Within each change theory strategic alignment is stressed as necessary to give people the insight and purpose they need to make autonomous decisions. So how can you go about creating strategic alignment? In this blog we will look at the business model canvas. One of the many tools available for strategic alignment. I like it a lot, because it is easy to read and understand and it still is very data driven. Most strategic documents take up a lot of pages. This ensures that not everyone who should read it does so. It also ensures multiple interpretations of the same strategy. When everything is on one page the discussions about strategy are a lot more lively and focused. The model makes it easier to adjust your strategy when the need arises. It is easy to develop a couple of models and see which version works best for you.
What is the business model canvas?
The business model canvas was designed by Alexander Osterwalder and Yves Pigneur. A business model describes the value an organization offers to various customers and portrays the capabilities and partners required for creating, marketing, and delivering this value to the customer. It also shows the relationships of these items with the goal of generating profitable and sustainable revenue streams.
It can be used in two situations:
To develop focus for a new organization
To analyze the strengths and strategic opportunities for an existing organization and adjust your strategy when needed.
The model consists of 9 building blocks. We will dive into each one. The value proposition and customer segments are the blocks that will take most of your time, since they are crucial for a successful canvas.
Customer segments
Value proposition
Channels
Customer relationships
Revenue streams
Key activities
Key resources
Key partnerships
Cost structure
Customer segments
In this block you start at a macro level and zoom in once you feel you have described the macro level.
Macro level
Maybe your company has one customer segment, maybe it has more. The best way to find out is by discovering what the value you are currently delivering for your customers. It may be easy to overlook a segment, so if you are not sure go out and see for yourself. An example of multiple segments is with affiliate marketing companies you have at least two customer segments: one for the advertisers and one for the publishers (the people using the advertisement on their website). The output of this first step is one or more customer segments and the value you are currently delivering to them.
Micro level
This is where your persona's come in. Why do people come to your store/website? What are their problems or needs? What alternatives do they have? You link each persona to a customer segment.
Value proposition
This is where you chart what type of value or job to be done the customers are looking for when they are coming to you. You have a lot of input for this phase from the customer segments.
At first you want to list out each and every value your customer is looking for.
Next you will want to rank them according to your competitive edge over other companies and importance to the customer.
Once you have ranked all of them you will want to put the most critical value propositions on your canvas.
The value propositions can be quantitative (price, speed of delivery and so on) and qualitative (design, customer experience and so on) in nature. The most critical value propositions are why a customer chooses you over a competitor. It is important to have enough data available about what drives customers, otherwise you may be tempted to write down the most important value propositions according to you personally.
At the end of this step you will have a list of the most critical value propositions and you will have mapped out which value proposition matters to which segment and which persona.
Channels
Channels is about listing every method or tool you use to get the attention from customers, sell to them and retain them as customers. These channels include the tools of partners if your use them.
A method most often used to identify the channels is by storyboarding AIDAOR:
Attention
Interest
Desire
Action
Onboarding
Retention
At the end of this step you have a list of channels and what job they do in the AIDAOR framework. If there are huge differences between customer segments in what channel they use it is advisable to map these differences.
Customer relationships
How do you interact with and service your customers? Do you have offline or online contact? Do they have a dedicated account manager? Or a customer service team which helps them out? Do they use contact forms on the website or are their different ways for contacting you? You need to be clear about the kind of relationship you want to have with your customer.
At the end of this step you will have a list of customer relationships and the way the interactions work. If there are important differences between segments at the macro or micro level write these down as well.
Revenue streams
How do you generate revenue? Are there subscriptions? How many sales do you need to break even? What is your conversion rate? What do you charge your customers and for what type of value?
You need a lot of data for this part. If you do not have it yet be sure to write down your assumptions and how you will test them during the day to day business. This way you can adjust your canvas when needed.
