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Developing your business model

Copyright © 2019 The Open University

2 of 17 http://www.open.edu/openlearncreate/course/view.php?id=3927 Monday 3 June 2019

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ContentsIntroduction 41 What is a business model? 52 The Business Model Canvas 63 Where do business models come from? 84 What is your unique value proposition? 105 What are your unique capabilities? 126 Innovating your business model 137 What is your ‘go to market’ strategy? 14Summary 16References 16Acknowledgements 16



Introduction

Figure 1 Management guru, Peter Drucker

Renowned management guru, Peter Drucker, once asserted that there are five keyquestions you must ask yourself about your business:

● What is our mission?● Who is our customer?● What does the customer value?● What are our results?● What is our plan?

(Drucker, 2008)

Each of these are critical questions and together they should form the basis of the way inwhich you approach doing business – your business model.In this unit you will consider how you might develop an effective business model and makemoney from your product, service or big idea.

Introduction



1 What is a business model?At its core the concept of a business model is actually fairly simple. As one thinker put it:

A business model is essentially a description of ‘how you planned to makemoney’ from the business.

(Lewis, 1999, cited in Ovans, 2015)

The problem for many early-stage entrepreneurs is that with all the excitement oflaunching a new business and the challenge of finding customers and making thingswork, the nuts and bolts of making money (most especially a profit!) might slip from theagenda. Yet, as the Danish academics Christian Nielsen and Morten Lund havepointed out:

No management activity is more important than having clarity about how theorganization creates, delivers, and captures value. It requires, among otherthings, knowing what customers want, how value can be best delivered, andhow to enlist strategic partners to achieve maximum benefit.

(Nielsen and Lund, 2018, p. 65)

1 What is a business model?



2 The Business Model CanvasOne of the most accessible and straightforward approaches to developing, analysing andunderstanding a business model is the Business Model Canvas (Figure 2).

Figure 2 The Business Model Canvas (click to view PDF)

(Note: If you are viewing the Business Model Canvas PDF on screen then zooming isrequired for readability. If you are printing this PDF then A3 size or larger isrecommended.)The Business Model Canvas approach was developed by Alexander Osterwalder (2012)and can be applied to organisations of any size, type or sector. It describes anorganisation and its functioning in terms of nine specific areas:

● Customer segments – the customer and market segments you serve.● Value propositions – how you solve customer problems and satisfy their needs.● Channels – how you deliver your unique value proposition to customers, including

communication, distribution and sales channels, among others.● Customer relationships – how you maintain relationships with customers and

customer segments and the types of relationship you have.● Revenue streams – income and revenue from the sale of your product, service or

idea.● Key resources – the most important resources required to deliver your unique

proposition to the market.● Key activities – what you actually do as a business in order to generate revenue

streams and deliver your offer to the market.● Key partners – who you partner with outside the business in order to deliver your

proposition, e.g. suppliers, distributors, etc.

2 The Business Model Canvas



● Cost structure – the costs you incur and the way your costs are structured andmanaged.

(For more detail see Osterwalder and Pigneur, 2010.)

Activity 1 The role of the Business Model CanvasAllow approximately 15 minutes to complete this activity

In this 3-minute video clip (Stanford eCorner, 2012), Alexander Osterwalder, creator ofthe Business Model Canvas, explains how it all fits together:

View at: youtube:2FumwkBMhLoAlexander Osterwalder: The Business Model Canvas

As you are watching, reflect on your business or a business you are familiar with. Canyou see how each of the nine areas of the Business Model Canvas has a role to play insupporting business success?

Provide your answer...

DiscussionAn important issue to consider is that the information inserted in the categories of thecanvas are coherent. This is a critical issue that affects the credibility of your businessmodel and the feasibility of your entrepreneurial idea.For example, if the channel chosen to target your key customers is not appropriate,your business model will be questioned. Using internet sales to target people whodon’t use the internet means that your idea does not address your customers’ actualneeds. In addition, costs and revenues that are not balanced mean that your businesswill not be financially sustainable, hence putting your venture at risk.

