure Assessment Our Key Resources are diffi cult for competitors to replicate 54321 12345 Our Key Resources are easily replicated Resource needs are predictable 54321 12345 Resource needs are unpredictable We deploy Key Resources in the right amount at the right time 54321 12345 We have trouble deploying the right resources at the right time We effi ciently execute Key Activities 54321 12345 Key Activity execution is ineffi cient Our Key Activities are diffi cult to copy 54321 12345 Our Key Activities are easily copied Execution quality is high 54321 12345 Execution quality is low Balance of in-house versus outsourced execution is ideal 54321 12345 We execute too many or too few activities ourselves We are focused and work with partners when necessary 54321 12345 We are unfocused and fail to work suffi ciently with partners We enjoy good working relationships with Key Partners 54321 12345 Working relationships with Key Partners are confl ict-ridden certainty of evaluation 1-10 importance to my b.m. 1–10 bmgen_final.indd 218 6/15/10 5:44 PM

219 Customer Interface Assessment Customer churn rates are low 54321 12345 Customer churn rates are high Customer base is well segmented 54321 12345 Customer base is unsegmented We are continuously acquiring new customers 54321 12345 We are failing to acquire new customers Our Channels are very effi cient 54321 12345 Our Channels are ineffi cient Our Channels are very effective 54321 12345 Our Channels are ineffective Channel reach is strong among customers 54321 12345 Channel reach among prospects is weak Customers can easily see our Channels 54321 12345 Prospects fail to notice our Channels Channels are strongly integrated 54321 12345 Channels are poorly integrated Channels provide economies of scope 54321 12345 Channels provide no economies of scope Channels are well matched to Customer Segments 54321 12345 Channels are poorly matched to Customer Segments Strong Customer Relationships 54321 12345 Weak Customer Relationships Relationship quality correctly matches Customer Segments 54321 12345 Relationship quality is poorly matched to Customer Segments Relationships bind customers through high switching costs 54321 12345 Customers switching costs are low Our brand is strong 54321 12345 Our brand is weak certainty of evaluation 1-10 importance to my b.m. 1–10 bmgen_final.indd 219 6/15/10 5:44 PM

220 assessing threats We’ve described how business models are situated within specifi c envi- ronments, and shown how external forces such as competition, the legal environment, or technology innovation can infl uence or threaten a business model (see p. 200). In this section we look at threats specifi c to each busi- ness model Building Block, and provide a non-exhaustive set of questions to help you think about ways to address each threat. Value Proposition Threats Are substitute products and services available? 12345 Are competitors threatening to offer better price or value? 12345 Cost/Revenue Threats Are our margins threatened by competitors? By technology? 12345 Do we depend excessively on one or more Revenue Streams? 12345 Which Revenue Streams are likely to disappear in the future? 12345 Which costs threaten to become unpredictable? 12345 Which costs threaten to grow more quickly than the revenues they support? 12345 bmgen_final.indd 220 6/15/10 5:44 PM

221 Infrastructure Threats Could we face a disruption in the supply of certain resources? 12345 Is the quality of our resources threatened in any way? 12345 What Key Activities might be disrupted? 12345 Is the quality of our activities threatened in any way? 12345 Are we in danger of losing any partners? 12345 Might our partners collaborate with competitors? 12345 Are we too dependent on certain partners? 12345 Customer Interface Threats Could our market be saturated soon? 12345 Are competitors threatening our market share? 12345 How likely are customers to defect? 12345 How quickly will competition in our market intensify? 12345 Do competitors threaten our Channels? 12345 Are our Channels in danger of becoming irrelevant to customers? 12345 Are any of our Customer Relation- ships in danger of deteriorating? 12345 bmgen_final.indd 221 6/15/10 5:44 PM

222 assessing opportunities As with threats, we can assess the opportunities that may lie within each business model Building Block. Here’s a non-exhaustive set of questions to help you think about opportunities that could emerge from each of the Building Blocks in your business model. Value Proposition Opportunities Could we generate recurring revenues by converting products into services? 12345 Could we better integrate our products or services? 12345 Which additional customer needs could we satisfy? 12345 What complements to or extensions of our Value Proposition are possible? 12345 What other jobs could we do on behalf of customers? 12345 Cost/Revenue Opportunities Can we replace one-time transaction revenues with recurring revenues? 12345 What other elements would customers be willing to pay for? 12345 Do we have cross-selling opportunities either internally or with partners? 12345 What other Revenue Streams could we add or create? 12345 Can we increase prices? 12345 Where can we reduce costs? 12345 bmgen_final.indd 222 6/15/10 5:44 PM

223 Infrastructure Opportunities Could we use less costly resources to achieve the same result? 12345 Which Key Resources could be better sourced from partners? 12345 Which Key Resources are under-exploited? 12345 Do we have unused intellectual property of value to others? 12345 Could we standardize some Key Activities? 12345 How could we improve effi ciency in general? 12345 Would IT support boost effi ciency? 12345 Are there outsourcing opportunities? 12345 Could greater collaboration with partners help us focus on our core business? 12345 Are there cross-selling opportunities with partners? 12345 Could partner Channels help us better reach customers? 12345 Could partners complement our Value Proposition? 12345 Customer Interface Opportunities How can we benefi t from a growing market? 12345 Could we serve new Customer Segments? 12345 Could we better serve our custom- ers through fi ner segmentation? 12345 How could we improve channel effi ciency or effectiveness? 12345 Could we integrate our Channels better? 12345 Could we fi nd new complementary partner Channels? 12345 Could we increase margins by directly serving customers? 12345 Could we better align Channels with Customer Segments? 12345 Is there potential to improve customer follow-up? 12345 How could we tighten our relationships with customers? 12345 Could we improve personalization? 12345 How could we increase switching costs? 12345 Have we identifi ed and “fi red” unprofi table customers? If not, why not? 12345 Do we need to automate some relationships? 12345 bmgen_final.indd 223 6/15/10 5:44 PM

224 using swot assessment analysis results to design new business model options A structured SWOT assessment of your business model yields two results. It provides a snapshot of where you are now (strengths and weaknesses) and it suggests some future trajectories (opportunities and threats). This is valuable input that can help you design new business model options toward which your enterprise can evolve. SWOT analysis is thus a signifi cant part of the process of designing both business model prototypes (see p. 160) and, with luck, a new business model that you will eventually implement. bmgen_final.indd 224 6/15/10 5:44 PM

225 Current Model Future Model(s) — swot process — bmgen_final.indd 225 6/15/10 5:44 PM

226 In this section we blend our business model tools with the Blue Ocean Strategy concept coined by Kim and Mauborgne in their million-selling book of the same name. The Business Model Canvas is a perfect extension of the analytical tools presented by Kim and Mauborgne. Together they provide a powerful framework for questioning incumbent business models and creating new, more competitive models. Blue Ocean Strategy is a potent method for questioning Value Proposi- tions and business models and exploring new Customer Segments. The Business Model Canvas complements Blue Ocean by providing a visual “big picture” that helps us understand how changing one part of a business model impacts other components. In a nutshell, Blue Ocean Strategy is about creating completely new industries through fundamental differentiation as opposed to competing in existing industries by tweaking established models. Rather than outdoing competitors in terms of traditional performance metrics, Kim and Mauborgne advocate creating new, uncontested market space through what the authors call value innovation. This means increasing value for customers by creating new benefi ts and services, while simultaneously reducing costs by eliminat- ing less valuable features or services. Notice how this approach rejects the traditionally accepted trade-off between differentiation and lower cost. To achieve value innovation, Kim and Mauborgne propose an analytical tool they call the Four Actions Framework. These four key questions challenge an industry’s strategic logic and established business model: 1. Which of the factors that the industry takes for granted should be eliminated? 2. Which factors should be reduced well below the industry standard? 3. Which factors should be raised well above the industry standard? 4. Which factors should be created that the industry has never offered? In addition to value innovation, Kim and Mauborgne propose exploring non-customer groups to create Blue Oceans and tap untouched markets. Blending Kim and Mauborgne’s value innovation concept and Four Actions Framework with the Business Model Canvas creates a powerful new tool. In the Business Model Canvas the right-hand side represents value creation and the left-hand side represents costs. This fi ts well with Kim and Mauborgne’s value innovation logic of increasing value and reducing costs. business model perspective on blue ocean strategy bmgen_final.indd 226 6/15/10 5:44 PM

227 which factors should be raised well above the industry's standard? which factors should be created that the industry has never offered? which factors should be reduced well below the industry's standard? which factors can you eliminate that your indus- try has long competed on? — four actions framework — — value innovation — + value – costs eliminate raise reduce create Source: Adapted from Blue Ocean Strategy. bmgen_final.indd 227 6/15/10 5:44 PM

228 The Business Model Canvas consists of a right-hand value and customer-focused side, and a left-hand cost and infrastructure side, as descibed earlier (see p. 49). Changing elements on the right-hand side has implica- tions for the left-hand side. For example, if we add to or eliminate parts of the Value Proposition, Channels, or Customer Relationship Building Blocks, this will have immediate implications for Resources, Activities, Partnerships, and Costs. Blue Ocean Strategy is about simultaneously increasing value while reducing costs. This is achieved by identify- ing which elements of the Value Proposition can be elimi- nated, reduced, raised, or newly created. The fi rst goal is to lower costs by reducing or eliminating less valuable features or services. The second goal is to enhance or create high-value features or services that do not signifi - cantly increase the cost base. Blending Blue Ocean Strategy and the Business Model Canvas lets you systematically analyze a business model innovation in its entirety. You can ask the Four Actions Framework questions (eliminate, create, reduce, raise) about each business model Building Block and imme- diately recognize implications for the other parts of the business model, (e.g. what are the implications for the cost side when we make changes on the value side? and vice versa). +value value-side value creation –costs cost-side cost implications blending the blue ocean strategy framework with the business model canvas + = eliminate raise reduce create Business Model Canvas Value innovation Blending approaches bmgen_final.indd 228 6/15/10 5:44 PM

229 artistic development animal care star performers animal shows aisle consession sales multiple show arenas fun & humor thrill & danger theme refi ned environment mutliple productions artistic music & dance unique venue focus on families focus on theater & opera visitors animals star performers refi ned environment costly animal maintenance costly star performer fees artistic production ticket price increase aisle concession sales Cirque du Soleil features prominently among Blue Ocean Strategy examples. Next we apply the blended Blue Ocean and Business Model Canvas approach to this intriguing and highly successful Canadian business. First, the Four Actions Framework shows how Cirque du Soleil “played” with the traditional elements of the cir- cus business Value Proposition. It eliminated costly ele- ments, such as animals and star performers, while adding other elements, such as theme, artistic atmosphere, and cirque du soleil unique venue theme refi ned environment multiple productions artistic music & dance fun & humor thrill & danger star performers animal shows aisle concession sales multiple show arenas VP CR CH CS KP KA KR R$ C$ adding the artistic element to the value proposition changes activities & costs eliminating animals from the show substantially reduces costs the value proposition combines elements from circus, theater & opera, which allows catering to higher end customers who pay higher ticket prices refi ned music. This revamped Value Proposition allowed Cirque du Soleil to broaden its appeal to theatergoers and other adults seeking sophisticated entertainment, rather than the traditional circus audience of families. As a consequence, it was able to substantially raise ticket prices. The Four Actions Framework, outlined in blue and gray in the business model canvas above, illus- trates the effects of changes in the Value Proposition. Source: Adapted from Blue Ocean Strategy. animal care animals star performers refi ned environment eliminate reduce create raise bmgen_final.indd 229 6/15/10 5:44 PM

