Welcome to the business model generation
Writing about business models and business modelling feels a little like dangerous territory. While the terms are intuitively understood, trying to pin down a definition is very difficult. For years, academics have been writing and re-writing their definitions, each with their own vagaries. And, as Alex Osterwalder neatly demonstrates in his lecture about business models (31:56), ask a room full of people “What is a business model?” and you’ll receive a multitude of answers. We shall nonetheless brave this field.
Attempting a definition
Personally, I find Osterwalder’s approach to defining what a business model is both simple and useful.
As the term business model intuitively suggests it has something to do with business and it has something to do with models. A quick lookup in the online version of the Cambridge Learner’s Dictionary (Cambridge 2003) returns no result for the full combined term but the following definitions for the two separate terms:
- business: the activity of buying and selling goods and services, or a particular company that does this, or work you do to earn money.
- model: a representation of something, either as a physical object which is usually smaller than the real object, or as a simple description of the object which might be used in calculations.
…Thus, in the case of a business model, the model (i.e. representation) shall help understand, describe and predict the “activity of buying and selling good and services” and “earning money” of a particular company. But as the notion of buying and selling seems too narrow, I try to extend it. So differently put, the business model is an abstract comprehension of the business logic of a company. And under business logic I understand an abstract comprehension of the way a company makes money, in other words, what it offers, to whom it offers this and how it can accomplish this.
I also find it useful to think of business models in much the same way as Joan Magretta describes them: “They are, at heart, stories—stories that explain how enterprises work.”
In many ways, there is no right or wrong definition of what a business model is, but it is useful to develop a shared understanding and to that ensure we are all on the same page.
A very brief lesson in history
Business models have, in essence, existed since the beginning of time. Although a business model is not always explicitly stated nor actively used for prediction and evaluation, every organisation has a logic to the way in which they do business and, in this sense, every organisation has a business model.
Many academics have charted the evolution of our present day concept(s) of business models and Anders Sunderlin has even created an impressively comprehensive timeline of the business model concept. We shall not attempt to reproduce such a history here!
Rather, we hope to fill in the broad brush strokes and to provide a background to the new generation of business modelling that we find ourselves with today.
According to several reviews, the term ‘business model’ first appeared in an academic article in 1957 and then appeared again in the actual title of a paper in 1960—Educators, electrons and business models: A problem in synthesis (written by Jones and published in Accounting Review).
However, Magretta observed that the term only really came into widespread use “with the advent of the personal computer and the spreadsheet.” Spreadsheets and computing power gave us the ability to more easily model the behaviour of our businesses. By using mathematical formulas and equations to calculate the interactions between each component of a business, it became possible to test out assumptions and to determine how individual changes impacted the whole. Questions about price sensitivity, choice of channel, cost structure and more, could now all be answered with the tap of a few keys. Not only that but, in the words of Magretta, “By enabling companies to tie their marketplace insights much more tightly to the resulting economics—to link their assumptions about how people would behave to the numbers of a pro forma P&L—spreadsheets made it possible to model businesses before they were launched.” Theoretical modelling became tied to real numbers.
Interest in the idea of business modelling truly boomed however from 1995 onward. Suddenly, the expression ‘business model’ began to appear in numerous contexts and forms, both in academic and non-academic publications—although as Osterwalder observed, “it can be said that the expression was inflated through journalists, business people and academics that used it in relationship with e-commerce, start-up companies and high tech companies.” A genuine interest in business modelling is nonetheless apparent. Sunderlin’s timeline shows that, since 2000, multiple attempts have been made to understand what exactly a business model is and to create a clear business modelling framework.
A fly in the ointment
Despite growing interest, there have historically been several problems with the business modelling concepts and frameworks that have been developed.
- Many business model concepts were financially based, particularly those that relied on spreadsheets and mathematical modelling.
Inherent within mathematical or financial models is an inability to create or invent a business model—in order to program a mathematical model, the model must have already been created at a conceptual level. Therefore, agile prototyping is difficult, if not impossible. Similarly, such models are only as good as the assumptions on which they are based, meaning that any conceptual errors prove at best misleading and at worst disastrous. Laborious and time consuming, these models are also somewhat limited to the realm of those who have either mathematical or computer science expertise.
- Those concepts that weren’t financially based were often academic, complex and inaccessible.
