Osterwalder explaining the Business Model Canvas

hi everybody my name is Alexander osterwalder I wrote a book called business model generation together with Eve pure and the book is used around the world to figure out what are business models and how do we design business models so I'm going to talk to you a little bit about how to design test and build business models and we're going to dive deeply into the topic with a Swiss invention and we're going to go into the time machine which was invented in Switzerland I'm going to take you back to 1958 why 1958 because I would

like to introduce you to a person called Jester Carlson so I learned about Chester Carlson from Henry chesbro and he told me the story about Chester Carlson so Chester Carlson was at the head of a research team at a company called hallowed and he invented the first modern-day photocopying machine this was an amazing machine it could make 2,000 copies a day at a time where you could maybe make 15 to 30 with a very smelly and dirty process okay so that was a big technological jump problem was that this technology was very expensive it was

about seven to eight times more expensive than anything known at the time so what do you do if you have this wonderful technology you're not quite sure how you can bring it to the market so hallowed went to the Consultants a company called Arthur dittle and they asked them what should we do Arthur D did their market research came back what do you think they told hallo well they said there's no Market they went out they searched of course you couldn't sell a technology that was so expensive so halloy didn't listen they went back to

the drawing board and they came up with a new business model it's actually the business model that defined the photocopying industry until today so they thought well what if we allowed companies to lease the technology for $95 a month and they would get 2,000 photoc copies for free but every time they would make an additional copy in that month they would have to pay a couple of cents per copy so what happened was that companies jumped on this offer they loveed the leasing of this great technology and they started photocopying not 2,000 times a month

but 2,000 times a day which means that from day two onwards hallowed which became Xerox had amazing growth rates they started to earn substantial amounts of money on millions billions of photoc copies that were made pretty interesting story now let's get back into the time machine and let's move to 1997 and I want to introduce you to two people who probably don't need any introduction Larry Page and Sergey Bren probably you know them very well now they came up with another invention or we could say they popularized the first modern-day search engine they had a

different problem their product their service was not too expensive it was free now how do you make money from free I think they have proven how you can do that they figured out how to make money from contextualized advertising by selling Search terms and not just by selling them by auctioning them off so the pricing mechanism made the big difference now if you look at those two examples what do they have in common what's similar between those two examples what do you think I'll give you three points the first point it's very important one is

that in both cases the product Innovation the Technology Innovation alone was not sufficient it was important it was may even a core part of the success but alone it was not sufficient it was the combination between technology and product innovation and the business model so you really want to figure out how business models products technology how they fit together and how they can lead to success and give you competitive Advantage the second point was that they didn't copy from competitors nobody did anything like that so they had to invent new business models now what's the

first thing we do today we look around us we try to figure out what do others do and we might want to be a little bit better a little bit faster maybe a little bit cheaper but sometimes it can be very powerful to move ahead and try out something new a new business model cuz that's what can give you a real Competitive Edge and now let's look at the third Point what do you think could they prove upfront that these business models would work very tough right they didn't know that these business models would work

so they had to experiment they had to experiment to figure out if this would work and that obviously requires some risk taking and what I'll talk about a little bit at the end of the presentation is could we test business models let's see so there are three things that we don't do well when it comes to business models and those three things were addressed in the in the points that we've seen before and that's what I'm going to talk about the next couple of minutes first how do we discuss business models when I say how

do we discuss business models I mean how do we go beyond products and services to think about all the pieces that make a business successful and the second point is well how do we come up with innovative business models if we can't copy from around us well we might need some techniques and and and and tools to come up with great business models and the third point is how do we test business models before we build them three interesting points so let's dive deep into the first one so I want to look at how we

discuss business models and we'll look we'll start with a little mini case here and I want to get you to work even though it's a webinar right we're going to look at Coffee coffee is an interesting industry it's a Commodities business right more coffee Growers than ever before Vietnam hasn't existed as a coffee grow a couple of decades ago and now they're one of the biggest so let me ask you a question related to my home country because I have the data there to Switzerland but it's a similar Fe phenomena happening around the world how

much do you think do we pay less or more for coffee consumed at home in our homes what would your guess be is it 20% less is it 20% more what do you think turns out Swiss are paying 600 to 800% more for coffee consumed at home and it's not George Clooney it's actually the brand for which George Clooney stands in most parts of the world it's Nespresso espresso has changed the business model of espresso the selling of coffee to households and at the heart of their business model there's a machine welld designed with aluminium

