Business Model Framework: A Framework for Innovation Success

Business model frameworks are tools businesses use to investigate their overall business plan. In our quickly-expanding technological world, a regular review of your business framework ensures that you never miss an opportunity for innovation.

One way to think about business model frameworks is as a truth serum. Completing a framework pushes us to consider all of our business processes in an honest manner. In fact, we’ve found that business management often balks at this strategy for innovation because it’s so effective at revealing assumptions that were wrong and decisions that aren’t paying off the way they “should have.”

Your business strategy is only effective, however, if it can withstand the intense scrutiny that accompanies business model work. If managers are truly interested in the future success of the businesses they lead–and not stroking or protecting their own egos–they’ll welcome the opportunity to unpack the building blocks of the how their business serves their customers’ needs.

What is a Business Model?

A Business Model defines the key aspects of your business, including your Value Proposition, how you create and deliver that value, and the resulting costs and benefits. In essence, it is the Who, What, How, and Why of your business.

When you design a Business Model, it is useful to lay out the assumptions or hypotheses that animate your business in a structured way. A Business Model Canvas helps you to do just that. The canvas helps you easily understand your current Business Model, design a new one, see if you have missed, anything important, and compare your model to others.

Related: The Business Model Canvas – Free Template and Guide

Different Types of Business Models

What types of business models are there actually?

That’s a more complicated question than it first seems. In fact, if you Google that phrase, you’ll find a pretty broad variety of answers, all based around the business in question’s key activities and key partners as well as how the customer experiences the business’s value proposition.

Related:

1. How to Write a Value Proposition Template? – Our Full Guide With Examples
2. The Value Proposition Canvas: The Beating Heart of the Business Model Canvas

Generally speaking, when we think about the types of business models companies can utilize, we want to consider the organizational structure and strategic goals of the company, along with its profit formula; in other words, what is the business built to do, how will it do it, and how are they going to get paid enough so they can keep doing it (and keep key stakeholders happy)?

The core components of every business focus on the customer value proposition and how customers will benefit from your products and services. All the marketing money in the world amounts to nothing if you can’t convince customers that their lives will improve through your value propositions.

But not to beat around the bush, at Digital Leadership, we recognize the following business model frameworks as particularly successful:

• The Retailer model
• The Manufacturer model
• The fee-for-service model
• The Subscription model
• The Product-as-a-service model
• The Franchise model
• The Distribution model

and, thanks to innovations in technology and shifting customer preferences:

• The Advertising or affiliate marketing model
• The Freemium model

Each of these approaches to business necessitates a different organizational structure and varied value propositions. We’ll have more to say about each of these business model frameworks in later articles. For now, it’s best to just recognize they exist and understand that business model innovation most often builds on existing business architecture rather than inventing something entirely new.

The Business Model Canvas: The Centerpiece of the Business Model

Our Extended Business Model Canvas is an iterated canvas based on the original Business Model Canvas created by Alexander Osterwalder and popularized by the Lean Startup movement. The Business Model Canvas has become the preferred tool for both start-ups and corporations, since it allows a team to easily understand, discuss, and evaluate a Business Model, as well as to rapidly design or redesign a new one. It is attractive because it condenses years of business school knowledge and management consulting practice into a single page (with some straightforward questions to help you fill in each section).

Business Model Template Building Blocks and Detailed Business Models

While some experts conceptualize business model frameworks in terms of nine building blocks, we believe the basic Business Model Template is structured in six distinct sections, with subdivisions helping to clarify some of them:

(1) Value Model: At the center of the canvas you find the Value Model. The Value Model is first of all defined by the Value Proposition(s) you offer. The Value Model also covers the supporting Product System, i.e., the complementary products and services which you offer in support of your core product. Think about accessories, related services and guarantees, and whatever allows you to up- and cross-sell.

Related:

1. How to Write a Value Proposition Template? – Our Full Guide With Examples
2. The Value Proposition Canvas: The Beating Heart of the Business Model Canvas

(2) Service Model: Below the Value Model, you find the Service Model. Most Value Propositions do not stand on their own—they are supported by a number of (increasingly digital) services. A Service Model defines the differentiating, core and supporting services delivered by an organization. If we consider Apple, for example, we can see how they differentiated through their Service Model, for example, developing a new way of connecting hardware with software; tailoring their in-store experience with the “Genius bar”; and seamlessly integrating Mac, iPhone, iPad, iCloud and Siri.. Clearly, these services go far beyond a mere hardware and a software offering.

When working on your Service Model, think about your service strategy and your core competitive and differentiating services. Think about the explicit customer segments you serve. Consider, too, Service-Level Agreements, service channels, and possible self-service.

