The Business Model Canvas Explained

The Business Model Canvas Explained

Have you ever wondered why are there so many canvases out there? 

It seems like every consultant or boutique agency in the innovation space has at least one. 

Well, we can blame that on the success of the business model canvas.

The bad boy that started it all. 

In the ancient 2000s Alexander Osterwalder published his doctoral thesis The Business Model Ontology: A Proposition In A Design Science Approach in which he outlined most common elements of the business model, and proposed a way to map them relationally. 

Then he built a community around, ultimately leading to the book Business Model Generation, and the canvas as we know it today.

So, what is a business model?

Defining a business model

In the simplest words, a business model describes the logic of how an organization creates, delivers, and captures value. 

Clayton Christensen et al., assert that business model is made up of four elements: 

  1. a value proposition for customers; 
  2. resources, such as people, money, and technology; 
  3. the processes that the organization uses to convert inputs to finished products or services; and 
  4. the profit formula that dictates the margins, asset velocity, and scale required to achieve an attractive return.

Business model canvas has all four elements, albeit structured in nine blocks: 

  1. customer segments, 
  2. value propositions, 
  3. channels, 
  4. customer relationships, 
  5. revenue streams, 
  6. key resources, 
  7. key activities, 
  8. key partnerships, and 
  9. cost structure.

Here are both definitions visualised:

But why should you map a business model? What’s the point?

When should you map a business model?

In high performing organisations innovation is one of key pillars of sustaining long term business success. (If you dare to delve into academic literature on the topic, begin here.) 

During my work and study, I’ve observed that large organisations struggle with application of innovation as a viable tactic to achieve their business and corporate agenda. 

Contemporary technology-enabled organisations like Google, Amazon, and venture capital funded Silicon Valley start-ups are lauded as innovation leaders. The mainstream narrative is to point either at technology, product, or organisational culture as a sole source of competitive advantage and as explanation to why they are performing so well. I’d argue that’s not the entire case.

Organisations’ ability to create, reconfigure, and execute their business model(s) is what I believe to be the core differentiator.

This creation and reconfiguration of business models is what we usually call business model innovation.

If you want to improve the current business model, then you should start with mapping the existing one.

If you want to create a new business model, you can start with blank slate. Since you most likely don’t live in a vacuum, you’ll need to map existing business models at some time. 

Both are the cases of business model innovation, although with varying degrees of uncertainty. 

Before you jump into mapping your business model(s), it’s worth investing some time into understanding all blocks of the business model canvas.

Business model canvas explained

Strategyzer, Osterwalder’s company, has the best materials explaining basic elements of the business model canvas. Most of them are free, so I suggest you start at the source.

You can begin with the two minute explainer video, and then read more about each block:

  1. How do I use the Customer Segments building block of the Business Model Canvas?
  2. How do I use the Value Propositions building block of the Business Model Canvas?
  3. How do I use the Channels building block of the Business Model Canvas?
  4. How do I use the Customer Relationships building block of the Business Model Canvas?
  5. How do I use the Revenue Streams building block of the Business Model Canvas?
  6. How do I use the Key Resources building block of the Business Model Canvas?
  7. How do I use the Key Activities building block of the Business Model Canvas?
  8. How do I use the Key Partnerships building block of the Business Model Canvas?
  9. How do I use the Cost Structure building block of the Business Model Canvas?

As you go through these materials I suggest you take notes and then write a one-sentence description of each block in your own words. That will help you remember it better, and will make it easier if you need to teach others, since you’ll be more authentic.

For further study I’d suggest getting the Business Model Generation book.

How to use the business model canvas

It is almost deceptively easy to use.

You need:

  • a business model canvas (printed, drawn, or taped),
  • sticky or pin notes, and
  • something to write with (markers are best).

Here are steps to use it with your team:

  • Make sure that everybody who is participating in creating a business model understands the task at hand. 
  • Show them the video and explain each block. 
  • Explain that you’ll try to describe the idea or new business model using the canvas.
  • Agree on the time and get to it. 
  • Create several canvases and discuss if they make any sense at all. 
  • Select the most promising one for further consideration.

For more detailed guides you can study following:

Remember that Osterwalder’s original intent was to use the canvas as a tool for visual inquiry into business models. 

In other words, you shouldn’t use it as a wallpaper, and accept that almost everything you put into the canvas has some degree of uncertainty. 

It is important to find the most uncertain elements and learn more about them. This is where Lean Startup style of experimentation is most useful.

May the fastest learner win!

The next webinar on the topic of business modelling is scheduled for Tuesday, 5th May 2020, 16:00 UTC/GMT+2Register here! 

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