pods coffee inside you take the aluminium pods you put them into the machine you press a button and out comes a very good espresso so good that even Italians will like it okay that's the technology that's the product the results are really amazing it's still after two decades one of the fasting growest growing businesses within Nestle the food Empire one of actually the biggest food company in the world pretty impressive and that means growth rates of 30% per anom for the last decade that's pretty impressive okay if you're Google if you're Facebook maybe not but

for most of us 10 years of growth rates like that is great now that represents a business of over3 billion US with one product line mainly coffee machines and pods okay interesting now let me get you to do a little exercise question to you is what made nespresso's business model so successful take a couple of minutes describe their business model and try to point out what made them so successful click on the pause button take some time and figure out what makes them so successful so back to the question what did you come up with

let's see I'm actually not just interested in what you wrote down but how you did it did you just think about it not write anything down did you write down a couple of bullet points or did you even draw a diagram now if you drew a diagram you're already pretty advanced in your thinking I think we need to apply more visual thinking we need to understand how the pieces of a business model fit together but now before digging down deep into what made bu espresso's business mod so successful I want us to do another little

exercise and it will be related to the first okay second exercise take one or two minutes to Define what a business model is since you've described the business model of an espresso you should know what a business model is so take 2 minutes to ask yourself what's a business model what does that mean to you and write down your definition click on the pause button and do this what's a business model write down your definition so I asked this question all around the world you know what's really funny this is how the answer looks have

you ever heard of this story of the Tower of Babel where people tried to create build a tower that would go reach all the way to to heaven and God came down on Earth and he created languages so they couldn't finish the tower that's how it looks like when we discuss business models I think it's a word we use all the time but we're not speaking the same language we don't really understand each other when we're talking about business models that's very often the case so let's look at how a meeting looks like where people

discuss either their existing business model or they try to figure out a business model for their new product or technology starts like this blah blah blah huh blah blah blah huh blah blah blah so this is not because we don't have a couple of smart people around the table it's because we're not speaking the same language and this phenomena is called blah blah blah so Dan Rome friend of mine he came out with a book called Blah Blah Blah what to do when words don't work and I think when it comes to business models we

need to use words and pictures diagrams to really understand what we're talking about and how the pieces of a business model fit together so that's why we came up and when I say we it's e p and myself who wrote the book business model generation why we came up with a language to have a better discussion about our business models to discuss our existing business models but more importantly to discuss new business models so we invented something called the business model canvas and the business model canvas is like a canvas to paint on you can

describe existing business models you can describe new business models you can challenge business models and and ultimately you can use it to invent new business models with the same language why the word canvas because you can paint out an existing business model or a new business model and make it tangible so let's look it into this it's about nine building blocks the first building block is customer segments you need to ask yourself which customers are you serving in your business let's look at a newspaper what what are the customer segments of a newspaper well in

fact there are mainly two the readers who want to be informed and entertained and the advertisers who want to reach an audience and sell something so two different customer segments with two different jobs to be done and for both segments and both jobs you will have a different value proposition a set of products and services that will help help the customer get the job done so once you know who you're targeting and what you're offering you need to ask yourself how do these customers want to be reached through which channels through which channels do they

want to communicate with me as a company as an organization through which channels do they want to receive the goods is it a physical channel is it a digital channel are we talking about stores are we talking about Direct channels are we talking about indirect channels so ask yourself how does each customer segment want to be reached the next block is about the customer relationships you establish so if you're a Swiss Private Bank you will have a very personal relationship a banker will try to build up a very personal relationship with a wealthy family maybe

even over Generations that will have implications on the rest of the business model because it will be people-based very personal but not very scalable if you're Amazon what do you think does Amazon have a personal relationship with us well not personal in the sense of a private bank but personalized because they understand our buying behavior and they recommend books to us so Amazon will have a very automated relationship but personalized based on systems based based on computers based on servers so very different and much more scalable now you could also look at it in a

different way so Steve blank uses the customer relationships to describe how you get keep and grow customers which is a very important point because customers you need to acquire them first and once you have them you better figure out how you're going to keep them and if you don't have enough customers it's not going to work out so you want to grow the next question is what are people or companies that you're serving really willing to pay for and how do they want to pay for something that they buy do they want to pay subscription

