The Business Model Book: Design, Build, and Adapt Business Ideas That Thrive

The Business Model Book: Design, Build, and Adapt Business Ideas That Thrive

by Adam J. Bock and Gerard George

“A business model is the organizational design used to exploit an opportunity and create value.”

“Great business models work because the elements are aligned in support of the value creation process… Consider Southwest Airlines, the precursor to low-cost air carriers around the world. Nearly everything about Southwest’s business model was designed to minimize costs… Yet it paid higher than average wages and spent more than other airlines on training and incentive packages. Why? Because in the airline industry small employee errors generate high costs. A late departure could impact multiple routes; if passengers or luggage miss a connection, the airline incurs high costs in customer service. If the firm’s profit margin is 10 per cent, then $100 in costs incurred resolving a customer service problem requires $1,000 in additional revenue to make up the loss. Southwest’s low-cost business model required a relatively high-cost human resource element.”

“Business models are complex systems… The success of the business model… depends on whether the system works effectively as a whole… A great business model is efficient. In the long run, a wasteful business model is vulnerable to industry changes and business model innovation.”

“Business models do not function is isolation… A business model is a ‘boundary-spanning’ system—it necessarily incorporates activities and transactions that reach across the boundaries of the organization to suppliers, partners, and customers. The business model therefore operates within the context of the firm’s supply chain and must contribute to how that supply chain generates value.”

Business model elements

“It helps to imagine a business model as a triangular pyramid that can be viewed from three different perspectives: resources, transactions, and values… Of course, the pyramid has a hidden side facing the ground. That hidden side is the business model narrative, the foundation of a business model’s purpose and guide for evaluating the inevitable trade-offs… Business models are coherent when the narrative links the resources, transactions, and values.”

Resources

Some resources are intangible. “You do not need to find specialized start-ups to see the power of rare and tacit capabilities. Incredible human skills are deployed regularly at many big, familiar companies.” The authors caution not to confuse tacit capabilities with ambiguous capabilities.

“Most organizations must expend effort to continually rejuvenate and build the resource structure. They invest in training, recruiting, maintenance, and physical asset management.”

“Many business model analyses underestimated the importance of key customer or channel relationships… They may represent months, years, or decades of effort.”

Transactions

“Transactions are the connectors that link, combine, and exchange resources in the value creation process. Sometimes these transactions are obvious; sometimes they are quite subtle or even hidden.” Keep in mind that many transactions are internal.

“Transactions frame value creation. Resources determine the value that your organization creates; transactions frame the value that your organization can capture. Capturing value is often much more difficult than creating it.”

Value

“At the very least, talk to potential customers to confirm or reject basic assumptions about value creation.”

Narratives

“A business model tells a story in which a problem is solved (value creation) through interactions with various other entities (transactions) via the judicious use of assets and capabilities (resources).”

“Business model narratives drive internal organizational alignment. An effective business model narrative should make sense to internal stakeholders. Share your narrative with a few key employees. They should respond to the narrative by saying something like: ‘Yes, that is the story of the organization.’ If not, you have a problem already.”

RTVN framework: resources, transactions, value, narrative

“Pre-launch and very early-stage ventures may get the most benefit from the simplest model framework: RTVN… If the simplest analysis…. clearly shows that the model does not work, a more complex analysis almost always will produce the same result.”

“The innovation is not the business model… Remember, you cannot do business model analysis on an innovation. You must focus on the opportunity and the business.” For example, from the MRail case study discussed in the book: “Is there an opportunity for an automated system that uses high-precision laser-based measurements to predict rail track failure? Is there a business model to create a viable company to realize that opportunity?”

“The most important task at first is to build something people want. If you don’t do that, it won’t matter how clever your business model is.” – Paul Graham

“You cannot business-model your way out of a shitty product.” – Tim O’Neill

The Lean Canvas for start-ups

“The Lean Canvas is a great framework for evaluating business models that have gone beyond the ideation stage… Lean Canvas is specifically intended to help you make your assumptions explicit so you can test them.”

