Business Model: Blueprint for Success

IdeaConnection Interview with Alexander Osterwalder, Co-author of Business Model Generation
By Vern Burkhardt
"We believe a business model can best be described through nine basic building blocks that show the logic of how a company intends to make money. The nine blocks cover the four main areas of a business: customers, offer, infrastructure...

Vern Burkhardt (VB): What led you to the idea of the Business Model Canvas?

photo of Alexander OsterwalterDr. Alexander Osterwalder: It originated with my doctoral dissertation which I wrote under my PhD supervisor, Professor Yves Pigneur. The aim was to build the foundation for a computer assisted business model design tool.

This was at a time when business models, particularly eBusiness models, were popular. Everybody was talking about them but, in fact, everybody was talking about something else. Some people were talking about revenue models; some about distribution; some about new markets, and there were other focuses as well.

Professor Pigneur and I concluded that people had different mental models so we thought we would create a shared language to help people better describe, understand, analyze, and challenge their business models. A shared language would enable people to focus on the building blocks in order to better describe and design business models. The goal was to be able to design business models, like an architect has a drawing table and incorporates different things in the design process for a structure.

This was the origin of the Business Model Canvas, which was our answer to the question of how to create a shared mental model. It's a simple language for describing business models and ultimately for inventing new, powerful business models.

(Vern's note: The 9 building blocks in the Canvas are Customer Segments, Value Propositions, Channels, Customer Relationships, Revenue Streams, Key Resources, Key Activities, Key Partnerships, and Cost Structure.)

VB: It should enable people to develop their own models.

Alexander Osterwalder: Exactly. It was about ten years ago that we started our research, and my doctoral dissertation was about this. Two years ago we decided to write a more accessible book that would be useful for practitioners.

VB: How does use of the Business Model Canvas improve the ability to do business model innovation?

Alexander Osterwalder: There are two aspects to it.

If you're an existing company you want to be able to describe, analyze and challenge your existing business model. You would expect a management team to be readily able to describe their business model, but surprisingly it can take them anywhere between one hour and a full day to describe their existing business model. As soon as you make the conversation concrete through use of the Business Model Canvas, they have a long discussion and are able to map out their business models. This helps them think about which business directions to pursue. It's an inside-out approach.

The second aspect is we deliberately use the word "canvas" to portray the fact you can sketch out your existing business model – you can draw it. We also use it as an analogy to landscapes; you can draw what you see outside your window. You make it tangible so others can understand and share the same image.

When it comes to new business models it is even more important that you make them tangible – sketch them out – because you're talking about things that haven't been done. By using a common language and a drawing board you can sketch out a new business model and explain the logic behind it. This makes it easy for people to understand the model.

I'm pretty sure you've been in the situation where somebody explained his or her business model and you didn't understand a word. This happens quite often because it's only explained in words. A business model is much easier to understand if made tangible by visualizing it.

Once you have learned the language you can describe new business models and, even more importantly, you can generate a whole series of possible alternative business models. If you have one product, one technology, or one service you can imagine 5, 10, or 20 different business models, but in order to make them comparable and to structure your brainstorming you need to use something like the Business Model Canvas.

All this is to say the Canvas can help structure your thinking. One approach is to start from an existing business model and try to improve it. The other is to start with a blank sheet and generate new ideas.

VB: What is the benefit of doing a SWOT assessment of each of the 9 Building Blocks in the Business Model Canvas when engaged in innovating one's existing business model?

Alexander Osterwalder: It's probably less interesting to do a SWOT on each building block than your entire model. In a business model all the pieces should be mutually reinforcing because if you pull one building block out the whole thing will crumble. This especially applies to the most powerful business models. Take the iPod as an example. Pull out iTunes and the whole business model falls apart. Pull out the contracts Apple has with music manufacturers and the whole business model falls apart.

So why would you want to do a SWOT? First, it's to understand the strengths and weaknesses of the entire model. What are you really good at? Do you have great patents? Do you have great resources? Are you especially strong in certain channels and customer relationships? Second, it enables you to examine your business model the other way around – where are your weaknesses? Is your marketing weak or badly designed?

By getting a holistic picture you can think about how you could improve. What could you do differently to build on your strengths, or to eliminate your weaknesses?

Amazon, for example, is traditionally known for selling books, CD's, electronic equipment, and other merchandise. When you ask what are they really good at you conclude they're not only good at selling books. They are really good at providing a Web IT infrastructure – it's their strength. In fact they are among the best, together with Google, eBay, and Microsoft.

What's Amazon's weakness? Compared with Google, eBay, and Microsoft, Amazon's margins are much lower because they sell 'stuff'. This makes it a low-margin business. Based on this understanding Amazon leaders said, "What if we were to build on our strengths and sell our Web IT infrastructure and our warehousing and logistics infrastructure to other businesses? By selling their infrastructure to other businesses they addressed one of their weaknesses and moved into a higher margin business. If you look from the outside it appears that they diversified into completely different businesses – eRetailing and selling IT and logistics infrastructure business to business. In fact, there is a clear synergy because they use the same back end as they use for their core business.

