The Model Business

The art of (re) establishing your business model is about changing the rules and adapting to the harsh (or antiquated) realities of doing business today. So, how's your strategy going?

What if Alexander Osterwalder is right? What if you could sketch out your company's future on a canvas and strategically redirect its fortunes with nothing more than a large whiteboard and some sticky notes? What if this seemingly simple method of helping transform your business model was as easy as that?

Osterwalder, the best selling author, advisor and highly sought after lecturer, believes it is that simple – sort of. In his ground-breaking book, the "Business Model Generation," Osterwalder takes the art of the business model to a whole new level, challenging today's entrepreneurial leaders to rethink the way they create value, build new businesses and transform their organizations.

But to fully understand Osterwalder's ideals, you must start from the beginning. Osterwalder's concept is rooted in a Ph.D. dissertation he completed on business model innovation with Professor Yves Pigneur at HEC in Lausanne, Switzerland. In 2006, his concept, the crux of which was defined in a must-read blog, began being applied around the world in companies such as 3M, Deloitte, Ericsson and Telenor. And then one day, during a workshop in the Netherlands, Business Model Inc. founder Patrick van der Pijl asked the question: "Why is there no book accompanying the method?"

The question spurred Osterwalder and Pigneur into action. But the last thing they wanted to do was publish a book on business models in a market flooded with books on business models. So they tried a different approach. Ditching the traditional publishing route, they launched a hub. The online platform would not only enable them to share their writings, but it also would allow them to seek input from followers who would pay a membership fee (ranging from $24 per month in the beginning, to $243, which helped keep the site exclusive). The innovative approach worked. The fees helped finance the production of the book, while the forums provided invaluable insight on business model innovations from some 470 practitioners in 45 countries around the world.

Generating your "business model canvas"

The "Business Model Generation" encourages business owners to plot out their business models using, what Osterwalder calls, the "business model canvas." The strategy forces entrepreneurs to communicate their business model visually, allowing them to get what's in their heads onto a canvas for others to see and contribute to. "Once your vision has been exported from your head onto a canvas your employees helped to create, you'll have a business that can grow without you calling all the shots – which is the essence of a sellable company," he says.

Osterwalder believes that a successful business model can best be described through nine basic building blocks that show the logic of how a company intends to make money. The building blocks cover the four main areas of how any business makes money: customers, offer, infrastructure and financial viability. The business model is like a blueprint for a strategy to be implemented through organizational structures, processes and systems. The tool resembles a painter's canvas that enables you to paint pictures of new or existing business models.

In an economic climate defined by how your company responds to change, the "Business Model Generation" lends credence to the theory that the key to a company's success is rooted in business model innovation, not technical innovation. "Technology innovation (product innovation) is always going to be important," Osterwalder says. "But in many cases, it's not technology or product innovation that gives you an advantage, it's business model innovation."

Technology alone is not enough

Take Apple, which in 2001 launched its iconic iPod portable media player. Working in conjunction with its iTunes software, the device enables users to transfer music and other content from the iPod to a computer. But Apple wasn't the first to hit the portable media player market. Others such as Diamond Multimedia and its Rio brand were there initially.

Apple's advantage was its business model, Osterwalder maintains. Its strategy offers a seamless music experience by combining its distinctively designed iPod devices with iTunes software (more than 40,000 developers and 400,000 applications and counting) and the iTunes online store (easily searchable and accessible digital music). Part of Apple's business model also included a number of deals with major record companies, creating one of the world's largest online music libraries.

"What Apple showed us is that business model innovation gives you a longer competitive advantage than just product or technology," Osterwalder says. "Technology in and of itself is just a technology. It's how you apply it. Product technology can lead to, five, 10, 30 different business models. The challenge is to think through alternative business models to see which ones are the most suitable. Technology innovation in itself isn't losing its relevance; it's just not as sufficient anymore."

Surveys regularly show that businesses of all sizes pay less attention than they should to business planning and business models. Small and medium-sized businesses can be especially burdened, as they typically run lean and have limited resources for addressing issues outside of day-to-day operations.

As the scope of the economic landscape continues to change, the winners will be those who can adjust to changes in their respective markets. "You can't predict the future," Osterwalder says. "What we see in a lot of industries is that a lot of disruptors are succeeding, and in some industries, replacing the incumbents."

Osterwalder says that existing companies are finding better ways to deal with innovation, a sign that start-ups won't be the only ones creating new business models. "You hear the folks in Silicone Valley say that everything will come from start ups. But I think large companies have some strengths. They just haven't found out how to overcome their weaknesses yet. But they will learn how to deal with this."

How Xerox transformed a market

Innovation for new business models can come from anywhere. As an example, Osterwalder cites the story of Xerox's foray into photocopiers. Chester Carlson, a patent attorney, and part-time researcher and inventor, created the technology that enabled a company to photocopy 2,000 copies per day in a time when machines could only generate between 15 and 30 copies per day.

But after sitting down with its consultants, the consensus was that the machine was too expensive to sell. Xerox didn't listen to the consultants. But that's not the lesson, Osterwalder says. Xerox went back to the drawing board and invented a new business model that would commercialize the machine. If nobody was going to buy it, they were going to lease it for $95 a month. As part of the lease, the company could make 2,000 copies per month at no charge. Anything over that would cost them a few cents a copy.

And then something revolutionary happened. Companies started making 2,000 copies a day. And as those extra copies started to add up, the market was transformed. "Xerox couldn't look at what the competition was doing," Osterwalder says. "A company's first inclination is to be better than the competition. But there wasn't any competition. So they went a step further. They invented a new business model."

Osterwalder says this type of behaviour will become the norm rather than the exception today. "There will be barriers that will force a company to go beyond product innovation. They will have to eliminate those barriers. They will have to rethink their business models. It won't be about beating the competition. It will be about changing the landscape."