The Business Model Canvas for Innovation — Ultimate Guide

Are you losing competitive advantage? Have you been trying to innovate, but you’re not sure what to do? Is your business stagnating? Have you wanted to create and communicate a business idea easily?

If these questions sound familiar, then the Business Model Canvas for Innovation — Ultimate Guide can help.

Alex Osterwalder’s Business Model Canvas

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What is the Business Model Canvas?

The Business Model Canvas (BMC) invented by Alex Osterwalder, of Strategyzer, is a tool to describe and visualise how a business creates, delivers and captures value all in an easy to understand one-page document. It contains 9 critical components that can be continually refined or innovated.

The 9 Components of the Business Model Canvas

The nine elements are:

• Customer Segments — This section describes who value is created for and who are our most important customers. The customer segment is the ‘customer profile’ from the Value Proposition Canvas.
• Value Proposition — The Value Proposition describes how your products and services create value for the customer segments. What is it that attracts customers or what fundamental problems or needs are resolved?
• Channels — Channels describe the various means that you reach customer segments and communicate with them. Examples might be, directly through a website or a salesforce or indirectly through third-party stores or wholesalers.
• Customer Relationships — This section details your acquisition, retention and growth strategies for each channel.
• Key Partners — What are the network of partners and suppliers that can be leveraged to make the business model work?
• Key Resources — What are the essential resources that you need to make the business model work either internally or acquired?
• Key Activities — What are the essential activities that drive success for your business model? These are the things that you will need to be really good at.
• Cost Structure — An outline of all the costs that will be incurred when executing the business.
• Revenue Streams — Revenue Streams describes how each segment will pay for the value that is delivered.

Benefits of the Business Model Canvas

There are several key benefits to the Business Model Canvas:

1. Clarity — The BMC provides a clear picture of either your current business model or the business model that you are innovating towards.
2. Communication — Having everyone on the same page is essential in any transformation or innovation process and the BMC is an ideal way to communicate essential information to all stakeholders. Think of it as a business plan without all the %*#!.
3. Collaboration — Now that your team have clarity and a standard communication tool, the BMC allows a unifying platform to collaborate on ideas.
4. Risk reduction — When changes to the business model are ideated, then you can quickly assess the impact on other components of the business.
5. Proven innovation model — The Business Model Canvas has been around for about 15 years and during that time thousands of companies have used the BMC for innovation.
6. Customer-centric — It’s no surprise that the Value Proposition is in the centre of the canvas. When designing your BMC use the Value Proposition Canvas to oscillate or zoom in and out to continually evolve the business.
7. Simple, not simplistic — You don’t need an MBA to be able to pick up the BMC and start to innovate. The important approach is to make your business model visual, ideate, test and learn as you innovate.

Disadvantages of the Business Model Canvas

There may be some conjecture online that the BMC does not consider the environmental forces shaping a sector and therefore your business or that it has limitations for start-ups.

While it is true that environmental forces are critical to consider such as competitors, technology or legal changes, trends or macro-economic factors. These forces are not part of your business model and as such is best understood through other strategy tools such as Porters 5 Forces or the Blue Ocean Strategy.

As far as limitations for start-ups, there may be a preference to use the Lean Canvas because some of the focus and terminology may be specifically tailored towards startups — which is a good thing, the BMC continues to be used effectively in the startup phase of a business. Even more so, if an existing business is exploring new business models as well as exploiting existing models then my preference would be to use the consistency of the BMC.

Essentially, I am yet to find a disadvantage to the BMC.

How to Use the Business Model Canvas — Step by Step Guide

There are seven main steps to complete the BMC:

1. Zoom Out. Research the business environment to understand your competitors business model and even look at other sectors that you might be able to get inspiration from. What regulations are on the horizon and what technology is likely to impact? Look at the changing horizons within segments. Are customers preferences changing? or, are there new profiles emerging? And, consider any macroeconomic trends that are occurring.
2. Create your ‘as is’ business model. Working through the 9 components map out how your current business model looks like using post-it notes. Make sure there are clear and necessary linkages between the components, in that each component supports and is not redundant. If there are multiple segments, use different coloured post-it notes so that you can see the different flows.
3. Zoom in. Create your ‘as is’ value proposition canvas. Similar to the BMC we need to understand what our current models look like. Using post-it notes, map out the segments jobs, pains and gains, then the products and services that will relieve pains and increase gains.
4. Business Model Scorecard. The business model scorecard is a set of 7 key business model design elements that can indicate whether your business model has a competitive advantage. See below for the 7 key elements.
5. Innovate. My preference is to start with the Value Proposition Canvas (although you could start anywhere on either canvas) and taking into account what you have learnt in step 1, begin to consider options such as, are there any pains that customers are experiencing and are yet unresolved? Are there any jobs that you were unaware of previously? Use design thinking to imagine new products and services. How do these then alleviate pain and increase gains? For the BMC perhaps such things as could new value propositions be established through leveraging existing channels and relationships? Could new partners drive new value propositions? This step is about creating multiple options rapidly.
6. Think like a scientist. Starting with the model that indicates the biggest opportunity, start testing all the hypotheses by running the Business Model Scorecard across them and get out and talk to customers to validate every part of your model. You will at times create prototypes (eg. marketing flyers or landing pages for a ‘new’ product) that can be tested and evidence obtained to make decisions based on facts, not assumptions. This step is about experimenting.
7. Fail your way to success. Creating a well thought out business plan is really a way of maximising risk and putting all your eggs in one basket. The approach I prefer is to make small calculated risks to test and learn about every part of a business model. Remaining open to change, getting insight from experiments and failure is a sure-fire way to improve the odds of success. This step is about letting go of egos and responding to the data that is presented.

The Business Model Scorecard

There are 7 key elements to consider for a more competitive business model. Each element can be each ranked on a scale of 1 (poor) to 10 (excellent) for ‘as is’ and ‘to be’ BMC prototypes.

• Is your business model scalable?
• What percentage of your business model revenues is recurring?
• How competitive is your cost structure compared to your competitors?
• How well protected from the competition is my business model?
• How much of the value (and therefore costs) are incurred internally by me versus created for free externally? Can more work be done externally?
• Are there significant switching costs?
• What percentage of revenues are earned before spending on costs?

In summary, the Business Model Canvas is a powerful, flexible and simple tool to use as a platform to innovate any business model or idea whether your business is already established or a startup.

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Vaughan Broderick is a service designer, entrepreneur and writer. He helps businesses to design better, human-centred, products & services at vaughanbroderick.com, facilitates strategy and design sprint workshops, created the Service Design Journal and Innovation Today publications.