230 We’ve discussed Nintendo’s successful Wii game console as an example of a multi-sided platform business model pattern (see p. 76). Now we look at how Nintendo dif- ferentiated itself from competitors Sony and Microsoft from the standpoint of Blue Ocean Strategy. Compared to Sony’s PlayStation 3 and Microsoft’s Xbox 360, Nin- tendo pursued a fundamentally different strategy and business model with Wii. The heart of Nintendo’s strategy was the assumption that consoles do not necessarily require leading-edge power and performance. This was a radical stance in an industry that traditionally competed on technological performance, graphic quality, and game realism: factors valued primarily by diehard gaming fans. Nintendo shifted its focus to providing a new form of player interac- tion targeted at a wider demographic than the traditional avid gamer audience. With the Wii, Nintendo brought to market a console that technologically underperformed rival machines, but boosted the fun factor with new motion control technology. Players could control games through a sort of “magic wand,” the Wii Remote, simply through physical movement. The console was an instant success with casual gamers, and outsold rival consoles focused on the traditional market of “hardcore” gamers. nintendo’s w ii Nintendo’s new business model has the following characteristics: A shift in focus from “hardcore” to casual gamers, which allowed the company to reduce console performance and add a new element of motion control that created more fun; elimination of state-of-the-art chip development and increased use of off-the-shelf components, reducing costs and allowing lower console prices; elimination of console subsidies resulting in prof- its on each console sold. game developers off-the-shelf hardware component manufacturers state of the art chi development high end console performance & graphics motion controlled games fun factor & group (family) experience narow market of “hardcore” gamers large market of casual gamers & families game developers new proprietary technology motion control technology retail distribution console production price technology development costs console subsidies profi t on console sales console subsidies royalties from game developers VP CR CH CS KP KA KR R$ C$ new proprietary technology motion control technology eliminate unchanged create reduce bmgen_final.indd 230 6/15/10 5:45 PM

231 The combination of Blue Ocean Strategy tools and the Business Model Canvas provide a solid foundation upon which to question your business model from value creation, customer, and Cost Structure perspectives. We propose that three different perspec- tives—the Customer Segment perspective, the Value Proposition perspective, and the cost perspective—provide ideal starting points from which to start questioning your business model using the Four Actions Framework. Changes to each starting point then allow you to analyze impacts on other areas of the Business Model Canvas (see also innovation epicenters on p. 138). Identify the highest cost infrastructure elements and evaluate what happens if you eliminate or reduce them. What value elements disappear, and what would you have to create to compensate for their absence? Then, identify infrastructure investments you may want to make and analyze how much value they create. • Which activities, resources, and partnerships have the highest costs? • What happens if you reduce or eliminate some of these cost factors? • How could you replace, using less costly elements, the value lost by reducing or eliminating expensive resources, activities, or partnerships? • What value would be created by planned new investments? Begin the process of transforming your Value Proposition by asking the Four Actions Framework questions. Simultaneously, consider the impact on the cost side and evaluate what elements you need to (or could) change on the value side, such as Channels, Relation- ships, Revenue Streams, and Customer Segments. • What less-valued features or services could be eliminated or reduced? • What features or services could be enhanced or newly created to produce a valuable new customer experience? • What are the cost implications of your changes to the Value Proposition? • How will changes to the Value Proposition affect the customer side of the model? Ask yourself the Four Actions Framework questions about each business model Building Block on the customer side of the Canvas: Channels, Relationships, and Revenue Streams. Analyze what happens to the cost side if you eliminate, reduce, raise, or create value side elements. • Which new Customer Segments could you focus on, and which segments could you possibly reduce or eliminate? • What jobs do new Customer Segments really want to have done? • How do these customers prefer to be reached and what kind of relationship do they expect? • What are the cost implications of serving new Customer Segments? value-side cost-side cost-side Cost Impact Exploration Exploring Value Proposition Impact Exploring Customer Impact ? ?? ? eliminate reduce raise create eliminate reduce raise create eliminate reduce raise create questioning your canvas with the four actions framework bmgen_final.indd 231 6/15/10 5:45 PM

232 Visionaries, game changers, and challengers are generating innovative business models around the world—as entrepreneurs and as workers within established organizations. An entrepreneur’s challenge is to design and successfully implement a new business model. Established organizations, though, face an equally daunting task: how to implement and manage new models while maintaining existing ones. Business thinkers such as Constantinos Markides, Charles O'Reilly III, and Michael Tushman have a word for groups that successfully meet this challenge: ambidextrous organizations. Implementing a new business model in a longstanding enterprise can be extraordinarily diffi cult because the new model may challenge or even compete with established models. The new model might require a different organizational culture, or it might target prospective customers formerly ignored by the enterprise. This begs a question: How do we implement innovative business models within long-established organizations? Scholars are divided on the issue. Many suggest spinning off new busi- ness model initiatives into separate entities. Others propose a less drastic approach and argue that innovative new business models can thrive within established organizations, either as-is or in separate business units. Constantinos Markides, for example, proposes a two-variable framework for deciding on how to manage new and traditional business models simul- taneously. The fi rst variable expresses the severity of confl ict between the models, while the second expresses strategic similarity. Yet, he also shows that success depends not only on the correct choice—integrated versus standalone implementation—but also on how the choice is implemented. Synergies, Markides claims, should be carefully exploited even when the new model is implemented in a standalone unit. Risk is a third variable to consider when deciding whether to integrate or separate an emerging model. How big is the risk that the new model will negatively affect the established one in terms of brand image, earnings, legal liability, and so forth? During the fi nancial crisis of 2008, ING, the Dutch fi nancial group, was nearly toppled by its ING Direct unit, which provides online and telephone retail banking services in overseas markets. In effect, ING treated ING Direct more as a marketing initiative than as a new, separate business model that would have been better housed in a separate entity. Finally, choices evolve over time. Markides emphasizes that compa- nies may want to consider a phased integration or a phased separation of business models. e.Schwab, the Internet arm of Charles Schwab, the U.S. retail securities broker, was initially set up as a separate unit, but later was integrated back into the main business with great success. Tesco.com, the Internet branch of Tesco, the giant U.K. retailer, made a successful transition from integrated business line into standalone unit. In the following pages we examine the issue of integration versus separa- tion with three examples described using the Business Model Canvas. The fi rst, Swiss watch manufacturer SMH, chose the integration route for its new Swatch business model in the 1980s. The second, Swiss foodmaker Nestlé, chose the separation route for bringing Nespresso to the marketplace. As of this writing, the third, German vehicle manufacturer Daimler, has yet to choose an approach for its car2go vehicle rental concept. managing multiple business models bmgen_final.indd 232 6/15/10 5:45 PM

233 — similarity of nine building blocks — — potential for synergies — — potential for confl icts — avoid confl icts between the integrated business models and allow for necessary autonomy create synergies among the separated business models and coordinate between them as necessary integration autonomy separation bmgen_final.indd 233 6/15/10 5:45 PM

234 smh’s autonomous model for swatch In the mid-seventies the Swiss watch industry, which had historically dominated the timepiece sector, found itself in deep crisis. Japanese and Hong Kong watch manu- facturers had dislodged the Swiss from their leadership position with cheap quartz watches designed for the low-end market. The Swiss continued to focus on tradi- tional mechanical watches for the mid- and high-end markets, but all the while Asian competitors threatened to intrude on these segments as well. In the early 1980s competitive pressure intensifi ed to the point that most Swiss manufacturers, with the exception of a handful of luxury brands, were teetering on collapse. Then Nicolas G. Hayek took over the reigns of SMH (later renamed Swatch Group). He completely restructured a newly formed group cobbled together from com- panies with roots in the two biggest ailing Swiss watchmakers. Hayek envisioned a strategy whereby SMH would offer healthy, growing brands in all three market segments: low, mid, and luxury. At the time, Swiss fi rms dominated the luxury watch market with a 97 percent share. But the Swiss owned only 3 percent of the middle market and were non-players in the low end, leaving the entire segment of inexpensive timepieces to Asian rivals. Launching a new brand at the bottom end was provocative and risky, and triggered fears among investors that the move would cannibalize Tissot, SMH’s middle-market brand. From a strategic point of view, Hayek’s vision meant nothing less than combin- ing a high-end luxury business model with a low-cost business model under the same roof, with all the attending confl icts and trade-offs. Nevertheless, Hayek insisted on this three-tiered strategy, which triggered development of the Swatch, a new type of afford- able Swiss watch priced starting at around U.S. $40. The specifi cations for the new watch were demanding: inexpensive enough to compete with Japanese offers yet providing Swiss quality, plus suffi cient margins and the potential to anchor a larger product line. This forced engineers to entirely rethink the very idea of a timepiece and its manufacture; they were essentially deprived of the ability to apply their traditional watchmaking knowledge. The result was a watch made with far fewer components. Manufacturing was highly automated: molding replaced screws, direct labor costs were driven down to less than 10 percent, and the watches were produced in large quantities. Innovative guerrilla marketing concepts were used to bring the watch to market under several different designs. Hayek saw the new product communicating a lifestyle message, rather than just telling time on the cheap. Thus the Swatch was born: high quality at a low price, for a functional, fashionable product. The rest is history. Fifty-fi ve million Swatches were sold in fi ve years, and in 2006 the company celebrated aggregate sales of over 333 million Swatches. SMH’s choice to implement the low end Swatch business model is particularly inter- esting in light of its potential impact on SMH’s higher end brands. Despite a completely different organizational and brand culture, Swatch was launched under SMH and not as a standalone entity. SMH, though, was careful to give Swatch and all its other brands near-complete autonomy regarding product and marketing decisions, while centralizing everything else. Manufacturing, purchasing, and R&D were each regrouped under a single entity serving all of SMH’s brands. Today, SMH maintains a strong vertical integration policy in order to achieve scale and defend itself against Asian competitors. bmgen_final.indd 234 6/15/10 5:45 PM

235 production & quality control r&d hr, fi nance, etc. blancpain, omega, longines, rado tissot, certina, hamilton, mido swatch, fl ik fl ak high end and luxury segment mid segment mass market manufacturing plants brand portfolio watch sales VP CR CH CS KP KA KR R$ C$ smh as production partner product design marketing & communication trendy low-cost lifestyle (second) watch lifestyle movement mass-market swatch design swatch brand swatch shops retail lifestyle events guerrilla marketing manufacturing payments to smh marketing watch sales VP CR CH CS KP KA KR R$ C$ SMH is vertically integrated and centralized with respect to production, R&D, sourcing and HR. Each SMH brand enjoys autonomy regarding product, design, and marketing communication decisions. blancpain, omega, longines, rado high end and luxury segment high end and luxury segment tissot, certina, hamilton, mido mid segment CH segment mid segment segment segment swatch, fl ik fl ak mass market mass market mass market segment plants watch sales R$ plants brand portfolio SMH Swatch smh as production partner product design marketing & communication trendy low-cost lifestyle (second) watch lifestyle movement mass-market swatch design swatch brand swatch shops retail lifestyle events guerrilla marketing manufacturing payments to smh marketing watch sales VP CR CH CS KP KA KR R$ C$ centralized decentralized bmgen_final.indd 235 6/15/10 5:45 PM

