UNIVERSITÀ COMMERCIALE “LUIGI BOCCONI” ‐ MILANO
Francesco Checcarelli Betti
1525708 CLEAM
THE LEAN START-‐UP: BUSINESS MODEL CANVAS
ANALYSIS AND APPLICATION.
Tutor: Professor Irene Dagnino
Francesco Checcarelli Betti
1525708 CLEAM
THE LEAN START-‐UP: BUSINESS MODEL CANVAS
ANALYSIS AND APPLICATION.
Tutor: Professor Irene Dagnino
to
those who believe in the Progress.
ABSTRACT
Innovation has always been the fuel for the progress. Everything can be innovated: the design of a product, a new process or a better way to deliver a service. Even the way a business is planned can be innovated. This thesis aims to analyze, describe and apply the most recent methodologies of strategic planning, considering theories like Customer Development and Business Model Canvas.
Divided in three parts, it starts with a particular focus on the critical aspects of developing a business plan in a start-‐up or in a new business unit and what are the methodologies to innovate the strategy planning. The second part is an in-‐depth description of the Business Model Canvas framework and the related techniques such as Customer Development.
The third part is the application of the model in a new start-‐up project where I am directly involved as partner, Augmented Reality Technology Experience (ARTE), an innovative form of artistic exhibition based on the usage of new digital creative technologies.
Innovation has always been the fuel for the progress. Everything can be innovated: the design of a product, a new process or a better way to deliver a service. Even the way a business is planned can be innovated. This thesis aims to analyze, describe and apply the most recent methodologies of strategic planning, considering theories like Customer Development and Business Model Canvas.
Divided in three parts, it starts with a particular focus on the critical aspects of developing a business plan in a start-‐up or in a new business unit and what are the methodologies to innovate the strategy planning. The second part is an in-‐depth description of the Business Model Canvas framework and the related techniques such as Customer Development.
The third part is the application of the model in a new start-‐up project where I am directly involved as partner, Augmented Reality Technology Experience (ARTE), an innovative form of artistic exhibition based on the usage of new digital creative technologies.
"Progress is impossible without change, and those who do not change their minds cannot change anything else"
(George Bernard Shaw).
1. INNOVATION THROUGH BUSINESS, THE LEAN START-‐UP METHOD
1.1 INTRODUCTION
It seems hard to reach a general definition for the word “Innovation”: with no doubt considering only technological innovation is a narrow approach. In a general view, to innovate means creating a change (in a positive way) in anything established. In the first half of the XX century, the economist Joseph Schumpeter, who contributed greatly to the study of innovation, argued that innovation is essential for the industrial change. An invention, according to him, is something purely scientific, while innovation is “making something new” in the economic system: it could be a new product, market or process. Schumpeter considers the scientific progress as exogenous to the economic system, and he does not analyze the effects of economic and social factors on scientific development, either the relations between the latter and innovation itself.
Innovation is the creative response of companies and not the simple adaptive reaction to the changing economic environment, it takes place both in small as in large enterprises, the size is neither necessary nor sufficient to drive it. Therefore, in business, innovation is the fuel to growth. The rapid advancements in transportation and communications over the past few decades, in particular Internet, have dramatically modified the concepts of key resources and comparative advantage typical of the old war.
Many important founders of nowadays greatest tech companies gave their opinion on why it is important to innovate in business. For example, when Steve Jobs said with no fear that “Innovation distinguishes between a leader and a follower ”, he wanted to remark that companies face everyday a fork, to be the leader, creating innovative businesses, or to be the followers trying to adapt to the leader’s changes. With even more direct words, Robert Noyce (Intel Co – Founder) said: “Innovation is everything. When you're on the forefront, you can see what the next innovation needs to be. When you're behind, you have to spend your energy catching up.” So, for having competitive advantage in a company, one of the necessary skills is the ability to bring innovation as a first mover or in the “best way” for the targeted market, investing resources without wasting them to catch up competitors.
1.2 WHEN THE FAILURE LEADS TO SUCCESS
Innovation becomes even more critical when it is the time to launch a new enterprise, both that it is a new tech company or an initiative within a large company, since it has always been a hit-‐or-‐miss proposition. For decades the formula which leads to success has always been the same: write a business plan, pitch it to investors to collect money, organize a team, develop the product/service and start selling it as hard as possible.
But recent researches show that most of the start-‐ups fail. Carmen Nobel, Senior Editor of HBS Working Knowledge, says in his web article “Why Companies Fail and How Their Founders Can Bounce Back” (Harvard Business School, 7 March 2011), that “the statistics are disheartening no matter how an entrepreneur defines failure”. In fact, he adds, if failure means liquidating all assets, with investors losing most or all the money they put into the company, then the failure rate for start-‐ups is 30 to 40 percent, according to Shikhar Ghosh, a senior lecturer at Harvard Business School who has held top executive positions at some eight technology-‐based start-‐ups.
If failure refers to failing to see the projected return on investment, then the failure rate is 70 to 80 percent. And if failure is defined as declaring a projection and then falling short of meeting it, then the failure rate is a whopping 90 to 95 percent. “
The reasons behind this discouraging data can be summarized in two key concepts. From one hand Ghosh explains that most start-‐ups fail due to lack of foresight, lack of wiggle room in the business plan, bad timing, or lack of funding. But from the other one, he also adds that too much funding for an unstable business model can take what would have been a small failure into a huge one.