(3) Experience Model: The Experience Model defines the ways in which your customers experience your Value and Service Models. It is wise not to leave this to chance; experience often generates the bulk of the value, whether due to convenience (Netflix) or luxury (Rolex). The Experience Model covers your brand, customer relationships, customer engagement and marketing.

• Brand: What is your brand architecture? How do you position yourself? How do you implement your brand experience across complimentary brands and touchpoints?
• Customer Relationships: What type of customer relationship do you have? Think about options such as self-service, personal assistance, communities or Single Point of Contact.
• Customer Engagement: How can you increase customer engagement? Think about data- based personalization, creating rewards for engagement, or collaborating with your customers to co-create an experience.
• Channels: Do you use traditional marketing channels? How can you think outside the box? Consider creating context-specific, go-direct or on-demand offerings.

Related:

• What is Customer Relationships in the Business Model Canvas?
• Distribution Channels in the Business Model Canvas

(4) Operating Model: On the left side of the canvas, you find the Operating Model, which essentially summarizes how you create value. Identify the key pillars that underpin our Value and Services Model.

• Value Chain(s): Initially, you will list your main Value Creation process. As you progress, you can add additional Value Chains to cover any additional products, services or related products that jointly deliver your Value Proposition(s). It may be helpful to differentiate between in- house and third-party activities. Keep in mind, however, that more chains will mean more complexity, which may clutter up the bird’s eye view of your Business Model.
• Key Resources: Identify and list your Key Resources, which can be categorized into physical, financial, intellectual property and unique people skill sets. Particularly focus on the core and differentiating strengths or capabilities that you may be able to leverage.
• Key Partners: In an interconnected world, leveraging relationships with ecosystem partners has become increasingly important because it allows you to focus on your relative strengths. Think about the four different types of partnerships, including strategic alliances between non-competitors, coopetition (strategic partnerships between competitors), joint ventures to develop new businesses, and buyer-supplier relationships to assure reliable supplies.

Related:

• The UNITE Operating Model Canvas: Bridging the Strategy-Execution Gap
• Key Partners Building Block of the Business Model Canvas
• Key Resources Building Block in Business Model Canvas
• Key Activities – Value Chain Building Block in Business Model Canvas

(5) Cost Model: Your operations drive your efforts and thus costs. Once you understand your Value Chains, Key Resources and Key Partners, it should be relatively easy to identify the key cost drivers and potential Opportunity Spaces for innovation. For any Business Model, managing costs is critical, but some Business Models are designed entirely around low-cost structures, such as “no frills” airlines. What role do costs play in your Business Model? Are you seeking to simply optimize them, or could they play a more differentiating role?

Related: Cost Structure in the Business Model Canvas

(6) Revenue Model: Revenue Streams outline how you earn money. What price is each of your Customer Segments truly willing to pay? Identify each possible Revenue Stream per Customer Segment. Think hard about the possible pricing mechanisms per Revenue Stream. Surprisingly, pricing can often be a source of differentiation! Pricing mechanisms can include auctioning, bargaining, fixed-list prices, market- or volume-dependent prices, or yield management. A Business Model can also involve transactional revenues resulting from one-time customer payments (e.g., a sale) or recurring payments (e.g., a subscription). In the context of the Revenue Model, think also about any other benefits you may be getting. Not all value is monetary!

Related Topics:

1. Key Activities – Value Chain Building Block in Business Model Canvas
2. Key Resources Building Block in Business Model Canvas
3. Key Partners Building Block of the Business Model Canvas
4. Distribution Channels in the Business Model Canvas
5. Revenue Streams in Business Model Canvas
6. What is Customer Segments in you Business Model Canvas?
7. What is Customer Relationships in the Business Model Canvas?
8. Cost Structure in the Business Model Canvas

The UNITE Business Model Framework

The core Business Model Canvas describes how an organization creates, delivers, and captures value. But a Business Model does not exist in a bubble; it operates in a wider context. This is what the eXtended Business Model Canvas allows you to see. It contextualizes an organization’s Business Model by outlining its underlying drivers, the customers and their needs, and the team and their structures, values ,and culture.

Last but not least, the extended Business Model Canvas helps you better understand and augment your Unfair Advantage, which is admittedly not part of a Business Model, but is highly useful to help you enhance your competitive advantage.