236 the nespresso success model Another ambidextrous organization is Nespresso, part of Nestlé, the world’s largest food company with 2008 sales of approximately U.S. $101 billion. Nespresso, which each year sells over U.S.$1.9 billion worth of single-serve premium coffee for home consumption, offers a potent example of an ambidextrous business model. In 1976, Eric Favre, a young researcher at a Nestlé research lab, fi led his fi rst patent for the Nespresso system. At the time Nestlé dominated the huge instant coffee market with its Nescafé brand, but was weak in the roast and ground coffee segments. The Nespresso system was designed to bridge that gap with a dedi- cated espresso machine and pod system that could conveniently produce restaurant- quality espresso. An internal unit headed by Favre was set up to eliminate technical problems and bring the system to market. After a short, unsuccessful attempt to enter the restaurant market, in 1986 Nestlé created Nespresso SA, a wholly-owned subsidiary that would start marketing the system to offi ces in support of another Nestlé joint venture with a coffee machine manufacturer already active in the offi ce segment. Nespresso SA was completely independent of Nescafé, Nestlé’s established coffee business. But by 1987 Nespresso’s sales had sagged far below expectations and it was kept alive only because of its large remaining inventory of high-value coffee machines. In 1988 Nestlé installed Jean-Paul Gaillard as the new CEO of Nespresso. Gaillard completely overhauled the company’s business model with two drastic changes. First, Nespresso shifted its focus from offi ces to high-income households and started sell- ing coffee capsules directly by mail. Such a strategy was unheard of at Nestlé, which traditionally focused on targeting mass markets through retail Channels (later on Nes- presso would start selling online and build high-end retail stores at premium locations such as the Champs-Élysées, as well as launch its own in-store boutiques in high-end department stores). The model proved successful, and over the past decade Nespresso has posted average annual growth rates exceeding of 35 percent. Of particular interest is how Nespresso compares to Nescafé, Nestlé’s traditional coffee business. Nescafé focuses on instant coffee sold to consumers indirectly through mass-market retailers, while Nespresso concentrates on direct sales to affl uent con- sumers. Each approach requires completely different logistics, resources, and activi- ties. Thanks to the different focus there was no risk of direct cannibalization. Yet, this also meant little potential for synergy between the two businesses. The main confl ict between Nescafé and Nespresso arose from the considerable time and resource drain imposed on Nestlé’s coffee business until Nespresso fi nally became successful. The organizational separation likely kept the Nespresso project from being cancelled during hard times. The story does not end there. In 2004 Nestlé aimed to introduce a new system, complementary to the espresso-only Nespresso devices, that could also serve cap- puccino and lattes. The question, of course, was with which business model and under which brand should the system be launched? Or should a new company be created, as with Nespresso? The technology was originally developed at Nespresso, but cappuc- cinos and lattes seemed more appropriate for the mid-tier mass market. Nestlé fi nally decided to launch under a new brand, Nescafé Dolce Gusto, but with the product completely integrated into Nescafé’s mass-market business model and organizational structure. Dolce Gusto pods sell on retail shelves alongside Nescafé’s soluble coffee, but also via the Internet—a tribute to Nespresso’s online success. 1976 first patent filed for nespresso system 1982 focus on the office market 1986 separate company created 1988 new ceo overhauls strategy 1991 nespresso is launched interna- tionally 1997 first ad campaigns launched 2006 george clooney retained as spokes- man for nespresso 1998 focus on internet with web site redesign 2000–2008 average annual growth of over 35% bmgen_final.indd 236 6/15/10 5:45 PM

237 retailers production marketing dolce gusto: multi-beverage machine & pods nescafé: quality instant coffee retail online shop mass market manufacturing plants brand portfolio retail marketing & sales production sales through retail (lower margin) VP CR CH CS KP KA KR R$ C$ C$ coffee machine manufacturers marketing production logistics high-end restaurant quality espresso at home nespresso club households offi ce market distribution channels patents on system brand production plants nespresso.com nespresso boutiques call center retail (machines only) mail order manufacturing marketing distribution & Channels main revenues: capsules other: machines & accessories VP CR CH CS KAKP KR R$ C$ dolce gusto: multi-beverage machine & pods retail online shop nescafé: quality instant coffee retail Nescafé high-end (Nespresso) mid-tier (Dolce Gusto) mass-market (Nescafé) Nespresso coffee machine manufacturers marketing production logistics high-end restaurant quality espresso at home nespresso club households offi ce market distribution channels patents on system brand production plants nespresso.com nespresso boutiques call center retail (machines only) mail order manufacturing marketing distribution & Channels main revenues: capsules other: machines & accessories VP CR CH CS KA KP KR R$ C$ nestlé’s portfolio of coffee business models mass market bmgen_final.indd 237 6/15/10 5:45 PM

238 daimler’s car2go business model Our fi nal example is still emerging as of this writing. Car2go is a new concept in mobility created by German vehicle manufacturer Daimler. Car2go provides an example of a busi- ness model innovation that complements the parent company’s core model of manu- facturing, selling, and fi nancing vehicles ranging from luxury cars to trucks and buses. Daimler’s core business generates annual revenue exceeding U.S. $136 billion through sales of more than two million vehicles. Car2go, on the other hand, is a startup business offering city dwellers mobility on demand using a citywide fl eet of smart cars ( smart is Daimler’s smallest and lowest-priced vehicle brand). The service is currently being tested in the German city of Ulm, one of Daimler’s key operational bases. The business model was developed by Daimler’s Business Innovation Department, which is tasked with developing new business ideas and supporting their implementation. Here’s how car2go works: a fl eet of smart “fortwo” two-person vehicles is made available throughout the city, serving as a vehicle pool accessible by customers at any time. Following a one-time registration process, customers can rent fortwo cars on the spot (or reserve them in advance) then use them for as long as they like. Once a trip is completed, the driver simply parks the car somewhere within the city limits. Rentals cost the equivalent $0.27 per minute, all-inclusive, or $14.15 per hour with a maximum of $70 per day. Customers pay monthly. The concept resembles popular car-sharing companies such as Zipcar in North America and the U.K. Distinctive char- acteristics of car2go include freedom from the obligation to use an assigned parking place, on-the-spot rental for as long as one likes, and a simple pricing structure. Daimler launched car2go in response to the accelerating global trend toward urbaniza- tion, and saw the service as an intriguing complement to its core business. As a pure service model, car2go naturally has completely different dynamics compared to Daim- ler’s traditional business, and revenues will likely remain comparatively small for some years. But Daimler clearly has high hopes for car2go over the long term. In the pilot phase, launched in October of 2008, 50 fortwo cars were made avail- able to some 500 employees of the Daimler Research Center in Ulm. These 500, plus 200 family members, participated as initial customers. The aim was to test the technical systems, gather data on user acceptance and behavior, and give the service an overall “road test.” In February 2009, the pilot was extended to include employees of Mercedes-Benz sales and service outlets and other Daimler subsidiaries, with the number of vehicles increased to 100. At the end of March, a public test was initiated with 200 vehicles and car2go was made available to all 120,000 of Ulm’s residents and visitors. At the same time, Daimler announced a U.S. pilot in Austin, Texas, a city with 750,000 residents. As in the fi rst phase of the German test, car2go will begin with a limited user group, such as city employees, then be opened to the public. These pilots can be seen as prototypes of a business model (see p. 160). Now, car2go’s business model prototype is being fi xed into organizational form. As of this writing, Daimler had not yet decided whether to internalize car2go or spin it off as a separate company. Daimler chose to start with business model design, then test the concept in the fi eld, and defer decisions regarding organizational structure until it could assess car2go’s relationship to its long-established core business. concept development internal pilot extended internal pilot ulm public pilot austin internal pilot austin public pilot which organizational form? Market introduction of car2go bmgen_final.indd 238 6/15/10 5:45 PM

239 car parts manufacturers manufacturing design cars, trucks, vans, buses, fi nancial services (e.g. mercedes brands) mainly high-end brands mass market vehicle plants intellectual property brands dealers sales force marketing & sales manufacturing r&d vehicle sales vehicle fi nancing VP CR CH CS KP KA KR R$ C$ C$ city management fl eet management telematics management cleaning individual urban mobility without car ownership one-off sign-up city dwellers service team telematic systems smart fortwo car fl eet car2go.com mobile phone car2go parking lots car2go shops pick-up/drop-off anywhere systems management fl eet management pay per minute— $ 0.27 (all inclusive) VP CR CH CS KAKP KR R$ C$ Daimler car2go car parts manufacturers manufacturing design cars, trucks, vans, buses, fi nancial services (e.g. mercedes brands) mainly high-end brands mass market vehicle plants intellectual property brands dealers sales force marketing & sales manufacturing r&d vehicle sales vehicle fi nancing VP CR CH CS KP KA KR R$ C$ Daimler’s phased approach to business model innovation: Phase 1: Business model design within Daimler Innovation Department Phase 2: Field test of the concept run by Daimler Innovation Phase 3: Decision on organizational structure of new business model (integration versus separation) vis-à-vis relationship to established core business city management fl eet management telematics management cleaning individual urban mobility without car ownership one-off sign-up city dwellers service team telematic systems smart fortwo car fl eet car2go.com mobile phone car2go parking lots car2go shops pick-up/drop-off anywhere systems management fl eet management pay per minute— $ 0.27 (all inclusive) VP CR CH CS KA KP KR R$ C$ bmgen_final.indd 239 6/15/10 5:45 PM

improve bmgen_final.indd 240 6/15/10 5:45 PM

invent bmgen_final.indd 241 6/15/10 5:45 PM

Process bmgen_final.indd 242 6/15/10 5:45 PM

Process bmgen_final.indd 243 6/15/10 5:45 PM

244 In this chapter we tie together the concepts and tools from the book to simplify the task of setting up and executing a business model design initiative. We propose a generic business model design pro- cess adaptable to your organization’s specific needs. Every business model design project is unique, and presents its own challenges, obstacles, and critical success factors. Every organization starts from a different point and has its own context and objectives when it begins addressing an issue as fundamental as its business model. Some may be reacting to a crisis situation, some may be seek- ing new growth potential, some may be in startup mode, and still oth- ers may be planning to bring a new product or technology to market. The process we describe provides a starting point upon which just about any organization can customize its own approach. Our process has five phases: Mobilize, Understand, Design, Implement, and Manage. We describe each of these phases in a general way, then revisit them from the perspective of the established organization, as business model innovation in enterprises already executing on one or more existing business models requires taking additional factors into account. Business model innovation results from one of four objectives: (1) to satisfy existing but unanswered market needs, (2) to bring new technologies, products, or services to market, (3) to improve, disrupt, or transform an existing market with a better business model, or (4) to create an entirely new market. In longstanding enterprises, business model innovation efforts typically reflect the existing model and organizational structure. The effort usually has one of four motivations: (1) a crisis with the existing business model (in some cases a “near death” experience), (2) adjusting, improving, or defending the existing model to adapt to a changing environment, (3) bringing new technologies, products, or services to market, or (4) preparing for the future by exploring and testing completely new business models that might eventually replace existing ones. Business Model Design Process bmgen_final.indd 244 6/15/10 5:45 PM

245 Business Model Design and Innovation Satisfy market: Fulfill an unanswered market need (e.g. Tata car, NetJets, GrameenBank, Lulu.com) Bring to market: Bring a new technology, product, or service to market or exploit existing intellectual property (IP) (e.g. Xerox 914, Swatch, Nespresso, Red Hat) Improve market: Improve or disrupt an existing market (e.g. Dell, EFG Bank, Nintendo Wii, IKEA, Bharti Airtel, Skype, Zipcar, Ryanair, Amazon.com retail, better place) Create market: Create an entirely new type of business (Diners Club, Google) c h a l l e n g e s • Finding the right model • Testing the model before a full-scale launch • Inducing the market to adopt the new model • Continuously adapting the model in response to market feedback • Managing uncertainty c h a l l e n g e s • Developing an appetite for new models • Aligning old and new models • Managing vested interests • Focusing on the long term Factors Specific to Established Organizations Reactive: Arising out of a crisis with the existing business model (e.g. IBM in the 1990s, Nintendo Wii, Rolls Royce jet engines) Adaptive: Adjusting, improving, or defending the existing business model (Nokia “comes with music,” P&G open innovation, Hilti) Expansive: Launching a new technology, product, or service (e.g. Nespresso, Xerox 914 in the 1960s, iPod/iTunes) Pro-active/explorative: Preparing for the future (e.g. car2go by Daimler, Amazon Web Services) s t a r t i n g p o i n t f o r b u s i n e s s m o d e l i n n o v a t i o n bmgen_final.indd 245 6/15/10 5:45 PM

