Leaders from all types of companies around the world are facing important challenges on how to design the way their companies should run and what type of decisions they need to make in an environment of high uncertainty. Strategic conversations are normally not very productive due to the limited knowledge and understanding of the key elements of a business.
Business model design is very important for companies so that even then they have extraordinary products, if the business model is not correctly designed, it can result in future failure. For example, when Xerox created a very fast copy machine that was very expensive, only a few customers bought it. It was only when they redesigned the business model to lease machines that the company generated great financial rewards.
Every company, from new to old, needs to regularly review their business model in order to understand the way they create and deliver value to their customers.
A business model called Canvas
A business model is a map of how business is going to create and deliver value to its customers and how it is intended to generate revenue and profits. The Canvas Business Model was developed by Alexander Osterwalder as a Ph.D. thesis with Yves Pigneur as his doctoral mentor.
The Canvas Business Model is a graphical tool used to describe what value is offered to clients, how this value is created, the way this value is communicated (channels) and delivered, the way the customers understand the current business model, and then creates the future model to achieve the company’s objectives.
Elements of a Canvas Business Model
- Customer Segments: Different groups of clients with similar characteristics and needs to be covered by the value proposition.
- Value Proposition: The way the product or service solves problems or satisfies a need.
- Channels: The way you communicate and deliver the value proposition to your clients.
Customer Relationships: The way you establish and maintain relations with each customer segment.
- Revenue Streams: The monetary result of every value proposition.
- Key Resources: The critical means necessary to develop value to customers.
- Key Activities: Critical processes or activities necessary to develop value to customers.
- Key Associations: People or companies that provide activities or supplies to the system.
The Canvas Business Model is being taught by the best universities in the world, such as Harvard and Stanford as well as at Osterwalder workshops. Canvas exercises are led by the top managers and generally guided by experienced Master Black Belts who lead the teams in the use and development of Canvas to generating dynamic and productive exercises of creating and debugging business models to ensure good results.
It is important that people from all different areas such as designers, sales and marketing people, accountants, process engineers, purchasing, human resources, etc. participate in the generation of new ideas, debugging them, and ensure the correct implementation of the selected models.
In 1958, Xerox invented a copy machine that could make 2,000 copies a day when the competition could make only 30 to 40 copies a day.
The machine was seven times more expensive, so sales were not what expected. They had a great product but a terrible business model.
They did a market study and concluded that no customer would buy such an expensive machine. But when they re-designed the business model to be based on an annuity model with leasing the machine, that resulted in significant recurring revenue and cash generation. In 2011, approximately, 83 percent of their total revenue was annuity-based revenue the included contracted services, equipment maintenance, consumable supplies, financing, among other elements. The company reinvented its business and became very successful.
As you see from this example, the right business model can make the difference between being the best or the last even with a great product or service.