are they going to pay a licensing fee and through which pricing mechanisms remember we mentioned Google Google is auctioning off their Search terms for advertising they're not just selling them that makes the much richer than if they would just sell them so that's the right hand part of the business model canvas the part that shows which value you're creating for whom and how you're delivering that and how you're capturing value for yourself as an organization now we want to look at the left hand side of the canvas where we ask ourselves how are we going

to do it what do we need to create value the first question is which resource do I really need to create value do I need Factories do I need a brand do I need intellectual property do I need servers what are the key things that you need to have to create that value that you're promising on the right hand side and then the next question is well we know what we need to have but what is it that we really need to do that we really need to be good at in our business model which

activities do we need to excel at is it marketing and sales is it research and development is it managing servers what are those activities that are crucial in our business model and since we're in the 21st century we're not going to do everything ourselves we're going to work with Partners so you want to ask yourself in addition to suppliers who are the key partners that can Leverage your business model that can turn your business model into something more powerful so an interesting example here is the social gaming company Zinga which built their entire business model

or a big chunk of it on the back of Facebook which became a partnership and probably Zinga couldn't have scaled so quickly without using Facebook as a partner now if you know all those three elements on the left hand side of your canvas very quickly you can sketch out what your core costs are and then you have a big picture understanding of the logic of your business all the pieces that you need to create deliver and capture value all those elements that are important to Succeed in Business now that's just a concept let's turn it

into a real tool that we can use in our everyday work where it really becomes a canvas on which we can paint out our business model and I use sticky notes or a new new Tool called states to map out business models that's very powerful because you will make it tangible ask yourself what are or who are the customers sticky note well if those are the customers what value am I offering them sticky note how am I reaching my customers sticky note oh if that's the value I'm creating that's the way I'm delivering it well

what resources do I need sticky note what activities do I need sticky note so you can map out your entire business model the business model you want to create or the business model that you already have it will give you a clear picture and a better understanding of all the pieces of your business model model now let's get back to our Mini case so we discussed Nespresso and at the heart of the Nespresso business model is a machine with the pods right but let's look at what was particular in their business model that made them

so successful so they had a very deliberate strategy their strategy was to sell the espresso machines through retail channels all the retail channels possible to households mainly big part of their business they would earn money from a one-time transactional sales but most of that money would go to their Partners the machine manufacturers now why do they sell for retail what do you think because they want to reach as many people as possible now here's where it gets interesting for the espresso pods with the coffee inside that you put in the machine they didn't use retail

they only sell through their own channels first mail order call center then obviously nespresso.com and then afterwards they built Nespresso stores which means they had to build as a key resource all their own channels this is curious why did they make a difference between the machines and the pods well because they understood the Dynamics of this strategy there that if they would get the machine in the households basically you don't have a choice anymore you're locked in once you have the machine you can only use Nespresso pods so you would automatically go to their channels

to get the pods so the pods they sell them only through direct channels what's the consequence well you're going to buy those pods in a repetitive way again and again and Away recurring Revenue but most interestingly well if there's no more middleman all the revenues go right into the pockets of an espresso so they earn more money by selling directly so let's look at the leftand side of the canvas what do they really need to make this happen let's look at the Key Resources what do you think are the key resources that an espresso needs

to make their business model reality couple of things one of the most important parts are the patents they have to protect their system so nobody else could make pods that would fit in that machine and they defended that for a very long time turns out one company found a way around that with biodegradable pods turns out that their some of their patents are expiring in 2012 so it would be very challenging for an espresso to rejuvenate their business model model what else do they need well coffee that's a no-brainer but you know what coffee is

really important because they try to take to get the best coffee and then the brand if you're in consumer goods like this you better have a good brand to really make it possible and then they build some really really high-end production facilities to create the best pods with the best quality coffee inside in the world now let's look at the activities I put three things there first one business to Consumer distribution it was the first time for nistle in their company in espresso to send small boxes to individuals before they used to send big pallets

to retailers with their n Cafe brand where they were shipping coffee around the world so they switched from business to business distribution in an espresso model to business to consumer consumer logistics and distribution that's a pretty important shift and then they want to excel obviously at marketing because they're in consumer goods and the third part is production they focus on really producing the best quality coffee and when you have the left hand side mapped out very quickly you can figure out the C the costs production business to Consumer distribution and marketing and boom you have

