NoteThis is a piece I wrote originally for The Irish Times on Business Innovation. Full article is at The Irish Times.
Decision makers in business are challenged by complexity. This makes it hard to innovate and test out opportunities for future growth. Mastering simplicity is key to innovation. In 2004, Alexander Osterwalder wrote in his doctoral thesis that “all parts of a business have to be optimised and that details in a business model make the difference. Yet, few approaches and concepts exist that give an overall view of a business”. The thesis tried to solve this problem, outlining generic business model framework that any business could use to map out all of its parts, partners, channels, and so on.
In 2010, he went on to co-author an illustrated guide that refined the core ideas of his doctorate with his supervisor at the University of Lausanne in Switzerland. The book, Business Model Generation, went on to become a global staple of business courses and start-up incubators. The book describes Osterwalder’s framework, which he calls the “business model canvas”.
It is a visual tool for synthesising the entirety of a business’s most important moving parts into a simplified blue print that shows all the elements that make the business work, from what it makes, how it distributes, and who it sells to.
Simplified, abstract picture
Having this simplified, abstract picture of the entire business frees its leaders to explore what would happen to the whole if elements were changed. By abstracting the business on to a single sheet, the status quo can be understood at a glance. More than that, entirely different business models can be tested at no cost, and teams can explore how tweaking one aspect of their business might affect the whole.
It is a simple template with nine boxes representing these nine elements of a business model: infrastructure (including partners, activities, and value proposition), customers (customer relationships, channels, can customer segments), and financial (cost structure and revenue streams).
Example: innovation at a family farm
Brendan Allen, CEO of Castlemine Farm, believes Osterwalder’s approach can help Irish beef farmers. He applied it to his own farm. At first glance the only element over which Castlemine had any control over was what it chose to produce. Large meat processors had the stranglehold over beef distribution and price, and could dictate terms. However, Allen decided to develop new channels for the farm, bypassing the distributors, and developing his own set of customers.
The difficulty was developing a channel to customers from scratch. Changing one part of the canvas made it clear what other elements of the business would require tweaking. “We were meat producers, and the canvas showed us that we had to also become leaders in sales and marketing”.
Business model innovation could alleviate the beef farming crisis, according to Allen. “Farmers getting together in groups to innovate their business models together could change the game”.
The nine elements
- Key partners, such as suppliers from whom a business sources key resources, or partners with whom the business collaborates.
- Key activities required to deliver the service or product, such as the channels of distribution, customer relationships, and revenue streams.
- Key resources, describing what resources the business needs to undertake key activities, such as presenting its value proposition and maintain customer relationship requires.
- Value propositions, problems that the business solves for its customers, what customer needs are satisfied.
- Customer relationships, what kinds of relationships should the business maintain with different types of customers, and what do these cost?
- Channels, what is the best way to reach each customer segment?
- Customer segments, the most valuable customers to the business.
- Cost structure, what are the most important costs, which resources and activities are most expensive?
- Revenue streams, what will customers pay for? What do they currently pay and to whom?
When I wrote about Allen’s example with Castlemine Farm in The Irish Times Alexander Osterwalder reacted on Twitter with surprise at how widely his template could be applied:
— Alex Osterwalder (@AlexOsterwalder) December 5, 2014
Irish beef farmers and business model innovation
Brendan Allen, CEO of Castlemine Farm, believes Osterwalder’s approach can help Irish beef farmers.
A business of any size can sketch a blueprint of its current situation on a single sheet, and can consider how to change it for the better.