If you map Amazon's business model out on the Canvas you can clearly see those synergies. It's in the left part of the Canvas where you find the building blocks of key resources, key activities and cost structures. That's what they're building on. Looking at the building blocks on the right hand side of the Canvas, they expanded from one customer segment – individuals throughout the world buying 'stuff' on Amazon – towards businesses that would buy their Web IT and logistics infrastructures. This is a nice example, which we describe in the book, of how a company can build on its strengths and eliminate its weaknesses.

VB: Examining strengths and weaknesses enables one to identify an opportunity.

Alexander Osterwalder: Exactly. Actually the low margins pushed Amazon to become much more cost efficient than the traditional players such as IBM in this field of Web IT infrastructure. This illustrates that a weakness can actually be a hidden force leading to an opportunity. They said "We're doing this for ourselves anyway. What if we also sell it to others?"

VB: You talk about the power of asking 'what if' questions to free us from the constraints of thinking in terms of the status quo – our existing business model. How does this work?

Alexander Osterwalder: More and more we need to understand that in the same industry there are many different business models competing against each other. Each business model has different logics and economics. When you ask yourself 'what if' questions, you start asking yourself, "How could I change my business, how could I tweak it?" If you take something away you have to add something else.

Let's consider use one example that makes this clear. I believe Bharti Airtel, an Indian mobile phone operator, is now the third largest in the world. At one point they asked themselves, "What if we served not just the richest people in India – let's say the top 200 million of the 1.2 billion? What if we try to serve everybody in India or a larger proportion of the population – 500 or 600 million?" By asking themselves this question they had to consider how to tweak their business model to achieve this goal of serving not just the top of the pyramid, but also the bottom of the population pyramid. It would require that they lower prices, and in order to lower prices they would have to work on their cost structure.

Traditionally the core asset of an operator in the Telco industry is the network. Here is where the leaders at Bharti Airtel made a big jump. They challenged this assumption by saying, "What if we took out the network and replaced it with something else?" They came up with the idea of out-sourcing all IT and network infrastructure to partners like ITC and a conglomerate of Telco's involving Ericsson and Nokia.

This allowed Bharti Airtel to transform fixed costs related to capital expenditures for the network into variable costs. It means they only pay for the bandwidth – the network capacity – that they consume. If you own a network, you don't just consume what you use – you have to incur the capital expenditures of first building it. By starting out with the question, "What if we were to serve a new market segment, what would we have to change in our business model?" they underwent a whole transformation.

The question, "What if I outsourced my network, could I find a business model that makes this work?" enabled them to challenge the core assumptions of an entire industry. This was a major challenge to the orthodoxy that the network is the most important thing for a Telco. You can imagine when they presented this notion to their board of directors it resulted in pretty intense discussions and debate! Bharti Airtel has become one of the biggest mobile phone operators in the world with probably the lowest call costs in the entire world, because they were the first to substantially move into this type of business model. This model is becoming more common in the telecom industry.

VB: What are the strengths of the business model of the providers of the network infrastructure, such as Nokia and Ericsson, of being an outsourced provider to Bharti Airtel?

Alexander Osterwalder: For them it's pretty interesting because they moved away from a retail transactional business model towards a business-to-business model. It isn't uninteresting for these network equipment suppliers to move into this new business model because they have a better forecast of their revenues for the coming years. They won't be pushed as much to sell to customers in the retail sector, because they're turning into a network infrastructure service provider. Interestingly, the 'what if' question in this case came from the retail operator.

What is the lesson of this example for other businesses? It means that they need to question their business model all the time – what could they change? And sometimes if they play around with changing the orthodoxies in their industry they can come up with powerful new business models.

The same thing happened in the airline industry with the low cost airlines, and many other industries as well. Companies that have asked the 'what if' questions, that came up with new business models, have often been able to gain a strong competitive advantage.

VB: In Business Model Generation you describe 5 business model patterns? Do these summarize all of the successful business models you are aware of?

Alexander Osterwalder: Definitely not.

Our goal in writing about the business model patterns was to take popular business theories – we took five – and describe them in the common language we developed so they would be comparable and a resource for those designing a business model. When you are looking at your own business model, the goal is to not consider only one management concept or theory. For example, you don't think that everything has to be a long tail based on Chris Anderson's book, The Long Tail. Or that everything has to be a multi-sided market.

The reality is that when you look at a specific business model, its context, and the industry it is within, you want to ask yourself, "Could I implement the long tail model? Could I implement the free model – the 'freemium' model? Could I implement any of the other possible business model patterns?

