Lesson: Business Model Canvas with Alexander Osterwalder

Step #6 Stories: Great business models have a story where every piece reinforces the other

I did a doctoral dissertation on business models, that's the origin of all of our work together with my coauthor today, Yves Pigneur, who was my PhD Supervisor. So the things we came up with didn't just fall from the sky, we didn't just put a couple of boxes on a piece of paper. It was rigorous research that we tested and it worked. There is an academic foundation, scientific foundation to the tools that we came up with.

The nine building blocks in the Business Model Canvas come from rigorous scientific research and it seem kind of weird and I think, "Oh, we can just put nine boxes there and then we got it." We looked at everything that was there, all the theories, we synthesized that into our model and we spend a lot of time designing this but then we went out and tested it with senior executives and entrepreneurs to figure out does this really reflect their business models.

We iterated on that until we nailed it. And today, I think we really got it because millions of people use the canvas and they are very happy with these nine boxes. So this is proven, so when people want to change the canvases say, "Well, you better design a tool that goes with it as a plug-in because it's not just about one tool it's about having all the tools that fit together but the Business Model Canvas does the tool of designing business models really well."

I wouldn't suggest redesigning that one, I would suggest adding other tools that work together with a Business Model Canvas. At the end of the day, while you need to need to master those individual blocks, the real challenge is to design something that has a story where they fit together.

Block itself is relatively easy and these are silos of businesses, marketing operations, finance, we kind of master that and we know how to do that or we don't know how to do that is to take those and make something holistic that really works.

What we mean with a business model story is the understanding how all these pieces fit together having a business model where every building block has a role to play. So if we take my favorite example the Nespresso, their story was, and this is obviously better if I explain in a visual way, I'll try with words.

They sell Nespresso machine through retail, broadest reach, to get it into the household. Then they create switching cost because you can only use one type of pod which is a Nespresso pod. They defend that with another piece in their business model which are the patents, which some of them ran out in 2011.

That's another piece of a business model. Then, once you are locked in as a consumer and you have this espresso machine they are selling the espresso pods to you only through their own channels.

What's important about that story is, well, recurring revenues. Number one, disintermediation. They are not using retail, they are using their own channels which means higher margins, which means insane profits.

Then on the other hand what we call the backstage of the business model, they needed to create partnerships with the machine manufacturers, the production facilities which they build themselves to turnout five billions pods every year.

Every piece in that story has a role to play, you pullout one piece the business model crumbles. Today, most companies I see they focus on product, product market fit is one piece of your business model, you better get that right for sure but the difference between a great million-billion dollar business and just another product, is the business model.

So there is a big topic where we were asking yourselves, "Is this a refine tool or is it something else which is networks of business models?" Today a lot of value is created in networks of business models so even I or we are asking yourselves, "What's the right tool there?"

We figured out just having a series of Business Model Canvas' connected is the best way to design that. It's not another tool, it's applying the canvas in a specific way and that's definitely one that was important.

We are looking more at other tools around it for a moment rather than zooming in because here is an important thing, the individual boxes actually don't matter that much. What really matters is how all the boxes or the content you have they fit together, it's the business model story that matters not the individual blocks.

Today, most people use the Business Model Canvas as a checklist, they fill out the boxes but great business models have a story where every piece reinforces other, think the Nespresso, think Facebook, think Nintendo Wii, think Dell when they were successful in the beginning, they have a business model story.

Of course, these stories expire which Dell have realized, which Nespresso is realizing now but you want to design the story rather than the individual pieces of your business model. Ask yourself, "How do the pieces of my business model fit together?"

Great channels alone are not enough, right? You want all the pieces to fit together. A great story, a great business model story means you pullout one piece, the whole thing crumbles.

So here is an interesting observation when people show me their business model and they have five revenue streams. I usually can immediately see that they don't have a business model because if you and no revenue streams because if you have five it means you have no story of a very clear revenue stream that makes you money.

To take an extreme case, Google earns 95% of their revenues with advertising and most of that through auctioning off their search terms. They have a very clear story in their business model and one piece of that story is the auctioning of search terms.

I hesitate to classify business models and saying, "This is good, this is bad." I don't think there is a dogma, right? You need to figure out what's the right business model for a specific industry in a specific country, in a specific situation.

We conceive the Business Model Canvas as a tool that allows you to design and prototype that right business model and not telling people everything needs to be free, everything needs to be like this, everything needs to be like that.

I think the search for the right business model should always start from the scratch, you should always challenge the most basic assumptions. If everybody is doing this in software as a service, well does that mean it's right or maybe not?

I'll give you couple of examples of companies that didn't just blindly follow what everybody else did, okay. Take the iPod, what did they design, what is the Steve jobs in Apple design around the iPod? A powerful business model, they got the record companies onboard to create an ecosystem around the device, they were the first to do that and that was the basis of their business model success over decades, to create a superior business model.

No other device manufactures are doing that at the time, they were all focusing on the device, Apple focused on the business model. They got us to put 1,000 songs in a pocket. Hello, once we have 1,000 songs in iTunes, it's hard to get them out, we're locked in. That's a great example.