6 THE BUSINESS MODEL

How it all fts together

Ever since the Internet became a universal medium of communication in

the mid-1990s, use of the concept of the ‘business model’ has spread. The
term was first used in relation to web commerce and addressed the ques-
tion of how people and enterprises that offer products and services on the
web can get users to pay – in short: ‘how to make money on the web’.
Today, that particular aspect is called a ‘revenue model’ or ‘revenue for-
mula’; meanwhile the ‘business model’ has evolved. When the ‘IT bubble’
burst in the first years of the millennium, the term began to be used in a
more general sense, namely, to describe how all the parts of a business are
interrelated and work together (i.e. an understanding of businesses as sys-
tems). Today, the term has expanded to encompass what used to be called
the ‘business concept’ or ‘business idea’, a development that invites more
holistic thinking and has led to more sophisticated descriptive models.
So far, there is still no universally accepted definition of what the busi-
ness model stands for and what components it should contain. There is,
however, common agreement as to the need for a deeper understanding of
the various parts and aspects of businesses and, perhaps most importantly,
how the parts are interlinked, both within organizations and outwards,
vis-à-vis the value networks in which they are embedded. The Internet and
digitization have opened up many alternative ways of ‘doing business’,
which has led to a need for both a language and a form that enable mean-
ingful reflection, communication and action on this subject. What people
are asking for is a format for a ‘story’ that explains their businesses, that is
a format for asking: Who? What? How? With whom? The question is how
all this should be structured, on what level and in what detail this story
should be told.

The business model’s role and position

Some have concluded that the business model is the same as a company’s
strategy. Most, however, place it somewhere between the strategic level,
with its outward-looking visions and objectives, and the more introspective
implementation level, with its concrete processes and flows of activities
164 THE BUSINESS MODEL

(operations). Whereas strategies focus on the market and competition, the

business model focuses on opportunity and implementation. The business
model may be said to form a bridge between the strategic and operational
levels, indicating what in the way of ideas, resources, activities and relation-
ships is needed to carry out a given strategy successfully. In this sense it is
a consequence of the strategy, while it also checks to make sure that ideas,
processes and finances are well aligned. When used this way, the model
bridges the gap between one’s general ideas and their realization, between
vision and action.
Here, the business model will be discussed primarily from an entre-
preneurial perspective, which means that in many cases there will be no
guiding beacon in the form of an explicit, agreed-upon strategy. In such
cases the entrepreneurs’ personal understanding of the situation, their
goals, available competence and networks will have a more dominant
influence on the formulation of the business model. Hence, it will be
more an expression of the entrepreneurs’ aspirations, values and dreams.
This means that one and the same opportunity can give rise to any num-
ber of possible business models – and no one can in advance say which is
the best one.
In cases when the business model evolves through search-and-learn pro-
cesses (≈ effectual processes) rather than through detached analysis, the
model will be elaborated parallel with the successive development of prod-
ucts, structures and processes. The model will in this case be an outcome
that reflects the emerging ‘recipe for success’, a kind of emergent strategy
(Figure 6.1).

A B
Strategic level
Vision, mission, Opportunity …
goals

Business model level … emerges

Business logic, through
revenues, costs experiments

Operation level … to a feasible

organization business model
routines, work˜ows

Figure 6.1 The role of the business model. (a) The business model as a bridge between
ideas and processes, deduced from the strategy. (b) The business model as the result
of the entrepreneur’s experimentation, improvisation and learning.
 THE BUSINESS MODEL 165

After a general introduction to the business model as a concept and

a survey of the purposes a business model can serve, we will focus our
attention on the currently most well-established notation for a business
model, a kind of de facto standard – the business model canvas (BMC).
The BMC is a well-documented visual tool that has proven easy to use,
with a logic that is congenial with entrepreneurial activity. It may be
used to describe, visualize, analyse, simulate and test in the early phases
of transforming the entrepreneurial opportunity into a feasible business
model.
The ‘lean start-up’ methods described in the preceding chapter take the
BMC as their starting point and assign the business model even greater
importance, positing that what you offer the customer, and what the cus-
tomer responds to, is the business model itself. In a lean start-up the busi-
ness model is the new product, and the start-up is, as mentioned, conceived
of as ‘an idea in search of a viable business model’. Once it has been found,
the project is no longer a start-up and instead transitions to a ‘scale-up’.
In the later phases of starting a business, and in existing organizations,
the BMC may be used as a tool for ‘business model innovation’ and contin-
ued improvement of the offering and/or the model (Figure 6.2). These uses
are discussed at the end of the chapter.

