Today the main aim of startup’s companies is to build products that create value for both the company itself and it customers. Understanding Business Model Innovation as well as designing a business model based on a real-life case, and iterating the business model to mature it, is a success factor. This blog entry is based on the online course offered by OpenSAP.
What is a Business Model?
Generally, a business model lets think about how to make money with a product or service which is the key factor for startup companies. It is mainly about how the value is created, delivered and captured in terms of money. Finding the appropriate business model is the main goal of a Business Model Innovation (BMI).
Nowadays Business model are very important in the society because they capture the business logic in a very tangible manner and focus on the customer’s needs in the best way. Business Models are developed base on an iterative approach that helps to embed several types of ideas into the right business model element.
Business Model Iteration
Usually, you start with a product or service idea. As you will see, the search for the appropriate business model is an iterative journey. An appropriate business model needs to be profitable, at least in the longer run, implementable in a given context, and scalable to a certain extent.
Next, you create a first baseline of the business model: an explanation, a rough description of how value is to be created, delivered, and captured. You use Osterwalder’s Business Model Canvas to do so. To a new business model there are many assumptions and uncertainties. Testing these assumptions and reducing uncertainty might entail severe changes to the initial idea, or even stopping the project completely.
Next, take a look at your team. The people involved need an entrepreneurial mindset to be successful.
Business Modell Baseline
The business model baseline consists of two parts: The network view and the enterprise view. The business model baseline is supposed to summarize all the knowledge the team already has.
The Network View
The network view gives you an overview about customers, partners, and competitors and about the interrelations between all of them and you. It is created in terms of a template. Partners are on the left, the customers are in the center and on the right hand side you find the competition.
Firstly look at the customers. They can be any type of entities. Distinguish and name your customer segments and describe the intended interaction / value streams between you and your customers along bidirectional arrows.
Secondly, think about your partners and name them. Similar as you did for the customers, describe the connection between you and your partners. Do not list every supplier, yet the key partners that are essential for the success of your business.
Finally, look at your competitors and how they fit into this network. Which of your customer segments do they address and what value do they provide? Consider the transactions within the overall network as they might have an impact on your business.
The Enterprise View allows you to capture the details of your business model. In these view you have to describe in more detail how value is actually created, which partners are part of it, how value is delivered to the different customer segments and also how the value is captured in terms of revenue and other nonnonetary benefits. It is also called Business Model Canvas.
The Business Model Canvas describes more or less the entire business model from an internal perspective on one single canvas.
The enterprise view is composed of nine components. The “value proposition” is in the center of the enterprise view. To the right are the section for the value delivery with your “customers”, “customer relationship” and “channels”. To the left you find the sections for the value creation like “key partners”, “key activities” and “key resources”. Underneath, is the lower part of the canvas in the section for the value capturing, namely the “cost structure” and “revenue” located. It has been established as best practice to fill in the canvas in the sequence of value delivery, next the value creation, completing it with the value capturing.
Analyze and improve
The analysis of specific elements of the business model allows us to improve the model and maximize the expected outcomes. The main focus here is the value proposition which is the core of your business model. Any changes in your value proposition may have a direct impact on the way you create and deliver value for your customers, as well as on the outcomes you can achieve for your company.
Understanding the motivation of customers and the job they want to get done is very important for this step.
The value proposition canvas has two sides: the customer profile on the right side, where you clarify your customer’ needs, and the value map on the left side, where you descibe how you want to create value for one specific customer profile. After selecting a customer segment to profile, we use the job-to-be-done (functional, social or emotional level) concept to better understand the business needs.
Ask yourself “What will be the job to be done by a product or service that makes the customer hire or buy this product and how good it performs in comparison to its competitors?” The ultimate goal in the end is that both sides of the canvas, the customer profile on the right and the value map on the left, fit best to each other. Each job will be associated to both. Gains, such as saving money, real time analysis etc., and possibly also pains.
Challenge and Change
In this process, you have a two-step approach. In the first step try to find out triggers for changing something, look at opportunities and threats, which are inherent in the business model. Out of these opportunities and facts, you then create, formulate a challenge, or several challenges, and as a second step you try to answer these challenges, you normally formulate in the form of “How might i…”-do-something. In that you apply some well-known ideation methods like Blue Ocean, but most successfully and most often you apply the so-called Digital Business Model Cards.
