[TIM KASTELLE] We know that to create value, new ideas need

new business models.

But what exactly is a business model?
David Teece from the University of California - Berkeley says:
"A business model articulates the logic and provides data and other evidence that
demonstrates
how a business creates and delivers value to customers."
That value creation idea is important - it means that any organization that creates
value
for a specific group of stakeholders has a business model - it's not just a concept
for
businesses.
A little over ten years ago, Alex Osterwalder started studying the academic
literature on
business models in an effort to build a model of business models that would be
useable for
managers.
At the time, the research was scattered.
Michael Porter had talked about a firm's value chain - which organises internal
operations.
Rebecca Henderson and Kim Clark had done research on what they called architectural
innovation
- which was innovation in how a firm organised its activities and resources.
The first work to really use the phrase business model was Henry Chesbrough's
investigation
of open innovation.
Osterwalder took this all in, and came up with a tool he calls the Business Model
Canvas.
He wrote about it in his PhD thesis, and has subsequently worked with a number of
collaborators
- particularly Yves Pigneur to develop the model further.
Their book Business Model Generation, and the suite of tools that have built up
around
that make the Business Model Canvas, or BMC, the easiest tool to use to help build
an innovative
business model.
You can use the BMC to describe and design a value creation system for your
organisation.
You can even use it to innovate the business model for your industry - this is a
powerful
form of innovation.
The BMC has nine parts - to explain them, I'll use the example of innovative
business
model that Haloid Photographic Company used to launch the Xerox 914 - the third
attempt
to sell a photocopier - and the first successful one.
When you work out your Business Model - the most important place to start is with
the
Value Proposition and Customer Segment.
The Value Proposition defines the value that you're creating for your stakeholders
- in
business, this means your customers.
In not-for-profits, the stakeholders and value propositions are usually more
complex.
A common mistake that people make here is to list the features of their idea.
In the case of the Xerox 914, the value proposition isn't that the copier can make
5 copies per
minute, or that the copies are of archival quality.
The value proposition when they launched the 914 was: get the same quality of
documents
that you get from a typist, at a fraction of the cost.
Once the value of photocopying was finally established, this Value Proposition
changed
to: the fastest, cheapest way to make a copy of any document.
The Customer Segment defines the stakeholders for whom you are creating value.
For the Xerox 914, the customer segment was: Fortune 500 companies that had big
typing
pools.
When launching new ideas, it is best to have the most precise customer segment you
can
identify to start with.
This target market was much more successful for Haloid than the earlier one that
they
used - all companies with a mimeograph machine.
It was more successful because it had a much sharper focus.
The next big issue that Haloid had to address was pricing.
Their earlier attempts at selling photocopiers had failed in part because their
equipment
was more than six times as expensive as their closest competitor - mimeograph
machines.
With the 914, they solved this problem by using leasing instead of outright sales.
This fills in the bottom right box in the BMC - Revenue Streams.
Channel describes the various ways that you can reach your Customer Segment.
The choice of Fortune 500 firms as the customer segment, and leasing as the Revenue
Stream
determined that the best Channel to use was direct sales.
It's really hard to sell a lease without a well-trained professional sales staff
that
interacts directly with the clients.
Customer Relationship describes how you interact with your Customer Segment.
Is it a transactional relationship, where they just buy something once and you
never
see them again?
Or are you trying to form deeper, more strategic relationships with a smaller set
of customers.
Again, the choice of Fortune 500 Firms as the Customer Segment determined the
answer
for Haloid.
They wanted long-term partnerships with their customers.
Your decisions on the right side of the BMC determine what goes in the boxes on the
left
side.
Key Activities are the things you need to do to create and deliver your Value
Proposition.
Some of the Key Activities that Haloid had to undertake included: high-quality
sales
and service, marketing, and manufacturing.
Key Resources defines the things required to undertake the Key Activities, they
include:
intellectual properties, human capabilities, financial resources, and physical
assets.
Some of the Key Resources for the Xerox 914 included many photocopier patents,
their highly
skilled sales force, manufacturing plants, and a relatively large amount of dollars
to
support the launch.
This last point is a bit subtle - because leasing was the primary Revenue Stream,
Haloid
required greater cash reserves to launch the 914 than if they had been selling them
outright,
because the money took longer to show up.
Key Partnerships is a broad category.
It includes both genuine partnerships like joint ventures or sponsorships, but also
the
other firms in your supply and distribution chains.
It also includes any Key Activities that you outsource.
Aside from normal supply and distribution partners, the most notable Key
Partnership
for the Xerox 914 was the marketing agency that produced the ads designed to reach
Fortune
500 decision makers.
The three boxes on the left hand side then define the last box in the BMC - your
Cost
Structure.
Of course, the main thing here is to include everything that you're paying for, and
making
sure that in time, that number is lower than the one being produced by your revenue
Streams.
Business models are an essential part of successful innovation.
The Business Model Canvas is a great tool to use to help identify how you can
create
and deliver value with your innovative ideas, and how you can capture enough of
that value
yourself to be economically sustainable.