In such a high-‐risk environment, where the probability to fail seems much higher than the one to success, an innovative approach, called “the lean start-‐up”, has been developed by the contribution and support of many relevant characters of the Silicon Valley. In particular three techniques have been realized to lead new ventures to a less-risked path. In 2005, Steve Blank, who has moved from being an entrepreneur in hi-‐tech start-‐ups to teaching entrepreneurship at U.C. Berkeley, Stanford University, Columbia University, has formalized the Customer Development methodology in his book “The Four Steps to the Epiphany”. Then, Alexander Osterwalder and Yves Pigneur have provided the Business Model Canvas, a visual framework to define a company business model. At last but not least, Eric Ries has applied the theories of the lean thinking to formalize the agile development. Before analyzing the methodologies it is important to understand what are the assumptions that have been used as driver.
1.3 THE LEAK OF THE PERFECT BUSINESS PLAN
In his article “Why the Lean Start-‐up Changes Everything” (Harvard Business Review, May 2013), Steve Blank explains that the typical approach entrepreneurs have used, due to the conventional methodologies, is first to write a business plan, a static document that describes the size of an opportunity, the problem to be solved and the solution that the new venture will provide.
It is a quite complex document with a lot of pages enriched by marketing analysis and financial forecasts from three to five years. Even if it is very useful to be presented to stakeholders and potential investors, due to its complexity and its visual nature (the “small book” format), it does not fit well to its strategic planning function. In fact, reviewing the company strategy through the business plan is rather complicated, since it is divided by all the functional areas typical of a company -‐ like marketing, operations, sales -‐ and it lacks of a visual framework, which could easily let to change parts having a general view on how those changes will modify the entire business strategy.
Blank criticize the business plan, focusing on the digital industry, for three main reasons. First, saying that “No Business Plan Survives First Contact With A Customer”, he stress the fact that typically entrepreneurs, once having raised the necessaries funds, start building and launching their product before having a real feedback from the customers they are serving, and that, too often, they learn too late that customers do not need or want many of the product features. In fact, the business plan is typically used by companies to present the existing strategies and operations to be performed, for example in the case of a line extension of a product. But in this context, customers, market and product are known. By contrast, the entrepreneur who creates a start-‐up faces a number of unknown elements. In this situation, writing a static document is not efficient in a dynamic phase, in which the primary objective is to research, through a repetition of hyp othesis and tests, the more effective business model. Second, he observes that a five-‐year financial forecast is quite an ambitious prevision for a business that does not have a track record and, even if the forecast is an useful way to understand the revenue model, it usually becomes a waste of time, since the revenue model it is not tested yet. Third, he remarks the difference between large companies and start-‐ups: while existing companies are big organizational complexes which follow a master plan, executing a business model, start-‐ups rather are looking for one. This distinction shapes the lean definition of start-‐up: “a temporary organization designed to search for a repeatable and scalable business model”.
1.4 BUSINESS PLAN VS BUSINESS MODEL
Having defined what a start-‐up is, it is necessary to focus on the key concept of business model. According to Alexander Osterwalder “a business model describes the rational of how an organization creates, delivers and captures value.” In other words it is the set of organizational and strategic solutions through the company acquires competitive advantage. Basically, a company creates value when helps its costumers doing a “critical” task, satisfying a need and/or solving a problem. The success or failure of a business strictly depends on the ability of the company to create value for its customers. So, the first activity when creating a new start-‐up, or re-designing an existing business, should be searching for a proper business model, in order to know what to do, how do to it and for which customers deliver value.
Rather than planning and researching for months “inside the building”, writing a document that explains the execution of an untested business model, the lean method suggests as a key principle that on day-‐one entrepreneurs accept to have only a series of hypothesis about their business model. This series of hypothesis need to be tested through a process called Customer Development which is going to change day-‐by-‐day the framework designed on day one. Therefore, a business model is designed to change rapidly, adapting to what is found “outside the building” in talking to customers, as Blank explains. Since it is a very dynamic element, also its representation must be done with a model that reflects this nature. The Business Model Canvas in this context is more effective than the Business Plan. First of all, what is usually explained in 30-‐40 pages is summed up in a board. In addition it is easy to change, since in the areas of the Canvas , elements are summarized. Finally, it offers an overview that allows to highlight connections and critical factors between the areas.
The business plan can be considered a good exercise to implement and refine the various parts of a business model, especially when the financial part is developed in order to plan what actions need to be implemented to make the organization profitable. However the business plan of a start-‐up does not contain real facts but assumptions, which needs to be validated through a direct comparison with the market. Indeed, the lean method consider the business plan as a “final document", which must be drawn up only after the validation of the business model. In this way, takes place its main function, the fund-raising, especially if paying attention to adapt the plan according to the audience who is going to read it (banks, business angels, venture capitalists, partners, prospective partners, etc..).
1.1 INTRODUCTION
It seems hard to reach a general definition for the word “Innovation”: with no doubt considering only technological innovation is a narrow approach. In a general view, to innovate means creating a change (in a positive way) in anything established. In the first half of the XX century, the economist Joseph Schumpeter, who contributed greatly to the study of innovation, argued that innovation is essential for the industrial change. An invention, according to him, is something purely scientific, while innovation is “making something new” in the economic system: it could be a new product, market or process. Schumpeter considers the scientific progress as exogenous to the economic system, and he does not analyze the effects of economic and social factors on scientific development, either the relations between the latter and innovation itself.
Innovation is the creative response of companies and not the simple adaptive reaction to the changing economic environment, it takes place both in small as in large enterprises, the size is neither necessary nor sufficient to drive it. Therefore, in business, innovation is the fuel to growth. The rapid advancements in transportation and communications over the past few decades, in particular Internet, have dramatically modified the concepts of key resources and comparative advantage typical of the old war.
