Southwest, Google, Apple, McDonalds, Amazon, Wal-Mart, Cragslist and many others have influential business models that have changed industries and the way we live. A business model is what we experience as stakeholders. Unless we are intimately connected to an organization, we do not know or understand its strategies or tactics but we do relate to its business model.
If you fly Southwest, then you are familiar with their direct booking process, its transparent low prices, the ability to buy-in an earlier boarding position, no charges for luggage, frequent flights to regional destinations, use of easy-to-access airports, friendly staff, predictable boarding sequence, self-serve seating, super friendly flight attendants, a relaxed flying environment, and for the most part, on time departures and arrivals. All of these elements are part of Southwest’s business model which come alive the moment we make a reservation.
Ramon Casadesus-Masanell and Joan Ricart in their Harvard Business Review (HBR) article How to Design a Winning Business Model, state that 98% of companies are intentional in the design of their business models. This would indicate that concerted efforts are applied to business model definition everywhere. In my experience, most organizations make an effort to define their go-to-market strategies but do not necessarily develop a full business model. Casadesus-Masanell and Ricart define four necessary elements of a business model: value proposition, market segments, resources and key activities.
Alexander Osterwalder and Yves Pigneur developed the Business Model Canvas based on Osterwalder’s earlier work on business model ontology and the contribution of over 470 practitioners across 45 countries. Their business model canvas published in their book Business Model Generation defines nine building blocks for a business model.
- Customer segments – the market segments the organization serves (the social system);
- Value propositions – the problems the organization solves and the additional value it brings for each customer segment;
- Channels – how the value propositions are delivered;
- Customer relationships – how relationships are established and maintained with each segment;
- Key resources – the assets and means by which the above elements are delivered;
- Key Activities – the actions that enable the above elements;
- Key partnerships – outside entities involved in delivering the value propositions;
- Revenue streams – the revenue generated from the value propositions; and
- Cost structure – the costs associated with the overall business model.
The canvas has evolved into to a large body of practitioners and a number of support tools which include websites, courses and software. I became aware of the canvas two years ago and have been using it extensively in my own work. I find it to be a recursive tool meaning that it can be applied at any level of an organization. I have used it as a key component of the functional plans in my organizations. The language of the canvas is visual and effectively descriptive. In my experience, it is best to learn the canvas by defining the current business model of an organization in a group setting with the key stakeholders of that organization. As a second step, a new or improved business model can be developed in one or more design sessions. The canvas acts as the container for the baseline model and the designed improvements.
Even though the canvas is a practical and effective tool for business model design, it does not validate the effectiveness of a design. How do we know the business model will work for our organization? Going back to the HBR article by Casadesus-Masanell and Ricart, these authors define the virtuous cycle in a business model as a way to test its effectiveness. The virtuous cycle is composed of the variables in the value proposition, customer segments and key activities and resources. In essence, the virtuous cycle is a causal loop where the variables under inspection generate a reinforcing relationship. Causal Loop Diagrams is one of the techniques developed by MIT as part of Systems Dynamics to study the causal influence of variables in a system and is appropriate for the determination of virtuous cycles. Peter Senge popularized Systems Dynamics and made it quite accessible in his book The Fifth Discipline: The Art and Practice of the Learning Organization. If you are now intrigued about designing and testing a business model, I recommend reading about Causal Loop Diagrams (CLDs). There are many references on the Internet under Systems Thinking. You do not need to know much about CLDs to be able to draw the relationship of the variables in your business model and test the presence of a virtuous cycle.
Another intriguing facet of business models is their applicability to individuals. If you are seeking to improve the value you bring to the world whether in your job or any of your activities, it would be good experience to tap into the business model canvas and use it to design your personal model. The nine building blocks identified above apply to individuals with a change in context. For instance, Channels would represent your job, your church, the non-profit organizations you support, your activities with little league, and the PTA. They can also represent your family and circle of friends. Osterwalder, Clark and Pigneur in their book Business Model You: A One Page Method for Reinventing Your Career show step-by-step how to generate a personal business model. They also have built a fair amount of infrastructure to support individuals using the canvas for individual purposes. If you pursue this path, I also recommend that you apply the virtuous cycle test to your model and validate that it will bring the results you aspire.
We and our organizations need strategies and tactics to bring value and do what we do every day. However, our constituencies interact with us and our organizations through our business models. Consequently, their effectiveness is intimately connected to our success. Being intentional about designing our business models is a first step. The business model canvas and its associated tools provide a good process to build and design models. However, testing our models is equally important. Causal Loop Diagrams provide an important mechanism to visually test our business models and feel more certain about our success before we implement them.