the end entire business model on one poster isn't that interesting now there's another reason why I use the Nespresso case when they started out Nespresso almost failed they almost went bankrupt with exactly the same product and Technology isn't that curious Well turns out that they tried in a joint venture with machine manufacturers to sell the Nespresso system through the Salesforce of the machine manufacturer to Office Buildings and you know what the offices weren't interested and the sales force of the machine manufacturers weren't interested either so this business model didn't work fell apart with exactly the

same technology so here the difference between success and failure was not the product and Technology alone it was all the pieces of the business model in combination with a great product and Technology now Nestle didn't stop there they went on to create another system Dolce Gusto which focuses on capuccino and you might know that the capuccino market and then espresso Market the espresso Market are not the same thing two different market segments so we might say well this this is just a different machine they probably use the same business model they didn't they figured out

that it would make more sense to use a different business model for this machine and they didn't stop there they started innovating in other fields and they came up with a new brand in technology called babiness where you would have baby formula in a pod you could take the pod put it in the machine press a button and in 30 seconds you would get the bottle ready for your baby they used a different business model for this one and they didn't stop there they went on with something that they're they're testing now in 2012 which

is special te with a different business model obviously so what does this mean that nly in their business they're going Beyond a product portfolio to a business model portfolio that's pretty interesting what was my biggest learning in the last couple of years using the business model canvas it was actually going beyond the blah blah blah I've seen many groups entrepreneurs Executives discussing business models thinking about business models by using the canvas they started really thinking deeply about each building block that they would put onto the canvas they negotiate they get to a consensus and every

block that's up there makes sense so you start having a good understanding as an individual and as a team of what the business model is and you will have much much better conversations now let's look at the design of business models how do we come up with interesting business models and when I use the word design I don't mean form I mean the techniques and tools that designers use in their business what do designers do every day they create stuff they're trained to create stuff what do we do in entrepreneurship we create companies so what

if we could use the tools from design in business let's look at One Design profession let's look at architecture and let's study Frank Gary a little bit very interesting architect and let's look at one of his iconic buildings the gugenheim museum in bilau Frank Gary and his team were brought in by the mayor of bilau Mayor of bilau told them you know what we have one of the ugliest cities in Spain or in the B country to be concrete we would like like you to transform our city with a building now is it Heavenly intuition

and creative genius that Reigns down on Frank Gary and his tee to come up with a building like that maybe a little bit of it but more importantly they have tools and techniques to figure out what they want to do and they do a lot of study models different types of models sketches they go in very different directions different materials different shapes they work with City scale landscape landscape scale building scale to figure out which Alternatives could really work and only then when they feel that the design has matured do they choose a Direction so

it's not prototyping to refine it's prototyping to explore Alternatives and only when they feel that the design has matured do they select One Direction now what does that have to do with you and me and organizations what's the same thing rather than falling in love with your first idea with your first business model you should be exploring multiple diff different Alternatives possibilities of what you could do think them through what if I gave away my product for free how would I make money what what if I created a business model with zero fixed costs only

variable costs how would that look what if I did a business model with my biggest competitor how would the business model look you can explore different Alternatives and here is the important part not by spending a day or a week on each individual alternative but by sketching Out rough models take 15 minutes to think of one take another 15 minutes to think through another possib ability by doing those rough sketches quickly with the business model canvas you will get to better ideas you will have better business models you will come up with more powerful Alternatives

you can use the business Mall canvas which you can download on the web and get it for free it's even under a creative comment license so it's all for you the important thing here is that you don't fall in love with your first idea because as we will see afterwards the second third 10th idea that might really work has nothing to do with the first one so you better think through and test multiple possibilities and this is what designers call prototyping and I like the way Tom buek put it he says prototyping is the conversation

you have with your ideas wonderful quote let's look at it very briefly at a mini case study and I want us to follow the story of Shaw who's an amazing entrepreneur aspired to change the solar energy industry he wanted large companies to be powered by solar energy but he had to go through a whole learning process to come up with the right model so was working in the solar energy industry and this is how it more or less looked the traditional business model solar panel manufacturers would sell panels and installations to mid to large siiz

organizations and they would be paid for those installations there a problem with that large companies were not interested in adopting this why is that because The Upfront investment was too high so that was a big pain Point larger midsized organizations would not be willing to bring up The Upfront investment to invest in green energy so that business model doesn't work and Shaw experienced that firstand because he was in the Salesforce of a solar panel manufacturer so came up with a different idea what if he gave give away the panels for free well that would definitely

