What is Business Model Innovation?

What is Business Model Innovation?

Business models are designs for running a business and include details regarding operations, generating revenue, defining customers and markets, products and services, and financial management. Like any kind of model, the map is not the territory, however business models are fair depictions using narratives and images to best represent the components of a business and how they interact. Innovation has three components: 1) creating something new or using something in a novel way, 2) putting the idea into practice, and 3) generating value through the implementation. Combining these ideas, business model innovation then entails generating new business models and taking action to implement them in such a way that value is created for the institution, constituents, stakeholders, customers, etc.

We can innovate business models in many ways. MBA and corporate training programs all offer suggestions and practices for creating business models and there are good resource materials for those readers looking for deep dives or comparative analyses of different approaches. Here, we are going to focus on the Business Model Canvas developed by Alex Osterwalder, Yves Pigneur, along with a host of collaborators. The process of innovation allows for the exploration of how an organization creates, delivers, and captures value. It also helps organizations explore alternatives, challenge assumptions, compare and set new strategies, and build shared vision and language.

Introducing the Business Model Canvas. The canvas is composed of 9 building blocks which we will only briefly explain here (for a more robust explanation, please read Business Model Generation by Osterwalder and Pigneur). They have kindly and wisely made their work available under the Creative Commons Attribution-Share Alike 3.0 Unported License. You can view a copy of this license or learn more about this way of sharing knowledge at http://creativecommons.org or directly to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA.

Here are the 9 building blocks or elements of the canvas in general organizational terms. We will later provide a somewhat revised canvas more appropriate for higher education.

We found this nice graphic online at https://handbook.globalservicejam.org.

1. Customer Segments: an organization serves one or several customer segments. This building block defines the different groups of people or organizations an organization hopes to reach and serve. These segments should be separated out if they have different needs, have their own channel, require different kinds of relationships, or have substantially different characteristics.
   
2. Value Propositions: organizations seek to solve customer problems and satisfy customer needs with value propositions. They represent the reason that customers choose one organization over  competitors. These propositions articulate the value delivered to the customer. They may describe the customer’s problems that are being solved and which needs are being satisfied. Some value propositions may be differentiated to target several distinct customer segments.

3. Channels: value propositions are delivered to customers through channels that cover communication, distribution, and sales. This building block describes the channel in detail including all of the touch points for each customer segment. Channels help raise awareness about products and services, help customers understand the value proposition, allow customers to purchase products and services, and provide customer support.
   
4. Customer Relationships: relationships are established and maintained with each customer segment. There are a wide variety of ways organizations can maintain relationships with customer segments, from close personal relationships to more automated contacts and interactions. These are shaped by customer expectations and vary depending on organizational capacities and how the relationships can be integrated with the rest of the business model.
   
5. Revenue Streams: value propositions successfully embraced by customers generate revenue streams.  These revenue streams represent the cash an organization generates from each customer segment in exchange for products and services. Transaction revenues result from one-time payments while recurring revenues result from ongoing payments.
   
6. Key Resources: key resources are the assets required to offer and deliver elements 1-5. These resources are fundamental to making the business model work. They can include physical, financial, intellectual, human, or other resources. They may be owned by the organization, leased as needed, or acquired from key partners.
   
7. Key Activities: these are the critical functions necessary to offer and deliver the elements 1-5. These activities are the most important things an organization must do to make the business model work. They are the actions an organization takes to be successful.  They can fall into categories of production or problem solving; can occur in platforms or networks, or may be expressed in other kinds of ways.
   
8. Key Partnerships: partners can be engaged to provide building blocks 6 and 7; some activities are outsourced and some resources are acquired outside the organization. Partnerships are increasingly important in organizations. They can be created to optimize a business model, reduce risk, acquire resources, or add value to any part of the business model. Osterwalder identifies four kinds of partnerships: strategic alliances with non-competitors; cooperative partnerships between competitors; joint ventures to develop new business; or buyer-supplier relationships to assure continuing supplies.
   
9. Cost Structure: the business model elements combine to generate the cost structure. This building block describes the most important costs to operate a business model. Costs should be calculated after defining the Key Resources, Key Activities, and Key Partnership blocks.

The Value Proposition is the central element in the Business Model Canvas. The left side blocks (Partners,  Resources, Activities, and Costs) focus on cost and efficiency. The right side elements (Customers, Relationships, Channels and Revenue) focus on revenue and value generation.

Applications in strategy crafting. How does one use the canvas? There are a number of potent applications for the business model canvas.

• Business model depiction: all activities that generate revenue and incur costs are business models, whether there are articulated as such or not. If an organization’s activity is creating value in exchange for goods or services, the underlying mechanisms of a business model are at play. An initial application of the canvas can be to make the invisible visible by creating a graphical version of an existing business model. This may be no small task, but when completed there can be great insight gained about the value proposition at work or any of the other building blocks.
  
• Business model evaluation: a more advanced kind of application once a business model has been articulated and visualized can be to evaluate the model as a whole or any of the components – how they work and interact. Business models that originate and develop organically can be suboptimized and a systematic approach to evaluating the models can uncover any number of potential variations or improvements.
  
• Business model evolution: when a business model no longer works or reaches limits in how effective it is, the canvas can be used to help evolve the model and make changes. Models may have developed poorly or lose effectiveness in turbulent environments. By seeking to evolve a business, one can improve the fit and function of the building blocks and realign the model with changing environment conditions. Organizations may also have multiple business models operating at one time and business model evolution can include balancing how the models together create value, consume resources, and generate revenue.
  

Business model design and innovation: a fourth application of the business model canvas it the innovation of completely new business models using various design principles like customer insights, ideation, visual thinking, prototyping, storytelling, and scenarios. This kind of innovation has three key steps, 1) creating an entirely new business model or using an existing business in a new application or industry, 2) putting the business into practice by enlivening both the cost and revenue sides, and 3) generating a value proposition for one more customer segments through the implementation.