246 Business model innovation rarely happens by coincidence. But neither is it the exclusive domain of the creative business genius. It is something that can be managed, structured into processes, and used to leverage the creative potential of an entire organization. The challenge, though, is that business model innovation remains messy and unpredictable, despite attempts to implement a process. It requires the ability to deal with ambiguity and uncertainty until a good solution emerges. This takes time. Participants must be willing to invest significant time and energy exploring many possibilities without jumping too quickly to adopt one solution. The reward for time invested will likely be a powerful new business model that assures future growth. We call this approach design attitude, which differs sharply from the decision attitude that dominates traditional business manage- ment. Fred Collopy and Richard Boland of the Weatherhead School of Management eloquently explain this point in their article “Design Matters” in the book Managing as Designing. The decision attitude, they write, assumes that it is easy to come up with alternatives but difficult to choose between them. The design attitude, in contrast, assumes that it is difficult to design an outstanding alternative, but once you have, the decision about which alternative to select becomes trivial (see p. 164). This distinction is particularly applicable to business model innova- tion. You can do as much analysis as you want yet still fail to develop a satisfactory new business model. The world is so full of ambiguity and uncertainty that the design attitude of exploring and prototyping multiple possibilities is most likely to lead to a powerful new business model. Such exploration involves messy, opportunistic bouncing back and forth between market research, analysis, business model prototyping, and idea generation. Design attitude is far less linear and uncertain than decision attitude, which focuses on analysis, decision, and optimization. Yet a purposeful quest for new and competitive growth models demands the design approach. Damien Newman of the design firm Central eloquently expressed the design attitude in an image he calls the “Design Squiggle.” The Design Squiggle embodies the characteristics of the design process: Uncertain at the outset, it is messy and opportunistic, until it focuses on a single point of clarity once the design has matured. Design Attitude bmgen_final.indd 246 6/15/10 5:45 PM

247 u n c e r t a i n t y c l a r i t y / f o c u s Source: Adapted from Damien Newman, Central research & understand design business model prototypes implement business model design bmgen_final.indd 247 6/15/10 5:45 PM

248 The business model design process we propose has five phases: Mobilize, Understand, Design, Implement, and Manage. As previ- ously mentioned, the progression through these phases is rarely as linear as depicted in the table on the right. In particular, the Understanding and Design phases tend to proceed in parallel. Busi- ness model prototyping can start early in the Understanding phase, in the form of sketching preliminary business model ideas. Similarly, prototyping during the design phase may lead to new ideas requiring additional research—and a revisiting of the Understand phase. Finally, the last phase, Manage, is about continuously managing your business model(s). In today’s climate, it’s best to assume that most business models, even successful ones, will have a short lifespan. Considering the substantial investment an enterprise makes in producing a business model, it makes sense to extend its life through continuous management and evolution until it needs complete rethinking. Management of the model’s evolution will determine which components are still relevant and which are obsolete. For each process phase we outline the objective, the focus, and which content in Business Model Generation supports that phase. Then we outline the five phases in more detail, and explain how the circumstances and focus can change when you are working with an existing business model in an established organization. 5 Phases Mobilize Understand Design Implement Manage objective Prepare for a successful business model design project Research and analyze elements needed for the business model design eΩort Generate and test viable business model options, and select the best Implement the business model prototype in the field Adapt and modify the business model in response to market reaction focus Setting the stage Immersion Inquiry Execution Evolution description Assemble all the elements for successful business model design. Create awareness of the need for a new business model, describe the motivation behind the project, and establish a common language to describe, design, and analyze and discuss business models. You and the business model design team immerse yourselves in relevant knowledge: custom- ers, technology, and environment. You collect information, interview experts, study potential cus- tomers, and identify needs and problems. Transform the information and ideas from the previous phase into business model prototypes that can be explored and tested. After an intensive business model inquiry, select the most satisfac- tory business model design. Implement the selected business model design. Set up the management struc- tures to continuously monitor, evaluate, and adapt or transform your business model. book sections • Business Model Canvas (p. 44) • Storytelling (p. 170) • Business Model Canvas (p. 44) • Business Model Patterns (p. 52) • Customer Insights (p. 126) • Visual Thinking (p. 146) • Scenarios (p. 180) • Business Model Environment (p. 200) • Evaluating Business Models (p. 212) • Business Model Canvas (p. 44) • Business Model Patterns (p. 52) • Ideation (p. 134) • Visual Thinking (p. 146) • Prototyping (p. 160) • Scenarios (p. 180) • Evaluating Business Models (p. 212) • Business Model Perspective on Blue Ocean Strategy (p. 226) • Managing Multiple Business Models (p. 232) • Business Model Canvas (p. 44) • Visual Thinking (p. 146) • Storytelling (p. 170) • Managing Multiple Business Models (p. 232) • Business Model Canvas (p. 44) • Visual Thinking (p. 146) • Scenarios (p. 180) • Business Model Environment (p. 200) • Evaluating Business Models (p. 212) bmgen_final.indd 248 6/15/10 5:45 PM

249 Mobilize Understand Design Implement Manage objective Prepare for a successful business model design project Research and analyze elements needed for the business model design eΩort Generate and test viable business model options, and select the best Implement the business model prototype in the fi eld Adapt and modify the business model in response to market reaction focus Setting the stage Immersion Inquiry Execution Evolution description Assemble all the elements for successful business model design. Create awareness of the need for a new business model, describe the motivation behind the project, and establish a common language to describe, design, and analyze and discuss business models. You and the business model design team immerse yourselves in relevant knowledge: custom- ers, technology, and environment. You collect information, interview experts, study potential cus- tomers, and identify needs and problems. Transform the information and ideas from the previous phase into business model prototypes that can be explored and tested. After an intensive business model inquiry, select the most satisfac- tory business model design. Implement the selected business model design. Set up the management struc- tures to continuously monitor, evaluate, and adapt or transform your business model. book sections • Business Model Canvas (p. 44) • Storytelling (p. 170) • Business Model Canvas (p. 44) • Business Model Patterns (p. 52) • Customer Insights (p. 126) • Visual Thinking (p. 146) • Scenarios (p. 180) • Business Model Environment (p. 200) • Evaluating Business Models (p. 212) • Business Model Canvas (p. 44) • Business Model Patterns (p. 52) • Ideation (p. 134) • Visual Thinking (p. 146) • Prototyping (p. 160) • Scenarios (p. 180) • Evaluating Business Models (p. 212) • Business Model Perspective on Blue Ocean Strategy (p. 226) • Managing Multiple Business Models (p. 232) • Business Model Canvas (p. 44) • Visual Thinking (p. 146) • Storytelling (p. 170) • Managing Multiple Business Models (p. 232) • Business Model Canvas (p. 44) • Visual Thinking (p. 146) • Scenarios (p. 180) • Business Model Environment (p. 200) • Evaluating Business Models (p. 212) bmgen_final.indd 249 6/15/10 5:45 PM

250 activities • Frame project objectives • Test preliminary business ideas • Plan • Assemble team critical success factors • Appropriate people, experience, and knowledge key dangers • Overestimating value of initial idea(s) Mobilize Prepare for a successful business model design project 1 2 3 4 5 Crucial activities in this first phase include assembling the project team and gaining access to the right people and information. While there are no rules about training the perfect team—again, each project is unique—it makes sense to seek a mix of people with broad management and industry experience, fresh ideas, the right personal networks, and a deep commitment to business model innovation. You may want to start doing some preliminary testing of the basic business idea during the mobilization phase. But since the potential of a business idea depends heavily on the choice of the right business model, this is easier said than done. When Skype launched its busi- ness, who would have imagined it would become the world’s largest long-distance call carrier? In any case, establish the Business Model Canvas as the shared language of the design effort. This will help you structure and present preliminary ideas more effectively and improve communications. You may also want to try weaving your business model ideas into some stories to test them. The main activities of this first phase are framing the project objec- tives, testing preliminary ideas, planning the project, and assembling the team. How objectives are framed will vary depending on the project, but this usually covers establishing the rationale, project scope, and main objectives. Initial planning should cover the first phases of a business model design project: Mobilize, Understand, and Design. The Implementation and Management phases depend heavily on the outcome of these first three phases—namely the business model direction—and therefore can only be planned later. bmgen_final.indd 250 6/15/10 5:59 PM

251 cooperation. A straightforward way to create legitimacy and visible sponsorship is to directly involve a respected member of top management from the very beginning. } Manage vested interests Take care to identify and manage vested interests throughout the organization. Not everybody in an organization is interested in reinventing the current business model. In fact, the design effort may threaten some people. } Cross-functional team As described previously (see p. 143), the ideal business model task force is composed of people from across the organization, including different business units, business functions (e.g. marketing, finance, IT), levels of seniority and expertise, and so forth. Different organizational perspectives help generate better ideas, and increase the likelihood that the project will succeed. A cross-functional team helps identify and overcome potential obstacles to reinvention early in the game and encourages buy-in. } Orienting decision makers You should plan on spending a considerable amount of time orienting and educating decision makers on business models, their importance, and the design and innovation process. This is critical to gaining buy-in and overcoming resistance to the unknown or not-yet-understood. Depending on your organization’s management style you may want to avoid overemphasizing the conceptual aspects of business models. Stay practical and deliver your message with stories and images rather than concepts and theory. One clear danger in the Mobilization phase is that people tend to overestimate the potential of initial business model ideas. This can lead to a closed mindset and limited exploration of other possibili- ties. Try to mitigate this risk by continuously testing the new ideas with people from varied backgrounds. You may also want to consider organizing a so-called kill/thrill session in which all participants are tasked first with brainstorming for 20 minutes on reasons why the idea won’t work (the “kill” portion), then spend 20 minutes brainstorming exclusively on why the idea will fly (the “thrill” por- tion). It’s a powerful way to challenge an idea’s fundamental worth. Working from the Established Company Perspective } Project legitimacy Building project legitimacy is a critical suc- cess factor when working within established organizations. Since business model design projects affect people across organizational boundaries, a strong and visible commitment by the board and/or top management is indispensable to obtaining bmgen_final.indd 251 6/15/10 5:59 PM

252 Understanding 1 2 3 4 5 Scanning, though, is inevitably accompanied by the risk of over- researching. Make your team aware of this risk at the outset and ensure that everyone agrees to avoid excessive researching. “Analysis paralysis” can also be avoided by prototyping business models early on (see Prototyping, p. 160). This has the added benefit of allowing you to quickly collect feedback. As mentioned earlier, research, under- standing, and designing go hand in hand, and the boundaries separat- ing them are often unclear. During research, one area that deserves careful attention is develop- ing deep knowledge of the customer. This sounds obvious, but it is often neglected, particularly in technology-focused projects. The Customer Empathy Map (see p. 131) can serve as a powerful tool to help you structure customer research. One common challenge is that the Customer Segment is not necessarily clear from the outset. A technology “still in search of a problem to solve” may be applicable in several different markets. This second phase consists of developing a good understanding of the context in which the business model will evolve. Scanning the business model environment is a mix of activities, including market research, studying and involving customers, interviewing domain experts, and sketching out competitor business models. The project team should immerse itself in the necessary materials and activities to develop a deep understanding of the business model “design space.” activities • Scan environment • Study potential customers • Interview experts • Research what has already been tried (e.g. examples of failures and their causes) • Collect ideas and opinions critical success factors • Deep understanding of potential targ et markets • Looking beyond the traditional boundaries defining target markets key dangers • Over-researching: disconnect between research and objectives • Biased research because of precom- mitment to a certain business idea Research and analyze the elements needed for the business model design effort Understanding bmgen_final.indd 252 6/15/10 5:59 PM

