Building Dynamic Business Models

How can established organizations innovate their business model?

That is the question that I’ve been putting a lot of thought into recently. Two ideas collided this week that gave me some insight into the question. First, in the comments on my post about different business models leading to different outcomes, Greg Satell said:

A business model changes over time, while architecture tends to be much more sticky. You can’t adapt it to market conditions. You are pretty much what you are.

I think a business model must be more maleable than organizational architecture. Value shifts and so does the basis of competition.

The second idea came from this tweet by Alex Osterwalder:

Greg’s comment is interesting, because while it is true, it is also true that organizational architecture is part of your business model. Which means that if you want to change your business model, then you will probably need to change your architecture.

While challenging, this is pretty doable for startups, and there are a lot of resources designed to help you do precisely that.

The statement by Osterwalder is also interesting – because there is nothing inherently dynamic in the business model canvas. In particular, when it is applied in larger firms, it can be just as static as any other planning tool tends to be.

Paul Hobcraft captures these issues:

Is it also because it might be hard to imagine that you can capture a complex picture within a one page canvas? Within large organizations you deal in pages (I mean pages) of business plans, marketing plans, briefing papers and countless justifications. Could a business model be captured so easily? Well actually yes, if anyone is wondering.

Larger organizations are slower in adoption; it is just a matter of course. Be this in new technology, new processes, social media or a host of new things they tread more cautiously, they are slower to adapt. Those that get ‘it’ internally spend often frustrating months, sometimes years, trying to convince others to make a change, to change a process, a planning structure, even a widget within an established product that often holds it back.

This is a general problem in larger firms – innovation can be generally harder in many ways. And in business model innovation, the challenge is changing some of the things that are deeply embedded – like organizational architecture.

So what can we do?

Osterwalder’s quote provides some guidance – start experimenting.

There are several good tools around now that can help you design and evaluate business models. This one is a good example of one that is essentially static. It’s a nicely constructed tool, but it’s essentially static.

However, there are two nice tools that allow you to build some dynamics into your business model assessment. The first is the Lean Launch Lab, which is built around the Business Model Canvas:

The second is the Lean Canvas tool, based on the work of Ash Maurya. In assessing the Business Model Canvas, Maurya replaced four of the boxes from the Business Model Canvas with things that he and his community thought were more useful for startups, adding Problem, Solution, Key Metrics, and Unfair Advantage:

Both of these tools are free for only one user, and have a monthly fee if you want to have multiple people contributing to the development of a particular model. Both of them have one feature that is great: experiments.

Both tools have been heavily influenced by Steve Blank’s approach to using Business Models in customer development – and experimenting is central to this approach. It’s useful to think of this as hypothesis testing, and it’s something that you can do in both startups and larger organisations.

There are several interesting points that follow from all of this:

  • Finding the right metrics are a critical part of experimenting. For example, if you are building a business model for a web-based product or service, Rob Fitzpatrick points out that using the standard metrics (traffic and revenue) will lead you astray. Instead, he says:

    The lean startup book’s engines of growth is a great starting point for picking good metrics:

    Growing virally? Focus on referral.
    Users never leave (e.g. subscription webapps)? Focus on retention.
    Buying new customers via ads or salespeople? Focus on cost of acquisition versus lifetime value.

    If those aren’t relevant then take your pick from amongst McClure’s pirate metrics, Ellis’ 40% disappointed test, the net promoter score, or something of your own creation.

    The hypothesis testing approach works when you establish a hypothesis about what you should be doing, figure out a way to test it, measure appropriate metrics, learn and adapt your approach.

    Everyone should be doing this – and it is built in to both of the LeanLaunchLab and Lean Canvas tools.

  • Larger organisations need to pay attention to their value network. Maurya hypothesises that this is less important for startups – a proposition that should probably be tested. However, this is where the organizational architecture question that I’ve been discussing with Greg comes in. As I discussed in the post, how you structure the value network can have a huge impact on how profitable you are. But it’s hard to change.
  • A great value network is an excellent example of an unfair advantage, which you need to succeed. In an outstanding post, Jason Cohen describes the types of things that make up an unfair advantage, and why you need one:

    To summarize: Anything that can be copied will be copied, including features, marketing copy, and pricing. Anything you read on popular blogs is also read by everyone else. You don’t have an “edge” just because you’re passionate, hard-working, or “lean.”

    The only real competitive advantage is that which cannot be copied and cannot be bought.

    What might these be? An impossible to replicate value network is one. Others that Cohen describes are: insider information – holding unique knowledge, single-minded, uncompromising obsession with one thing (think Apple + Design), authority, a dream team, strong relationships with existing customers.

    The interesting thing about all of those things – they take time and effort to build. This is an area where existing organisations have a huge advantage over startups.

Business models are an invaluable tool for organisations, and business model innovation is a particularly powerful form of innovation. To successfully innovate a business model, you must use the tool dynamically.

This is particularly important in larger organisations. Their business models can become stagnant for many reasons. As we’ve discussed, having an well-established value network is one of them. Using the business model approach to test the basic assumptions behind your approach is one good way to break out of this rut.