They become a resource when designing your own business model. Rather than following an ideology that everything has to be like this or that, we take these business concepts – these patterns – and make it possible to compare them with each other. This means they become a tool, a resource for the persons or groups that are designing a new business model.

The advantage of understanding business model patterns is it enables you to understand the dynamics of a specific type of business model. If you consider the 'freemium' model – combining free products with premium products – you know that all business models that use this pattern have similar dynamics. It means you will have a deeper understanding of these models. It goes further than just using the Canvas to sketch out your business model. It pushes you into thinking of the dynamics of your business model and how it relates to these business model patterns.

Back to your question about whether there are more than 5 business model patterns. I would say there are maybe 10, 20, or 30. When you find design structures or dynamics in more than one company, it is likely a pattern which you can use as an input when you think about and challenge your own business model.

VB: When referring to open business models you say, "Established companies with strong brands, strong Distribution Channels, and strong Customer Relationships are well suited to an outside-in open business model." Do you foresee a trend toward an increased number of established companies using this open business model approach?

Alexander Osterwalder: There will be more using it, but I would never say, "You have to use it" or "You don't have to use it." I don't believe in dogma.

Open innovation is really important, and a lot of companies are starting to look at this pattern. You have to ask yourself, "Does open innovation make sense for my business model?"

For many businesses open innovation is becoming something they should look at because the world is going in this direction. You don't have all of the most intelligent people in your own company, and you have to work with people from different fields if you want to obtain the best ideas.

Henry Chesbrough has done a great job in describing what open innovation and open business models can achieve. You have to ask yourself, "Does it suit my business model or not?"

VB: You quote Chris Anderson, Editor-in-Chief of Wired Magazine, as saying, "Every industry that becomes digital eventually becomes free." What is the implication of this for business model innovation and for Internet-based businesses?

Alexander Osterwalder: I'm strongly opposed to these kinds of dogmatic statements, and I'll give you a prime example. When we wrote Business Model Generation we did it on an online platform. It was purely digital; there was no physical book.

We got people to pay to participate in the creation of the book. Although we were 100 percent in a virtual digital world, we created a revenue stream. We said, "If you want to join a group that's working on this book you have to pay an entry fee."

Not everything in the digital world will become free, because you can create business models where the free and paying components can co-exist. What is true is that to produce digital products you have an initial cost and then it's almost free to replicate them in the digital world. But that's the cost side.

On the revenue side, if you're creative not everything has to be free. What is true is that you'll see more business models that are using free. In the book we describe Skype, which is a beautiful example of a company that has used 'free' to build a strong business model which has challenged an entire industry – the voice part of the Telco industry.

Although not everything has to be free just because it's in the digital world, the big question is, "What job are you solving and how are you creating value?" If you create value you can always charge for it, even if your cost structure is moving towards zero.

VB: "The world is so full of ambiguity and uncertainty that the design attitude of exploring and prototyping multiple possibilities is most likely to lead to a powerful new business model." Can entrepreneurs and business leaders readily learn the tools of the design professional?

Alexander Osterwalder: I don't think it's a question of whether they can be learned. They have to be learned.

I do a lot of work with big companies, but also occasionally work with entrepreneurs – especially those involved with technology. One of the big mistakes I see is entrepreneurs often have a business model in mind when it comes to their product, service, or technology, and they don't take sufficient time to think of alternatives.

Every technology, product, or service can have 5, 10, or 20 different business models. The job of the entrepreneur, if he or she wants to be successful – which is usually the case – is to first think through, 'What are all the alternative business models that would be possible for my product, service, or technology?' For example, when thinking of the freemium model can you offer it for free but charge for printing? Can you find a way to turn all your fixed costs into variable costs? You should generate 5, 10, 20, or more different business models before you choose the direction you will pursue.

Designers are very good at doing this because it's an integral part of their set of skills. Take architecture; it's a design profession. Before good architects finalize the design for a building they will make many study models, produce many prototypes of different scales, and try different materials. The building that comes out at the end may use only 10% of all the prototypes the architect has prepared. It's because the architect explores different possibilities as a way of testing things with the client to see if the client will be happy. Materials will be tested to see if they hold together in the new kind of structure being considered. Models are created to understand the visual and emotional implications. Those tools found in the design profession and in architecture can also be used in business model design.

The question is how do you translate those design tools into the development of new business models? How do you develop prototypes of business models? In the book we tried to make design thinking more concrete in order to give entrepreneurs and business people easy to learn tools for business model design. One is the idea of prototyping – producing conceptual prototypes using the Business Model Canvas. Another is focusing on customer insights.

Designers are good at not starting to design or make the first prototypes until they've understood the real jobs to get done. Rather than starting from the idea of the product, good designers start from the point of view of the customer – the user.