2 The Business Model Canvas



3 Where do business models come from?

Figure 3 Rustic jam jars on sale in a shop or at a market

While in some situations a business model might emerge on the basis that it is the ‘rightthing to do’ or it just makes sense, at other times – such as when considering specificopportunities or challenges – you will need to plan and make conscious decisions aboutyour business and how it will grow and develop.A simple example might serve to illustrate this.Imagine you have started a business selling homemade jams at local farmers’ markets.After several months of doing this successfully you might recognise that the ‘natural thingto do’ would be to augment your offering with a range of fresh breads that customers couldbuy with their jam. Adding bread would be an extension of the product range and wouldcomplement and provide added value for your customers.Importantly, this diversification of your offering would, among other things:

● bring additional revenue streams● broaden the range of customers● change the supplier base● impact the business costs.

Now fast-forward 12 months: your business has been so successful that you have beenapproached by a major national retail chain that wishes to stock your product. A decisionto accept this offer would mean a complete change in virtually each of the nine areas ofthe Business Model Canvas: new partnerships will be required, different resources will becritical, your revenue and cost structures may well be radically different.What might seem like the big opportunity you have been waiting for could force you toradically change your business model in new and unexpected ways. This can lead you to




consider the unique value proposition that you are offering to the market, and mostparticularly how you are creating value for existing and potential customers.It is consequently important to recognise that while the ‘natural thing to do’ can serve youwell up to a point, it is critical for the growth and long-term success of a business that thebusiness model is consciously reviewed and updated on a regular and structured basis.This is to ensure that the business model remains fit for purpose and that strategicdecisions made earlier in the business’s life cycle are not now impeding its future growth.This review might involve some simple tweaking, or perhaps full-scale business modelinnovation (Jarrell, 2017).




4 What is your unique value proposition?

Figure 4 What is unique about your business or offering? Is it unique simply because itis new?

One of the earliest questions you should be asking yourself as an entrepreneuris: ‘Why should customers care about my product or service?’. In businessparlance, your unique value proposition is what sets you apart from your rivals.It’s the secret sauce that makes your product something people should payattention to, and want to purchase from you.

Before you can consider trying to sell your product or service to anyone else,you need to sell it to yourself. This consists of mapping out why your productmatters, and effectively pinpointing what makes you unique. If you can’tachieve this, you can’t hope to market yourself effectively.

(Small Business BC, 2018)

It is critical for the success of any business that you have a clear picture of what makesyou unique and, in particular, what makes your proposition unique and uniquely valuablefor your existing and potential customers. Perhaps it is modesty or perhaps it is a lack ofclear thinking, but distilling your unique value proposition and understanding whatdistinguishes you in a crowded marketplace can be one of the hardest things you will do inbusiness.So how can you define your unique value proposition?A good way to approach it can be by asking yourself some key questions:

● What customer problem are we attempting to solve?● What customer needs do we try to satisfy?● What segment-specific products and services do we offer our customers?● What value do we generate for our customers?● How does our value proposition differ from that of the competition?

Having a clear answer to these questions will help you define your unique valueproposition for the long term.




Activity 2 Your unique value propositionAllow approximately 15 minutes to complete this activity

What is your unique value proposition? Take a moment to reflect on this and note downsome answers to each of the five questions.

1. What customer problem are we attempting to solve?


2. What customer needs do we try to satisfy?


3. What segment-specific products and services do we offer our customers?


4. What value do we generate for our customers?


5. How does our value proposition differ from that of the competition?


DiscussionThere are no correct answers to these questions. The responses you give will verymuch depend on your business, the stage of development of your business idea andthe field in which you are operating. Someone at the early stages of setting up a retailconcept will, for example, have very different answers from someone managing aninvestor-ready tech start-up.You should nonetheless take the time to consider these questions on a regular basis. Ifyou are unable to answer them, or find it difficult to answer them clearly, it might beworth taking a step back and ensuring that you are on the right path.




5 What are your unique capabilities?A business’s capability is essentially its ability to ‘deploy resources effectively’ (Mengucet al., 2014, p. 315) in order to achieve its desired goal. If we consider the wide range ofresources available to a business, from the people to the financial and everything inbetween, it is clear that a business’s capabilities should be understood broadly to includeany of the following:

● Skills and knowledge● Machinery and technology● Managerial systems● Values and norms● Organisational processes● Learning.

