Strategic Thinking, Decision Making and Innovation

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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

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 organizations.

$34.95 USA/$41.95 CAN

2/C: PANTONE PMS COOL GRAY 11 M + PROCESS BLACK

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Business Model Generation

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This book is printed on acid-free paper. o

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

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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

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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.

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Enterprise Consulting

Aline Frankfort

Alexander Korbee

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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 _______

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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.

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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?

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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 you’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 complements 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 innovation 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 innovative 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, business 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.

Since 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.

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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.

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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.

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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.

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1 Canvas

14 Definition of a Business Model

16 The 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 Perspective 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 from?

276 References

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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

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14 Definition of a Business Model

16 The 9 Building Blocks

44 The Business Model Canvas Template

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A business model describes the rationale of how an organization creates, delivers, and captures value

Def_Business Model

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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

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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

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Kr Key Resources

KP Key Partners

KA Key Activities

C$ Cost Structure

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CS Customer Segments

Cr Customer Relationships

VP Value Propositions

CH Channels

r$ Revenue Streams

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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

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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?

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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 Propositions2

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.

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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 creation.

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.

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“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).

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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.

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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

Channels3 CH

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27Through 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 to 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

stores

Wholesaler

In d

ir ec

t D

ir ec

O w

n P

ar tn

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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.

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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.

GlaxoSmithKline 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?

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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

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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.

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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.

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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

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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

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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?

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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.

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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?

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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

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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?

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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$

bmgen_final.indd 40 6/15/10 5:32 PM

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

CSKP KA

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

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

VP CR

CSKP KA

R$C$

VP CR

CSKP KA

R$C$

bmgen_final.indd 46 6/15/10 5:33 PM

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.

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left brain logic

right brain emotion

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VP CR

CSKP KA

R$C$

VP CR

CSKP KA

R$C$

left canvas effi ciency

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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

HOW DO YOU USE THE CAnVAS?

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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 BUSInESS

PLANS InTO THE BUSInESS PROCESSES 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 nGO. The Business Model Canvas was especially helpful 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 netherlands to 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 broWn 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

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

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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

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Un- Bundling Business Models

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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 Market

Leaders: Choose Your

Customers, Narrow Your

Focus, Dominate Your

Market. Treacy, Michael,

Wiersema, Fred. 1995.

[ ex·am·ples ]

mobile telecom industry,

private banking industry

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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!

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.

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Product Innovation

Customer Relationship Management

Infrastructure Management

E co

no m

ic s 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

C ul

tu re

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

C om

pe ti

ti on

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.

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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.

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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

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

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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

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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

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Unbundled Patterns µ3

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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

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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

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High premium chargeable

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The Long Tail

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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 Future of Business

Is Selling Less of More.

Anderson, Chris. 2006.

2 • “The Long Tail.” Wired

Magazine. Anderson,

Chris. October 2004.

[ ex·am·ples ]

Netflix, eBay, YouTube,

Facebook, Lulu.com

Def_Pattern No. 2

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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

S al

TOP 20% Focus on a small number of products, each selling in high volume

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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

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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

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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

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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

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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

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

CSKP KA

R$C$

LEGO Factory: Customer-Designed Kits

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Long Tail Pattern

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VP CR

CSKP KA

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.

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Multi- Sided Platforms

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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 • “Strategies for Two-Sided

Markets.” Harvard Busi-

ness Review. Eisenmann,

Parker, Van Alstyne.

October 2006.

2 • Invisible Engines: How

Software Platforms Drive

Innovation and Transform

Industries. Evans, Hagiu,

Schmalensee. 2006.

3 • “Managing the Maze

of Multisided Markets.”

Strategy & Business.

Evans, David. Fall 2003.

[ ex·am·ples ]

Visa, Google, eBay,

Microsoft Windows,

Financial Times

Def_Pattern No. 3

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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

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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

FA CILIT

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ATE

FA CILIT

ATE

FA CILIT

ATE

FA CILIT

ATE

FA CILIT

ATE

FA CILIT

ATE

FA CILIT

ATE

FA CILIT

ATE

FA CILIT

ATE

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ATE

FA CILIT

ATE

INTE RAC

TION

Segment NSegment NSegment N

etc.

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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 VPCR CR

CH CH

CS CSKP KPKA KA

KR KR

R$ R$C$ C$

Google oΩers distinct

Value Propositions to

three interdependent

Customer Segments

targeted ads advertiserstargeted ads advertisers

free search web surfersfree search web surfers

content creators monetizing

content content creators

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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

CSKP

R$C$

targeted ads

content owners content

web surfers

content

advertisers

content

monetizing content

targeted ads

free search

monetizing

targeted adstargeted 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

CSKP KA

targeted ads

content owners content

web surfers

content

advertisers

content

monetizing content

targeted ads

free search

monetizing

targeted adstargeted ads

keyword auctions

free search

monetizing content

free search advertisers

web surfers

content owners

keyword auctionskeyword auctions

Google has one main

Revenue Stream that

subsidizes other oΩers

(Revenue Stream is

replaced by “free”)

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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

CSKP KA

R$C$

gamers

developers

hardware sales at a loss

hardcore gamersconsole

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

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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

CSKA

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 saleshardware sales

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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

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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

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Multi-Sided Platform Pattern

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VP CR

CS KP KA

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.

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FREE as a Business Model

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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

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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.

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(How) can you set it free?

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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

CSKP KA

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

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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?

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Free Advertising: Pattern of Multi-Sided Platforms

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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.