In the technology field, and this applies to entrepreneurs in general, people often start from a product, technology, or service and ask, "How can we sell it?' This is not absolutely wrong but at the end of the day you only create value by getting a job done for specific customers. Otherwise no one is going to pay for them.

Taking the customers' perspective may sound trivial, but it isn't always done. We can use all those tools from the design field to build better businesses.

VB: "Businesses that fail to take the time to develop and prototype new, ground breaking business model ideas risk being sidelined or overtaken by more dynamic competitors – or by insurgent challengers appearing, seemingly, from nowhere." Is this a call to action for leaders of all organizations?

Alexander Osterwalder: Definitely.

I'm working with some organizations that are proactive. They start acting before they're in crisis, before they are facing bankruptcy.

For those who aren't proactive, they better look at the industries that got into deep trouble – such as the music industry. Their revenues are going down but most businesses in this industry still haven't come up with a new business model. Who has come up with a new business model for the music industry? One is Apple, and there are also a lot of musical startup singers and bands that are playing with new business models. They've recognized that they've lost their fans.

If you are an established business, and are not starting to think and experiment with new business models, somebody's going to do it and disrupt you. This is almost guaranteed.

For entrepreneurs it is usually easier because they start from a blank sheet. For established companies it's often harder because their existing business model is fine tuned with relatively efficient processes, and often they're not geared to start something new that could potentially cannibalize their current revenue streams. On the other hand, an existing organization has other advantages including resources, knowledge, and skilled people. The outstanding question is whether they can put the management and innovation structures in place to play the proactive game of business model experimentation?

Some companies are starting to do this. Daimler is playing with new business models. Another is Nestle. They have a portfolio of business models for their coffee business. They still have Nescafe. They built Espresso which is the fastest growing business within Nestle. They are starting with a new product called Dolce Gusto, which has its own business model using a machine like the one for making Espressos but focused on Cappuccinos.

Others are not as good at the proactive game of business model experimentation. Some industries, like the news industry, are much slower in coming up with business models because they have been late to the game of experimentation. It's crucial that people in all industries get on with business model experimentation.

Another reason for being open to new business models is that if people in large established companies have great ideas but can't execute them; they'll leave and create their own start up. This often happens.

If you want to be competitive in the next 5 to 10 years, you have to be good at analyzing, designing, and iterating your business model until you find one that can scale and grow.

VB: And you need to embrace change.

Alexander Osterwalder: There is no way around it.

Saul Kaplan from Business Innovation Factory says that business models have a much shorter shelf life, and I couldn't agree more with him. Business models are getting outdated much quicker. In many industries, but not in all, it's becoming difficult to maintain a competitive advantage with an existing business model.

Take Dell. Dell had an innovative business model but they seem to have failed to reinvent themselves, so it is questionable whether they will grow as rapidly as they did before. Obviously they are big and it's difficult to keep the same rate of growth, but I don't think they have reinvented themselves in the last few years.

Apple, the poster child of innovation these days, is pretty impressive with what its done in the last 13 years. It came out of near bankruptcy, but didn't just do product innovations over the 13 years. It substantially innovated its business model at least four times, and these were big business model innovations.

Having great products and services is merely the ticket to compete. If you want to have a competitive advantage, you're going to have to find innovative business models.

It's mandatory that you offer great products and services to stay in business. Having great business models is what's going to give you a competitive advantage. And as I said, Apple is a wonderful example.

VB: Do you think some major newspapers could have successfully changed their business model to avoid financial catastrophe if they had been able to examine their situation using your Business Model Canvas, and had known about the concept of having a portfolio of business models?

Alexander Osterwalder: Definitely some of them could have.

This is how industries work. It's Werner Sombart's Creative Destruction idea that in the process of transformation related to radical innovation some companies disappear because nimbler and more innovative competitors undo them. Some of the smaller newspapers, particularly in the U.S. market, had to disappear because their business model didn't have a long-term viability. In these instances online free newspaper sites have led to creative destruction of the traditional paper-based newspaper.

Could some of them survive by modifying their business model? Probably, but maybe not all of them. The Canvas tool and the process of designing business models do help companies be proactive for change. It still means they have to implement those new or revised business models. The conceptual part, thinking through your business model, challenging your current model, and designing a new business model is useful, but it doesn't guarantee success on its own. You still have to implement the new business model. It sounds a bit trivial to say but you need both the design and the implementation.

From my experience all businesses tend to be weak in thinking through their existing business model and creating, generating, and inventing new business models that will be successful in five or more years. You would expect this to be a strength in the newspaper industry, but I haven't seen many new business models come from the established big or small players in this industry. They were more often disrupted than proactively inventing new business models themselves. The bigger players, such as the Financial Times, were in a more comfortable situation, but even they have to substantially rethink what they're doing because the environment is changing so much. Technology is having such a strong influence.

