Models & Canvases

Introducing Alexander Osterwalder

Friends,

Last week, we discussed one of the five Ps in Henry Mintzberg’s 5P model – the strategic perspective. Center to my critique was its rather theoretical nature; it described that perspectives emerged, yet practically nothing about how or why. Although the inner workings of emergence can be difficult-to-impossible to define (as we know from previous conversations concerning complexity), failing to comment upon the organizational implications nonetheless means that the exercise becomes almost entirely academic. Or to put it differently, it may be theoretically profound, but also practically trivial.

By comparison, today’s concept is intended to sit on the other side of the spectrum. Alexander Osterwalder’s business model canvas (BMC), first introduced in Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers (co-written with Yves Pigneur), is a tool created to provide overviews of existing business models and enable the generation of new ones. Its raison d’être is rooted in the pragmatic and to-the-point; it describes in real terms how the company creates, delivers and captures value. Or so it should, anyway.

Normally, the BMC is visualized like this:

Starting out from the top, one will first find the Key Partners that make the business model work. These could be, for example, non-competitive alliances, partnerships between competitors, joint ventures and buyer-supplier relationships.

Next, there are the Key Activities that define what the company must do in order to make the rest of the business model work; the most important aspects to get right in the vertical in which it acts (e.g., programming in software development). In turn, these are supported by Key Resources, whether financial, intellectual or physical.

The Value Proposition is, of course, created to describe why anyone would consider purchasing anything from the company – the benefits received, pain points soothed and so forth. Given that the ways in which the value can be delivered may vary, establishing how one prioritizes various kinds of Customer Relationships (automated, personalized, transactional, communities etc.) can provide clarity. For obvious reasons, this is also highly dependent on the Channels that those in the relevant Customer Segments prefer.

Lastly, we have the Cost Structure and Revenue Streams. While all costs would be impossible to detail, those most crucial to the business model deserve special attention. The list may be constructed from a more philosophical standpoint (say, a cost-driven vs value-driven structure), but should always include core attributes such as fixed and variable costs. The revenue streams state how much and in what ways customers are willing to pay.

As one might expect given the simple yet useful nature of the tool, the BMC has become wildly popular. For companies, consultants and – not to be understated - students alike, it provides a quick overview of many of the essentials of a business. As far as starting points to understanding a company go, one can undoubtedly do a lot worse.

However, if you are like me and from the proverbial West (meaning that you read from left to right), the nine building blocks are likely to make more sense in content than in order.

Starting with key partners would be, to be blunt, strategically inane. Similarly, putting relationships and channels before segments, or cost structures before revenue streams, merely creates a series of Catch 22s. It is not until one has defined an audience that one can know what channels or kinds of relationships it might prefer, nor can costs be established before one has figured out how one intends to make money in the first place.

The original BMC also, despite its creators’ numerous claims to the contrary, provides little to no strategic guidance. In a somewhat ironic turn of events, it describes what the company does (much like Mintzberg’s perspectives), but provides little information about why it does it. The overarching aspiration, the shared understanding of success, is entirely omitted.

In practice, an updated version such as that developed by Adrien Book makes more sense:

Here, we have at least some semblance of a strategic origin point, and it is evident that Book understands that there is more to fundamental financials than revenues and costs. Not every profit mechanism is equal, nor will all companies have the option to make of their profit what they will (for some there may be a legal requirement to distribute wealth to shareholders, for example).

Yet even if Book’s model and others like it provide steps in the right direction, they too fail to provide the full picture.

As we have established time and again, a firm is a complex adaptive system. This means, among many other things, that the organizational whole is different from the sum of its constituent parts. The BMC is inherently reductionist and falls victim to the common fallacy that the organizational metaphor is that of a machine; as if its various functions could be taken out, optimized, and put back in. We know this to be untrue. Fundamental building blocks are important to understand, but there is much more to a business.

Further, competition is only implicitly referenced. Although focusing too heavily on external actors may be harmful to profitability, understanding the competitive context in which one acts remains an essential aspect of strategy. Leaving it outside of the model, as Osterwalder has emphasized it should be, limits the strategic value of the tool.

In other words, the BMC is and should be treated as a checklist more than anything. While there is nothing wrong with checklists per se, strategy is more than filling in blocks (regardless how much some strategists appear to prefer that were the case). For one, there will always be more than nine, each fluid and overlapping the next.

Basing one’s entire enterprise on the BMC would therefore be a mistake, even though that is arguably why it was created in the first place; too many key aspects of practical business (such as strategy, aspiration, measurement and competition) are simply left out. That is not to say that it is without value, but its usefulness is nowhere near as immense as many, including its creators, claim. It is not the tool, but one among many. Used as such, it makes sense.

Next week, we are going to take a closer look at one of the aspects that Osterwalder left out, namely what might motivate employees to deliver to strategy (and business model). The concept of obliquity developed by John Kay is seldom discussed in strategic circles, but there may be a reason to start.

Oh, and that will also force us to discuss the ever-controversial topic of purpose. Hold on to your hats - there will be swearing.

Until then, have a lovely weekend.

Onwards and upwards,
JP