253 informed design make tangible Directions Working from the Established Company Perspective } Mapping/assessing existing business models Established organizations start with existing business models. Ideally, mapping and assessing your current business model should be done in separate workshops involving people throughout the organization, at the same time ideas and opinions for new business models are being collected. This will provide multiple perspectives on the strengths and weaknesses of your business model, and provide the first ideas for new models. } Looking beyond the status-quo It is particularly challenging to see beyond the current business model and business model patterns. Because the status quo is usually the result of a successful past, it is deeply embedded in organizational culture. } Searching beyond the existing client base Searching beyond your existing client base is critical when seeking lucrative new business models. Tomorrow’s profit potential may well lie elsewhere. } Demonstrate progress Excessive analysis risks losing senior management support due to a perceived lack of productivity. Demonstrate your progress by describing customer insights or showing a series of business model sketches based on what you’ve learned from research. A critical success factor in this phase is questioning industry assumptions and established business model patterns. The game console industry was building and selling cutting edge subsidized consoles until the Nintendo Wii overturned commonly accepted assumptions (see p. 82). Questioning assumptions includes exploring the potential of “the low end” of established markets, as Scott Anthony points out in The Silver Lining . As you scan the environment and assess trends, markets, and competitors, remember that the seeds of business model innovation can be found just about anywhere. During the Understanding phase you should also actively seek input from varied sources, including customers. Start testing preliminary business model directions early by soliciting feedback on Business Model Canvas sketches. Bear in mind, though, that breakthrough ideas may encounter strong resistance. bmgen_final.indd 253 6/15/10 5:59 PM

254 seek alternative revenue streams, and explore the value of multiple distribution channels. Try out different business model patterns (see p. 52) to explore and test new possibilities. To test potential business models with outside experts or prospective clients, develop a narrative for each and seek feedback on your telling of each model’s “story.” This is not to imply that you need to modify your model based on each and every comment. You will hear feedback such as “this won’t work, customers don’t need it,” “that’s not doable, it goes against industry logic,” or “the marketplace just isn’t ready.” Such comments indicate potential roadblocks ahead but should not be considered showstoppers. Further inquiry may well enable you to successfully refine your model. Iqbal Quadir’s quest to bring mobile telephony to poor rural villagers in Bangladesh in the late 1990s provides a powerful example. Most industry experts rejected his idea, saying poor villagers were pressed by more basic needs and wouldn’t pay for mobile telephones. But seeking feedback and developing contacts outside the telecommunications activities • Brainstorm • Prototype • Test • Select critical success factors • Co-create with people from across the organization • Ability to see beyond status quo • Taking time to explore multiple business model ideas key dangers • Watering down or suppressing bold ideas • Falling in love with ideas too quickly Design Adapt and modify the business model in response to market response 1 2 3 4 5 The key challenge during the Design phase is to generate and stick with bold new models. Expansive thinking is the critical success factor here. In order to generate breakthrough ideas, team members must develop the ability to abandon the status quo (current business models and patterns) during ideation. An inquiry-focused design attitude is also crucial. Teams must take the time to explore multiple ideas, because the process of exploring different paths is most likely to yield the best alternatives. Avoid “falling in love” with ideas too early. Take the time to think through multiple business model options before selecting the one you want to implement. Experiment with different partnership models, bmgen_final.indd 254 6/15/10 6:00 PM

255 design decide execute inquiry provoke prototype decide decide uncertainty. If you clearly define the uncertainties involved (e.g. new pricing mechanisms, new Distribution Channels), you can prototype and test them in the market to better predict how the model will perform when launched full-scale. } Participatory design Another way to improve the likelihood of having bold ideas adopted and subsequently implemented is to be especially inclusive when assembling the design team. Co- create with people from different business units, different levels of the organizational hierarchy, and different areas of expertise. By integrating comments and concerns from across the organi- zation, your design can anticipate and possibly circumvent implementation roadblocks. } Old versus new One big design question is whether the old and new business models should be separated or integrated into one. The right design choice will greatly affect chances of suc- cess (see Managing Multiple Business Models, p. 232). } Avoid short-term focus One limitation to avoid is a short-term focus on ideas with large first- year revenue potential. Big corporations, in particular, can experience huge absolute growth. A company with annual sales of U.S. $5 billion, for example, generates $200 million in new revenues by growing at the modest rate of four percent. Few breakthrough business models can achieve such revenues during their first year (doing so would require acquiring 1.6 million new customers, each paying an annual fee of $125). Therefore, a longer-term perspective is required when exploring new business models. Otherwise, your organization is likely to miss out on many future growth opportunities. How much do you imagine Google earned in its first year? industry led to a partnership with microfinance institution Grameen Bank, which became the cornerstone of Grameenphone’s business model. Contrary to expert opinion, poor villagers were indeed willing to pay for mobile connectivity, and Grameenphone became Bangladesh’s leading telecommunications provider. Working from the Established Company Perspective } Prevent taming of bold ideas Established organizations tend to water down bold business model ideas. Your challenge is to defend their boldness —while assuring that they won’t face overwhelming obstacles if implemented. To achieve this tricky balance it can be helpful to draw a risk/reward profile of each model. The profile could include questions such as, What is the profit/loss potential? Describe potential conflicts with existing business units. How might this affect our brand? How will existing customers react? This approach can help you clarify and address the uncertainties in each model. The bolder the model, the higher the level of prototype bmgen_final.indd 255 6/15/10 6:00 PM

256 Business Model Generation focuses on understanding and developing innovative business models, but we’d also like to offer some sug- gestions on implementing new business models, particularly within established organizations. Once you’ve arrived at a final business model design, you will start translating this into an implementation design. This includes defining all related projects, specifying milestones, organizing any legal structures, preparing a detailed budget and project roadmap, and so forth. The implementation phase is often outlined in a business plan and itemized in a project management document. Particular attention needs to be paid to managing uncertainties. This implies closely monitoring how risk/reward expectations play out against actual results. It also means developing mechanisms to quickly adapt your business model to market feedback. 1 2 3 4 5 activities • Communicate and involve • Execute critical success factors • Best practice project management • Ability and willingness to rapidly adapt the business model • Align “old” and “new” business models key dangers • Weak or fading momentum Implement Implement the business model prototype in the field bmgen_final.indd 256 6/15/10 6:00 PM

257 mentation of the new model is even planned. Deep, cross-functional participation allows you to directly address any concerns regarding the new business model before drawing the roadmap for its implementation. } Project sponsorship A second success element is the sustained and visible support of your project sponsor, something that signals the importance and legitimacy of the business model design effort. Both elements are crucial to keeping vested interests from undermining the successful implementation of a new business model. } Old versus new business model A third element is creating the right organizational structure for your new business model (see Managing Multiple Business Models, p. 232). Should it be a standalone entity or a business unit within the parent organization? Will it draw on resources shared with an existing business model? Will it inherit the parent’s organizational culture? } Communication campaign Finally, conduct a highly visible, multi-channel internal commu- nication campaign announcing the new business model. This will help you counter “fear of the new” in your organization. As outlined earlier, stories and visualizations are powerful, engaging tools that help people understand the logic of and rationale for the new business model. For example, when Skype started becoming successful and was signing up tens of thousands of new users each day, it had to immediately develop mechanisms to cost-effectively handle user feedback and complaints. Otherwise, skyrocketing expenses and user dissatisfaction would have brought the company to its knees. Working from the Established Company Perspective } Proactively managing “roadblocks” The single element that most increases the likelihood of a new business model’s success is in place long before actual implementation. By this we are referring to the participation of people from throughout the organization during the Mobilization, Understanding, and Design phases. Such a participatory approach will have already established buy-in and uncovered obstacles before the imple- bmgen_final.indd 257 6/15/10 6:00 PM

258 At least one person on the organizational strategy team—if not a new team—should be assigned responsibility for business models and their long-term evolution. Consider organizing regular workshops with cross-functional teams to evaluate your business model. This will help you judge whether a model needs minor adjustments or a complete overhaul. Ideally, improving and rethinking the organization’s business model should be every employee’s obsession rather than something that preoccupies only top management. With the Business Model Canvas you now have a formidable tool with which to make business models clear to everybody throughout the enterprise. New business model ideas often emerge from unlikely places within an organization. Proactive response to market evolutions is also increasingly important Consider managing a “portfolio” of business models. We live in the business model generation, a time when the shelf life of successful business models is shrinking quickly. As with traditional product life- 1 2 3 4 5 activities • Scan the environment • Continuously assess your business model • Rejuvenate or rethink your model • Align business models throughout the enterprise • Manage synergies or conflicts between models critical success factors • Long-term perspective • Proactiveness • Governance of business models key dangers • Becoming a victim of your own success, failing to adapt Manage Adapt and modify the business model in response to market reaction For successful organizations, creating a new business model or rethinking an existing one is not a one-time exercise. It’s an activity that continues beyond implementation. The Manage phase includes continuously assessing the model and scanning the environment to understand how it might be affected by external factors over the long term. bmgen_final.indd 258 6/15/10 6:01 PM

259 vation or redesign projects, and track the overall evolution of the organization’s business mod- els. It should also manage the “master” business model that describes the entire organization. This master template could serve as the starting point for each business model project within the organization. The master business model would also help different functional groups, such as operations, manufacturing, or sales align with the organization’s overarching goals. } Manage synergies and conflicts One of the business model governance authority’s main tasks would be to align business models with each other to exploit synergies and avoid or manage conflicts. A Canvas document describing each business model in the organization would help illuminate the big picture and achieve better alignment. } Business model portfolio Successful, established companies should proactively manage a “portfolio” of business models. Many formerly successful companies in the music, newspaper, and automotive industries failed to proactively examine their business models and slid into crisis as a result. A promising approach to avoiding this fate is to develop a portfolio of business models whereby cash-generating businesses finance business model experiments for the future. } A beginner’s mindset Maintaining a beginner's mindset helps keep us from becoming victims of our own successes. We all need to constantly scan the landscape and continuously assess our own business models. Take a fresh look at your model regularly. You may need to overhaul a successful model sooner than you thought. cycle management, we all need to start thinking about replacing our current cash-generating business models with growth models for tomorrow’s marketplace. Dell disrupted the PC industry when it introduced the build-to-order format and direct online sales. Over the years, Dell grew so success- fully that it established itself as the industry leader. But the company failed to fully rethink its once disruptive business model. Now that the industry landscape has changed, Dell risks remaining stuck in a commoditized PC market, while growth and profits, generated elsewhere, lie outside its reach. Working from the Established Company Perspective } Business Model Governance Consider establishing a “business model governance” authority to help better manage business models across the enterprise. This group’s role would be to orchestrate business models, engage stakeholders, launch inno- informed design make tangible Directions Directions bmgen_final.indd 259 6/15/10 6:01 PM

Prototyping is pote ntially the mos t imp ortant par t of the boo k and too ls prov ided. My reasoning is based upon the stress and resis tance that established orga- nizations are facing in the proc ess of innovating their own business models. The refore a ver y pot ent str ategy is prot otyping—in order to cre ate buy-in pro cesses nee ded. Terje Sand, Norway Typically when an organization looks at improving their business model, it is as a result of gaps. Visualizing your cur rent bus iness mod el can dem onstrate the logical gaps that exist and make th em tan gible as act ion ite ms. Ravila White, United States In established companies, there are often ample physic al "produc t ideas" that nev er ge t serious consider ation because they don't immediately fit the prevailing business model. Gert Steens, Netherlands Do not get too attached to the first idea or implementation. Build in feedback loops and monitor early warning signals to explicitly challenge your original conc ept and be willing and able to comple tely change it if requir ed. Erwin Fielt, Australia The freemium business model as the rev erse of insuranc e—insightful! Makes me want to turn other models upside down! Victor Lombardi, United States A business model is the "core content" or the "SH ort S tor Y" of the company (actual or prospec tive). A business plan is the “guideline for the action” or the “full st ory.” Fernando Saenz-Marrero, Spain When I work with non-profits the first thing I tell them is that they in fact have a "business" (model) in that they must creat e and cap ture value, whether that value comes from donations, subscrip- tions, and so on. Kim Korn, United States Begin with the end in mind while taking the end client perspective. Karl Burrow, Japan WhA T ELSE? 260 bmgen_final.indd 260 6/15/10 6:01 PM