Many important founders of nowadays greatest tech companies gave their opinion on why it is important to innovate in business. For example, when Steve Jobs said with no fear that “Innovation distinguishes between a leader and a follower ”, he wanted to remark that companies face everyday a fork, to be the leader, creating innovative businesses, or to be the followers trying to adapt to the leader’s changes. With even more direct words, Robert Noyce (Intel Co – Founder) said: “Innovation is everything. When you're on the forefront, you can see what the next innovation needs to be. When you're behind, you have to spend your energy catching up.” So, for having competitive advantage in a company, one of the necessary skills is the ability to bring innovation as a first mover or in the “best way” for the targeted market, investing resources without wasting them to catch up competitors.
1.2 WHEN THE FAILURE LEADS TO SUCCESS
Innovation becomes even more critical when it is the time to launch a new enterprise, both that it is a new tech company or an initiative within a large company, since it has always been a hit-‐or-‐miss proposition. For decades the formula which leads to success has always been the same: write a business plan, pitch it to investors to collect money, organize a team, develop the product/service and start selling it as hard as possible.
But recent researches show that most of the start-‐ups fail. Carmen Nobel, Senior Editor of HBS Working Knowledge, says in his web article “Why Companies Fail and How Their Founders Can Bounce Back” (Harvard Business School, 7 March 2011), that “the statistics are disheartening no matter how an entrepreneur defines failure”. In fact, he adds, if failure means liquidating all assets, with investors losing most or all the money they put into the company, then the failure rate for start-‐ups is 30 to 40 percent, according to Shikhar Ghosh, a senior lecturer at Harvard Business School who has held top executive positions at some eight technology-‐based start-‐ups.
If failure refers to failing to see the projected return on investment, then the failure rate is 70 to 80 percent. And if failure is defined as declaring a projection and then falling short of meeting it, then the failure rate is a whopping 90 to 95 percent. “
The reasons behind this discouraging data can be summarized in two key concepts. From one hand Ghosh explains that most start-‐ups fail due to lack of foresight, lack of wiggle room in the business plan, bad timing, or lack of funding. But from the other one, he also adds that too much funding for an unstable business model can take what would have been a small failure into a huge one.
In such a high-‐risk environment, where the probability to fail seems much higher than the one to success, an innovative approach, called “the lean start-‐up”, has been developed by the contribution and support of many relevant characters of the Silicon Valley. In particular three techniques have been realized to lead new ventures to a less-risked path. In 2005, Steve Blank, who has moved from being an entrepreneur in hi-‐tech start-‐ups to teaching entrepreneurship at U.C. Berkeley, Stanford University, Columbia University, has formalized the Customer Development methodology in his book “The Four Steps to the Epiphany”. Then, Alexander Osterwalder and Yves Pigneur have provided the Business Model Canvas, a visual framework to define a company business model. At last but not least, Eric Ries has applied the theories of the lean thinking to formalize the agile development. Before analyzing the methodologies it is important to understand what are the assumptions that have been used as driver.
1.3 THE LEAK OF THE PERFECT BUSINESS PLAN
In his article “Why the Lean Start-‐up Changes Everything” (Harvard Business Review, May 2013), Steve Blank explains that the typical approach entrepreneurs have used, due to the conventional methodologies, is first to write a business plan, a static document that describes the size of an opportunity, the problem to be solved and the solution that the new venture will provide.
It is a quite complex document with a lot of pages enriched by marketing analysis and financial forecasts from three to five years. Even if it is very useful to be presented to stakeholders and potential investors, due to its complexity and its visual nature (the “small book” format), it does not fit well to its strategic planning function. In fact, reviewing the company strategy through the business plan is rather complicated, since it is divided by all the functional areas typical of a company -‐ like marketing, operations, sales -‐ and it lacks of a visual framework, which could easily let to change parts having a general view on how those changes will modify the entire business strategy.
Blank criticize the business plan, focusing on the digital industry, for three main reasons. First, saying that “No Business Plan Survives First Contact With A Customer”, he stress the fact that typically entrepreneurs, once having raised the necessaries funds, start building and launching their product before having a real feedback from the customers they are serving, and that, too often, they learn too late that customers do not need or want many of the product features. In fact, the business plan is typically used by companies to present the existing strategies and operations to be performed, for example in the case of a line extension of a product. But in this context, customers, market and product are known. By contrast, the entrepreneur who creates a start-‐up faces a number of unknown elements. In this situation, writing a static document is not efficient in a dynamic phase, in which the primary objective is to research, through a repetition of hyp othesis and tests, the more effective business model. Second, he observes that a five-‐year financial forecast is quite an ambitious prevision for a business that does not have a track record and, even if the forecast is an useful way to understand the revenue model, it usually becomes a waste of time, since the revenue model it is not tested yet. Third, he remarks the difference between large companies and start-‐ups: while existing companies are big organizational complexes which follow a master plan, executing a business model, start-‐ups rather are looking for one. This distinction shapes the lean definition of start-‐up: “a temporary organization designed to search for a repeatable and scalable business model”.
1.4 BUSINESS PLAN VS BUSINESS MODEL
Having defined what a start-‐up is, it is necessary to focus on the key concept of business model. According to Alexander Osterwalder “a business model describes the rational of how an organization creates, delivers and captures value.” In other words it is the set of organizational and strategic solutions through the company acquires competitive advantage. Basically, a company creates value when helps its costumers doing a “critical” task, satisfying a need and/or solving a problem. The success or failure of a business strictly depends on the ability of the company to create value for its customers. So, the first activity when creating a new start-‐up, or re-designing an existing business, should be searching for a proper business model, in order to know what to do, how do to it and for which customers deliver value.
