We’ve been using the word business model throughout this conversation and it was something that at least for the last 20 years when it first became popular in the 1990’s, academics and consultants said it was important, but it usually took about 200 pages to describe.
But in the past five years, Alexander Osterwalder got it down to a single sentence and a one page diagram, and I though his description and diagram is actually brilliant because it helps us understand when we use that phrase what do we mean.
So the definition of a business model is how a company, your company creates, delivers, and captures value. But what that translates to is we could draw on a single piece of paper, on the whiteboard something called The Business Model Canvas, and a business model canvas kind of articulates the nine things that are critical for any company strategy that creates, and delivers, and captures value and those nine things are pretty simple.
You know, who are the customers, what are their segments, you know get them down to archetypes etc. What’s the value proposition, which is a fancy word for what product and or service are you delivering to those customer segments. What’s the channel? That is what’s the distribution channel to get that value proposition from your company to the customer.
What are the customer relationships? In the early stages customer relationships are, how do we get, keep, and grow customers? Later on when we have those customers it’s how do we maintain our relationships with them.
What’s the run new model? And run new model is not just pricing, that’s a tactic but is it a subscription, is it a license, is it a direct sale, and so what’s our revenue models, which are strategy and what’s the pricing tactic.
What are the activities do we need to be expert at to pull off these value propositions, those things we’re building and delivering. And an activity could be that we need to be experts in supply chain or we need to be world-class manufacturing people, so great semiconductor with technology, or we need to be experts in branding. That is what are the key strengths of the company, and then the next piece is what other resources that we need if those are activities, do we need great engineers, or do we need you know, know how to bend metal or need a whole factory to kind of do that, so what are the resources? And by the way, do we need any partners outside of our company to pull off those activities. Do we need FedEx as a shipping partner, do we have our own planes. Or do we need a overseas factory because we’ve decided to outsource our manufacturing.
And then finally what are our costs and this is the classic, what are our fixed costs, what are our variable costs etc.
But if you really think about it, we’ve just described what typically used to be a 45 page document in nine boxes, and we actually start with by just writing down on little yellow stickies in a new venture what our hypotheses are, that is what our guesses are on each one of those components. And then we get out of the building and test them.