Running head: BUSINESS MODEL GENERATION 2
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Business Model Generation Exercise 2
Jesse N. Reed
Liberty University
Business Model Generation 2
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The role external factors of demand should play in successful business models
In order to for a business model to be successful it must include variables that it
may have some influence over as well as those in which it cannot control. These variables
can be referred to as a firm’s task environment and it’s general environment. Task
environment being the one it can control and the general environment being the latter.
Managers need to fully appreciate the power of these factors, in both domestic and global
markets, to assess their effects on firm performance (Rothaermel, 2016). The role that
external factors of demand play in business models encompass four main external
environmental categories, which include: market forces, industry forces, key trends, and
macroeconomic forces (Osterwalder and Pigneur, 2010). By understanding these factors,
organizations can develop resilient, effective and innovative business models.
It can be argued that effective strategic decision-making can only occur if we
understand the market forces that affect our business. Market forces being the economic
factors that affect the price of, demand for, and availability of a commodity. For example,
In the late nineteenth century, the Australian and American railroads servicing newly settled
rural regions were financial failures because management failed to appreciate the structural
changes that the revolution in steam-powered transport had initiated; a revolution which
resulted in commodity prices being determined by global demand and supply balances
rather than by local factors. As a result, they continued a policy of expansion that was no
longer financially justified (Bowden, B., 2017).
A lot of times market forces can bring on industry forces. The way the trains
expanded supply and demand to a global scale, so does the Internet do the same thing much
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more drastically. By connecting the buyer and the seller so efficiently they have also
connected competitors, stakeholders, substitutes and suppliers. Key trends are also
important to understand in order to recognize potential threats. Key trends encompass
technological, regulatory, societal, and socioeconomic trends. Legislation changes can
disrupt industries while creating flourishing new ones. For example the legalization of
marijuana has created a booming market for marijuana growers while potentially
harming pharmaceutical company profits.
Macroeconomic forces deal with the state and future outlook of the economy,
as well as gauging the availability of resources such as funding and raw materials
(Osterwalder and Pigneur, 2010). Macroeconomic shock therefore refers to sudden changes
that occur in a nation’s macroeconomic situation. These changes, although they occur
suddenly, have often been in process for several years, but when the shock occurs, the
impact is severe, immediate, and widely felt (Green and Smith, 2001). For example the
subprime mortgage crises was years in the making but finally imploded causing mortgage
delinquencies, foreclosures and ultimately a Wall Street bailout. It’s important to be aware
of macroeconomic factors as they can have detrimental affects on your business.
What “Business Model Design and Innovation” is
Business model design and innovation refers to the process by which either a new
or existing organization decides to either: satisfy the needs of a market, bring new products
or services to a market, change an existing market, or create a new market (Osterwalder
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and Pigneur, 2010). The business model design process has five phases: Mobilize,
Understand, Design, Implement, and Manage. Mobilizing is the first phase and during this
phase the main activities are framing the project objectives, testing preliminary ideas,
planning the project, and assembling the team (Osterwalder and Pigneur, 2010). When a
startup is undergoing the mobilize phase they are searching for the best programmers,
researcher, sales people etc. They are testing ideas and framing objectives.
Then comes the understand and design phase. Understanding refers to familiarizing
yourself with the context in which the business model will evolve (Osterwalder and
Pigneur, 2010). The startup has mobilized and now they must look to the future and start to
plan for expansion and adaption. They anticipate external forces as well as potential growth
opportunities. In the design process it is time to start putting the project together. Lots of
brainstorming comes in this stage as well as prototype designs. Creativity is high and ideas
and criticisms are being shared. It is easy in this stage to fall in loves with a design which is
a pitfall many fall into.
The last two stages are implement and manage. Implement as you may guess is
when you execute your design. It is critical to be able to adapt the business model if you
discover you may have made errors in your design. As you are implementing it’s also
important to track your best practices so that you are learning from the process and have
information to reference in the future. Finally once the design has been implemented and is
running you must manage it. Nothing is constant but change and in order to keep the design
operating as planned we must guide its course. We must continuously assess the business
model, scan the environment and tweak and hone the model to adapt (Osterwalder and
Pigneur, 2010).
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Challenges to “Business Model Design and Innovation”
Designing and innovating a business model is a inherently challenging process and
there are challenges at every step. One clear danger in the Mobilization phase is that people
tend to overestimate the potential of initial business model ideas. This can lead to a closed
mindset and limited exploration of other possibilities (Osterwalder and Pigneur, 2010). A
way to mitigate this is by requiring all participants to think of reasons why and idea won’t
work then think of reasons why it will work. Some of the key dangers of the understanding
phase are over researching and not spending enough time actually focusing on taking
productive steps toward accomplishing the objective. Also biased research is an issue that
stems from a precommitment to a certain business idea (Osterwalder and Pigneur, 2010).
The key challenge during the Design phase is to generate and stick with bold new
models. Watering down or suppressing bold ideas is a pitfall in this area. Teams must take
the time to explore multiple ideas and avoid “falling in love” with ideas too early
(Osterwalder and Pigneur, 2010). The design phase is where creativity should be rewarded
and an environment where no idea is a dumb idea should be created. During the implement
phase a challenge is weak or fading momentum. This is the phase where you execute the
design and it is important to get off to a good start, create a buzz and build up a lot of
momentum.
Finally during the manage phase the main challenge is becoming a victim of your
own success and failing to adapt (Osterwalder and Pigneur, 2010). This can happen when
you don’t study the external factors and forecast events that can impact your business.
Barnes and Nobles did not manage the onslaught of Amazon.com. Blockbuster rode its
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success and did not properly plan for the competition and future of Netflix. Managing
requires a company to always be ready to adapt but more importantly to have foresight and
awareness of external market factors.
References
Bowden, B. (2017). An exploration into the relationship between management and market
forces. Journal of Management History, 23(3), 297-314. doi:10.1108/jmh-12-2016-
0062
Green, R. T., Mandhachitara, R., & Smith, T. (2001). Macroeconomic Shock and Product
Disposition in an Emerging Market. Journal of Macromarketing, 21(1), 47-60.
doi:10.1177/0276146701211005
Osterwalder, A. & Pigneur, Y. (2010). Business model generation. Hoboken, NJ: John
Wiley & Sons.
Rothaermel, F. (2016). Strategic Management Concepts (3e). McGraw-Hill College.