Rather than planning and researching for months “inside the building”, writing a document that explains the execution of an untested business model, the lean method suggests as a key principle that on day-‐one entrepreneurs accept to have only a series of hypothesis about their business model. This series of hypothesis need to be tested through a process called Customer Development which is going to change day-‐by-‐day the framework designed on day one. Therefore, a business model is designed to change rapidly, adapting to what is found “outside the building” in talking to customers, as Blank explains. Since it is a very dynamic element, also its representation must be done with a model that reflects this nature. The Business Model Canvas in this context is more effective than the Business Plan. First of all, what is usually explained in 30-‐40 pages is summed up in a board. In addition it is easy to change, since in the areas of the Canvas , elements are summarized. Finally, it offers an overview that allows to highlight connections and critical factors between the areas.
The business plan can be considered a good exercise to implement and refine the various parts of a business model, especially when the financial part is developed in order to plan what actions need to be implemented to make the organization profitable. However the business plan of a start-‐up does not contain real facts but assumptions, which needs to be validated through a direct comparison with the market. Indeed, the lean method consider the business plan as a “final document", which must be drawn up only after the validation of the business model. In this way, takes place its main function, the fund-raising, especially if paying attention to adapt the plan according to the audience who is going to read it (banks, business angels, venture capitalists, partners, prospective partners, etc..).
2. THE BUSINESS MODEL CANVAS
2.1 THE CANVAS
The Business Model Canvas is a strategic tool which through a visual language helps to create and develop innovative business models: it represents how a company creates, delivers and captures value.
2.1 THE CANVAS
The Business Model Canvas is a strategic tool which through a visual language helps to create and develop innovative business models: it represents how a company creates, delivers and captures value.
Figure based on OSTERWALDER A., PIGNEUR Y., Business Model Generation, Wiley & Sons, 2010 pages 18-‐19
The Business Model Canvas is a framework where is featured, through nine basic building blocks, the logic of how a company intends to be profitable. The nine blocks cover the four main areas of a business: customers, offer, infrastructure, and financial viability. The business model is like a blueprint for a strategy to be implemented through organizational structures, processes, and systems (OSTERWALDER A., PIGNEUR Y., Business Model Generation, Wiley & Sons, 2010, page 15).
The blocks are:
1. Customers Segment: the segment targeted by the company;
2. Value Proposition: which contains the products / services the company is offering, considering the problems and needs solved.
3. Channels: the contact and distribution channels with customers.
4. Customer Relationships: the relationships with customers.
5. Revenue Streams : the cash flow structure generated by the model;
6. Key Resources: the resources the company needs to operate;
7. Key Activities: the activities to make operative the company's business model;
8. Key Partnerships: the partners with whom the company will have to form alliances;
9. Cost Structure: the cost structure the company has to sustain.
The blocks are:
1. Customers Segment: the segment targeted by the company;
2. Value Proposition: which contains the products / services the company is offering, considering the problems and needs solved.
3. Channels: the contact and distribution channels with customers.
4. Customer Relationships: the relationships with customers.
5. Revenue Streams : the cash flow structure generated by the model;
6. Key Resources: the resources the company needs to operate;
7. Key Activities: the activities to make operative the company's business model;
8. Key Partnerships: the partners with whom the company will have to form alliances;
9. Cost Structure: the cost structure the company has to sustain.
2.2 CUSTOMER SEGMENTS
The Customer Segments block describes the different groups of people and / or organizations to which the company directs its value proposition. This block is essential in order to build the products / services portfolio around the specific needs of a particular customer segment. To locate the customers segments in a precise way, it is useful to categorize groups in relation to behaviors, needs and other attributes (i.e. gender, nationality, income, etc..) that people have in common. Customers can be separated also considering how they are reached through distribution channels and the types of relationships they require. Another way is to divide them by their willing to pay for different aspects of the offer. First of all, a business model may establish one or several Customer Segments that represent a large group of people or a small one.
The decision about which segments to serve and which segments to ignore is crucial and an organization has to make a conscious choice. After having selected the segments, a business model can be carefully designed around a strong understanding of specific customer needs. (OSTERWALDER A., PIGNEUR Y., Business Model Generation, Wiley & Sons, 2010 page 20 ). Defining the Customer Segments identifies the type of market where the company is going to make the positioning. If the business model does not distinguish between different customers, it is focused on a mass market. In this situation, the value proposition, distribution channels and customer relationships are fully standardized, focusing on one large group of customer with similar characteristics and needs (i.e. Coca Cola). The opposite happens when the business model targets a niche market, focusing a specific and specialized customer segment and developing the value proposition, distribution channels and customer relationships to its specific needs, as Rolex watches company does. When the business model aims to different groups of customer with similar but varying needs and problems, it plays in a segmented market -‐ adapting the value proposition to each segment – while if the customers have very different needs it plays in a diversified market.
For example, Virgin Group moved from music production to travel and mobile phones. A particular case occurs when an organization serves two or more interdependent Customer Segments, like for a newspaper company which needs both a large reader base and advertisers. In this situation the business model requires all the segments to operate.
2.3 VALUE PROPOSITION
The Value Proposition (V.P.) block indicates the products / services portfolio that represents value for a specific customer segment. When developing the V.P. entrepreneurs have to think about why customers should choose their product / service, since this section distinguishes organization uniquely, determining the success or failure of the company's business model.
An effective V.P. creates value through a distinct mix of elements catering to that segment’s needs (OSTERWALDER A., PIGNEUR Y., Business Model Generation, Wiley & Sons, 2010 p. 23). First it is relevant to analyze in which way the V.P delivers value: it could be innovative, representing a new or disruptive offer focusing on elements like design, customer experience or bringing new technologies to create a new industry -‐ like the launch of cell phones did in the past decade – or be similar to already existing market offers, adding features and attributes or improving those already on the market, like a lower price, better performance, higher speed of service and more. Second it is important to test customer segments needs and see if the V.P. is matching with them. The Business Model Canvas offers an almost mandatory, pushing anyone who wants to create his own business model to start right from the analysis of the Customer Segments block in order to create a proper V. P..