It is helpful to draw a matrix to brainstorm opportunities and threats within your business model baseline. For this, look at both the network, and the enterprise view. Ask yourself:
- What might cause trouble?
- Where are opportunities for improvement?
Select the ones you think are most critical and urgent. Now convert this into a challenge formulated as a “how might I…” question.
In order to come up with innovative ideas, you have to developed an initial set of methods that foster both incremental and disruptive thinking as well as looking at the business model from a different perspective from company to global focus. These range from rather conservative incremental approaches like learning and adapting to known patterns as well as more disruptive global approaches such as “Kill-the-Company” and Blue Ocean.
Digital business models use the advantages of the digital world. Read the cards from your Digital Business Model Cards carefully as they will inspire you to get new ideas. Ask yourself how your business model would look if you applied the concept and whether it would contribute to the success of your business. Note down all the ideas you have about changing your business model. As a last step go back to your enterprise and network view and analyse.
Test & Verify Iteration type
Here you focus on testing the most critical assumptions with the Minimum Viable Product (MVP). The MVP is a cost-efficient and early prototype of the actual product, tailored to answer the assumptions at hand.
The main goal of the “Test & Verify” iteration is to reduce uncertainties and risks of the business model. Identify the most critical or risky assumptions in your business model, and phrase them as hypothesis. An example for an hypothesis could be “We assume that our value proposition is attracting a certain customer segment”.
By applying the so-called “build-measure-learn” cycle you will turn your assumptions in your business model into facts. Based on your most critical assumptions, you define a test strategy including how you want to conduct your test, what type of MVP is most suitable for testing your hypothesis, some actionable metrics, and eventually the learning you want to gain from the test results.
You also have to define actionable metrics to measure and set specific thresholds you want to achieve. Actionable in this context means to specify metrics that can clearly be measured with numbers and acted upon, opposed to very subjective formulated measures.
However, it’s also important that you derive consequences from the results and eventually learn from them. If the test results meet or exceed the thresholds, you can consider your assumption as proven and go on and further elaborate your business model in the given direction. But often, you have to apply significant changes to the business model.
Pivoting means changing the business model in one or several respects. In the worst case, your results indicate that you have to drop the entire business model. In fact, most business models undergo significant changes based on MVP results. Using quick and multiple iterations of MVP experiments and learning from them, helps you identifying potential risks to your business model very early.
Evaluating & Deciding & Implementing your Business Model
It is very important to evaluate the different business model options that you have created along the way in order to finally decide which business model option is the most appropriate for you. There is the qualitative evaluation and the quantitative evaluation.
In the qualitative evaluation, you should find criteria and grade criteria along two Dimensions (impact and ease of implementation). Impact means the market perspective (market growth or number of customers). Ease of implementation means your internal perspective (factors like time, cost or effort).
In the quantitative evaluation, you should be talking about your business case (find real numbers that you should put behind your revenues and costs that you find in your business model). Once you’ve found the most appropriate business model for you, you quickly need to think about implementation that means how to bring the business model, or product, or service, to the market and how to develop it, eventually.
Conclusions and Outlooks
What was good
- I liked the cool videos making schematic diagrams and explanations.
- The way various steps of business model baseline, analyze & improve, test & verify and finally evaluate & decide have been comprehensively covered the understanding and deep insights on BMI.
- The way the collaborative exercises helped me interact with teammates from diverse backgrounds, thoughts, work styles, corporate cultures and opinions was indeed a great value addition.
What was bad
- My first disappointment was not to get the chance to be able to get in touch with all members selected to participate in the collaboration assignment.
- SAP Sports One was presented almost every week as case-study example, however, they failed to leave up to the expectation.
- SAP Sports One videos just confirmed they used the tools which were presented in earlier videos by did not explain how exactly and did not provide any details.
- The discussions were somehow very messy because we couldn’t delete old messages.
What I wish
- I wish that could have dived deeper into the tools like digital business model concept cards, testing the most critical assumptions with MVP, business model pivoting, qualitative and quantitative BM evaluations and game planning, in order to gain more confidence in practically implementing the same at my workplace,
- I wish the Course should be done with early registration and timely declaration thereby giving the opportunity to other members to join the group for the collaborative exercise in case some appointed members don’t want to be part it.
- All the external links could be open in a new window and not in the same one.
Author: Justard Tankou