But why is this important? In essence, it is the unique utilisation and application of thesecapabilities that ‘may be at the root of why two firms that have similar resources obtaindrastically different levels of performance’ (Menguc et al., 2014, p. 315).Equally, as you reviewed this list you might have noticed that while some of thecapabilities listed are quite tangible – machinery and technology, for example – otherssuch as skills, knowledge and learning are quite intangible. Very often intangiblecapabilities are just as important as tangible capabilities, most particularly in knowledge-based businesses.For you as an entrepreneur, the secret is to recognise your own capabilities and tounderstand how they are unique. It is these capabilities that will support your businessmodel and enhance your unique value proposition.

Activity 3 Your unique capabilitiesAllow approximately 10 minutes to complete this activity

What are your unique capabilities? Take a moment to reflect on what capabilities youhave that are truly unique and how these might support your business model. Youmight wish to consult with a mentor or colleague who knows you and your businesswell.


DiscussionAt this stage you might struggle to identify capabilities that are unique to you and yourbusiness. That is ok!Over time you should continue to reflect on this and look to strengthen and fine tuneyour capabilities to ensure that you are building upon your strengths and taking stepsto address any weaknesses.

5 What are your unique capabilities?



6 Innovating your business modelSometimes, however, you might need to be more proactive in how you adapt yourbusiness model. There might be many reasons for this, including the desire to prepare fornew opportunities or perhaps to refine the way you are doing things in order to reach evengreater heights of success.In such situations it is necessary to take a more considered and conscious approach toinnovating your business model. This might mean deliberately and carefully addressingsome, if not all, of the nine key elements of the Business Model Canvas.So how can you do this?Girotra and Netessine assert that innovating your business model involves re-evaluatingfour key elements:

What your offerings will be, when decisions are made, who makes them, andwhy. Successful changes along these dimensions improve the company’scombination of revenue, costs, and risks.

(Girotra and Netessine, 2014, p. 98).

While this might seem like a straightforward exercise, it is worthwhile undertaking it on aregular basis. This can be done through individual reflection, though involving otherpeople and drawing on their expertise and perspectives can be particularly beneficial.If change is necessary, a ‘pivot’ might be in order. To learn more about pivoting take a lookat the Pivoting unit of the Entrepreneurship Accelerator programme.

6 Innovating your business model



7 What is your ‘go to market’ strategy?Your ‘go to market’ strategy will very much depend on the product or service you areoffering. There is no single right way to approach the market and it might be a case of trialand error until you find the model that really works for you.

How will you generate revenue?

Figure 5 Distributing or reselling someone else’s product or service can be a viablebusiness option

For many start-ups the natural tendency can be to make and provide your own product orservice. Yet there are a number of other approaches worth considering that can help yougenerate revenue:

● Acting as a third-party distributor servicing a particular market or territory (e.g. takingon a franchise or licence for an existing business).

● Buying and reselling someone else’s product (e.g. importing).● Buying and transforming someone else’s product or service to provide something

new to the market (e.g. assembling a product or service consisting of different partsand reselling it as your own).

It is also worth considering how you might gain valuable business insight throughpartnering and leveraging the best that various parties have to offer.

Pricing strategiesSome basic approaches to pricing include:

● Free samples – offering potential customers free samples of your product or servicein order to generate interest and sales (e.g. tasting samples offered by cafes orsupermarkets).

● Licensing – while you maintain ownership of your intellectual property, you licenseother people to re-sell your product or service in a given market and/or for a givenperiod (e.g. a franchise such as Subway).

● Freemium – a version of your product or service with limited functionality is madeavailable to customers for free, and they have the option of upgrading to a paidservice with full or additional functionality (e.g. LinkedIn).

7 What is your ‘go to market’ strategy?



● Subscription – customers pay you a regular subscription fee in return for the right touse or receive your product or service (e.g. Sky TV).

● Loss leader – selling a particular product or service at or near a loss in order toentice further sales of other products (e.g. printers are often sold relatively cheaply inorder to lock consumers into buying printer cartridges).