Even those that are more or less successful now are going to have to think about what will be the business models of the future. I don't think there will be one dominant newspaper business model that will emerge. There will be several co-competing for slightly different business segments and each company will have to develop the one that is most suitable for it.

One of the most important things in developing business models is to think beyond industry boundaries. During discussions about re-inventing the newspaper industry people usually stay within the boundaries of today's news and newspaper industries. This is not likely to prove to be a successful perspective.

Consider Apple. When they came up with the iPod they exploded the industry barriers with the idea that they were not only in the business of manufacturing devices and selling hardware. When they created the iPod it meant they were in the music business so they had to make it easy for people to copy music – to find digital music online, download and listen to it. Apple went beyond the traditional music industry boundaries and did so with a new business model. Today if I asked you which industry is Apple in can you classify it in today's definitions of industries? It's impossible. They produce hardware, develop software, and integrate books. They are involved in e-commerce because they sell a lot through the Internet. They provide content – music and movies.

Apple was really intelligent in not getting held back by traditional industry boundaries. And that's what the newspaper industry will have to do to reinvent itself. The leaders can't look only at their traditional boundaries. They will have to look at business models that go way beyond what they've been traditionally doing. This might entail integrating with the iPod, developing a totally new technology, or it might be something completely different. This is where there is still a lot of work to be done.

VB: Are you still working on developing the computer aided business model editor, which is currently in the prototype stage?

Alexander Osterwalder: Most definitely.

We are working on the last stages of the editor for operation on the iPad so that should be on the market in the App Store in early November. It will allow people to design business models. It will also enable people to modify various building blocks of their existing business models, such as asking 'what if I added a new distribution channel?' 'If I converted certain fixed costs into variable costs what would it mean for my business model?' This will be a boost to the idea of experimenting with multiple changes to various components of business models.

Completing the system has been much slower than we would have liked but I guess that's how every software project works.

VB: Will each of the 5 topics you included in the 'Outlook' section of Business Model Generation end up being its own book?

cover of Business Model GenerationAlexander Osterwalder: I'm not sure. I think everything we discussed in this section will come to pass in one form or another, but not all of them are going to be written by Yves Pigneur and me.

As we just discussed, we're working on the software support tools, an area that has a lot of potential. As long as the tools are simple and democratized like the approach we took with the book so they're easy to understand, people will use them. It won't be a book; it will be a systems tool.

'Business models beyond profit' pertains to using the Canvas to drive business model innovation in the public and non-profit sectors. These are business models with a social impact, and it is something we would like to turn into a book. It's a project we have started. We already have something like 400 people on a platform and they're waiting for us to start the writing process. We're still trying to find the right business model from a financial point of view so we can make it happen.

Process enterprise architecture is not a book that I'm going to write because I don't have enough experience in this area. As a collaborative project with people who have the knowledge and expertise it could very well result in a book. There are a lot of software companies that are interested in this area. You can imagine that all of the companies, which are using business process management tools, will be interested in adding this strategic layer to their work.

VB: Other people will likely develop some of your ideas.

Alexander Osterwalder: Hopefully. That's why we call the section "Outlook." We would like to see it happen because we see a lot of potential. All the topics are pretty relevant as an extension to the work we started so we hope it goes further.

VB: Would you talk about the innovative way you and your co-author, Yves Pigneur, wrote Business Model Generation?

Alexander Osterwalder: We felt we couldn't write a book on business model innovation without doing it ourselves. Otherwise we would lose credibility.

We created different prototype business models. One was working with sponsors who would finance the book; another was a personalized book where people could download chapters as and when they wanted to read them. In the end we chose the business model of collaboratively writing the book in an online platform, which worked pretty well for us.

You may ask why we chose this model on the spectrum of co-creation. We had ten year's research and practice so we knew parts of what we wanted to write, but we still wanted to receive feedback and input from others. If we were to write a book on topics where we have less experience or don't have lot's of background and research, we'd probably be even more co-creative in our approach – even to the point of giving people the opportunity to write parts of the book.

People were advised they would be able to participate in production of a potential best seller. There were 470 people who joined the platform.

Yves Pigneur and I would create book chunks and send them to the people on the platform inviting their comments. Sometimes we'd ask specific questions such as, "Do you have an example that we could include?" There would be a virtual discussion about each book chunk on the platform, and we'd revise the content based on those discussions. People didn't write the book for us, but they challenged us all the time. In total we received in the neighborhood of 1300 comments. We answered every comment that was made.

We allowed ourselves to be challenged all the time, which needs some courage because we received direct, honest feedback. If somebody thought certain parts of what we wrote were irrelevant to a practitioner they told us this was the case. These conversations made the content stronger because people challenged us all the time, and they gave us useful insights based on their experiences.

The business model we chose was interesting in that people paid to join the platform. Why? Part of the answer may be that people like having content before everybody else if there's something trendy going on. Also, they wanted to participate in this community and offer their input.