The Customer Segments block describes the different groups of people and / or organizations to which the company directs its value proposition. This block is essential in order to build the products / services portfolio around the specific needs of a particular customer segment. To locate the customers segments in a precise way, it is useful to categorize groups in relation to behaviors, needs and other attributes (i.e. gender, nationality, income, etc..) that people have in common. Customers can be separated also considering how they are reached through distribution channels and the types of relationships they require. Another way is to divide them by their willing to pay for different aspects of the offer. First of all, a business model may establish one or several Customer Segments that represent a large group of people or a small one.
The decision about which segments to serve and which segments to ignore is crucial and an organization has to make a conscious choice. After having selected the segments, a business model can be carefully designed around a strong understanding of specific customer needs. (OSTERWALDER A., PIGNEUR Y., Business Model Generation, Wiley & Sons, 2010 page 20 ). Defining the Customer Segments identifies the type of market where the company is going to make the positioning. If the business model does not distinguish between different customers, it is focused on a mass market. In this situation, the value proposition, distribution channels and customer relationships are fully standardized, focusing on one large group of customer with similar characteristics and needs (i.e. Coca Cola). The opposite happens when the business model targets a niche market, focusing a specific and specialized customer segment and developing the value proposition, distribution channels and customer relationships to its specific needs, as Rolex watches company does. When the business model aims to different groups of customer with similar but varying needs and problems, it plays in a segmented market -‐ adapting the value proposition to each segment – while if the customers have very different needs it plays in a diversified market.
For example, Virgin Group moved from music production to travel and mobile phones. A particular case occurs when an organization serves two or more interdependent Customer Segments, like for a newspaper company which needs both a large reader base and advertisers. In this situation the business model requires all the segments to operate.
2.3 VALUE PROPOSITION
The Value Proposition (V.P.) block indicates the products / services portfolio that represents value for a specific customer segment. When developing the V.P. entrepreneurs have to think about why customers should choose their product / service, since this section distinguishes organization uniquely, determining the success or failure of the company's business model.
An effective V.P. creates value through a distinct mix of elements catering to that segment’s needs (OSTERWALDER A., PIGNEUR Y., Business Model Generation, Wiley & Sons, 2010 p. 23). First it is relevant to analyze in which way the V.P delivers value: it could be innovative, representing a new or disruptive offer focusing on elements like design, customer experience or bringing new technologies to create a new industry -‐ like the launch of cell phones did in the past decade – or be similar to already existing market offers, adding features and attributes or improving those already on the market, like a lower price, better performance, higher speed of service and more. Second it is important to test customer segments needs and see if the V.P. is matching with them. The Business Model Canvas offers an almost mandatory, pushing anyone who wants to create his own business model to start right from the analysis of the Customer Segments block in order to create a proper V. P..
2.4 CHANNELS
The Channels block describes how the company reaches a certain customer segment to deliver its value proposition. Channels are the points of contact with the customers segments, covering five different phases:
1. Create awareness among customer due to the products / services offered.
2. Help customers evaluate the value proposition
3. Allow customer segments to buy the products / services
4. Deliver the value proposition.
5. Support customers in the after sales.
The Channels block describes how the company reaches a certain customer segment to deliver its value proposition. Channels are the points of contact with the customers segments, covering five different phases:
1. Create awareness among customer due to the products / services offered.
2. Help customers evaluate the value proposition
3. Allow customer segments to buy the products / services
4. Deliver the value proposition.
5. Support customers in the after sales.
OSTERWALDER A., PIGNEUR Y., Business Model Generation, Wiley & Sons, 2010 page 27
Channels can be owned by the company itself, being direct channels (sales force and web-‐site) or outsourced (such as partners stores, wholesalers and web channels owned by partners). If the business model is based on direct channels, the costs incurred by the company will be clearly higher, but in this case it will also have higher margins due to greater effectiveness of the channel itself. Indirect channels, on the contrary, allow the company to support lower costs and to have a capillary diffusion and faster growth of the brand. Each channel must be managed in relation to the others by taking into account the customers to whom it is addressed.
2.5 CUSTOMER RELATONSHIPS
The Customer Relationships block describes the type of relationship the company establishes with the different customer segments. This section outlines the ways in which the organization acquires, retents and boosts sales due the relationships between customers. The different types of relationships an organization decides to have with customer segments support and structure even better the customer experience. The customers “community” helps the company to have an awareness of needs of its targeted customers and spread the various initiatives from time to time, about products / services it provides, and new value propositions that wants to bring to the market.
The Business Model Canvas identifies several ways in which companies can decide (in reference to their business model) to relate to their clients. It can be a direct relationship like group assistance, with employees managing a whole customer segment and personal assistance, with a very intimate relationship (i.e. financial advisors) or an indirect one, like self-service, which allows customers to get everything they need by theirself, and web communities based on social networks. An interesting kind of relationship is the co-creation, where the client actively participates in making the choices that modify the company’s products (for example the brand Activia gave the opportunity to customers on the web, through Facebook, to choose the new flavors to put into production.) At the operational level, it is therefore strategically important to understand how to integrate the different types of relationships with the business model that is being built and what kind of relationship is more functional for a specific customer segment. This allows both to make appropriate choices, either to harmonize the flow of the process.
