10.8.1 Purpose
A business model canvas describes how an enterprise creates, delivers, and captures value for and from its customers.
10.8.2 Description
A business model canvas is comprised of nine building blocks that describe how an organization intends to deliver value:
- Key Partnerships,
- Key Activities,
- Key Resources,
- Value Proposition,
- Customer Relationships,
- Channels,
- Customer Segments,
- Cost Structure, and
- Revenue Streams.
These building blocks are arranged on a business canvas that shows the relationship between the organization’s operations, finance, customers, and offerings. The business model canvas also serves as a blueprint for implementing a strategy.
A business model canvas can be used as a diagnostic and planning tool regarding strategy and initiatives. As a diagnostic tool, the various elements of the canvas are used as a lens into the current state of the business, especially with regards to the relative amounts of energy, time, and resources the organization is currently investing in various areas. As a planning and monitoring tool, the canvas can be used as a guideline and framework for understanding inter-dependencies and priorities among groups and initiatives.
A business model canvas allows for the mapping of programs, projects, and other initiatives (such as recruitment or talent retention) to the strategy of the enterprise. In this capacity, the canvas can be used to view where the enterprise is investing, where a particular initiative fits, and any related initiatives.
A business model canvas can also be used to demonstrate where the efforts of various departments and work groups fit and align to the overall strategy of the enterprise.
.1 Elements
Key Partnerships
Key partnerships frequently involve some degree of sharing of proprietary information, including technologies. An effective key partnership can, in some cases, lead to more formalized relationships such as mergers and acquisitions.
The benefits in engaging in key partnerships include:
- Optimization and economy,
- reduction of risk and uncertainty,
- acquisition of particular resources and activities, and
- lack of internal capabilities.
Key Activities
Key activities are those that are critical to the creation, delivery, and maintenance of value, as well as other activities that support the operation of the enterprise.
Key activities can be classified as:
- Value-add: characteristics, features, and business activities for which the customer is willing to pay.
- Non-value-add: aspects and activities for which the customer is not willing to pay.
- Business non-value-add: characteristics that must be included in the offering, activities performed to meet regulatory and other needs, or costs associated with doing business, for which the customer is not willing to pay.
Key Resources
Resources are the assets needed to execute a business model. Resources may be different based on the business model.
Resources can be classified as:
- Physical: applications, locations, and machines.
- Financial: what is needed to fund a business model, such as cash and lines of credit.
- Intellectual: any proprietary aspects that enable a business model to thrive, such as knowledge, patents and copyrights, customer databases, and branding.
- Human: the people needed to execute a particular business model.
Value Proposition
A value proposition represents what a customer is willing to exchange for having their needs met. The proposition may consist of a single product or service, or may be comprised of a set of goods and services that are bundled together to address the needs of a customer or customer segment to help them solve their problem.
Customer Relationships
In general, customer relationships are classified as customer acquisition and customer retention. The methods used in establishing and maintaining customer relationships vary depending on the level of interaction desired and the method of communication. For example, some relationships can be highly personalized, while others are automated and promote a self-serve approach. The relationships can also be formal or informal. Organizations interact with their customers in different ways depending on the relationship they want to establish and maintain.
Channels
Channels are the different ways an enterprise interacts with and delivers value to its customers. Some channels are very communication-oriented (for example, marketing channel), and some are delivery-oriented (for example, distribution channel). Other examples include sales channels and partnering channels.
Enterprises use channels to:
- raise awareness about their offerings,
- help customers evaluate the value proposition,
- allow customers to purchase a good or service,
- help the enterprise deliver on the value proposition, and
- provide support.
Understanding channels involves identifying the processes, procedures, technologies, inputs, and outputs (and their current impact), as well as understanding the relationship of the various channels to the strategies of the organization.
Customer Segments
Customer segments group customers with common needs and attributes so that the enterprise can more effectively and efficiently address the needs of each segment.
An organization within an enterprise may consider defining and targeting distinct customer segments based on:
- different needs for each segment,
- varying profitability between segments,
- different distribution channels, and
- formation and maintenance of customer relationships.
Cost Structure
Every entity, product, or activity within an enterprise has an associated cost. Enterprises seek to reduce, minimize, or eliminate costs wherever possible. Reducing costs may increase the profitability of an organization and allow those funds to be used in other ways to create value for the organization and for customers. Therefore, it is important to understand the type of business models, the differences in the types of costs and their impact, and where the enterprise is focusing its efforts to reduce costs.
Revenue Streams
A revenue stream is a way or method by which revenue comes into an enterprise from each customer segment in exchange for the realization of a value proposition. There are two basic ways revenue is generated for an enterprise: revenue resulting from a one-time purchase of a good or service and recurring revenue from periodic payments for a good, service, or ongoing support.
Some types of revenue streams include:
- Licensing or Subscription fees: the customer pays for the right to access a particular asset, either as a one-time fee or as a recurring cost.
- Transaction or Usage fees: the customer pays each time they use a good or service.
- Sales: the customer is granted ownership rights to a specific product.
- Lending, Renting, or Leasing: the customer has temporary rights to use an asset.
.2 Usage Considerations
Strengths
- It is a widely used and effective framework that can be used to understand and optimize business models.
- It is simple to use and easy to understand.
Limitations
- Does not account for alternative measures of value such as social and environmental impacts.
- The primary focus on value propositions does not provide a holistic insight for business strategy.
- Does not include the strategic purpose of the enterprise within the canvas.