It’s one thing to map out a Bus iness Mod el Can vas. But for cre ating a bus iness mod el tha t in its elf is a bre akthrough inn ovation, it is hel pful to use too ls use d to cre ate bre akthrough inn ovation in othe r ind ustries, suc h as in des ign. Ellen Di Resta, United States Aravind uses the Fre emium Bus iness Mod el to ena ble FRE E eye sur gery for the poor in India. Business model innovation can re ally make a differ ence! Anders Sundelin, Sweden I find that although most managers understand str ategy concep ts, they have a tough time applying these conc epts at their level of the organization. h ow ever, discussions about business models connec t the high-lev el conc epts to day- to-day decision- making. It' s a gre at middle ground. Bill Welter, United States Personas, Scenarios, Vis ualization, Emp athy map s, and so on are tec hniques tha t I hav e use d sin ce the lat e 199 0s in use r exp erience typ e pro jects. In the las t few yea rs I hav e see n tha t the y are inc red- ibly eff ective at a str ategy/business lev el. Eirik V Johnsen, Norway If solving humanity’s current problems requir es rethinking how value is gener ated and for whom, then business model innovation is the premier tool to organize, communic ate, and implement that new thinking. Nabil Harfoush, Canada I'm interested in hearing how people are integr ating technology ideas into their models using the Canvas. We 've explored adding it as a separat e layer (above or below financial) but have now settled on integr ating it as not es on each of the 9 ke y are as. Fr om this we then st ep back and dev elop a separat e integrat ed technology plan. Rob Manson, Australia Yo U r business model I s not Y o U r business It’s a method of inquiry to help you understand what to do next. Tes ting and iter ation is ke y. Matthew Milan, Canada Multi-sided platforms are actually rather easy at the business model lev el; the dif- ficult y comes in execution: attracting the "subsidized side," pricing on both sides, vertical or horizontal integr ation, how to change the business model in st ep with the size of the marke t on each side. Hampus Jakobsson, Sweden business model innovation combines creativity with a structured approach —the best of both worlds. Ziv Baida, Netherlands Many of my clients do not have a holistic view of their business model and tend to focus on trying to address the immediate problem. The Business Model Canvas pro vides a framew ork that helps clarify the why, who, what, when, where, and how . Patrick van Abbema, Canada I lov e the idea of using these tools to design businesses and to tinker under the hoo d of the engine of an organization. Michael Anton Dila, Canada There are thousands of business models to be inves tigated and many tho usands of people who are interested in the m. Steven Devijver, Belgium Simplicity is very important to explain the patterns and to trigger the non- pro fessional's involv ement in business inn ovation. Gertjan Verstoep, Netherlands We have been working too long and too hard for companies with bad or improper business models. Lytton He, China The term business model is thrown around a lot and more frequently than not to mean an incomple te understanding of what makes a business a business (mostly just the financial/ revenue aspect). Livia Labate, United States Business model innovation is one of the LEAST u SE D & most powerful ways to cre ate sustainable pro fit grow th, economic dev elopment and creat e new ‘marke ts’ and ‘industries’. Deborah Mills-Scofield, United States 261 bmgen_final.indd 261 6/15/10 6:01 PM

Outlook bmgen_final.indd 262 6/15/10 6:01 PM

We hope we’ve shown you how visionaries, game changers, and challengers can tackle the vital issue of business models. We hope we’ve provided you with the language, the tools and techniques, and the dynamic approach needed to design innovative and competitive new models. But much remains to be said. So here we touch on five topics, each of which might well merit its own book. The first examines business models beyond profit: how the Canvas can drive business model innovation in the public and non-profit sectors. The second suggests how computer-aided business model design might leverage the paper-based approach and allow for complex manipulation of business model elements. The third discusses the relationship between business models and business plans. The fourth addresses issues that arise when implementing business models in either new or existing organizations. The final topic examines how to better achieve business model and IT alignment. bmgen_final.indd 263 6/15/10 6:01 PM

264 VP CR Ch CS R$ Beyond-Profit Business Models The application of the Canvas is in no way limited to for-profit cor- porations. You can easily apply the technique to non-profit organiza- tions, charities, public sector entities, and for-profit social ventures. E very organization has a business model, even if the word “busi- ness” is not used as a descriptor. To survive, every organization that creates and delivers value must generate enough revenue to cover its expenses. Hence it has a business model. The difference is merely a matter of focus: the for-profit business’s goal is to maximize earnings, while the organizations discussed in the following pages have strong non-financial missions focused on ecology, social causes, and public service mandates. We find useful entrepreneur Tim Clark's suggestion that the term “enterprise model” be applied to such organizations. We distinguish between two categories of beyond-profit models: third-party funded enterprise models (e.g. philanthropy, charities, government) and so-called triple bottom line business models with a strong ecological and/or social mission (“triple bottom line” refers to the practice of accounting for environmental and social, as well as finan- cial, costs). It is mainly the source of revenue that distinguishes these two, but as a direct consequence they have two very different business model patterns and drivers. Many organizations are experimenting with blending the two models in order to exploit the best of both. Third-Party Funded Models In this type of enterprise model, the product or service recipient is not the payer. Products and services are paid for by a third party, which might be a donor or the public sector. The third party pays the organization to fulfill a mission, which may be of a social, ecological, or public service nature. For example, government (and indirectly, taxpayers) pays schools to deliver education services. Likewise, donors to Oxfam, a large U.K. non-profit organization, help finance its efforts to end poverty and social injustice. Third parties rarely expect to receive direct economic benefits from the exchange, unlike advertisers—who are players in for-profit business models which also feature third party financing. One risk of the third-party enterprise model is that value creation incentives can become misaligned. The third-party financer becomes the main “customer,” so to speak, while the recipient becomes a mere receiver. Since the very existence of the enterprise depends on contributions, the incentive to create value for donors may be stron- ger than the incentive to create value for recipients. All this is not to say that third-party funded enterprise models are bad and recipient-funded business models are good. Conven- tional businesslike selling of products and services doesn’t always work: education, healthcare, and utility services are clear examples. There are no simple answers to the questions raised by third-party financed enterprise models and the resulting risks of misaligned incentives. We must explore which models make sense, then strive to design optimal solutions. mission product or service “donor” “recipient” free donation bmgen_final.indd 264 6/15/10 6:01 PM

265 Solving the big issues of our generation requires bold new business models Triple Bottom Line Business Models Earlier we shared the story of how Iqbal Quadir, an investment banker in New York, set out to build Grameenphone. His goal was to provide universal access to telecommunications services in remote, rural areas of his home country of Bangladesh. He achieved his aim with a for-profit model that had a profound, positive impact on rural Bangladesh. Grameenphone eventually provided over 200,000 women in rural areas with income-earning opportunities, raised their social status, connected 60,000 villages to a mobile phone network, reached 100 million people, turned a profit, and became the Bangla- deshi government’s biggest taxpayer. To accommodate triple bottom line business models, we can extend the Canvas with Blocks illustrating two outcomes: (1) the social and environmental costs of a business model (i.e. its negative impact), and (2) the social and environmental benefits of a business model (i.e. its positive impact). Just as earnings are increased by minimizing financial costs and maximizing income, the triple bottom line model seeks to minimize negative social and environmental impacts and maximize the positive. Villagers in Bangladesh were too poor to afford phones, so Grameenphone partnered with Grameen Bank, the microfinance institution, to provide local women with microloans to purchase mobile phones. The women sold calling services in their villages, repaid the loans, earned income, and thereby improved their social status. Grameenphone went beyond establishing near universal access to telephone service and earning a profit. It also had substan- tial social impact by providing “village phone ladies” with earning opportunities and improved social status. grameen bank network consortium (telenor) manage network income opportunity mobile communication village phone ladies villagers network grameen bank village phone ladies network communication income VP CR C h CS KP K A KR R$ C$ social and environmental costs social and environmental benefits “universal access” income for women and better social status bmgen_final.indd 265 6/15/10 6:01 PM

Prototype of a computer aided business model editor: www.bmdesigner.com 266 Computer-Aided Business Model Design Mike, a senior business analyst with a large financial group, wraps up the first of a two-day workshop he is facilitating with a group of 24 executives. He collects the business model prototypes and ideas that participants sketched on large Canvas posters and hurries to his office. The re, Mike and his team enter the ideas into a collaborative computer-aided business model design program to further develop the prototypes. Other business analysts working overseas add resource and activity cost estimates, as well as calculations of potential Revenue Streams. The software then spits out four dif- ferent financial scenarios, with business model data and prototype diagrams for each plotted on large posters. The following morning Mike presents the results to the executives, who have gathered for the second day of their workshop to discuss the potential risks and rewards of each prototype. Thi s scenario doesn’t yet describe reality, but it soon will. A Business Model Canvas printed on a large poster and a big box of Post-it™ notes are still the best tools for triggering creativity and generating innovative business model ideas. But this paper-based approach could be extended with the help of computers. Turning a prot otype business model into a spreadsheet is time- consuming, and each change to the prototype usually requires a manual modification of the spreadsheet. A computer-aided system could do this automatically and make possible lightning-quick, comprehensive business model simulations. Furthermore, computer support could make creating, storing, manipulating, tracking, and communicating business models far easier. Such support would seem to be almost a requirement for collaboratively working on busi- ness models with geographically disparate teams. Doe sn’t it seem strange that we can design, simulate, and build airplanes or develop software across continents, yet we can’t manipulate highly valuable business models outside of the board- room and without paper and pencil? It’s time to bring the speed and power of microprocessors to the development and management of new business models. Inventing innovative business models certainly requires human creativity, but computer-aided systems could help us manipulate business models in more sophisticated and complex ways. An example from the field of architecture is helpful in illustrat- ing the power of computer-aided design. In the 1980s so-called Computer-Aided Design (CAD) systems started becoming more affordable and slowly were adopted by architectural firms. CAD made it much easier and cheaper for architects to create three- dimensional models and prototypes. They brought speed, integration, improved collaboration, simulation, and better planning to architec- ture practices, Cumbersome manual tasks, such as constant redraw- ing and blueprint sharing, were eliminated, and a whole new world of opportunity, such as rapid visual 3D exploration and prototyping, opened up. Today paper-based sketching and CAD happily co-exist, each method retaining its own strengths and weaknesses. bmgen_final.indd 266 6/15/10 6:01 PM

267 In the realm of business models, too, computer-aided systems could make many tasks easier and quicker, while revealing as-yet unseen opportunity. At the least, CAD systems could help visual- ize, store, manipulate, track, annotate, and communicate business models. More complex functions would involve manipulating layers or business model versions, or moving business model elements dynamically and evaluating the impact in real-time. Sophisticated systems might facilitate business model critiquing, provide a reposi- Paper-based • Paper or poster-based Canvases can be easily created and used just about anywhere • Paper and poster-based Canvases impose few barriers: no need to learn a specific computer application • Very intuitive and engaging in group settings • Fosters creativity, spurs ideation when used on large surfaces • Napkin sketches to draw, understand, or explain business models • Collaborative brainstorming sessions to develop business model ideas • Collaborative assessment of business models Computer-aided Easy to create, store, manipulate, and track business models • Enable remote collaboration • Quick, comprehensive financial, other simulations • Provide business model design guidance (critiquing systems, business model database, pattern ideas, control mechanisms) • Collaborative business model design with remote teams • Complex manipulations of business models (navigation, business model layers, merging models) • Deep, comprehensive analysis Advantages Applications tory of business model patterns and off-the-shelf building blocks, enable distributed business model development and management, simulate models, or integrate with other enterprise systems (e.g. ERP or business process management). Computer-aided business model design systems will likely evolve in step with interface improvements. Manipulating business models on wall-sized touch screens would bring computer-aided design closer to the intuitive paper-based approach and improve usability. bmgen_final.indd 267 6/15/10 6:01 PM