2.6 REVENUE STREAMS
The Revenue Stream block represents the revenues a company gets by the sale of products / services from each customer segment. The variables to be taken into account in the composition of this block are the price and the payment methods, both fundamental to adjust cash flows and make a business model sustainable. Pricing mechanisms depends on the decision between fixed or dynamic prices. In the first case, prices are based on static variables like volume, characteristics of a customer segment, features of the products, while, in the second case, prices change based on market conditions.
Price is an important element in building a business model but, as mentioned earlier, is certainly not the only variable that makes a model sustainable: the payment method completes the process of business design and gives to R.S. block the ability to provide important information about how cash is generated.
2.5 CUSTOMER RELATONSHIPS
The Customer Relationships block describes the type of relationship the company establishes with the different customer segments. This section outlines the ways in which the organization acquires, retents and boosts sales due the relationships between customers. The different types of relationships an organization decides to have with customer segments support and structure even better the customer experience. The customers “community” helps the company to have an awareness of needs of its targeted customers and spread the various initiatives from time to time, about products / services it provides, and new value propositions that wants to bring to the market.
The Business Model Canvas identifies several ways in which companies can decide (in reference to their business model) to relate to their clients. It can be a direct relationship like group assistance, with employees managing a whole customer segment and personal assistance, with a very intimate relationship (i.e. financial advisors) or an indirect one, like self-service, which allows customers to get everything they need by theirself, and web communities based on social networks. An interesting kind of relationship is the co-creation, where the client actively participates in making the choices that modify the company’s products (for example the brand Activia gave the opportunity to customers on the web, through Facebook, to choose the new flavors to put into production.) At the operational level, it is therefore strategically important to understand how to integrate the different types of relationships with the business model that is being built and what kind of relationship is more functional for a specific customer segment. This allows both to make appropriate choices, either to harmonize the flow of the process.
2.6 REVENUE STREAMS
The Revenue Stream block represents the revenues a company gets by the sale of products / services from each customer segment. The variables to be taken into account in the composition of this block are the price and the payment methods, both fundamental to adjust cash flows and make a business model sustainable. Pricing mechanisms depends on the decision between fixed or dynamic prices. In the first case, prices are based on static variables like volume, characteristics of a customer segment, features of the products, while, in the second case, prices change based on market conditions.
Price is an important element in building a business model but, as mentioned earlier, is certainly not the only variable that makes a model sustainable: the payment method completes the process of business design and gives to R.S. block the ability to provide important information about how cash is generated.
OSTERWALDER A., PIGNEUR Y., Business Model Generation, Wiley & Sons, 2010 page 33
In fact, in the first days of a new venture it is likely to have the R.S. block without real economic values: they will be inserted through the collection of data coming from any market analysis in progress. There are different methods of payment that generate different revenue streams. One of the sources of income is definitely the assets sale. This is the best known source of income, and also the one that is best associated with a certain kind of products such as cars, books, clothing, etc... Another source of revenue comes from the use of a particular service paying a usage fee. Telephone companies generate this kind of revenue stream when allow customers to pay a certain amount based on the actual minutes of talk time. The cash flow can be also generated by a subscription fee, selling continuous access to a service, as gyms do. A company may decide to use a patent or intellectual property while maintaining the property and generating revenues by licenses or lease assets for a specified time (i.e. car rental). In the process of business design of a startup it is important to reflect on each of these components: what are customers paying for, how are the payment methods and how much is the price.
2.7 KEY RESOURCES
The Key Resources block encompasses strategic assets that a company must have to create and sustain its business model. Each activity is characterized by key resources which can be physical, intellectual, financial and human. Physical activities include tangible property such stores, equipment, technologies, machines and everything that physically a company needs to have to produce or sell a particular product / service. Intellectual property rights include the know-‐how of a company, patents, trademarks, copyrights, projects developed, the partnership and the customer database. Human resources are important in every business model, especially if it is in the services industry, for example people are a core resource in a consulting firm. Financial resources include details of financial assets such as lines of credit, cash or a stock option pool for hiring key employees.
2.8 KEY ACTIVITIES
The Key Activities block describes the strategic activities that must be performed to create the Value Proposition, reach customers, maintain relationships with them and generate revenue. In other words, this block determines which are the most important processes the company has to develop in order to operate its own business model. Activities vary according to the type of business model: for a consulting firm key activities are focused in advising services (the resolution of some problems and simplification of some processes), for a food company key activities can be identified with the specific production process which allows to offer products in the market. They can be categorized in three types: production activities, typical of manufacturing companies in which it is essential to design, make, and deliver a product; problem solving activities, related to coming up with new solutions to individual customer problems; maintenance / development of platforms / networks activities, related to platform management, service provisioning, and platform promotion (OSTERWALDER A., PIGNEUR Y., Business Model Generation, Wiley & Sons, 2010 page 37).
Key activities in the Business Model Canvas are only the most important activities (those that determine the competitive advantage), not all the activities that are part of the business. Along with key resources and key partners, key activities will determine the cost structure of the company will have to bear. To make easier the B.M.C. analysis it is good to always keep a clear and concise overview of its business model, this will help the translation of the Canvas in subsequent strategic planning documents.
2.9 KEY PARTNERSHIPS
The Key Partners blocks defines the network of suppliers and partners necessary to the company's business model. In fact there are external players that are strategic because allow to fully realize the business model and increase the chances of success in the market. It is possible to distinguish between different types of partnerships: strategic alliances between non-competitors or strategic partnerships between competitors (Coopetition); Joint ventures to develop new businesses and buyer‐- supplier relationships to assure reliable supplies. The creation of partnership s aims to make the company able to respond to different needs, internal and external, which are not included within its business model. The main motivations to establish partnerships can be identified in optimizing the business model, through buyer‐- supplier partnership which aims to economies of scale and cost reduction; risk reduction and uncertainty in a competitive environment (i.e. the Blu Ray developed by a group of the world’s leading consumer electronics, personal computer, and media manufacturers) and acquisition of particular resources and activities, to share technologies, knowledge, licenses, or access to customers.
