A few years ago, Alexander Osterwalder and Yves Pigneur published their ground-breaking book Business Model Generation. Since its publication, their book has gone on to be one of the “must read” business books for start ups, entrepreneurs, and business leaders alike.
Billed as “a handbook for visionaries, game changers, and challengers”, Business Model Generation was created to enable business model creation and, more importantly, innovation – a way to re-imagine business models to create value in an ever evolving business environment while also getting an edge on old guard businesses using old school business models.
One of the most interesting things about the approach that Osterwalder and Pigneur’s book and model takes is that it allows you to depict your thinking and business model in a visual format (called the business model canvas). Though not new (the strategy map was introduced many years earlier as a visual strategy and business communication and management tool), the visual format provided by the business model canvas is really appealing in today’s quick information, sound-bite world. In addition, this approach makes it easy for business leaders and their teams to sketch out and test business models as they explore strategic alternatives and innovations.
If this is the first you are hearing about this book, I would strongly encourage you to check it out – it’s loaded with lots of great information, tips, and practical examples business leaders and their teams can use.
Let’s take a moment to look a little closer at the approach to business model creation and innovation outlined in the book.
Business Model Generation defines a business model as “describing the rationale of how an organization creates, delivers, and captures value”. I would agree with this definition but I would actually go a little further and frame it like this: “describing the rationale behind, and the way in which, an organization creates and delivers value to a specific customer (or stakeholder), AND demonstrating how it translates value creation and delivery into business benefits”.
Tweaking the definition of a business model in this way may look subtle but it actually makes a BIG difference to the approach you might want to take to business models (hold that thought for a moment!).
Very quickly, Business Model Generation adopts nine building blocks that are designed to cover four key business areas: customers, the offer, infrastructure, and financial viability. The nine building blocks, determined through a collaborative process roughly in this order, are:
1. Customer Segments (CS): The one customer or several customer segments the organization serves.
2. Value Propositions (VP): The customer problems the organization seeks to solve and the customer needs it strives to satisfy with its products and services in an effort to provide value to the customer segment(s).
3. Channels (CH): The communication, distribution, and sales channels that will be used to deliver the value propositions to customers
4. Customer Relationships (CR): The relationships you want to establish and maintain with each customer/customer segment.
5. Revenue Streams (RS): The revenue streams that will result from delivering the value propositions successfully to customers
6. Key Resources (KR): The assets required to offer and deliver everything that has been defined in 1-5 above
7. Key Activities (KA): The critical activities key resources must perform to deliver everything that has been defined in 1-5 above
8. Key Partnerships (KP): When some key activities are outsourced and/or some resources are acquired from outside the organization, partners and partnerships are required
9. Cost Structure (C$): The pricing structure the business model elements result in.
These nine building blocks are depicted on the business model canvas. You can click on this link to see a picture of the business model canvas, to watch a 2 1/2 minute video overview on it, and/or to download a blank business model canvas poster.
There is no doubt that the business model canvas is a great tool for the creation of a company’s business model but it’s important for business leaders to realize that the business model canvas on its own won’t get you where you want to go. That is, creating a business model canvas alone won’t translate into business success. Why? Because is doesn’t fully transform your business model into terms that effectively guide the people on the ground who need to put it into action every day. It also doesn't show how the elements of the model must work together to produce results.
Remember my expanded definition of a business model? (“describing the rationale behind, and the way in which, an organization creates and delivers value to a specific customer (or stakeholder), AND demonstrating how it translates value creation and delivery into business benefits”) The business model canvas does a great job of helping you develop and document the rationale for how your organization creates, delivers, and captures value and it even sheds some light on the way in which this can happen but it just doesn’t do the complete job and it isn’t, in my mind, designed to demonstrate how the rationale and elements of the business model translate value creation and delivery into the desired business benefits and results.
This means that we have a gap between the business model idea, which is depicted on paper in the business model canvas, and the execution of that business model (including the realization of the expected benefits). Luckily, we have a proven tool that can bridge that gap effectively: the strategy map.