This business model helped us finance some of the work that was very costly. It is a visual book so we changed not just the business model but also the product, and that costs a lot of money. Designing a visual book is a big undertaking, and requires a great designer. We were fortunate to have had Alan Smith of The Movement, who did an absolutely phenomenal job with the design of the book. We also needed visuals and JAM, a company in the Netherlands which uses visual thinking to solve business problems, did a fantastic job in providing the right images for the book.

All participants have their names at the front of the book as co-creators, as co-authors. Once the book was finished people started meeting in person in different cities to discuss the contents of the book. The fact that people who met online to discuss the drafts of content started to meet offline afterwards demonstrates that a sense of community emerged.

VB: Although people were motivated to participate because they would have their name in the book as co-creators, perhaps the greater motivator was to be part of a community exploring new ideas about business model design?

Alexander Osterwalder: Absolutely. People like to participate. Many like being part of something bigger. People wanted to be part of a community where they could discuss many types of business models with innovation practitioners so we connected among each other. This was a real movement.

We were trying to create a best seller with a different business model. It fascinated people when we said, "We won't go with a publisher. We'll self-publish." They wanted to be a part of developing this approach.

A large proportion of people involved are proud of what we produced by virtually working together. Of course, even though a community emerged there were huge differences among the 470 people in how and how much they participated in the process.

VB: Do you have any specific advice for business model generation in terms of how to prosper in the increasingly competitive global economy?

Alexander Osterwalder: I would advise entrepreneurs to use the concepts in Business Model Generation. They should work more like architects when designing a new building, and product designers when designing a new product.

My advice would be to spend time designing new, alternative business models for an existing product or technology. The more opposed they are the better your understanding will be of what could be a powerful business model. It's about continually testing new business models – playing and trying out different models.

One thing that I'm currently thinking about is early testing of your business model ideas with customers. Steve Blank, a successful entrepreneur who now teaches at Stanford and Berkeley, has developed a method he calls 'Customer Development.' It is described in his book titled Four Steps to the Epiphany. In this method he synthesizes the experiences he had in the 8 companies that he's built. He talks about how good we are at product innovation, but how we also fail because we are too late in testing our ideas with customers.

Steve Blank provides a step-by-step strategy for bringing a product to market, or to set up a new company. His advice includes writing a business plan, marketing plan, and sales plan – to organize sales, marketing and business development.

The goal would be to merge our approach with the Business Model Canvas for inventing new business models with Steve Blank's approach to customer development. How do you iterate? How do you "pivot" the marketing, sales and business development strategies in the business model for emerging startups? And how do you effectively test with customers who are often fickle.

Once you design some business model directions in which you could go, or you think might be interesting possibilities, apply Steve Blank's theory of Customer Development. Rather than immediately building a company because you think you found the right business model, test with customers for a pretty long time considering different aspects of your value proposition, different channels, different pricing approaches, and so on until you think you have nailed it. It's at that point when you can start scaling up and building the company.

In summary, there are two aspects to this. One is prototyping several alternative business models. The other is testing it as long as possible in an iterative way by pivoting your business model until you think you've really found your answer. Then you can scale up.

What happens today is often the other way around. People search for funding to build the business, they discover it doesn't work, and they have to change it. Sometimes they've burned through all their money and it's too late. Scaling up – 'building the company' as Steve Blank would call it – and implementing your business model on a larger scale happens at the very end.

I would suggest people first read Business Model Generation which will provide the tools to map, design, and discuss a business model. Then read Steve Blank's Four Steps to the Epiphany which will promote the mindset and tools to continuously test the proposed business model and assumptions with customers and iteratively adapt this starting model using the Business Model Canvas in response to this market feedback. Once people find the right business model they can scale it up.

There are other reasonable approaches to help design business models – like Blue Ocean Strategy – so these should be explored as well.

VB: Developing a sound value proposition is a large challenge for a lot of entrepreneurs. Do you have any advice?

Alexander Osterwalder: At least from my experience, the problem is that a lot of entrepreneurs in the technology field think that their technology is the value proposition. But often it's just a resource that allows them to create a value proposition which solves a customer job. This notion is based on the whole idea of jobs to get done, which Clayton Christensen's group, Innosight, made popular.

The real challenge in developing your value proposition is to first understand what problem you are solving, and what value proposition are you offering in providing the solution. This often requires entrepreneurs to take a step back and remind themselves that what they have is just a key resource, and they need to find the real customer problem that they're solving."

When I ask entrepreneurs, "What problem are you solving?" they struggle to provide an answer. The problem can be very different from one customer segment to another.

Many less experienced entrepreneurs don't take the time to clarify which customer segment are they targeting and which problem they are solving. When they do clarify these two matters it becomes much easier to define their value proposition.

VB: An unclear value proposition is a problem from the point of view of the customers.