2.10 COST STRUCTURE
The Cost Structure block determines the costs that the company incurs to make running a business model. In the process of designing the Business Model Canvas cost structure is defined at the end because it comes almost directly from the structure of the blocks related to key activities, key partners and key resources. For some types of activities keeping costs down becomes absolutely central to being able to provide its value, for others it is not so important because their value proposition is based exactly on the value created in terms of status, service, innovation, etc... For this reason it is possible to distinguish in two broad classes of business model: cost-driven business models -‐ an example is Curves, a gym for women that allows to have fitness programs lasting only 30 minutes with a very low cost-structure that involves few key resources and few key activities – and value‐-¬driven business models, like luxury brands (i.e. Rolex), which focus on value creation through a high investment in the resources, R&D and customization of the products / services. By analyzing the cost structure, a business model may have one or more of the following characteristics: costs can be fixed, if the costs remain the same regardless of the volume of the goods or services produced (rent, salaries, production facilities) or variable, depending on the volumes of goods and services produced. In the cost-structure analysis is crucial to underline the possible presence of economies of scale and / or economies of scope to understand the grade of scalability of a business model.
When outlining the C.S. block it is important to pay attention to key resources, key partners and the key activities to realize which of these elements will cost more, if there are alternatives or if, to achieve a particular outcome, it is necessary to support all the costs planned. A business model becomes sustainable only if revenues are higher than costs. Otherwise, it is possible that there are errors in the price strategy for the product / service offered or that resources are not optimized. Paying attention to all these features gives the opportunity to anticipate errors that once in the market become difficult to correct in the short-‐term.
3. CUSTOMER DEVELOPMENT
3.1 THE MODEL
The Customer Development Model (CDM), formalized by Steve Blank in The Four Steps to the Epiphany, starts from the consideration that the management practices that are used by large companies to design and launch new products (product management) are not applicable to a startup. Making a start-‐up, in fact, does not mean developing a new product, but searching a market for this product and finding customers, starting from those who are worn by inclination to experiment new products. They are those that Rogers called the Early Adopters in his "Technology adoption lifecycle ", the model that allows to identify the different existing clusters of adopters of new technologies (Rogers 1962). The Customer Development is the process that helps the entrepreneur to navigate the path along which he discovers and learns about his company's customers and the market in which customers move. Along this route, the startup must prove that there is a potential market, make sure that someone is willing to pay for the solution offered, and finally, to actually create the market for its product. These activities of discovery, learning and testing are what makes a startup unique. The model developed by Steve Blank is divided into four steps: customer discovery, customer validation, customer creation and company building.
2.7 KEY RESOURCES
The Key Resources block encompasses strategic assets that a company must have to create and sustain its business model. Each activity is characterized by key resources which can be physical, intellectual, financial and human. Physical activities include tangible property such stores, equipment, technologies, machines and everything that physically a company needs to have to produce or sell a particular product / service. Intellectual property rights include the know-‐how of a company, patents, trademarks, copyrights, projects developed, the partnership and the customer database. Human resources are important in every business model, especially if it is in the services industry, for example people are a core resource in a consulting firm. Financial resources include details of financial assets such as lines of credit, cash or a stock option pool for hiring key employees.
2.8 KEY ACTIVITIES
The Key Activities block describes the strategic activities that must be performed to create the Value Proposition, reach customers, maintain relationships with them and generate revenue. In other words, this block determines which are the most important processes the company has to develop in order to operate its own business model. Activities vary according to the type of business model: for a consulting firm key activities are focused in advising services (the resolution of some problems and simplification of some processes), for a food company key activities can be identified with the specific production process which allows to offer products in the market. They can be categorized in three types: production activities, typical of manufacturing companies in which it is essential to design, make, and deliver a product; problem solving activities, related to coming up with new solutions to individual customer problems; maintenance / development of platforms / networks activities, related to platform management, service provisioning, and platform promotion (OSTERWALDER A., PIGNEUR Y., Business Model Generation, Wiley & Sons, 2010 page 37).
Key activities in the Business Model Canvas are only the most important activities (those that determine the competitive advantage), not all the activities that are part of the business. Along with key resources and key partners, key activities will determine the cost structure of the company will have to bear. To make easier the B.M.C. analysis it is good to always keep a clear and concise overview of its business model, this will help the translation of the Canvas in subsequent strategic planning documents.
2.9 KEY PARTNERSHIPS
The Key Partners blocks defines the network of suppliers and partners necessary to the company's business model. In fact there are external players that are strategic because allow to fully realize the business model and increase the chances of success in the market. It is possible to distinguish between different types of partnerships: strategic alliances between non-competitors or strategic partnerships between competitors (Coopetition); Joint ventures to develop new businesses and buyer‐- supplier relationships to assure reliable supplies. The creation of partnership s aims to make the company able to respond to different needs, internal and external, which are not included within its business model. The main motivations to establish partnerships can be identified in optimizing the business model, through buyer‐- supplier partnership which aims to economies of scale and cost reduction; risk reduction and uncertainty in a competitive environment (i.e. the Blu Ray developed by a group of the world’s leading consumer electronics, personal computer, and media manufacturers) and acquisition of particular resources and activities, to share technologies, knowledge, licenses, or access to customers.