Technology

creates

Opportunities

Business
to develop
models

delivering

Value

Figure 6.2 Technology alone does not create value. As discussed in Chapter 2 in terms
of a ‘knowledge flter’, there is no straight line between knowledge/technology and
value creation. To break through you need someone seeing and seizing the opportu-
nity, creating a business model accordingly and enact/execute.
166 THE BUSINESS MODEL

The concept of the business model and its essence

In order to grasp the breadth of the concept, we need to consider some of
its many conceptions, which all are plausible aspects:
As outlined by Osterwalder and Pigneur (2010), Amit and Zott (2001),
Magretta (2002) and George and Bock (2012), a business model:

• describes the rationale of how an organization creates, delivers and

captures value (Osterwalder and Pigneur, 2010);
• is the overall configuration of ideas, resources, activities and logics
in the organization;
• describes how all the elements in the system fit together to form a
functional whole;
• is a story that explains how the business is expected to function;
• constitutes the link between the opportunity and the organization
formed to exploit it.

From the key elements in these definitions we may distil the essence and
philosophy that underlie the concept.

The business model as system

Here we discuss the value-generating whole, its parts and how the parts are
interrelated are in focus. The business model may therefore be discussed as
a system constructed to create value: an assemblage of parts forming a uni-
tary whole via relations (e.g. a solar system, school system, ecological sys-
tem, political system, system of philosophy, heat system, plumbing system).
One example of such a system is IKEA, which has a stable and success-
ful business model that, furthermore, has proven to be difficult to imitate,
precisely because of its systemic character. It is not enough to understand
and copy products; the company as a whole is what IKEA offers. Their
vision – ‘to create a better everyday life for many people’ – is backed up by
a value-creating system of building blocks that together make a distinctive
home-furnishing offering. A good business model, in which the system’s
parts work together in good sync, is the key to sustainability. What is more,
the IKEA business model is dynamically stable in that the bearing structure
remains unchanged, whereas other, supporting parts can vary and adapt
over time. The core has survived some 60 years but is of course under pres-
sure from the disruptive retail revolution (i.e. online business and changing
preferences), which will test its agility.
It should be noted that in early phases the coordination of parts is
seldom perfect, and the entrepreneur will have to make do with ‘good
enough’. It took Ingvar Kamprad many years to fine-tune IKEA’s system,
and even today, different supporting parts are continuously under review
and renewal. The e-business growth, continuing urbanization and green
 THE BUSINESS MODEL 167

Global concept
In-house
design

Flat-packed,
Long-term For the whole self-assembly
integrated family Self-service
furniture
contractors customer as
Volume and Customer co-producer
scale advantages Module-based
highly involved in
design
delivery chain
Long, deep Global
The IKEA
relations supply chain Self-service
catalogue

Support
Focus on Limited sales
to Informal
the individual sta˜ng
suppliers organization

Organization Good
Entrepreneurial
culture citizen Innovative
E°ectiv e store concept
logistics Flat org-style, Volume and
centralized
leaders present scale advantages
operations

E˜ciency in Low cost in Huge number

Value
the logistic storing and of free parking
for money
system transportation places

Self-transport ’Right
by customers quality’

Figure 6.3 A portion of IKEA’s business model. Note the integration of the parts so that
they support one another, which creates synergic efects – the whole as more than the
sum of its parts.
Source: Adapted from NUTEK (2005).

values might also cause some changes in the fundamentals in the years to
come. But, if you change a little all the time, radical shifts might not be
necessary.

The business model as a model for creating value

‘Value’ may be an abstract concept, but it is also central. This is because
the business model is founded in what has come to be called the value
chain – the series of activities that generate the value, utility and advan-
tages that the customer perceives and is willing to pay for. As early as 1985,
Michael Porter posited that one has to understand one’s value chain in
order to understand the keys to one’s company’s competitive strength, and
that means the entire chain – design, sourcing of materials, production,
marketing, customer services and auxiliary functions – has to be analysed,
both as to its parts and as a whole. Today, this linear chain metaphor is not
entirely adequate; instead, we speak of ‘value stars’, ‘value constellations’
‘value networks’ and, not least, ‘value platforms’ (we shall return to this last
later in the chapter).
The preferred notation for the business model in this book is applica-
ble to both the traditional linear value chain and the more contemporary
168 THE BUSINESS MODEL

network-based logic. It is bound to neither, but seeks to help its user iden-
tify a logic whereby one’s business is able to create, deliver and capture
value out of the opportunity at hand.
The concepts, ‘value’ and ‘customer value’ offer another advantage in
that they steer the entrepreneur away from the hazards of product fixation
and so-called ‘market myopia’,1 which easily dominates one’s thinking. The
focus of one’s attention should be the customer and her ‘problems’, not the
specific product or service, which, after all, is always a tentative solution
that may be shifted out as technological advances and new ideas dictate.
A classic example of this myopia is the case of the Black & Decker drill.
Black & Decker should understand that while they sell electric drills, their
customers do not necessarily need a drill, but need to make a hole, or per-
haps just hang a picture on a wall. