THE BLOG

The Blueprint of Business Strategy Is the Business Model

06/06/2015 02:51 pm ET | Updated Jun 06, 2016

Dr. Alex Osterwalder is the international bestselling author of Business Model Generation, a book about business models around this approach called the Business Model Canvas that helps companies discover new ventures and large companies to think about business models and reinvent themselves. Based on that book and that methodology, Osterwalder founded Strategyzer, a software company that helps businesses reinvent themselves. His vision is to create the SAP of strategy by delivering the necessary tools, processes and software to aid with strategy and innovation design. Osterwalder has written several bestselling books, Business Model Generation and Value Proposition Design that highlight business model change and product market fit.

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Dr. Alex Osterwalder, Author and CEO of Strategyzer

Says Dr. Osterwalder:

Business model innovation and new value propositions are very relevant topics because business models expire like yogurt in the fridge. It's a competitive world out there, so there is no stopping anymore.

Everybody has to reinvent themselves. If you want to seriously reinvent yourself you have to have the best in-class tools. And that's a series of tools, there's no one thing here that can give you all the tools.

Osterwalder's mission is to help companies innovate with the best tools using sound business models and value propositions. In order to better understand his vision and mission, I asked Osterwalder to provide a high-level overview of business model innovation and value proposition definitions and concepts.

What is a business model?

A business model is the blueprint of your strategy. Your strategy tells you where you want to go, and the business model tells you how you are going to do that. Osterwalder is a world renowned expert at helping companies develop a visual description of how you create, deliver, and capture value.

What are the components of a business model?

Osterwalder and his team created the Business Model Canvas, a very pragmatic and visual business tool that allows companies to address nine important questions to describe the business model. The business model asks questions like: Who are you targeting -- customer segment? What value are you creating -- value proposition? How do you reach this market -- channels to customer? What kind of relationship will you establish -- transactional or long-term? What are you deliverables -- products and services? How will you deliver value? What are you customers willing to pay -- revenue streams? Answering these questions -- five components -- will establish the front stage of how companies create value. After knowing your target audience and your value proposition, then you are ready to focus on the 'how' and the 'backstage' components of the business model.

With the backstage, you're going to ask yourself, okay I know who I'm targeting and what I'm delivering, how am I going to do it? Now the focus is key resources, assets, and factories, and the brand. How are you going to do it?

Who are the key partner? Who are you going to work with to deliver value? Answering these questions helps companies develop the cost structure. So at the end, if you answer these nine questions, you have the equation of how you are going to earn more money than you are spending. These are the essential pieces to the blueprint of your strategy.

Why is business model innovation so important?

Today, business models expire must faster. Osterwalder points out that business models - what you do, how you do it, and the value you deliver -- can vary within the same industry. "Let us take the music industry. Apple was one company that started disrupting that, then came Spotify, and you had the record majors that are trying to figure out how to do things. So business models today, expire much faster than they ever did before and in one particular industry you'll find multiple different business models," says Osterwalder.

Understanding the right business model for your industry is increasingly important. Osterwalder points out to Apple as a company that extends beyond one industry -- they are in software, hardware, content, etc.

Basically it is the business model that matters, not the industry anymore. What is the blueprint of your strategy? That's why business models start to matter because there are many more choices than before.

What is the Business Model Canvas?

The Business Model Canvas is a way of visually representing business models with nine questions or nine building blocks. The business model canvas establishes a shared language, a practical language that executives and entrepreneurs could use to describe their business model. The canvas has been tested by millions of people and it helps them to describe, collaborate and test their business models.

How do you use the Business Model Canvas?

There is no right or wrong way to use the business model canvas. A recent blog highlighted the "14 ways to use the Business Model Canvas". There is broad applicability with the canvas, allowing companies to use the tool to managing existing businesses or to create new ones. All organizations have business models and they are vary to a certain degree, so every kind of function in a business will have the flexibility to define and adapt based on the 9 building block elements.

Osterwalders has advice to startups and their business models. "Admit that when you start out, uncertainty is at its maximum. You don't know what's going to work, in particular when you are trying something radically you know, and you need to admit that, which means you're not going to execute an idea. You're actually going to search for the right business models and the right value propositions to bring that idea to market. To turn that vision of what you think could be done into a strategic and complete blueprint." Says Osterwalder. Osterwalder encourages companies to reduce uncertainty with small experiments, tests, and prototypes in order to capture evidence. Do not invest in ideas without evidence.

