Wednesday, February 17, 2016

Use the Business Model Canvas to Avoid Big Mistakes

The business model canvas is a core tool of the Lean LaunchPad methodology.  On one level, it’s organized common sense:  the nine categories that all ventures must address in order to succeed.  But isn’t it amazing how often entrepreneurs and product developers manage to take leave of their senses?  Rather than thinking comprehensively, they focus on one or two things that they are just positive will make all the difference, while ignoring or downplaying other factors that turn out to be fatal flaws after product launch.  Famous examples:

  • – a era venture that did a great job of building warehouses designed for a large-scale business and generating consumer awareness (the famous Sock Puppet in a Super Bowl commercial) but a terrible job in convincing consumers to buy pet food online and a cost structure that lost money on every transaction 
  • Olestra – a Procter and Gamble fat substitute that produced great-tasting, cholesterol-reducing, low calorie chips with the unfortunate side effect of causing diarrhea   
  • Edsel – a  beautifully designed, but shoddily manufactured car introduced at the start of a recession
  • Iridium – a Motorola-backed global satellite phone company, which filed for bankruptcy after burning through $5 billion to put multiple satellites into space to enable communications throughout the world, just not settings where the phone signal is blocked (like inside buildings or vehicles)

The Business Model Canvas, developed by Alex Osterwalder, enables structured consideration of all aspects of a venture.  As my colleague Kirk Froggatt puts it, the BMC forces you to think about Can We Do It (i.e. economic and operational feasibility) but Should We Do It (i.e. customer value and financial upside).  The BMC looks like this:

You can get the details from the Business Model Generation book or the Strategyzer websiteThe nine elements are:
  • Value Proposition: The collection of products and services a business offers to meet the needs of its customers
  • Customer Segments: Who the business is serving and what they need/want
  • Channels: The means by which a product or service is sold/delivered
  • Customer Relationships: To ensure the survival and success of any businesses, companies must identify the type of relationship they want to create with their customer segments
  • Key Activities: Operationally, how the product or service will be produced and delivered
  • Key Resources: Human capital, intellectual property and physical assets 
  • Partner Network: Suppliers, joint ventures, alliances - external organizations you will depend on operationally
  • Cost Structure: Operational expenses and capital expenditures
  • Revenue Streams: How a company earns money from paying customers 
As we emphasize in the MIN-Corps classes and clinics, the trick is to drill down on the right elements at the right time.  The very first consideration is value proposition design – the intersection between customer needs and your product/service offering.  The value proposition is at the core of “should we do it” – if there is no significant value, you are done. This can take a long time to get right, and you may not like what you hear during customer discovery.  It is very tempting to ignore the voice of the customer, and assume that somehow the market will appreciate you once the right people understand you better.   

The value proposition is just the beginning.  Next comes the heavy slog of the operational challenges of figuring out HOW you’ll deliver value, as well as how much it will cost and where the revenue will come from.  Manufacturing, product quality, service reliability, efficiency not only matter, but can be sources of breakthrough innovation, as Larry Keeley et al. explain in Ten Types of Innovation.   Don’t give short shrift to the less glamorous boxes in the Business Model Canvas!