The business model canvas (“BMC”), proposed by Osterwalder and Pigneur in 2010, is a very powerful toolset to describe and develop business models. Not only does it help understand how a given business works today or may work in the future, it can also be used as the founda-tion for developing and / or enhancing a company’s operating model, that is, describing its functional landscape, its organizational structure and governance, its deployment of capital, and its technology infrastructure. Using the BMC with actual clients for some years now, I have come up with six extensions that add significant value to me. In the light of the philosophy un-der which the BMC was developed, I would like to share them with you.
In my day-to-day consulting work, I am very often confronted with helping companies improve their operating model. The challenges brought to me read like this:
- What should I do to change my organization from an “I” to a “we” mentality?
- My current CRM system achieves end of life and I want to replace it. What should be the requirements on a new CRM system?
- How can I develop innovative services that can actually be delivered upon the expectations of my customers?
- How can I increase cross-selling?
- How can I streamline my business processes?
Before trying to address the specific challenges, I always start by assessing the big picture of the concerned business – in management terminology, understand their strategy. As strategy is for many business managers still an abstract concept, I successfully rely on A. Osterwalder and Y. Pigneur’s (2010), the “BMC”, to discuss, understand, and more often than not, improve, adapt, and particularize, the implemented business model.
Over the years, I have come up with six generic extensions to the BMC that simplify the discussion between my clients and me around how their business actually works and / or where the challenges lie. Following the philosophy under which the BMC was developed, I share my observations with you in this insight.
Six ways to add value to the Business Model Canvas
1. Reading from left to right
My experience has shown that describing an existing or developing a new business model, usually starts with customers (customer segments) or products and services (value proposition). As western languages are read and written from left to right, I find it advantageous to apply this logic also to the BMC. Therefore as first added-value refinement, I recommend mirroring the BMC, as shown in Figure 1.
2. Color as an additional dimension
Using color allows adding an additional descriptive dimension to the BMC. Decomposing the BMC into four major components, and coloring those differently, provides added clarity when discussing BMC prototypes and their relationship to operating model components. As shown in Figure 2, I suggest using the following four colors:
- Green – Customer related components (green being mostly associated with hope and envy)
- Red – Value proposition related components (the red meat of any business model)
- Blue – Production and delivery related components (in reference to blue collar workers)
- Grey – Finance related components (grey being a color without color, like money)
This has proven beneficial to me, especially when relating the different components of the BMC to the associated operating model. For example, in an IT architecture diagram, coloring the different software components according to their role in the business model, simplifies the description and discussion, and helps avoid the “blah, blah, blah” trap.
3. Distinguishing between customers and their needs
When discussing customers and their needs, it is very easy to mix customer segments with customer needs. Even though the BMC addresses this issue in detail through the Value Proposition Designer (Osterwalder et al., 2014), I experienced it as very fruitful to distinguish already at the BMC level between different customer segments and their needs, as shown in Figure 3.
Making the distinction between customer segments and customer needs, allows better understanding the interaction between customer segments, their needs and the provided value propositions. It helps differentiate between a customer characteristic, like a wealthy banking client, and his/her need for financing the acquisition of a private airplane. It also simplifies the discussion about what sound customer segments actually are. For example, age based customer segments, although sound at first may, or may not be related to differentiated needs.
The natural flow introduced to the BMC reads:
Customer Segment → Customer Needs → Customer Relationship → Value Proposition → Distribution Channels → Customer Segment
4. Making the value proposition tangible
Although it is sound to focus on the value proposition as the centerpiece, or meat, of any BMC, my experience has shown that talking first about products and services is more tangible than specifying value propositions, especially when interacting with non-business strategy experts. The value proposition can be defined as the external and intangible view of the value added, whereas products and services represent the internal and tangible view.
Consider for example a private banking customer (customer segment), who is risk averse and wants to save for retirement (customer needs). One possible solution would be to ensure that at retirement the customer’s funds have not decreased in real value terms (value proposition). The introduced red product / service component, allows to make the value proposition tangible and allows for it to be validated with respect to
- whether or not is satisfies the formulated need and
- whether or not it can be produced (through key activities, resources / skills, partners / suppliers) and delivered (distribution channel).