Ideas don't matter, is turning that idea into concrete value proposition and business models that you can prove with evidence that they are going to work. That's the hard part, and then you execute it. The ideas don't really matter at all.

What do large companies need to know about business model change?

Osterwalder believes that larger more established companies need to create an innovation space, which is in addition to what they already have, and in that space the rules and incentives are totally different. The processes and the types of people that need to succeed are also different. The creation of a second space to accelerate innovation is a challenge.

That second culture, that second space needs to be deeply integrated with the execution space -- the execution engine as some like to call it. It needs to be a partnership, you need to have a dual culture that works hand-in-hand. That's very tough to do.

Osterwalder also believes that a lean approach is key to success. "An entrepreneur and a business model innovator should never start with a huge team and a huge budget, because you will waste the money; you will blow it."

You want to start small and increase that, but it means you need to give your innovators really a seat at the top table, and I like to be really provocative and say, hey, what if we created the Chief Corporate Entrepreneur, who has just as much power as the CEO and he or she reports to the board? You're creating a space where people can innovate with real power to create the future for the company.

What is digital transformation?

Osterwalder's simple and profound definition of digital transformation is based on this question: "How are we going to use the new technologies today that exist to better value propositions and better business models. Don't just focus on the digital aspects, but also focus on the value propositions that we create, but focus on the business models that create value for the company. So digital transformation is a combination of innovation, value proposition, innovation business models, and innovation in processes. It's the whole aspect of transforming on the basis of the digital tools that exist today.

Why does digital transformation require a business model change?

Osterwalder believes that a lot of the things that are possible today require very different processes, very different ways of working. You can do things today that you couldn't do five years or maybe a decade ago.

To create new types of value propositions. And change doesn't come easily to anybody, right. So the difficulty is, in addition to this execution engine that you built - which is very good, you need to be lean and cut costs to produce efficiently. In addition to that you need to open up and say okay, well some things are new, some things are different what if we experimented in that space and experimentation is never lean. Experimentation always requires a culture where you can fail, where failure is a good thing to do because you are going to learn and you're going to change.

What is a value proposition?

The value proposition is the story of how you are addressing jobs, pains, and gains that matter to the customers. Your value proposition describes how your products and services, or how you intend you know to create value for your customer with your products and services. The value proposition is never your products and services alone; it's how they address the things that matter to your customers. So it's the story of how your helping you're customer succeed.

What is product market fit?

Product market fit is when you get traction with your value proposition.

You might have something great on paper that you came up with in your meeting room, looks like a brilliant idea because your best marketers, your best engineers you know came up with it and it just seems obvious that this is going to work.

But that's just a concept. That's just a prototype of how you think, and how you intend to create value. Then you go out and test it and you are probably going to be wrong. Nobody knows customers as much as customers know themselves.

So basically when you go and start and test these things, you will be wrong at the beginning and you'll change your value proposition until customers get excited -- until you've nailed it. And when you've got it right that's when your value proposition gets traction.

Said Osterwlader

"When your value proposition gets traction, that's when you have product market share. The journey from taking an idea, conceptualizing it in a value proposition, and then testing it until the right fit between products and services, and the jobs, pains and gains of your customers." Says Osterwalder.

Our conversation with Osterwalder concluded with a discussion around disruptive innovation and industry disruptors like Uber.

What's amazing is they have relatively little physical assets. You know you take a taxi company as a comparison, the business model is night and day. Where they actually get others to do the work in their business model and the use other companies or other people's assets.

So what that business model does is it intelligently, leverages the work of others and the assets of others. So some of these business models which have huge evaluations do that really well. Take Facebook, now, why is Facebook so valuable?

Well because they have a changing content every day. People don't come to Facebook for the platform, they come for the content of their so called friends. But you know, who creates that content? Well, it's the free workforce of over 1.4 billion people today.

Osterwalder's advice is to not neglect the companies that do have assets. "The most successful company in the world is Apple today and they are not just this kind of digital platform. It is one component of what they do, but they do have a lot of physical assets, and a lot of workers around the world, and that's not likely to change. They're not going to move towards you know a much lighter and more scalable model. There is always dangerous to say that there is this type of business model that is right or wrong," said Osterwlader.

Innovation will always give you new models in spaces where you would have never expected them and that could be you know, asset heavy or asset light. The challenge is you not always to question the fundamental assumptions and 'Okay, these companies have done it well that way.

What if we actually did only assets?' You have to think, well you always have to be ready to question the fundamental assumptions rather than doing what others have done.