Alexander Osterwalder: Absolutely. You need to shift your thinking to be more customer-centric, to take a customer perspective.

It's something that sounds trivial but in practice this often gets lost. People often take a more company-centered view and say, "I have this technology, or I have this key competent resource, what can I do with it? How can I sell it?" That's the wrong approach. You need to take a customer-centric approach.

VB: Do you have any tips about developing customer segments when doing business model analyses?

Alexander Osterwalder: Customer segmentation is a whole profession in itself. I'm pretty sure others are better able to talk about this question.

One thing that's important with customer segmentation in business models is to be extremely clear what job you're getting done. Looking at group or demographic characteristics like income, age, sex, or geographic location is often the wrong criteria for segmenting customers. In some cases it can make sense, but often it's not the best approach. Different age groups, for me, are sub-segments within a customer segment.

It makes more sense to look at the specific job that you're doing for a group of customers, and what you are offering to those customers. This means that to one customer segment you'll probably offer a different value proposition than to another, and this will be more apparent when you focus on how to help people get a job done. You can speak of different customer segments if you have something very different to offer them.

I'll give you an example albeit it's a bit black and white. The business model for most newspapers has two main customer segments – readers and advertisers. Both have a different job to get done, and a different value proposition applies to each. Obviously a newspaper might sub-segment its readers into all readers in a specific country; that's why there is the Financial Times Germany and the Financial Times for the U.S. for example. However, almost all readers have the same job to get done, which is to be informed or be entertained. That's a very different job to get done than the advertiser who wants to reach large numbers of people and sell products. It is more useful to look at customer segmentation in this way – what problem are you solving rather than considering customer characteristics.

A different customer segment exists if you offer them something substantially different, or if you get them to pay a substantially different amount – like charging more to a business Telco customer than to individual customers. Alternatively, you may have different segments pay through substantially different revenue streams – one might be transactional while another is by subscription. Another lens for identifying different customer segments might be according to the channels – one customer segment might be serviced through a sales force and another through retail outlets.

VB: Is there a risk that if a company is spending too much time focusing on its key activities in the Business Model Canvas – production, problem solving, or platform/network – it may be inclined to focus on incremental innovation for continuous process improvement rather than on business model innovation?

Alexander Osterwalder: Re-thinking your business model is a continuum that can involve all 9 building blocks in the Business Model Canvas, and as you know Key Activities is one of the building blocks. There is nothing wrong with incremental innovation; you want to do it. If you have a cash cow you want to improve your cash cow and prolong its life.

At the same time, and this is the challenge, while you're improving your cash cow – improving your existing business model – you want to work on the right hand side of the continuum of business model innovation. You want to be inventing and designing new business models, which is a different ball game.

There is a certain truth in what you said. Companies often have a hard time substantially questioning some of the things they're doing. Often key resources or key activities they've been doing for 10 or 20 years are very difficult to change because they're what made them successful. It is a challenge for companies to say, "Let's not focus on these key activities. Let's look at other building blocks in the business model and see what are our strengths. Maybe it's our customer relationships. Maybe we can leverage our customers to do something else." It is a risk if you focus too much on one business model building block that has made you successful, such as key activities.

On the other hand consider Amazon, the example I mentioned earlier. One of their key activities is Web IT Development. They focused on this key activity to build a substantially different business model. It didn't prevent them from doing something that was beyond incremental innovation.

The biggest challenge is to be able to challenge all orthodoxies in your existing business model. One example I often use in my workshops is a Finnish shoe manufacturer called Pomarfin. If you're a shoe manufacturer it seems to be a tough challenge to innovate your business model. You and the entire industry have been manufacturing shoes in a specific way. You can probably be innovative in the production processes, but can you radically innovate your business model?

It turns out that Pomarfin has come up with a totally new business model called 'Left Foot.' They base this business model on a foot scanner that can scan customers' feet and create a digital footprint that enables manufacturing of the perfect fit shoe. That's the technology.

Pomarfin had to find the right business model innovation to powerfully use this technology so they could compete or out-compete against cheaper Asian manufacturers. The business model they developed was to build their own stores, their own retail chain where they have the machines to scan customers' feet and, on the other hand, to put foot scanners into their traditional retail sales channels. In order to make it attractive for retailers to scan their customers' feet Pomarfin had to come up with an innovative model because they were also selling their shoes online. You can't ask retailers to install a foot scanning machine that enables their customers to henceforth buy their shoes at Pomarfin's website. It doesn't sound like an interesting value proposition for the retailers.

So Pomarfin came up with a royalty model where they told the retailer, "If you install this foot scanning machine so your customers can start buying our personalized shoes over our web site you will earn a royalty. All you have to do is scan your customers' feet once and every time they buy shoes on our web site you're going to earn a royalty."

