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Business model as medicine

Business Model Generation: A Handbook for Visionaries, Game Changers and Challengers, by Alexander Osterwalder and Yves Pigneur

I RECEIVED a request from a client to help them with a common problem: "We don’t need a new strategy, what you did for us is just fine. We are in trouble and we need a turnaround plan.”

As I was preparing for this assignment, I recalled the book Business Model Generation, and its suitability for this purpose.

A solid study conducted by the Association of Insolvency and Restructuring Advisors showed the balance between “bad luck” and bad management as a cause for business decline. The study revealed that only 9% of failures are due to influences beyond management’s control and are simply bad luck, whereas 91% of business failures were caused by factors management could have controlled.

Of these, 52% of the problems were created internally and could have been addressed, but were not.

As such, the start of any turnabout process always must involve a “no holds barred” confrontation with the brutal facts. If the responsibility for the troubles is internal, as uncomfortable as that may be, it offers hope for the turnabout of the company. If the cause was completely beyond managerial control, the correct course of action is most often to plan the closure, and salvage what is left. A horrible thought.

A business model is a description of “how an organization creates, delivers, and captures value”. Revisiting a troubled company’s business model is a very useful way to have staff confront the real problems in the business and see where they should focus their efforts to redeem the situation. This confrontation, while brutal, shows the way back to success and often lifts the pall of despondency that hovers over troubled businesses.

Business Model Generation is visual, and begins with a clarifying structure with which any business can be described. The clarity that comes from what the authors call the “canvas” highlights both the problems and the opportunities. The clarifying structure becomes a shared language that facilitates discussion, and highlights flaws and opportunities.

Know your clients

There are nine segments to the model. The first segment is the customer, the identification of the groups of people or organisations that the company desires to connect with and serve. Clearly without customers, no company will survive. It should also be added that a customer is someone who puts money in your pocket; charity is when you put money into theirs.

The easiest way to deal with customers is to group them by their common needs, behaviours and anything else they have in common. These groups may require different offerings, may need to be reached in different ways, treated differently, may be willing to pay for only some aspects of what you offer, and so on. From these groupings more specific responses to these customers' needs can be seen, and it becomes visible how they are not being serviced.

The second segment is the “Value Proposition” - why customers choose one company over another. Here the challenge is to interrogate the offering and constantly clarify why the customer should care to do business with your company. It could be anything from performance to your ability to customise the offering, from status to convenience, and more.

The third segment is the way the company communicates and reaches its customer segments. These are the various channels to the market. It is here that questions about how well these channels are working, and how easily they are accessed by the customers, need to be answered.

This segment is coupled to the customer relations segment, as both describe how you get through to the customer in the easiest and most pleasant way for them. Do they need and receive personal assistance, self-service or automated service? Would they be better served through you creating communities for them such as user groups?  Do they need to co-create the goods or services you sell, as Amazon does, by inviting customers to write reviews to guide other book lovers?

Revenue streams: fixed or dynamic?

These three segments - the customers, the value proposition and the customer relations - create the fourth segment: the revenue streams. If the customers are properly captured through the three other segments, they will pay for the goods or service they have bought, leased, or acquired in some other way. And prices can be fixed, or they can be dynamic such as yield management or an auction.

With the customer side of the model described, the organisation to deliver the goods or services can discussed. The first of these segments covers the key resources or assets required to make a business model work, be they human, a process, the distribution channel, the revenue streams, or a physical asset.

The next segment is the key activities a company must perform to achieve. These could be the distribution channels, the customer relations channel, or the various revenue streams.

The segment that rounds off the business model is the key partnerships required. These include the network of suppliers and others who contribute to making the business model function.

Check out your costs

The last of the nine segments is the crucial issue of the costs of operating the business model.

When the senior team gather round to draw the model, the weaknesses and the problems become evident. While the business model only shows the higher-level picture, it makes the levels below more obvious.

The value of Business Model Generator lies in the simplicity of the process and the comprehensive guidance it gives to fleshing out each segment.

Being a sketch it provides rich information through a simple view, making it easier for all to understand. It also makes the problem areas obvious.

With a shared language and a common understanding, the business of rebuilding an organisation is so much easier. So is building an organisation from scratch or taking it to the next level. This is a very useful tool in your cognitive armoury.

Readability:    Light --+-- Serious
Insights:        High +---- Low
Practical:        High +---- Low

*Ian Mann of Gateways consults internationally on leadership and strategy and is the author of Strategy that Works. Views expressed are his own.

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