What a strategy map does is translate your business model and its key elements, organized under the nine building blocks, into actionable terms. In addition, it allows you to depict the cause and effect relationships that you believe exist between the elements of your business model and then test whether they work as you expect. In essence, the strategy map serves two business-critical purposes: (1) it translates the key elements of your business model into terms that enable the consistent execution of the model across your organization; and (2) the consistent execution of your business model allows you to test whether it actually works in the real world (which provides you with valuable feedback for business model improvement if required). When your business model proves to be “right”, you achieve your desired customer and business results!
Let’s take a look at how the elements from the business model canvas can be translated to the strategy map.
At the Top of your Strategy Map (SM): Your mission and vision go at the top of your SM. Mission and vision are not elements included on the business model canvas but they are important goals that provide essential cues that support the execution of your business model and strategy. They can easily be added to your SM based on the conversations that occurred during business model generation. You should also include a statement of your Customer Value Proposition (VP), or the big, differentiating promise you are delivering to your customer based on your understanding of your target Customer’s/Customer Segment’s needs (CS), at the top of your SM.
The Financial Perspective: Here you outline your planned Revenue Streams (RS) and, the ways you intend to leverage them to achieve your objectives for profitable business growth. Additional objectives included here relate to the Cost Structure (C$) building block and they outline how you plan to use company assets in the most optimal way to support profitability.
The Customer Perspective: This perspective expands on your Value Proposition (VP) by outlining what your customer value proposition looks like in action and the experience and benefits you must deliver to your customer. Objectives relating to Customer Relationships (CR) included here outline how you want to act with and relate to your customer as part of your value proposition.
The Internal Process Perspective: Business model canvas elements addressed here include Key Activities (KA) (objectives relating to the specific critical activities required to support your customer value proposition and how they must work to achieve that goal), Channels (CH) (objectives identifying the key channels that support delivery of your customer value proposition and how they must work to achieve success), and Cost Structure (C$) (objectives that outline how your key activities and channels must perform to support the cost structure required to achieve business profitability).
The Suppliers and Partners Perspective: In addition to objectives relating to supplier and partner-relevant Key Activity and Channel performance, this perspective includes Key Partners (KP) objectives that outline how you need to work with your suppliers and partners to execute your Key Activities via identified Channels both according to your desired Cost Structure and in a way that delivers your Value Proposition.
The Organizational Capabilities Perspective: Business model canvas elements built into this perspective include Key Resources (KR) (the physical, intellectual, cultural, and human (and the skills and capabilities they need) resources, and the financial and non-financial resource management attributes do you need to have in place AND how you will obtain and/or develop them), and Cost Structure (C$) (how you will invest in your key resources AND how you will use them in ways that support the delivery of your customer value proposition while also achieving a cost structure required for business profitability).
At the Bottom of Your Strategy Map (SM): Your company’s core values are the beliefs and principles that govern your organization’s behavior and support the execution of your business model. Core values are not included in the business model generation approach but they are critical for the consistent decision making and the successful execution of your business model and customer and business strategy. You probably have a set of core values identified for your company – be sure to include them on your SM.
Here is a picture showing how the nine building blocks from the business model canvas can be translated to a strategy map.
You’ll notice that I haven’t included cause and effect arrows on this strategy map. After translating the elements of your business model canvas into relevant strategic objectives on your strategy map (as I have outlined above) and adding in the cause and effect arrows, I’m sure that you can see that this SM would play a pivotal role in translating your business model into action at all levels of your organization and enabling the consistent execution of your business model and strategy.
It turns out that the business model canvas and the strategy map are the “ying and yang” of successful strategy formulation, execution, and management. They need each other and you need both of them if you want to realize your vision for business growth and success. The business model canvas allows you to develop innovations in business strategy and ensures that the required building blocks have been successfully identified. From there, the strategy map translates your business model canvas into something that can be put into action in your company and with your customers. In addition, formatting your business model in a strategy map opens the door for focused organizational alignment and quick assessment, gap identification, and the creation of plans for gap closing initiatives, processes, resources, and capabilities. Finally, translating your business model into a strategy map enables the creation of a relevant balanced scorecard indicator set that will help test the performance of your business model and provide you with the valuable feedback and information you need to continually innovate your business model as needed.
Are you looking at business model innovation as your key to creating greater customer and business value? Don’t stop with just the business model canvas. Why not translate the nine building blocks of your business model into a strategy map? I think that you’ll discover that leveraging both tools is a powerful strategy that will give your company the necessary agility and game changing business success you are looking for!