268 Business Models and Business Plans The purpose of a business plan is to describe and communicate a for-profit or non-profit project and how it can be implemented, either inside or outside an organization. The motivation behind the busi- ness plan may be to “sell” a project, either to potential investors or internal organizational stakeholders. A business plan may also serve as an implementation guide. In fact, the work y ou may have done designing and thinking through your own business model is the perfect basis for writing a strong business plan. We suggest giving business plans a five-section structure: The Team, The Business Model, Financial Analysis, Exter- nal Environment, Implementation Roadmap, and Risk Analysis. The Team One business plan element that venture capitalists particularly emphasize is the management team. Is the team experienced, knowl- edgeable, and connected enough to accomplish what they propose? Do the members have successful track records? Highlight why your team is the right one to successfully build and execute the business model you propose. The Business Model This section showcases the attractiveness of the business model. Use the Canvas to provide readers with an immediate visual portrait of your model. Ideally, illustrate the elements with drawings. Then, describe the Value Proposition, show evidence of customer need, and explain how you will reach the market. Use stories. Highlight the attractiveness of your target segments to pique the reader’s interest. Finally, describe the Key Resources and Activities needed to build and execute the business model. Financial Analysis This is traditionally an important business plan component that attracts much attention. You can make pro forma calculations based on your Canvas Building Blocks and estimate how many customers can be acquired. Include elements such as breakeven analysis, sales scenarios, and operating costs. The Canvas can also help with capital spending calculations and other implementation cost estimates. Total cost, revenue, and cash flow projections determine your fund- ing requirements. External Environment This section of the business plan describes how your business model is positioned with respect to the external environment. The four external forces covered earlier (see p. 201) provide the basis for this descrip- tion. Summarize your business model’s competitive advantages. Implementation Roadmap This section shows the reader what it will take to implement your business model and how you will do it. Include a summary of all projects and the overarching milestones. Outline the implementation agenda with a project roadmap that includes Gantt charts. Projects can be derived directly from your Canvas. Risk Analysis In closing, describe limiting factors and obstacles, as well as critical success factors. These can be derived from a SWOT analysis of your business model (see p. 216). bmgen_final.indd 268 6/15/10 6:01 PM

269 BUSINESS PLAN executive summary the team • Management Profile • Why We Are a Winning Team the business model • Vision, Mission, and Values • How Our Business Model Works • Value Proposition • Target Markets • Marketing Plan • Key Resources and Activities financial analysis • Breakeven Analysis • Sales Scenarios and Projections • Capital Spending • Operating Costs • Funding Requirements external environment • The Economy • Market Analysis and Key Trends • Competitor Analysis • Competitive Advantages of Our Business Model implementation roadmap • Projects • Milestones • Roadmap risk analysis • Limiting Factors and Obstacles • Critical Success Factors • Specific Risks and Countermeasures conclusion annexes VP CR Ch CS KP KA KR R$ C$ environmental analysis financial spreadsheets implementation roadmap SWOT and uncertainty analysis bmgen_final.indd 269 6/15/10 6:01 PM

270 Implementing Business Models in Organizations We’ve laid out the fundamentals of business model innovation, explained the dynamics of different patterns, and outlined tech- niques for inventing and designing models. Naturally there is much more to say about the implementation that is critical to a business model’s success. We’ve alr eady addressed the question of how to manage multiple business models (see p. 232). Now let’s turn to another aspect of implementation: turning your business model into a sustainable enterprise, or implementing it in an existing organization. To illus- trate, we’ve combined the Canvas with Jay Galbraith’s Star Model to suggest aspects of organizational design you may want to consider when executing a business model. Galbraith specifies five ar eas that should be aligned in an organi- zation: Strategy, Structure, Processes, Rewards, and People. We place the business model in the middle of the star as a “center of gravity” that holds the five areas together. Strategy Strategy drives the business model. Do you want to grow 20 percent in new market segments? Then that should be reflected in your business model in terms of new Customer Segments, Channels, or Key Activities. Structure The characteristics of a business model determine the optimal organizational structure for its execution. Does your business model call for a highly centralized or decentralized organizational structure? If you will implement the model in an established business, should the new operation be integrated or spun off (see p. 233)? Processes Each business model demands different processes. Operations run under a low-cost business model should be lean and highly automated. If the model calls for selling high-value machines, quality processes must be exceptionally rigorous. Rewards Different business models require different reward systems. A reward system must use appropriate incentives to motivate workers to do the right things. Does your model require a direct sales force to acquire new customers? Then your reward system should be highly performance oriented. Does your model depend heavily on customer satisfaction? Then your reward system must reflect that commitment. People Certain business models call for people with particular mindsets. For example, some business models call for particularly entrepreneurial mechanisms to bring products and services to market. Such models must give employees significant leeway, which means hiring proac- tive, but dependable, free-thinkers. bmgen_final.indd 270 6/15/10 6:01 PM

271 VP CR Ch CS KP KA KR R$ C$ people processes structure strategy Power What type of organizational structure does your business model require? Skills/mindset What kinds of people with what skills does your business model require? What type of mindset is needed? Direction What are your strategic goals? How do they drive the business model? Information What information flows, processes, and workflows does your business model require? Motivation What reward system does your business model require? How can you motivate your people? rewards bmgen_final.indd 271 6/15/10 6:01 PM

272 Aligning IT with Business Aligning information systems and business goals is fundamental to the success of an enterprise. Chief executives officers ask their chief information officers (CIOs), Do we have the right IT? How do we know? How can we best align our business with our technology systems? Inf ormation technology research and advisory firm Gartner highlights this issue in a report called “Getting the Right IT: Using Business Models.” Gartner asserts that the Business Model Canvas is a powerful tool that helps CIOs quickly grasp how a business works without getting bogged down in operational details. Gartner recommends that CIOs use the Business Model Canvas to align IT and key business processes. This helps them align business and IT decisions without diving too deeply into tactical issues. We find it useful to pair the Canvas with an Enterprise Archi- tecture approach. Many of the various Enterprise Architecture concepts describe the enterprise from three perspectives: the busi- ness perspective, the applications perspective, and the technology perspective. We recommend using the Canvas to guide the business perspective, then align the business with the applications and tech- nology perspectives. In the application perspective, you describe the portfolio of applications that leverage aspects of your business model (e.g. recommendation systems, supply chain management applications, etc.) and you describe all the business model’s information require- ments (e.g. customer profiles, warehousing, etc.). In the technology perspective you describe the technology infrastructure that drives your business model (e.g. server farms, data storage systems, etc.). Authors W eill and Vitale propose another interesting way to explore IT alignment. They pair categories of IT infrastructure service with business models. Weill and Vitale propose aligning business models with application infrastructure, communications manage- ment, data management, IT management, security, IT architecture, channel management, IT research and development, and IT training and education. On the opposite page w e’ve brought these elements together in a graphic to help you pose some fundamental questions regarding business and IT alignment. bmgen_final.indd 272 6/15/10 6:01 PM

273 Business Applications Technology VP CR Ch CS KP KA KR R$ C$ strategy business model operational models How can IT support the processes and workflows required by my business models? What information do I need to capture, store, share, and manage to improve my business model? How does my application portfolio leverage the specific dynamics of my business model? How will IT architecture, standards, and interface choices limit or leverage my business model? Which technology infrastructure is required and crucial to the success of my business model (e.g. server farms, communications, and so on)? Where in my business model does security play an important role and how does that influence my IT? Do I need to invest in IT training and education to leverage my business model? Could investments in IT research and development improve my business model in the future? bmgen_final.indd 273 6/15/10 6:01 PM

274 Context 2004: Alexander Osterwalder com- pletes a Ph.D. dissertation on the topic of business model innovation with Professor Y ves P igneur at hEC L ausanne, Switzerland. Fast forward. 2006: The approach outlined in the dissertation starts being applied around the world based on Alexander’s business model blog, notably in companies such as 3M, Ericsson, Deloitte, and Telenor. During a workshop in the Netherlands Patrick van der Pijl asks “why is there no book accompanying the method?” Alexander and Yves take up the chal- lenge. But how does one stand out in a market where countless strategy and management books are published every year? INNOVATING the model Alexander a nd Y ves d ecide they can’t credibly write a book about business model innovation with- out an innovative business model. They d itch p ublishers a nd l aunch t he hu b, an o nline p latform to s hare t heir writings f rom d ay o ne. A nybody w ith an i nterest in t he t opic c an j oin t he platform f or a f ee ( initially u. S. $ 24, which is g radually r aised to u. S. $ 243 to keep t he p latform e xclusive). T hat t his and o ther i nnovative R evenue S treams finance t he b ook p roduction in a dvance itself is an i nnovation as w ell. It b reaks the f ormat of c onventional s trategy a nd management b ooks in o rder to c reate more v alue f or r eaders: it is c o-created highly v isual, a nd c omplemented by exercises a nd w orkshop t ips. key audience visionary and game changing . . . entrepreneurs / consultants / executives WhERE DID ThIS BOOK COME FROM? onsultants / ecutives nd bmgen_final.indd 274 6/15/10 6:01 PM

275 process The core team, consisting of Alexander, Yves, and Patrick start the project with a number of meetings to sketch out the business model of the book. The Hub is launched to co-create the book with business model innovation practitioners throughout the world. Creative Director Alan Smith of The Movement hears about the project and puts his company behind it. Finally, Hub member Tim Clark joins the core team after recognizing the need for an editor. The group is completed by JAM, a company that uses visual thinking to solve business problems. An engagement cycle is started to pump fresh “chunks” of content out to the Hub community for feedback and contribu- tions. The writing of the book becomes completely transparent. Content, design, illustrations, and structure are constantly shared and thoroughly com- mented upon by Hub members worldwide. The core team responds to every comment and integrates the feedback back into the book and design. A “soft launch” of the book is organized in Amsterdam, Netherlands, so members of the Hub can meet in person and share their experiences with business model innovation. Sketching out participant business models with JAM becomes the core exercise of the day. Two hundred special limited edition prototypes of the (unfinished) book go to print and a video of the writing process is produced by Fisheye Media. After several more iterations the first print run is produced. toolS uSeD strategy: • Environmental Scanning • Business Model Canvas • Customer Empathy Map content and r&d: • Customer Insights • Case Studies open process: • Online Platform • Co-Creation • Access to un finished W ork • Commenting & Feedback design: • Open Design Process • Moodboards • Paper Mockups • Visualization • Illustration • Photography the numbers 9 years of research and practice 470 co-authors 19 book chunks 8 prototypes 200 copies of a messed up test print 77 forum discussions 287 Skype calls 1,360 comments 45 countries 1 3 7, 7 5 7 views of method online before book publishing 13.18 GB of content 28,456 Post-it™ notes used 4,000+ hours of work 521 photos MADE I N. . . Written: Lausanne, CH Designed: London, UK Edited: Portland, USA Photographed: Toronto, CA Produced: Amsterdam, NL Events: Amsterdam & Toronto bmgen_final.indd 275 6/15/10 6:01 PM

