Sustaining success in almost any organization relies on a strong and durable business model.
Business models explain how a company makes money - who pays and why. Even when money does not change hands (think free services, including the government), the business model defines how a company and customer exchange value.
For startups, developing a sustainable business model is a primary challenge and opportunity. Steve Blank, among the top entrepreneurial educators in the world and subject of the video embedded below, defines startup as, "A temporary organization designed to search for repeatable and scalable business model."
Large companies must also consider how their business model should evolve to reflect the changing economic, social, technical, regulatory, and competitive environment. For even the largest organizations, failing to adapt business models to changing circumstances can have dramatic and negative results.
For example, look at turnover in the Fortune 500 list of companies. Between 1955 and 2014, about 89 percent of the companies in that list were replaced. The life expectancy of a company in the Fortune 500 is now only 15 years. The Kauffman foundation wrote a paper on this topic [PDF download]. Today, business model evolution should be a key part of any digital transformation initiative.
It's not easy to create a viable new business model. In the words of Apple, a company that fully understands business models, it requires thinking differently about an organization and its relationship to the outside world. In addition, a complete business model should address elements such as customers, sources of revenue, costs, channels, and resources; there are many moving parts.
The importance and complexity of business models encouraged me to talk with Steve Blank, a leading thinker about business model innovation in both startups and very large organizations. Our conversation is part of the CXOTalk series .
We spoke at length about lean innovation management and plan to publish quite a bit about our conversation. To start, listen to the short video below, in which Steve Blank explains the concept of business models. Note that he references the work of Alex Osterwalder, who developed a widely-used tool called the Business Model Canvas.
Here is a transcript, edited for length and clarity:
We've been using the word business model throughout this conversation. For the last 20 years, when it first became popular in the 1990's, academics and consultants said was important, but it usually took about 200 pages to describe.
But in the past five years, Alexander Osterwalder got it down to a single sentence and a one-page diagram, and I thought his description and diagram are actually brilliant, because it helps us understand what it means when we use that phrase.
The definition of a business model is how a company, your company creates, delivers, and captures value. What that translates to is we could draw on a single piece of paper, on the whiteboard, something called the Business Model Canvas, which articulates the nine things that are critical for any company strategy that creates, and delivers, and captures value.
Those nine things are pretty simple. Who are the customers, what are their segments, get them down to archetypes, etc. What's the value proposition, which is a fancy word for what product and or service are you delivering to those customer segments. What's the channel? That is, what's the distribution channel to get that value proposition from your company to the customer.
What are the customer relationships? In the early stages customer relationships are, how do we get, keep, and grow customers? Later on when we have those customers it's how do we maintain our relationships with them.
What's the revenue model? And revenue model is not just pricing, that's a tactic. Is it a subscription, is it a license, is it a direct sale, and so what's our revenue models, which are strategy and what's the pricing tactic.
What are the activities do we need to be expert at to pull off these value propositions, those things we're building and delivering? An activity could be that we need to be experts in supply chain or we need to be world-class manufacturing people, great with semiconductor technology, or we need to be experts in branding. That is, what are the key strengths of the company
Then, the next piece is what other resources we need if those are activities. Do we need great engineers, or do we need know how to bend metal, or need a whole factory to do that? What are the resources?
And by the way, do we need any partners outside of our company to pull off those activities? Do we need FedEx as a shipping partner, do we have our own planes? Or do we need an overseas factory because we've decided to outsource our manufacturing.
And then finally what are our costs and this is the classic. What are our fixed costs, what are our variable costs etc.?
If you really think about it, we've just described what typically used to be a 45-page document in nine boxes. We actually start by just writing down on little yellow stickies, in a new venture, what our hypotheses are, that is what our guesses are on each one of those components. And then we get out of the building and test them.