Building dynamic business models requires a hypothesis testing approach to support experimentation. And if you get it right, over time you can build an unfair advantage yourself.

Note: The conversation on the previous post obviously triggered some thoughts – Greg has written an excellent post on the topic today too, which you should check out.

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

Please note: I reserve the right to delete comments that are offensive or off-topic.

10 thoughts on “Building Dynamic Business Models

  1. Tim you are right (as usual) a Canvas is only as dynamic as it use- both in inputs that make it dynamic (and complex) and in its outcomes to focus upon.

    I think the Canvas is diverging. We have a continuous stream of advancing suggestions and experience with start ups and in the entrepreneual spaces but less in the more complex domain of established and entrenched organizations. Until the community interested in advancing BM Canvas turns its attention to this more complex space we will have a problem of deepening adoption.

    Making it more dynamic in larger organizations is a huge issue and treated in a entrepreneur mindset can onlz take this so far.

  2. Thanks Paul. As you know, this is a topic that both of us are interested and invested in – so I think we need to keep putting an effort into building knowledge in this space.

  3. Hi Tim (and Paul),

    Great article, and precisely the stuff I’m working on: change management with big corps (in my case in food&ag). I’ve used the canvas in a couple of cases, where I needed to discover basic causality between lead firm strategies and value chain impact on labour. This study, commissioned by the ILO will be out shortly. I’m going to write an announcement when it does on the business model hub, as Alex was super in helping me get started on the work.

    Also I’m applying business model thinking at my research institute, a substantial medium-sized organization, which needs to reinvent itself considerably.

    My intuitive observation from applying business model thinking in these contexts, is the purpose with which you apply the canvas matters significantly. With big corps I used it to explain changes in value chain impact before and after strategic change. The focus here is not on new ideas, or innovating, but on collecting institutional memory in the canvas with a group of key witnesses. This holds value in its’ own right, as many corporations have trouble figuring out the essence of what they are doing in the first place. This appeared to work out particularly well with large firms who are trying to understand how their core business systematically impacts their value chains, in order to use those insights to manage it.

    At “home” in the institute I work for, I see a diversity of purposes. The organization needs to decide on which direction to go, under conditions of research funding cut backs, and changing funding priorities. Some of the old products and services are simply not market proof anymore, whilst other products are promising, but don’t have a validated market yet.

    In this context I think it is highly valuable to work out the business models for the various products and services the institute has. What really helps out management to create direction, is organizing the various models according to the market type they are in (as in Steve Blanks categorization). This helps the organization to create a balance between the amount of innovation they are willing to take on versus the cash cows they want to stick to.

    In conditions of economic uncertainty this approach greatly helps diversify coping strategies. You know on what segments you hold a defensive containment/cutback policy, while on the other hand you also create a shared logic for the value propositions you want to innovate with, even in times of economic decline and uncertainty. A very concise and agile way of laying the basic structure for corporate decision making.

    Cheers and I look forward to receiving your insights!

    @bdoorn

    • Hi Bart – thanks for the very thoughtful comment.

      I fully agree that the business model concept can take a slightly different angle of approach in larger firms. I have also used it in ways that are similar to your experiences. I talk about that a bit here:

      http://timkastelle.org/blog/2012/01/three-things-you-can-do-with-a-business-model/

      The other thing that you can do in larger firms is evaluate the business model for individual sections.

      Your last point is excellent. I have used BM work as almost a form of scenario planning, which is explicitly designed to build those diversified coping strategies.

      It definitely sounds to me as though you’re doing some excellent work!

  4. You know what? People have been talking about this loong time, saying the saaaaaaaaaaame looooooong story about BM’s. This post is way toooooooo long. It is truth, but I am getting really afraid about BMI becoming this decade’s worst buzz word after innovation itself.
    Do you think the biggest hit of Alex Osterwalder is that his little rectangle with 9 boxes makes people believe they are more intelligent than they actually are? or better managers? I really do. Which I have to admire from him. Big time! [You have to give people what they want no? "jobs to be done" -OH MY GOD an other BUZZ PHRASE since 2005 that ONLY NOW everybody who considers an innovator pronounces]! BM Canvas is good, it gives different people from an organisation a common language to communicate, but is just an oasis effect. It helps, sure, but is just the 1st little step of a way bigger journey when trying to disrupt the industry or to be innovative (really innovative).
    Just saying! -Finally I dared- I bought the book as well though :-) 3 years ago. I wasn’t expecting it to explode so later on. But I do Like this website, if you don’t block I’ll see you around guys. Congrats

    • Thanks for stopping by and thanks for the comment Cesar.

      You raise some interesting points. I don’t worry too much about buzzwords, as long as the concepts are useful. I’m not sure if models like this make people think they’re smarter, or if they just make people more comfortable. In my classes, I notice that people just love models. They don’t always use them well, but they love having them. I’m still not sure why. Maybe you’re right, maybe they just make people feel smarter…

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