These are only examples and the ways in which you can sell your product or service isvirtually endless. However you do it, just remember that each approach comes withcertain risks that need to be carefully managed.

Activity 4 Your pricing strategyAllow approximately 5 minutes to complete this activity

What is your pricing strategy? Review the list of examples given to see if one of theseis appropriate for you or if another approach is needed.


DiscussionThe approach you take to pricing your offering will have significant implications for yourlong-term revenue and profitability levels. This is particularly so if your business modelrequires you to sign long-term contracts with clients, which can result in you beinglocked into less than ideal pricing structures.While you can, of course, change the approach over time, this can actually be quitedifficult to achieve, most especially if your customers are reluctant to do thingsdifferently or if contracts are in place.

7 What is your ‘go to market’ strategy?



SummaryWhile there is no single perfect business model, there are nonetheless some basic thingsyou must consider. In this unit we have introduced you to the Business Model Canvas andoutlined key elements required for the effective growth of your business model. While youcannot work on them all at once, a methodical approach will help you ensure that noinadvertent mistakes are made as you grow and develop your business.

ReferencesDrucker, P.F. (2008) The Five Most Important Questions You will Ever Ask about YourOrganization, San Francisco, Jossey-Bass.Girotra, K. and Netessine, S. (2014) ‘Four paths to business model innovation’, HarvardBusiness Review, vol. 92, no. 7, pp. 96–103.Jarrell, K. (2017) ‘Why organizations need to innovate their business model now’,XPLANE, 21 April [Blog]. Available athttps://xblog.xplane.com/innovate-your-business-model (Accessed 16 January 2019).Menguc, B., Auh, S. and Yannopoulos, P. (2014) ‘Customer and supplier involvement indesign: the moderating role of incremental and radical innovation capability’, Journal ofProduct Innovation and Management, vol. 31, no. 2, pp. 313–28.Nielsen, C. and Lund, M. (2018) ‘Building scalable business models’, MIT SloanManagement Review, vol. 59, no. 2, pp. 65–69.Alexander Osterwalder: The Business Model Canvas (2012) YouTube video, added byStanford eCorner [Online]. Available athttps://www.youtube.com/watch?v=2FumwkBMhLo (Accessed 16 January 2019).Osterwalder, A. and Pigneur, Y. (2010) Business Model Generation: A Handbook forVisionaries, Game Changers, and Challengers, Hoboken, NJ, John Wiley & Sons.Ovans, A. (2015) ‘What is a business model?’, Harvard Business Review, 23 January[Online]. Available at https://hbr.org/2015/01/what-is-a-business-model (Accessed 16January 2019).Small Business BC (2018) 5 Tips to Create a Unique Value Proposition, 17 October[Online]. Available athttps://smallbusinessbc.ca/article/5-tips-create-unique-value-proposition/ (Accessed 16January 2019).

AcknowledgementsEvery effort has been made to contact copyright holders. If any have been inadvertentlyoverlooked the publishers will be pleased to make the necessary arrangements at the firstopportunity.Important: *** against any of the acknowledgements below means that the wording hasbeen dictated by the rights holder/publisher, and cannot be changed.

Summary


https://xblog.xplane.com/innovate-your-business-model

https://www.youtube.com/watch?v=2FumwkBMhLo

https://hbr.org/2015/01/what-is-a-business-model

https://smallbusinessbc.ca/article/5-tips-create-unique-value-proposition/


Grateful acknowledgement is made to the following sources:Figure 1: Isaac Mao. This file is licensed under the Creative Commons Attribution Licencehttp://creativecommons.org/licenses/by/2.0/Figure 2: ***© Business Model Alchemist, This file is licensed under the CreativeCommons Attribution-Share Alike Licence http://creativecommons.org/licenses/by-sa/3.0/Figure 3: Image by Michal Jarmoluk from PixabayFigure 4: Image by mightybutton from PixabayFigure 5: © melpomen / 123 Royalty Free

Acknowledgements


http://creativecommons.org/licenses/by/2.0/

http://creativecommons.org/licenses/by-sa/3.0/


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