A BUSINESS MODEL CANVAS

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By Kelvin Chungu

THOMAS Jefferson, the third President of the United States was quoted as saying “I find that the harder I work, the more luck I seem to have.” Perhaps in today’s world, he would have refined that quote to read “I find that the harder I work with the right tools, the more luck I seem to have.”

One of the cardinal challenges in modern business management is about how to implement business strategies and about the tools available for that.

Alex Osterwalder and Professor Yves Pigneur

That is why, the tool developed by Alex Osterwalder and Professor Yves Pigneur, at the University of Lausanne, Switzerland, the Business Model Canvas is essential for today’s businesses.

It is a simple concept of a business designed to make it easy to understand a company or business’s value proposition and facilitates the answers to certain key questions about a business such as; 1) what is our competitive advantage over our competitors? 2) What is our fundamental unique capability or the unique benefits of doing business with our company?

This tool enables the understanding of an entity’s value creation and makes it easy to describe an entity’s core strategy to generate economic value, ultimately in the form of revenue. There are a number of ways this business model canvas comes through;

Canvas

First, the Canvas enables the unmasking of the value proposition embedded in a product in terms of its use-value – that is the benefits that a product/service user will gain from the using the product.

That is that it facilitates an understanding of how the transfer value can be linked to the price at which a potential user would be agreeable to pay to have the benefits that are promised. In other word, the product concept.

The advantage of knowing a product concept is that it facilitates an understanding of the industry and the market for the business.

Second, the Canvas enables the focus on customers to be at the centre of the analysis. It is designed to make it easy to understand who the business targets as customers and how products are delivered to them and how it establishes relationships with them.

The Canvas assist with realigning the focus to what customer’s desire/need/want and what they are ready to accept and not on the structures.  In other words, knowing how the customers want to be serviced, supported and involved creates a valuable relationship to the business and the customer.

To fulfill the needs of customers, there is an inherent need to understand the distinct customer segments that the business services, so that a business model is designed around a strong understanding of specific customer needs in each segment.

Customer segments

Alex Osterwalder and his Professor Yves Pigneur suggested that Customer segments can be identified by their requirements, by how distinct an offer can be made to them, by the type of different distribution channels that a business will use to service those selected segments efficiently, by the type of relationships needed to effectively service the segment and by the costs the business is willing to incur to establish and maintain those relationships and by the customer’s willingness to pay for a different segmented proposition.

Thirdly, the Canvas model expresses the systems identified as key activities, key resources (people and/or others), and key partners in terms so that they can be designed to assist in efficiently realizing the value inherent in the product/service. It focuses on identifying what the business model requires.

Value proposition

The focus in terms of resources is about what a business will need to create and offer a value proposition, reach markets, maintain relationships with customer segments, and earn revenues, answering a question about what those resources are, that the business value propositions requires, that will sustain the customer relationship and generate the required revenue streams.

The focus in terms of key activities is on those that the business will need to operate successfully, specifically those activities that create and offer a value proposition, reach markets, maintain customer relationships, and earn revenues.

The focus on key activities is around those that are necessary to support the business value propositions in the distribution channels, customer relationship and revenue streams.

Finally, in terms of organisation, partnerships can be formed to drive the business model, reduce risk or acquire resources. These can be strategic alliances between non-competitors or between competitors. It could also be strategic alliances to develop new businesses. In this case the questions becomes, what those key business partners are, what are the business needs from the key partners and what are they needed to do.

The Canvas model also has a focus on financial consideration divided into the revenue streams and cost structure. The revenue streams represent what a business must ask of itself for each of the segments created, it needs ask the value that a customer segment is able and willing to pay for.

If the question can be answered, it can unlock how many revenue streams can be generated from each customer segment. One important consideration is that each revenue stream could have different pricing mechanisms which could be market dependent, volume dependent etc.

Revenue streams

The Canvas model also defines two types of revenue streams which can involve transaction revenues resulting from one-time customer payments or recurring revenues resulting from ongoing payments to either deliver a value proposition to customers or provide post-purchase customer support.

The other important financial consideration is the costs incurred while creating, delivering value, maintaining customer relationships and generating revenue.

It is easy to calculate and determine the relevant costs when key resources, key activities and key partnerships are identified. The question to answer around cost is what are those important costs inherent in our business model? Which key resources and activities are most expensive?

In a 2008, in a Harvard Business Review Article ‘Reinventing Your Business Model, – Johnson, Christensen, Kagermann (2008)’ wrote;  “Successful companies already operate according to a business model that can be broken down into four elements; a customer value proposition that fulfils an important job for the customer in a better way than competitors offerings do; a profit formula that lays out how the company makes money delivering the value proposition; and the key resources and key processes needed to deliver that proposition.” These elements as described earlier are necessary considerations in any business enterprise and the Canvas model simplifies a way to a look at this

A canvas business model distills the value proposition in a business and ensures that the conversation at those executive management committees centers on creating, delivering value, maintaining customer relationships and generating revenue.

About the author:

Kelvin Chungu is a Partner at Nolands Zambia. He is contactable on kelvinc@nolands.co.zm +260976-377484.

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