Understanding The Business Model Canvas

Entrepreneurship is affected by three misconceptions.

 Let’s not forget that the idea matters, but its execution matters more.

This concept is well assessed by the Business Model Canvas, which we are going to present in this post.

Traditional business literature does not often work well with startups. There is a generalised misconception in business management, suggesting that starting a new business is similar to managing an existing one. This could not be farther from the truth.

Aspiring entrepreneurs have to face the fact that literature and academia have not yet cracked the code of starting a successful venture.

Entrepreneurship and new product development will always be uncharted territory and in order to make well-informed decisions, we need to establish new perspectives on how to structure the logic our business will pursue.

Here’s a breakdown of this article’s content
1. The idea is not enough
2. The structure of the business model canvas
3. Conclusions and suggestions for further research

1. The idea is not enough

The idea is not enough, you need a good business model too.

A second misconception suggests that in order to come up with a successful company you need to focus on developing a great idea. The honest truth is that the idea is not enough, you need an appropriate business model to deliver value to your customer. But fear not, the Business Model Canvas is here, and is going to assist you with “crossing the desert”. By crossing the desert we mean moving from that stage of initial enthusiasm to the stage in which the business actually starts becoming profitable.

Remember that the importance of failing is downplayed. As any entrepreneur can tell you, in business you need to identify and manage risks.

There are many risks associated with starting a company, and it’s hard for anyone to come up with a clear and final strategy to build your organisation up from day one. What you need to do is go through an extensive process of trial and error, comprised of testing, trying, failing, trying again.

In the business literature, there are very few models which are actually able to contemplate failure, unfortunately, some businesses praise themselves of almost being exact sciences. The business model canvas, however, can help you with the challenges of the ‘not knowing stage’ by helping you focus on asking yourself the right questions as opposed to finding the right answers.

The BMC can help in identifying 9 essential questions, that need to be answered in a clear, concise and coherent logic.

Here’s the canvas with its essential blocks. In the next section of the post, we are going to address each of these 9 blocks in detail to show how through the process of trial and error you can build a unique combination of assets and processes that deliver great value to the customer.

2. The structure of the business model canvas

The BMC is essentially split into two sides, the right side of the canvas allows you to understand what your company wants to be and what value it wants to deliver to its target audience, the left side accounts instead for what the company needs to do in order to deliver this value to the market.

If I dared to provide a guideline, or an ideal order to fill the blocks of the model, I would suggest to:.

  • Start with the idea. Understand what is at the core of your business and what problem you want to solve for your customers is the starting point of the journey. If you look at the current Unicorns (companies valued above 1 billion dollars) you’ll see that nobody tries to reinvent the wheel they all try to solve a problem better than the competition, in many cases using technological breakthroughs.
  • Identify your customers. We don’t live in a generalist mass market where a company can simply consider ‘everyone’ their potential audience. Customers are smart and are likely to have strong opinions about what works for them. It’s necessary to have a broad idea of who our company will address, and what is the consumer behaviour associated with their target. Identifying your customer is a long journey which takes time and effort. In order to answer this question, we recommend using a very useful marketing framework called Jobs to Be Done Theory. More articles in this area can be found at the bottom of the article.
  • Understand How to Reach Your Customers and What Relationship to Establish. Once you understand who you are targeting and what you are offering them,  you will be able to understand what are the best ways to interact with them, both in terms of building a relationship and in terms of finding the right distribution strategy. Both of these elements comprise the “customer experience“. In order to make your business attractive to new customers, you need to provide both tangible and intangible benefits and customer experiences are a concept that accounts for both these elements, as they have a big impact on the perceived value of your products and services.
  • Identify the revenue model that best fits your value proposition. There is a big difference between what customers want and what customers will pay for. We don’t need to focus on how much the customer pays for the service, but what is the revenue model the company pursues. In this larger framework, what matters for your company is identifying the revenue streams, and creating a revenue model that increases the value and decreases cost.  The company as a result will be able to make money in more than one way, differentiating income that is derived from various types of business activities.

Now that you’ve decided what you want to be for your customers, it’s time to look at how you can deliver on your promises.

  • What resources do you need? In order to bring to fruition your vision, you need to identify the necessary assets which build your competitive advantage. Clarifying this point will provide a  lot of insight into the types of resources (both financial and human) that you will require to build your organisation.
  • Focus on you “key activities”, or what you need to be great at. As the motto says, either be first or be the best. “Key” activities are those business activities which you need to excel at in order to have a fighting chance of winning a customer. These activities define what your company does to provide value to its customers.
  • Find strength through your network and identify your “key partners”. In the globalised world, we’ve got so many different opportunities to create collaborations and partnerships which can assist us in building a strong business. We need to know who our friends are and make sure we can leverage the opportunity of creating connections which go towards communal interests and shared business goals.
  • Identify Costs. How much will all of this cost? We need to understand the price structure and costs that the company needs to address to stay “afloat”. Here is where you will compare all of your expected expenses with the revenue forecasts to understand the potential for profit.

There are a variety of factors to be considered. Starting a business requires us to assess many different variables while making lots of decisions. Using a visual tool allows us to always keep in mind the logic that needs to glue our business together.  Remember that you are always allowed to fail, to change your answers, change your beliefs, challenge your assumptions, make changes every day until you find a business model that really hits the mark.

Don’t try to get the business model right from the start, use post-its and erasable pens instead. You are likely to change your mind often.

3. Conclusions

By looking at the current trends in business we can realise that over the last decade business management has switched from managing products to managing business models. This is a unique tool which gives us the opportunity to be wrong 1000 times, always bearing in mind that we need to be right just once.

In this sense, the BMC can really help us focus on the journey of building a company by looking for the right questions, rather than rushing to find immediate answers. At 440 Industries we are big fans of entrepreneurship. At the end of this article, you’ll find many more resources to keep exploring this fascinating topic.

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Understanding The Business Model Canvas Very few business analysis frameworks actually account for trial and error and the Business Model Canvas among them, helping companies overcome deserts.
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