At the end of this step you will have a list of revenue streams backed up with data and linked to your customer segments and value propositions. Together with customer segments, value propositions, customer relationships and channels you now have the first part of your canvas ready. It is time for the infrastructure part of the canvas.
Key activities
What activities and capabilities are necessary to deliver on your value proposition? This step is not an exhaustive list of all your activities, but it is about the activities and capabilities you need to deliver on your value proposition. This is not just your core capabilities, but also the activities that give you your competitive edge and help draw in customers. It may be that you wil identify activities you cannot get deliver on yourself. Write these down as well.
At the end of this step you will have a list of key activities and how they link up with your value propositions.
Key resources
What strategic assets do you need to keep your competitive edge? These can be physical, financial, intellectual or human resources. Be sure to link them to your value propositions. If you cannot link them they are not key resources, unless they are in some other way necessary for the continued existence of your company.
At the end of this step you will have a list of key resources (physical, intellectual, human or otherwise) and you have linked them to your value propositions.
Key partnerships
Some of these partnerships may have already been mentioned during customer relationships, channels, resources or the value proposition. Be sure to add those here, since they are needed for your competitive edge. The next question you will look at is what type of key activities you cannot deliver on, but are still needed by your customers? Can a partner help you out here? What partnerships can help you grow or develop at a faster pace so you can stay ahead of the market? (Or not fall behind more). As a general rule there are three reasons for starting a key partnership:
Economies of scale. Using partners to expand your scale will reduce costs.
Reduction of risk or insecurity. In extremely competitive market alliances can build trust and piece of mind.
Acquisition of certain resources or activities. It is not always possible or sensible to do or own everything yourself.
At the end of this step you will have a list of your key partnerships. You will also have a map of how each partnership relates to your key activities.
Cost structure
And last but not least: the cost structure of your business. What kind of costs come from your key activities, partnerships, channels and value propositions? Which costs are fixed and which are variable? What happens with these costs once your companies scales up certain activities? Or sells more of a certain product?
If you do not have all the facts yet on your costs write down your key assumptions. Also make a plan on how to monitor your key assumptions during day to day business, so you can adjust your canvas when needed. For some business models cost is the biggest driver (for instance budget air companies) , for other companies it is more about value creation. This is reflected in the cost structure.
At the end of this step you will have a list of costs. For each one you will know how they relate to key activities, whether it is a fixed or a variable costs and what happens to the costs when business grows.
How to make a business model canvas
First things first: Making a business model canvas is not a solitary excercise. You need to involve all your stakeholders. Making a business model is an iterative process. You will need to collect data and insights about customers, costs, revenue and competition. You can work out a business model canvas in one on one interviews, but also in group sessions.
I personally like the group sessions for their time effectiveness. But in order to have effective group sessions you will need to prepare data and be sure your participants are prepared. How long the workshops will take depends on a couple of factors:
Is this the first time you will use the canvas?
Are people used to thinking in value propositions and customer segments?
Are facts about costs, revenue and competition widely known?
How do people feel about using a new tool?
How much data is available beforehand?
To give you a short recap of all of the text above, here is a short video:
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Some last tips
It is easy to just start filling in the blanks on the canvas. When you do this the canvas will lose a lot of it's strength. I always like to use stories and visualization to make sure everyone in the room sees and knows the same things about our business. By using stories and visualization I trigger different parts of people's brains than I would by just using facts and assumptions. This way people are being pushed to use their imagination and you get intuitive and associative knowledge on top of the facts. The combination of these knowledge types make for the best outcomes.
As said before: a good business model canvas is the result of a group effort. Not just of staff or management but by using knowledge from the entire organization.
You do not make a business model canvas once or once a year. You keep on checking and adjusting the canvas to your progress and the developments in the market. Try to formally adjust your canvas at least once every three months.
In some business model canvasses culture and values is added at the bottom of the canvas. This part is about leadership style, relationship style and values. I sometimes use these. This depends on the situation at hand.
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