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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

CSKP KA

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 accountsfree limited basic accounts

sharing

premium photo

free basic photo sharing

annual subscription pro account

high-volume users

annual subscription pro accountannual subscription pro accountannual subscription pro account

premium photo sharing

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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 subscriptionprofessional subscription

VP CR

CSKP KA

R$C$

clients

professional subscription

enterprise clients

professional subscriptionprofessional subscriptionprofessional subscription R$

professional subscriptionprofessional subscription

users

free software

self-service users

free software

continuously

free softwarefree softwarefree software

continuously upgraded, serviced, &

guaranteed software

free (linux) open source based

software

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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

CSKP KA

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

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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

CSKP KA

R$C$

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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

CSKP KA

R$C$

Many paying users

cover the costs of a

few claims

payments from insurance companies

other rescue victims

payments from insurance companiespayments from insurance companies R$

payments from insurance companiespayments from insurance companies

other rescue victims

sponsorship fee

sponsoring patrons

operations

sponsorship feeR$ sponsorship feesponsorship feesponsorship feesponsorship fee

rescue operations

free rescue operationsfree rescue operations

"insurance"

other rescue victims

payments from insurance companies

free rescue operations

payments from insurance companies

patrons

free rescue operationsfree rescue operations

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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

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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

CSKP KA

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)

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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 free 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.

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“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

phones

services

n x monthly subscription

1 x free

Bait & Hook of Free Mobile Phones

n x monthly subscriptionn x monthly subscription

VP CR

CSKP KA

R$C$ n x monthly subscriptionn x monthly subscriptionn x monthly subscriptionn x monthly subscription

R$ n x monthly subscriptionn x monthly subscription

customerscustomers

1 x free

free phones

subscription

1 x free1 x free1 x free

free phones

subscription

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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

CSKP KA

R$C$ 1 x handle purchase1 x handle purchase

frequent blade replacements

customerscustomers

1 x handle purchase

frequent blade replacements

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106

Bait & Hook Pattern

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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.

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Open Business Models

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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

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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

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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

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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

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

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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”

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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 challengesfree access to challengesfree access to challengesfree 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

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“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

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VP CR

CSKP KA

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.

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VP CR

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.

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o V

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V ie

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

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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

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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

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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

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Administrator

Sticky Note

Len:26-09-2015 13:40 read 70 pages

Technique_No. 1

Customer Insights

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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

. . . 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.

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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 —

‹‹

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you Organiza

tion-cent ric

business model de

sign

What can we sell c

ustomers ?

how can we reach

custome rs most

e≈ciently ?

What rela tionships

do we ne ed to esta

blish

with cust omers?

how can we make

money fr om

our custo mers?

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.

themCustomer-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?

how do our customers prefer to be

addressed? how do we, as an enterprise,

best fit into their routines?

What relationship do our customers expect

us to establish with them?

for what value(s) are customers truly

willing to pay?

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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

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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?

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?

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.

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.

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?

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:

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C R

EA T

IV E

PR O

B LE

M S

O LV

IN G

T O

O LS

C R

EA T

IV E

PR O

B LE

M S

O LV

IN G

T O

O LS

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 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

gain

What does she

see? environment

friends what the market oΩers

"wants"/needs measures of success

obstacles

Source : Adapted from XPLANE

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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

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Technique_No. 2

Ideation

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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.

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Id e

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Io n

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 new Business Model Ideas —

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Id e

a t

Io n

Igno re th

e sta tus

quo

Forg et th

e pa st

Stop focu

sing on c

omp etito

Cha llen

ge o rtho

dox ies

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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).

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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.

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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

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. . . 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.

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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).

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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

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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.

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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.

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145to 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

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Technique_No. 3

Visual Thinking

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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 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.

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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 —

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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

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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 DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing with DrawingsVisualizing 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

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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

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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

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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

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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 CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove CommunicationImprove Communication

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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.

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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

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Visual Storytelling Activity

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.

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.

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.

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.

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Technique_No. 4

Prototyping

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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.

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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 —

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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

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old old thinkingthinkingthinkingthinkingthinking

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old old old thinking

old old thinkingthinkingthinking

old old old thinkingthinkingthinking

old old old thinkingthinking

old old thinkingthinkingthinkingthinking

old old thinkingthinkingthinking

old old thinkingthinkingthinkingthinking

old old old old old old old old thinking

old old old old old old old old thinkingthinkingthinkingthinkingthinkingthinkingthinkingthinkingthinkingthinkingthinkingthinkingthinkingthinking

old old thinking

old old old thinkingthinking

old thinking

old old thinkingthinking

old thinking

old thinkingthinkingthinkingthinkingthinkingthinkingthinkingthinkingthinkingthinkingthinkingthinkingthinking few business models

dominate an industrydominate an industry

few business models

dominate an industrydominate an industrydominate an industry

outside-in: industry defi nes

business modelsbusiness models

outside-in: industry defi nes

business models

outside-in: industry defi nes

linear thinkinglinear thinkinglinear thinkinglinear thinkinglinear thinking

early choice of business early choice of business

model

implementation-focusedimplementation-focusedimplementation-focusedimplementation-focusedimplementation-focused

effi ciency-focusedeffi ciency-focusedeffi ciency-focusedeffi ciency-focusedeffi ciency-focused

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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

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Administrator

Sticky Note

Len Rijvers: 27-09-2015 13:40

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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

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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 Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor Publishing a Bookfor 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.

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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.

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design

decide executeinquiry

provoke

prototype

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John, 55

Founder & CEO

Strategy Consultancy

210 employees

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).

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).

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-

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Technique_No. 5

Storytelling

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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.

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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 —

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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.

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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

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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.

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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 margin s

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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 margin s

7 8

11 12

E-commerce

Infrastructure

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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

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.

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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

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

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Technique_No. 6

Scenarios

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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 . . .

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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