276 references Boland, richard Jr., and Collopy, Fred. Managing as Designing. stanford: stanford Business Books. 2004. Buxton, Bill. Sketching User Experience, Getting the Design Right and the Right Design. New York: Elsevier. 2007. Denning, stephen. The Leader’s Guide to Storytelling: Mastering the Art and Discipline of Business Narrative. san Francisco: Jossey-Bass. 2005. Galbraith, Jay r. Designing Complex Organizations. reading: Addison Wesley. 1973. Goodwin, Kim. Designing for the Digital Age: How to Create Human-Centered Products and Services. New York: John Wiley & sons, Inc. 2009. Harrison, sam. Ideaspotting: How to Find Your Next Great Idea. Cincinnati: How Books. 2006. Heath, Chip, and Heath, Dan. Made to Stick: Why Some Ideas Survive and Others Die. New York: random House. 2007. Hunter, richard, and McDonald, Mark, “Getting the right IT: Using Business Models.” Gartner EXP CIO Signature report, oc tober 2007. Kelley, Tom, et. al. The Art of Innovation: Lessons in Creativity from IDEO, America’s Leading Design Firm. New York: Broadway Business. 2001. Kelley, Tom. The Ten Faces of Innovation: Strategies for Heighten- ing Creativity. New York: Profile Business. 2008. Kim, W. Chan, and Mauborgne, renée. Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant. Boston: Harvard Business school Press. 2005. Markides, Constantinos C. Game-Changing Strategies: How to Create New Market Space in Established Industries by Breaking the Rules. san Francisco: Jossey-Bass. 2008. Medina, John. Brain Rules: 12 Principles for Surviving and Thriving at Work, Home, and School. seattle: Pear Press. 2009. Moggridge, Bill. Designing interactions. Cambridge: MIT Press. 2007. o'reilly, Charles A., III, and Michael L. Tushman. “The Ambi-dextrous organization.” Harvard Business Review 82, no. 4 (April 2004): 74–81. Pillkahn, Ulf. Using Trends and Scenarios as Tools for Strategy Development. New York: John Wiley & sons, Inc. 2008. Pink, Daniel H. A Whole New Mind: Why Right-Brainers Will Rule the Future. New York: riverhead Trade. 2006. Porter, Michael. Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press. 1980. roam, Dan. The Back of the Napkin: Solving Problems and Selling Ideas with Pictures. New York: Portfolio Hardcover. 2008. schrage, Michael. Serious Play: How the World’s Best Companies Simulate to Innovate. Boston: Harvard Business school Press. 1999. schwartz, Peter. The Art of the Long View: Planning for the Future in an Uncertain World. New York: Currency Doubleday. 1996. Weill, Peter, and Vitale, Michael. Place to Space: Migrating to Ebusiness Models. Boston : Harvard Business sc hool Press. 2001. bmgen_final.indd 276 6/15/10 6:01 PM

277 #bmgen @business_design Three steps to effective use of "Business Model Generation": 1) Buy book 2) Test live 3) Be amazed ;-) http://bit.ly/OzZh0 @Acluytens Excitement! Business Model Genera- tion book arrived! It's going to be an “I'm reading weekend," sorry darling! :-) #bmgen @tkeppins Still quiet in the house this sunday morning. Enjoying a cappuccino and reading Business Model Generation. @hvandenbergh I have a dilemma now: to catch up on class reading or have fun with Business Model Generation by @business_design... @vshamanov Just got my copy of Business Model Generation by @business_design designed by @thinksmith Even more beautiful than I imagined #bmgen @remarkk heading over to #ftjco to visit @ryan- taylor and borrow his copy of #bmgen tonight. Exciting evening all-around! @bgilham I'm SO tempted to write all over my copy of #bmgen, but it's too beautiful to destroy. Think I need 2 copies. #bmgento @skanwar Just got my copy of Business Model Generation - looks to be as beautifully made as it is useful. Congrats! @francoisnel @business_design I am BLOWN AWAY by the stuff I've learned from #bmgen!! I can't thank you guys enough for writing it! @will_lam Is reading Business Model Genera- tion... This is perhaps the neatest and most innovative book I have ever read! @jhemlig I am so in love with my copy! Thanks @business_design #bmgen @evelynso market response The market response to Business Model Generation has been extremely gratifying. The first print run of 5,000 books sold out in two months, with no marketing budget and without the support of a traditional publisher. News about the book spread exclusively by word-of-mouth, blogs, Web sites, e-mail, and Twitter. Most gratifying of all, local meetups, where readers and Hub followers got together to discuss Business Model Genera- tion's content, formed spontaneously worldwide. 277 @skanwar beautiful ation": 1) Buy book 2) Test live 3) ;-) http://bit.ly/OzZh0 @Acluytens I'm SO c opy of t o destroy. #bmg @skanwar @skanwar bmgen_final.indd 277 6/15/10 6:02 PM

278 Is it me or is everybody in Toronto picking up a copy of Business Model Generation? #bmgen @will_iam Just got my copy of Business Model Generation.. Too good!! The new age of innovation in book-writing @Neerumarya Just received my copy of the book 'Business Model Generation'. It's a musthave for entrepreneurs who think out of the box @Peter_Engel Business model generatiom really is a stunning book. Feeling like a kid at Christmas with it in my hands. #bmgen @mrchrisadams my edition of http://www .businessmodelgeneration.com has arrived! This is the coolest business book ever! WOW! #bmgen @snuikas The Business Model Generation book will bring a lot more depth to current, often superficial BM discussions #bmgen http://pic.gd/6671ef @provice Reading Business Model Generation over a lonely dinner in London. The book is exquisitely designed. Once you see it, there's no going back. @roryoconnor Excited to have participated in the Business Model Generation book. Now published!! @pvanabbema giddy as a little kid. just received my copy of Business Model Generation http://tinyurl.com/l847fj awesome book design. @santiago_rdm Reading Business Model Generation by Alex Osterwalder and Yves Pigneur: best mngt book in a long time @JoostC your big experiment just arrived in Japan. First printing of "Business Model Generation." Electrifying hands-on book. @CoCreatr My Business Model Generation by @business_design & Yves Pigneur arrived! So awesome to have been a TINY part. @jaygoldman @thinksmith @business_design @ patrickpijl Guys, I am happy! Insane. What a wonderful result. @dulk Got my hands on the #bmgen book a few days ago, very nice! Great job, @business_design, @thinksmith et al! @evangineer It was so amazing to experience 40+ people all embracing business model gen thinking in Toronto #bmgento - this city is exploding! @davidfeldt bmgen_final.indd 278 6/15/10 6:02 PM

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the movement (design) ning platform amazon.com 3rd party logistics company publishers content production hub management guerrilla marketing and word-of-mouth logistics and shipping visual, practical, and beautiful handbook for business model innovators co-creation of a potential bestseller personalized books for companies and their customers businessmodelhub .com business model event, amsterdam visionaries, game changers, and challengers entrepreneurs, executives, consultants, academics companies blog and visibility on the web business model hub powerful methodology hub members word-of-mouth (1) businessmodel generation.com (2) amazon.com (3) book stores intermediation through publishers design content production printing distribution hub membership fees advance & post-publication sales FREE give away canvas section fees for customized versions royalties from publishers hub members VP CR Ch CS KA KR R$ KP C$ Differentiation An entirely different format, business model, and story for the book makes it stand out in a crowded market. Revenues The book was financed through advance sales and fees paid by co-creators. Additional revenues come from custom- ized versions for companies and their clients. Production and Logistics Anything beyond content creation is outsourced to readily available service providers. Buyers Paying customers are not only readers, but co-creators and companies that want customized books for their employees and clients. Reach A mix of direct and indirect Channels and a phased approach optimizes reach and margins. The story of the book lends itself well to viral marketing and word-of- mouth promotion. Community The book is co-created with practitioners from around the world who feel owner- ship thanks to attribution as contributing co-authors. the canvas of business model generation bmgen_final.indd 280 6/15/10 6:02 PM

Alex osterwalder, Author Dr. O sterwalder is an a uthor, s peaker, a nd a dviser on t he t opic of b usiness m odel innovation. his p ractical a pproach to d esigning i nnovative b usiness m odels, d evel- oped t ogether w ith D r. Y ves P igneur, is p racticed in m ultiple i ndustries t hroughout t he world by c ompanies i ncluding 3 M, E ricsson, C apgemini, D eloitte, T elenor, a nd m any others. P reviously he h elped b uild a nd s ell a s trategic c onsulting fi rm, p articipated in the d evelopment of a T hailand-based g lobal n onprofit o rganization c ombating hI V/ AIDS a nd m alaria, a nd d id r esearch at t he un iversity of L ausanne, S witzerland. Yves Pigneur, co-Author Dr. P igneur h as b een a P rofessor of M anagement I nformation S ystems at t he un iversity of L ausanne s ince 1 984, a nd h as h eld v isiting p rofessorships at G eorgia State university in Atlanta and at the university of British Columbia in Vancouver. he has served as the principal investigator for many research projects involving informa- tion system design, requirements engineering, information technology management, innovation, a nd e -business. Alan Smith, creative Director Alan is a big scale thinker who lo ves the details just as much. h e's a co-founder at the aptly named change agency: The Movement. There he works with inspired clients to blend community knowledge, business logic, and design thinking. The resulting strategy, communications, and interactive projects feel like artifacts from the future but always connect to the people of today. Why? Because he designs like he gives a damn—every project, every day. tim clark, editor and contributing co-Author A t eacher, w riter, a nd s peaker in t he fi eld of e ntrepreneurship, T im’s p erspective is informed by h is e xperience f ounding a nd s elling a m arketing r esearch c onsultancy t hat served fi rms s uch as A mazon.com, B ertelsmann, G eneral M otors, L VMh, a nd P eopleSoft. Business m odel t hinking is k ey to h is Entrepreneurship for Everyone a pproach to personal a nd p rofessional l earning, a nd c entral to h is d octoral w ork on i nternational business m odel p ortability. Business Model Generation is h is f ourth b ook. Patrick van der Pijl, Producer Patrick van der Pijl is the founder of Business Models, Inc., an international business model c onsultancy. P atrick h elps o rganizations, e ntrepreneurs, a nd m anagement teams d iscover n ew w ays of d oing b usiness by e nvisioning, e valuating, a nd implementing new business models. Patrick helps clients succeed through intensive workshops, t raining c ourses, a nd c oaching. bmgen_final.indd 281 6/15/10 6:02 PM

You’re holding a handbook for visionaries, game changers, and challengers striving to defy outmoded business models and design tomorrow’s enterprises. It’s a book for the . . . written by Alexander Osterwalder & Yves Pigneur co-created by An amazing crowd of 470 practitioners from 45 countries designed by Alan Smith, The Movement Disruptive new business models are emblematic of our generation. Yet they remain poorly understood, even as they transform competitive landscapes across industries. Business Model Generation offers you powerful, simple, tested tools for understanding, designing, reworking, and implementing business models. Business Model Generation is a practical, inspiring handbook for anyone striving to improve a business model — or craft a new one. change the way you think about business models Business Model Generation will teach you powerful and practical innovation techniques used today by leading companies worldwide. You will learn how to systematically understand, design, and implement a new business model — or analyze and renovate an old one. co-created by 470 strategy practitioners Business Model Generation practices what it preaches. Coauthored by 470 Business Model Canvas practitioners from forty-five countries, the book was financed and produced independently of the traditional publishing industry. It features a tightly integrated, visual, lie-flat design that enables immediate hands-on use. designed for doers Business Model Generation is for those ready to abandon outmoded thinking and embrace new, innovative models of value creation: executives, consultants, entrepreneurs — and leaders of all org anizations. $34.95 USA/$41.95 CAN 2/C: PANTONE PMS COOL GRAY 11 M + PROCESS BLACK