The Lean Canvas tool, created by Ash Maurya, “prioritizes experimentation over detailed planning.” It is comprised of nine elements: problems, solutions, key metrics, customer segments, channels, unique value proposition, costs, and revenue streams.

“The ‘problems’ in the Lean Canvas are the customers’ problems… Any problem should be clear, specific, and quantifiable… Key metrics are the quantification of critical success factors (CSFs)… You cannot measure everything, so every metric you select probably de-emphasizes another metric… An ‘unfair advantage’ is something that competitors cannot easily copy, acquire, or otherwise execute.”

Osterwalder’s Business Model Canvas (OBMC)

“For a large organization… we recommend using the OBMC rather than the Lean Canvas, because it focuses on the organization rather than a specific opportunity or innovation.”

“Alexander Osterwalder introduced the Business Model Canvas in his book, Business Model Generation.” It is also comprised of nine elements: key resources, key activities, key partners, value propositions, customer relationships, channels, customer segments, revenues, and costs.

“The hard truth is that many entrepreneurs and managers do not fully understand why customers buy from their companies… Whenever possible, it is important to get the product or service, or some reasonable facsimile, in front of potential customers. The feature you thought was the differentiator might turn out to be either a minimum criteria or even unnecessary. Only the customer is the final arbiter of what is a ‘must-have’ versus a ‘nice-to-have’ versus ‘no value’ feature.”

“Once you are clear about what the customer will pay for, consider alternative revenue mechanism types.”

More than one business model

“Multiple business models in the same organization may be parallel, connected, or synergistic… Parallel business models have no significant connections or interactions; changes in one business model, including shutting it down, should have no substantive impact on the others… Google uses its knowledge of web content to generate advertising revenue (Adsense), but it also uses the promise of advertising revenue to generate content (YouTube). These types of business models are… synergistic.”

Business model change and innovation

“A key lesson from this book is that business models are not static. Truly great business models must adjust to changes in the organization, the market, and the industry… Remember independent travel agents? Music stores that sold (new) LPs, cassettes, and CDs? Video rental stores like Blockbuster? … Schumpeter’s vision of ‘creative destruction’ is more evident and vibrant now than it has ever been.”

“We define business model change as: ‘the implementation of non-trivial changes to at least two business model elements.’ This helps clarify the difference between business model change and minor changes in operations, strategy, product, process, or market.”

“Business model innovation is the implementation on nontrivial changes to a least two business model elements resulting in a business model configuration that is new to the organization’s industry and market… Business model innovation comes with a steep price. Thousands of companies have gambled unsuccessfully on business model innovation. Most are completely lost to study.”

Value creation

“Imagine that, for whatever reason, you want to sell your business. What is it that an acquirer is really buying? … Most likely, the acquirer is buying your business model. The acquirer wants the sum total of your operations, which should exceed the sum of the value of all the parts. It is the combination of resources, transactions, and value creation that makes acquisitions attractive.”

“Although we have focused primarily on for-profit businesses in this book, business models are relevant for any organization… Business models can be applied to academic institutions and governments… And the same tools and frameworks apply; usually the key distinction is the definition of ‘value.’”

The authors recommend using an online tool such as canvanizer.com to create business model canvases. They also provide worksheets and supplemental reading “excursions” on the book’s website: www.thebizmodelbook.com.

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Bock, Adam J., and Gerard George. The Business Model Book: Design, Build and Adapt Business Ideas that Thrive. Harlow, England: Pearson Education Limited, 2018. Buy from Amazon.com

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Note: I have modified the spelling to appease my American spellchecker.

Books mentioned:

Inventing Entrepreneurs by Adam J. Bock and Gerard George (2008)

Models of Opportunity by Adam J. Bock and Gerard George (2012)

Place to Space: Migrating to eBusiness Models by Peter Weill and Michael Vitale (2001)

Business Model Generation by Alexander Osterwalder (2010)

The New Business Road Test by John Mullins (2017)

Crossing the Chasm by Geoffrey Moore (3^rd edition, 2014)

The Lean Startup by Eric Ries (2011)