Many of the models depicted in Sunderlin’s timeline are somewhat impenetrable for anyone without a business degree and would certainly be very difficult to use on a day-to-day basis in the real world.
- In general, the concepts lacked a shared language and there was little standardisation.
Although in theory many people were attempting to contribute to the same idea, each new concept was distinctly different from the last. Not only that but even a single framework could generate models that were almost unrecognisable from one another even when modelling the same business. This made it difficult to draw comparisons between different business models and prototyping or evaluation of models was very difficult.
Enter the Business Model Generation
In 2004, a new generation of business modelling began to emerge that was, in large part, aimed at solving these dilemmas. Driven initially by Alex Osterwalder’s PhD dissertation on the topic of business model innovation and ontology, the approach he outlined started to be applied around the world.
In 2006, Osterwalder and Professor Yves Pigneur embarked upon a project to create a book that accompanied their business modelling methodology, resulting in the publication of Business Model Generation.
Now used by over 100,000 people and organisations from start-ups right the way through to giants such as 3M, Capgemini, Ericsson and Deloitte, Business Model Generation provides a practical, easy-to-understand framework for anyone interested in improving an existing business model or creating a new one.
Interestingly, Alex and Yves felt that they couldn’t “credibly write a book about business model innovation without an innovative business model.” Rather than following a traditional publishing route, they instead launched the Hub, an online platform through which they could share their writings and gather feedback from day one. Not only did this finance the book’s production as people had to pay to join the platform but it also meant that the book was co-created by 470 practitioners from 45 countries.
Highly visual in its approach, the central premise of Business Model Generation is the Business Model Canvas.
Explained in just over 2 minutes in the video below, the canvas is a simple but rigorous business model framework that visually represents “the nine basic building blocks that show the logic of how a company intends to make money.” Not only is the canvas easy to use but it also enables a shared language for business modelling—both ‘quick and dirty’ and systematic prototyping, comparison and evaluation have now become possible. Teams can, at long last, see, interact, engage with, share and compare their business model in a very tangible way.
And, if all that wasn’t enough, there is even a Business Model Toolbox for the iPad and a web version of the toolbox is on its way soon! Old school can be good though too—we’ve found that printing the canvas onto A0, blu-tacking it to a wall and sticking Post-it notes all over it works really well in a team environment.
Although the Business Model Generation is certainly not the end of the story and there have been further conceptual developments in recent years, for us, Business Model Generation remains the clearest, most practical framework available and it is our concept of choice to date.
What does all this mean for you?
A business model isn’t just a theoretical construct or a nice thing to explore on a management away day—rather, it describes the fundamentals of what makes your business competitive. By mapping out your business as a whole, it becomes possible to design and assess new opportunities, to innovate and evaluate, and to question, transform and challenge without losing sight of the bigger picture or getting bogged down in endless number crunching.
In our experience, the Business Model Canvas enables owners, managing directors and teams to ‘see and touch’ their business model. It gives visual clarity to thoughts and ideas that would otherwise remain conceptual and difficult to pin down, enabling you to gain a clear sense of how everything works together and to assess the strength of your own model. The canvas also enables quick and easy comparisons to be made between alternative business models or even between your model and that of your competitors’—now that’s one way to stay ahead of the game!
Whether you’re sketching out the seed of an idea or assessing an organisation that has been doing business for years, business modelling enables you to prototype, develop, evaluate and test as you strive to enhance your competitive edge. Use business modelling and the Business Model Canvas to:
- Discuss, create, clarify and communicate strategy within your organisation
- Create a single view of your business that anyone can understand
- Map out your competitors’ business models and compare them to your own
- Design and invent innovative new business models
- Communicate your business model to your stakeholders
- Easily create a business plan having mapped out the fundamentals
In the words of Osterwalder and Pigneur themselves:
…the scale and speed at which innovative business models are transforming industry landscapes today is unprecedented. For entrepreneurs, executives, consultants, and academics, it is high time to understand the impact of this extraordinary evolution. Now is the time to understand and to methodically address the challenge of business model innovation.
And for those of you who like the research…
Magretta, J. (2002). Why business models matter. Harvard Business Review.
Osterwalder, A. (2004). The business model ontology: a proposition in a design science approach.
Osterwalder, A. & Pigneur, Y. (2010). Business Model Generation. New Jersey: John Wiley & Sons.
Sunderlin, A. (2010). The evolution of the business model concept. The Business Model Database.