Streamline your business with the Business Model Canvas
Causal, symptomatic, autoregressive, developmental tendencies. The static ones and the more dynamic ones. Economists love models. They allow them to depict reality and the interrelationships occurring between factors influencing it from different sides in a simplified way, often also allowing them to choose the optimal solution. Not surprisingly, models, this time describing the activities of businesses, have recently become a permanent fixture in the business world. Currently, one of them is particularly popular - the business model canvas created a few years ago by Swiss business theorist and practitioner, then doctoral student Alex Osterwalder.
What is the phenomenon of Alex Osterwalder's Business Model Canvas?
Any business model should clearly present the company's situation, indicate where it gets the funds to finance its activities, but also what exactly and to whom the company is supposed to sell. The ideal model is simple, relevant to reality and understandable, but also, on the other hand, does not oversimplify and falsify the reality presented. According to many specialists, Osterwalder's model has all the above-mentioned characteristics.
How can the Business Canvas help an entrepreneur develop or improve the operating strategy of his business?
The breakdown of resources, those owned, but also those potential, allows us to look at a given business and its operation from a broader perspective. It becomes extremely important to identify the dependencies that exist between the various elements and their interactions.
The most important element, which is, so to speak, the heart of the entire model, is Customer Segmentation. Choosing this particular element as the key to the model emphasizes the role of the customer. It is the recognition and understanding of HIS needs that guarantees success in a given industry. How to properly identify the various customer segments?
If it is necessary for a particular group of consumers:
- Developing a special offer tailored to a particular type of need,
- Use of a separate distribution channel,
- establishing a different kind of relationship,
is a sign that this group may constitute a separate customer segment, and thus will require the entrepreneur to employ a separate strategy. The other two factors that may suggest that we are dealing with a new segment are the significant share of a given customer group in the company's profits and their demonstrated willingness to pay for other aspects of the offering.
With proper customer segmentation, instead of offering the same product or service to everyone, we can differentiate our offerings, promotion and distribution channels and even our pricing strategy accordingly, depending on the audience.
The value proposition, or the reasons why a particular customer chooses our products or services in the first place. It's worth focusing on a few key questions here:
- What value do we generate for our customers? What makes us different?
- What customer needs do we meet, what problems do we help solve?
- What set of products and services do we offer to each segment? Given our offerings, are we sure we are approaching each of them individually?
Novelty, efficiency, high quality, price, or perhaps a high degree of personalization of the product or service? These are just a few of the wide range of factors that can give an advantage to a company's value proposition. However, it should be remembered that as many customers, as many types of needs, and thus opportunities to offer something special.
Customer Relationships, which are appropriate for the type of business, cannot be overlooked either. We can get the information we need to analyze customer relationships from a customer satisfaction survey. Relationship building is most often aimed at attracting new customers and retaining current ones, but it is also worth considering how to win back those customers who have turned away from us for some reason. So to get the full picture, we need to keep in mind three groups of customers: current, potential and lost.
When building a relationship on the basis of sales growth, it is important to remember that it is not only the number of products sold that counts, but also the value of the completed transaction, and new customers, attracted only by a clearly lower price, if it increases, may quickly leave us in favor of the competition.
Revenue and cost streams
Osterwalder wrote: "If we can call customers the heart of a business model, then the revenue structure is its artery." Here, the basic question a company must ask itself is about the price a customer is willing to pay to deliver a certain added value. Equally important is the form of payment - perhaps the limited options for the type or timing of payment discourage some customers from making a purchase? If we consider the price of a product or service to be a key element of the revenue stream, it is important to remember that we can offer not only a fixed price menu, but also use a mechanism based on dynamic prices, i.e. prices that are adapted to the market situation, also taking into account room for negotiation.
When optimizing our revenue strategy, we should also keep in mind that we can profit not only from the so-called core business. Perhaps at a small cost we can combine our core service or product with another complementary product or service and thus increase our revenue stream? A simple example might be the sale of electronic equipment combined with the possibility of repairing it.
On the other side of the financial flows are the costs a company incurs in connection with its operations. Optimization of this element is particularly important for companies that rely on a low-cost model. In this case, economies of scale, i.e. those associated with an increase in production volume, come to the rescue. No matter how large a company you manage, whether you want to minimize costs at all costs, or whether you place more importance on the value you offer your customers, you should carefully consider the cost of the main resources your company needs to acquire. Which ones require the greatest financial outlay? Are there costs within the company's operations that can be avoided in some way? Both fixed and variable costs can be optimized to some extent, so they should be carefully monitored and creative solutions sought to reduce them.
3K: Key resources, key activities, key partners
Key resources consist not only of physical resources, i.e. the capital a company has at its disposal. It is also the often underestimated human capital, the knowledge, experience and creativity of employees who, with a little freedom and a sense of responsibility, can become a source of solutions to effectively improve the operation of our business. We can also obtain resources through relationships with our Key Partners. Companies engaged in related activities must not be viewed only from the perspective of competitors to be gotten rid of. Contacts acquired within a given industry can result in the creation of various types of strategic partnerships or mutually beneficial alliances, ensuring the strengthening of both companies' positions in a given market. There is a reason why "networking" is one of the words most often uttered in business circles today. As in the case of Key Resources, the nature of Key Activities depends directly on the specific business area that our company deals with. Examples of such activities could be production or problem solving, or, for example, the development of new applications. These very activities should lead to satisfying the needs signaled by potential customers, and we should also adjust the distribution channels and the types of relationships we build with customers to them.
Each model has its drawbacks
Although seemingly brilliant in its simplicity, the model also has some fundamental flaws that we should keep in mind when using it to build a strategy.
The first objection directed against the business model canvas is its staticity. According to one critic, it is only a "snapshot of reality," which yes, helps to understand the main idea of a particular business, but does not contribute to improving efficiency managing it, nor does it suggest actions to be taken. Rather, the emphasis here is on showing the relationship between the various elements. What's more, it mainly applies to companies with rather stable financial situation and market position. The problem arises when we want to apply the model to a young start-up company, which bases its "to be or not to be" mainly on one resource of innovation of its idea.
After analyzing all the elements and the pros and cons of the Osterwalder model, all that remains is:
(a) Draw a template of the model,
(b) Place it in a conspicuous place, such as on a wall,
(c) Outline a model diagram that corresponds to the structure of our business,
and then start building, modifying and optimizing the strategy so that our company begins to achieve further success.
For all those interested in the figure of Alexander Osterwalder, as well as in the very idea of a business model canvas, we recommend the bestseller "Creating Business Models. A visionary's handbook".
If you need support in preparing a Canvas model, contact us!