The Business Model Canvas Package

We have prepared a full Business Model Canvas as an OpenSource Package for you to use. The download contains:

1. Business Model Canvas (blank and pre-filled with guiding questions)
2. eXtended Business Model Canvas (blank and pre-filled with guiding questions)
3. Definitions and instructions including suggested fill order and risk iteration path
4. Workshop instructions

Download Here

Business Model Innovation

Let’s assume you have completed a first Business Model template. It’s pretty likely not a winner. Just like your product, it needs to be iterated and refined. Use Business Model Innovation (BMI) practices to work towards a better Business Model. Start with your completed Business Model Canvas. Then take one part of the Business Model (for example, your channels) and iterate that single component. Consider which other channels would help you get in touch with the target group: a newsletter? App notifications? Physical meetups? Free location-based offers? Test these ideas on your target group.

With every iteration of this one component, reassess whether you have made progress. And remember to make sure that your Value Proposition and Value Creation setups leverage at least some key assets and capabilities of your parent organization.

Because every project is different, it can be hard to say how many iterations are needed to get to a place where you are ready to start on an MVP. If you started (as we hope you have) with a thorough understanding of your customers’ Jobs to be Done(Stream A), we would recommend that you iterate at least once through your Value Proposition(Stream B) and Business Model (Stream C). It takes time to get all aspects of a Business Model and offering optimally configured to achieve “fit” between your customer, your product and your Business Model.

Don’t forget to get in front of customers again! As you make progress with your Value Proposition and Business Model, go out and learn what potential customers have to say. Or you can even invite a small group into your space to discuss problems, solutions and hypotheses. Based on that feedback, keep iterating both sides of the business. Shorter cycles are better. Go out at least twice to meet with real customers concerning both the Value Proposition and the Business Model.

The solutions that are still in the loop after several weeks of prototyping, customer validation, learning and iteration should now be validated at least in a qualitative way from both a product and business perspective.

Business Model Patterns

Researchers from the University of St. Gallen found out that over 90% of all Business Model Innovations are recombinations of previously existing concepts, ideas or entire Business Models. This means that most Business Models are not created by business geniuses but are strategically assembled based on existing patterns. These patterns provide the blueprints you need to revolutionize your business and drive powerful change. Your competitive advantage builds from innovation in how you deliver specific customer value and engage new customers with new products and new services.

Related: Business Model Innovation – How to Innovate your Business Model?

Working with Business Models Patterns will allow you to develop new combinations in a structured manner. First, the process will help you to break with your dominant industry logic. Then, you can adapt the pattern to your company’s specific context and so create an innovative variant. Your own ideas and creativity are as essential at this point as challenging your Business Model against other patterns.

The most important question to ask is,
“How will adopting pattern X in my company change my Business Model?”

Critics of this approach may then ask, but where does the beauty and creativity of innovation then lie? Isn’t this simply producing copies? The innovation lies in the understanding, translation, recombination, and transfer of successful patterns to your own industry and challenges. You may end up with the same result without using a system such as the one we present, but then you are leaving a lot up to luck.

Leading neuroscientists and neuroeconomics, such as Gregory S. Berns, have argued in favor of such a systematic approach. Berns contends that to get a different perspective on an issue, we need to confront ideas that we have never considered before. Pushing our brains to re-categorize information enables us to break free from our habitual patterns of thought and ultimately begin to develop entirely new ideas.

Finding a successful business model

To assist you in the journey of adapting patterns and creating your own innovative Business Model, we have assembled a framework of the most common patterns used in Business Model Innovation and mapped it to the Business Model Canvas.

If you look at Amazon, Netflix, and Apple, you will see that their Business Models utilize many of the patterns in our table. What makes their Business Models unique, innovative and thus defensible, is the number and combination of the patterns used. The more patterns you can get to work together, the more innovative and successful you will be.

As you review each aspect of your Business Model Canvas, think about the patterns and combinations of patterns that can help you gain a competitive advantage. Remember to also experiment with patterns that are not typical in your industry, even if this may be uncomfortable at first. It may seem like you are just jumping into a void, but it will be rewarding once you go through a few iterations and begin to see the potential of the new patterns you are assembling.

Related: Business Model Innovation – How to Innovate your Business Model?

Closing Thoughts

Working with the Business Model Innovation Patterns in conjunction with your Business Model Canvas may lead to a very interesting question: Now that we have designed our new Business Model, what if we could scale exponentially?

Not all Business Models can be scaled exponentially, but certainly, almost all Business Models contain factors that will limit or promote the organization’s inherent growth potential. Our focus should be to maximize the growth potential of a Business Model.

Digital Leadership welcomes the opportunity to work with you to build your business model framework. We’re excited by your business capabilities: are you ready to move toward innovation?

We think you are. Let us prove it to you. Click on the Contact Us link and let’s start a conversation!