This is attractive to the retailers because they only have to scan customers' feet once, and they don't have to engage in a sales process with those customers anymore because Left Foot is doing it for them. This eliminates the need for inventory because Left Foot is producing shoes on demand. Even with shoe manufacturing, where you might say it's pretty difficult to come up with an innovative business model, Pomarfin with its Left Foot concept has demonstrated that you can do interesting things.

Yes, companies shouldn't focus too much on one building block in the Business Model Canvas. This applies to key activities, but also to the other building blocks as well. In private banking, for example, the most important thing is customer relationships but if they focus too much on their existing customer relationship they may be unable to innovate. So all building blocks can potentially push you into incremental innovation, because if you consider them as a given you're going to do things the way you have always done them. The challenge is to question what you have done for 2, 5, 10, 20, 30, and perhaps even 100 years and see if new business models are possible.

VB: Would you describe the services you provide? Do you provide consulting services?

Alexander Osterwalder: I mostly provide keynote talks at conferences where I try to inspire entrepreneurs as well as large companies – a call to action as you nicely said before – to think of new business models. On the other hand, just inspiring them is not enough, so I give them the tools to develop new models.

I also do this in 1- or 2-day workshops that are sometimes open to whoever wishes to register to come, or are dedicated to companies that want to work on their business model thinking. My workshops help them start thinking of new business models. Perhaps this is pretty close to consulting work.

For larger projects, I usually take on the role of providing the inspiration, tools, and the method of business model design, and then I collaborate with partners who provide the consulting part.

In the longer term I'm working on the software supported tools for business model design. There is a lack of such strategic tools supported by software designed in a way that people will use them. Some software tools like strategy maps, and balanced score cards do exist, but from my point of view they're not well designed. This means that only specialists or consultants are going to use them.

We wanted to make our book accessible and approachable. The feedback we have been receiving is that people who have never read a business book or don't understand business model design are reading Business Model Generation.

My idea is to also make the software tools for business model design democratic – to democratize them in a way that everybody will be able to use them. If we can achieve this goal I think we'll have achieved something really interesting. It would allow people to prototype business models. This is a bit similar to when architects introduced computer-aided design. If we could do the same thing for strategic business thinking I'd be pretty proud.

VB: Congratulations on a wonderful book. Business Model Generation is interesting reading, informative, and visually pleasant to the eye. At first glance judging by the design and layout one would not think it's a business book.

Alexander Osterwalder: Thank you. It was possible by working with the designer, Alan Smith, who dived into the content. He didn't just put lipstick on the page; his design work took us to another level.

I would never write a business book again without using design, and I hope more business books will go in this direction – even if not as extreme. We probably pushed the limits, but visual thinking helps convey content and it makes things that are difficult to describe with words simple. I hope more business books will look like this but we'll see. It depends on the publishing industry.

VB: Thank you for taking the time to talk with me.

Alexander Osterwalder: It's been great, and I hope it will help your IdeaConnection readers engage in business model innovation.

The authors indicate that business model innovation results from one of the following:

  1. To satisfy existing but unanswered market needs

  2. To bring new technologies, products, or services to market

  3. To improve, disrupt, or transform an existing market with a better business model

  4. To create an entirely new market

The Business model Canvas is a great visual worksheet and tool for designing and fine-tuning business models. The
It is good to be reminded that a start up or new venture's quest for the best business model should consist of three stages:

  1. Designing a starting business model

  2. Iteratively adapting this starting business model in response to market feedback

  3. Scaling the business only when you have "nailed it"

Alexander Osterwalder's Bio:
Dr. Alexander Osterwalder has a Ph.D. in Management Information Systems (MIS) from the University of Lausanne, Switzerland, where he worked as a teaching and research assistant and published extensively. Previously, he was active as an entrepreneur in the banking sector and as an online business journalist for BILANZ.

Alexander Osterwalder works as an independent author, speaker and advisor with a particular focus on business model innovation, strategic management, and management innovation. He regularly performs keynote speeches and workshops on the topic of business model innovation in companies, in business schools, and at conferences around the world.

Besides his independent activities he is partner at Arvetica, a consulting boutique focusing on the private banking and wealth management industry. His role includes business development and the management of a peer knowledge exchange platform for senior executives in private banking. The platform aims at helping senior executives and private banking professionals understand the changing industry landscape, notably from other leading personalities, such as CEOs of top Swiss and international banks.

Alexander Osterwalder founded and ran, a consulting boutique active in strategy consulting with a focus on business model innovation. He also helped develop and implement the strategy and business concept of a globally active not for profit network called The Constellation for over one year in Thailand. The Constellation brought knowledge management methods from the private sector (particularly BP) to the health sector to better respond to the challenges of HIV/AIDS and Malaria.

He is an inaugural member of the Open World Initiative of the Evian Group at IMD, Switzerland.

Alexander Osterwalder is co-author with Yves Pigneur of Business Model Generation (2010).

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