In the given example, the product delivering the formulated value proposition could be a mutual fund that is investing in real assets, like inflation linked bonds and property.
The natural flow introduced to the BMC then reads:
Customer Segment → Customer Needs → Customer Relationship → Value Proposition → Product / Service → Distribution Channels → Customer Segment
5. Without activities, no value
The original BMC relates the value proposition to
- key activities and
- key resources.
My experience has shown that first identifying the activities required to produce the product / service, that is, answering the question “how”, before addressing the challenge what resources, skills, partners, and suppliers are needed, simplifies the discussion and increases the focus on the essential components of the BMC. As illustrated in Figure 5, I suggest moving the key activities component on top of the resources / skills and partners / suppliers block.
On the blue side of the BMC, the flow becomes:
Value Proposition → Product / Service → Key Activities → Resources / Skills | Partners / Suppliers
Once the activities are defined, the discussion moves to the make-or-buy questions, that is, whether to provide the resources and skills to deliver the activities in-house or outsource them to external partners* or suppliers. This relates to answering the following questions:
- Is the activity to be performed critical with respect to producing the product / service, and thus delivering the value proposition? Does it provide a competitive advantage?
- If the activity is not critical according to the first question, are there economies of scale and / or scope that speak for internalizing rather than outsourcing?
- Can capital allocation be improved by outsourcing or not?
Consider an asset manager who provides transparency as part of its value proposition. He delivers this value proposition through providing a monthly extended report (the product) which requires analytical reporting capabilities to be produced (key activities). As this extended report is the only tangible outcome delivered to the customer, it can and should be seen as critical, and therefore should not be provided by partners / suppliers. The required resources / skills would, in this case, be financial analysts being able to produce the content of the extended reports and an IT solution providing the reporting capabilities around that content.
6. Simplifying the capex discussion
I have found that it helps extending the make-or-buy discussion by distinguishing at the business model level between
- expensed resources and skills,
- capitalized (capex based) resources and skills, and
- partners and suppliers,
as shown in Figure 6.
What does that mean? It means answering the questions whether the resources and skills required need upfront capital expenditures, and thus can be seen as assets (tangible or intangible) on the balance sheet, or not. As capital allocation is a key element of any business model design, I find it important to address the capex aspect in the context of the business model, and not reduce it to a component of the cost structure discussion.
For example, if the customer segment is related to the value proposition through a brand, capex is required to develop that brand and build the customer relationship. On the other hand, increasing sales through offering an existing product under a sales campaign, requires sales resources that are expensed rather than capitalized to deliver the sales activity.
A final word
The proposed extensions to the original BMC may be used collectively or individually. They are generic and should be relevant to any business area and maturity of the considered business model. My experience has shown that these six extensions add significant value when trying to describe and understand existing businesses, especially when focusing on addressing related operational challenges. In addition, they simplify the interaction with non-business model trained managers, as they relate BMC concepts, like the value proposition or customer needs, to day-to-day known concepts, like products and services, or customer segments.
The fine print
As for the original BMC, all six ways to add value to the BMC are distributed under a Creative Commons Attribution-ShareAlike 4.0 International License. This allows you to share, that is, copy and redistribute the material in any medium or format, adapt, that is, remix, transform, and build upon the material, for any purpose, even commercially, under the conditional that you give appropriate credit, and distribute your contributions under the same license as the original.
Osterwalder, A. & Y. Pigneur (2010). Business Model Generation: A Handbook for Visionaries, Game Changers, and Challenges, John Wiley & Sons, Hoboken, NJ.
Osterwalder A., Y. Pigneur, G. Bernarda, & A. Smitz (2014). Value Proposition Design, John Wiley & Sons, Hoboken, NJ.
*) I define a partner as a supplier who is investing own capital in the relationship, whereas a supplier is not.