2.10 COST STRUCTURE
The Cost Structure block determines the costs that the company incurs to make running a business model. In the process of designing the Business Model Canvas cost structure is defined at the end because it comes almost directly from the structure of the blocks related to key activities, key partners and key resources. For some types of activities keeping costs down becomes absolutely central to being able to provide its value, for others it is not so important because their value proposition is based exactly on the value created in terms of status, service, innovation, etc... For this reason it is possible to distinguish in two broad classes of business model: cost-driven business models -‐ an example is Curves, a gym for women that allows to have fitness programs lasting only 30 minutes with a very low cost-structure that involves few key resources and few key activities – and value‐-¬driven business models, like luxury brands (i.e. Rolex), which focus on value creation through a high investment in the resources, R&D and customization of the products / services. By analyzing the cost structure, a business model may have one or more of the following characteristics: costs can be fixed, if the costs remain the same regardless of the volume of the goods or services produced (rent, salaries, production facilities) or variable, depending on the volumes of goods and services produced. In the cost-structure analysis is crucial to underline the possible presence of economies of scale and / or economies of scope to understand the grade of scalability of a business model.
When outlining the C.S. block it is important to pay attention to key resources, key partners and the key activities to realize which of these elements will cost more, if there are alternatives or if, to achieve a particular outcome, it is necessary to support all the costs planned. A business model becomes sustainable only if revenues are higher than costs. Otherwise, it is possible that there are errors in the price strategy for the product / service offered or that resources are not optimized. Paying attention to all these features gives the opportunity to anticipate errors that once in the market become difficult to correct in the short-‐term.
3. CUSTOMER DEVELOPMENT
3.1 THE MODEL
The Customer Development Model (CDM), formalized by Steve Blank in The Four Steps to the Epiphany, starts from the consideration that the management practices that are used by large companies to design and launch new products (product management) are not applicable to a startup. Making a start-‐up, in fact, does not mean developing a new product, but searching a market for this product and finding customers, starting from those who are worn by inclination to experiment new products. They are those that Rogers called the Early Adopters in his "Technology adoption lifecycle ", the model that allows to identify the different existing clusters of adopters of new technologies (Rogers 1962). The Customer Development is the process that helps the entrepreneur to navigate the path along which he discovers and learns about his company's customers and the market in which customers move. Along this route, the startup must prove that there is a potential market, make sure that someone is willing to pay for the solution offered, and finally, to actually create the market for its product. These activities of discovery, learning and testing are what makes a startup unique. The model developed by Steve Blank is divided into four steps: customer discovery, customer validation, customer creation and company building.
Figure based on the Customer Development representation elaborated by S. Blank
3.2 THE FOUR STEPS
Step 1: Customer discovery
The goal of customer discovery is to identify customers and understand if the problem the startup wants to solve is actually important to them. To do this, it is necessary to face the reality of "getting out of the building" to learn directly from potential customers; the results of this search will help to understand what features are really important to customers and to focus on the way to present the product.
The goal of this stage is to organize a series of focus groups and gather information to develop a list of desirable features. In a startup, product characteristics are defined by the founders: what it is essential to figure out is whether there is a fit with customers and a possible market.
Step 2: Customer validation
The goal of customer validation is to develop a repeatable and field-tested sales process, demonstrating that the startup has actually found customers and a market. If this happens it is possible to say that the startup has built a business model and that was able to test a series of hypotheses, identifying a sale price, distribution channels and so on. If, and only if, this process is repeatable, then it is possible to move to the next step, climbing and then building the company itself.
Step 3: Customer creation
The customer creation step starts from the early sales success and its goal is to support the product demand. The process varies greatly depending on the characteristics of the market: some startup enters existing markets while others in total new markets, and still others are trying to re-segment existing markets by focusing on price or on a niche. Each of these markets requires different strategies. For example, investing a lot of money in advertising makes sense if a company is entering an existing market because customers already know what product the company is selling. On the other hand, it could be a waste of money if entering a new market, because potential customers do not even know what the company is talking about, since they do not have any terms of comparison.
Step 4: Company building
The company building step represents the transition from an informal organization, based on learning and discovery, in a formal structure with departments and VPs of sales, marketing and so on. It is a very delicate phase since a common error is to anticipate the timing, putting together a company that is not yet able to support the activities on its own resources and in which the sales volumes fail to cover the costs of the organization.
3.3 RELATION WITH THE BUSINESS MODEL CANVAS
The combination between Business Model Canvas and Customer Development, as Steve Blanks explains, can be a successful way to find out a proper business model for a new venture. In fact, if in his original concept the Canvas was a snapshot of the brainstorming work done by team members being, using it as the “launch-‐pad” for setting up the hypotheses to test, and a scorecard for visually tracking iterations and pivots during customer discovery and validation transforms it from a static planning tool to a dynamic one. Therefore after having designed the business model, the next step is to translate each one of the nine business model canvas blocks directly into a set of Customer Discovery hypotheses.
4. PROJECT ARTE - Augmented Reality Technology Experience
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BIBLIOGRAPHY
- OSTERWALDER A., PIGNEUR Y., Business Model Generation, Wiley & Sons, 2010 BLANK S., DORF B., The Startup Owner’s Manual, K&S Ranch Publishing, 2012 RIES E., The lean startup. Crown Publishing, 2011
- BLANKS., The Four Steps to the Epiphany, Lulu Enterprises Incorporated, 2003
- GRANDO, VERONA, VICARI, Tecnologia Innovazione Operations. 2nd Edition, Milano, Egea. 2010
- BLANK S., Why the Lean Start-‐Up changes everything, Harvard Business Review, May 2013
- TAYLOR A., WAGNER K., ZABLIT H., The Most Innovative Companies 2012, The Boston Consulting Group, 2012