eliminate the pain point but how do you do that profitably let's do another little exercise you are now Shaw your task is to figure out how could you get these companies to switch to solar energy industry so brainstorm around different possibilities Alternatives have how to give away solar panels for free but still building a profitable company easy to give away but how do you give away profitably click on pause take a couple of minutes and come up with three four or five different Alternatives of what you could do here's the business model canvas that you

can use for that now let's look at what did he said these are the companies I want to Target and the way I'm going to do it is that I'm going to sell them something that you can already find in oil and gas It's called Power purchasing agreements so he would go to a company and say look I can offer you green energy at a very competitive price for the next 10 years please sign with me for 10 years and you'll get energy at a fixed price no volatility are you interested many companies jumped on

the offer they were very interested to get energy at a fixed price for 10 years because that would allow him to plan so jiger acquired a lot of these power purchasing agreements which he sold through a Salesforce and he was expecting to be paid for the next 10 years through Power purchasing agreements on the left hand side of the canvas he would obviously have to set up the infrastructure to do that question is now well how can you finance that so thought I have proof that I can earn money for a decade well that should

be interesting for investors turns out they were not interested so had a problem how would he do it he figured out a new way to make this business model work he had to Pivot to a new business model so what he did was took those power purchasing agreements and he turned them into smaller Investments that could be sold through institutional investors and private Banks to private in investors and other institutional investors and you know what that was very interesting for a lot of investors because now they became technically the owners of green energy got the

payments from the power purchasing agreements and because they were owners of green energy they got tax CS C tax cuts and subsidies from the government so all of a sudden the this business model took off well for meant and Son Edison that the revenue streams slightly changed he earned from investment fees and he learned he earned from the installation and maintenance costs it also meant that he had to change the backstage of his business model a little bit but the results of this last pivot were amazing jigger's company Sun Edison became the big biggest provider

of solar energy in the US and you know what sold this company for 200 million US dollar after a couple of years and he's now the CEO of the carbon war room which was co-founded by Richard Branson what a story so if we think of what happened here we can learn that innovative business models allow us to unlock potential opportunities that weren't readily available with the existing business models before so Shaw didn't focus on Technology Innovation he figured out a new business model to unlock the potential of this market now let's look at the last

part and I will stay brief here the testing of business models this was for me something very new that I learned by reading what's going on in this area the biggest learning was that even with the best thinking even by prototyping business models figuring out what could really work getting the smartest people together to create the smartest business models well there's one thing we need to realize we're still talking about a series of hypothesis here or if we want to use a simple word well a series of guesses we don't know if a business model

is going to work even if it looks very powerful on paper and it makes all the sense of the world we don't know if it's going to work what we really need to figure out if is the Mark if the market is really interested in our business model remember jiggers Shan his story so for me the eyeopener was this book the four steps to the Epiphany by Steve blank I learned from this book that you could test business mods before you build them that was a very powerful learning for me and the underlying idea here

is that you need to get out of the building and test all the hypothesis hypothesis of your business model with your customers your channel Partners your manufactoring or Service Partners to figure out are your hypothesis realis IC will it work or not so let me draw this up conceptually the first layer we talked about was the business model layer we talked about that quite a bit now over the last couple of minutes we will get to our best guess here by figuring out from all the Alternatives that we thought through which Dynamics could really work

but once we have that we need to extract the hypothesis underlying this business model we need to ask ourselves what really needs to be true for this to work which hypothesis do we have to test to make this work so making these hypothesis explicit is already a pretty good thing but we should go a step further and design a test for each hypothesis to really figure out well will this work and once we've done this we'll have a better chance of succeeding so let me draw this up how this would look basically means that we're

looking at business models over a Time axis where we might have our best guess on paper which will look amazing because we're a smart group of entrepreneurs or corporate Executives that are doing corporate innovation but once we figured out the hypothesis and we started describing how we're going to test that how we're going to go out of the building we're going to learn that you know what this hypothesis doesn't work this hypothesis doesn't work so we're going to come up with a new business model in the next iteration or the next pivot where we're going

to change and adapt the business model canvas in a way that fits from what we've learned when we got out of the building and we'll do that until we feel confident here over time that we have a business model that works where all the hypothesis Pro are proven true so the business model will breathe over time it will live over time and without the testing we're taking a b pretty big risk that our business mall is not going to work so I hope you learned something thank you very much for your attention and good luck

with all your new ideas your prototypes and the testing of your business models hope to see you soon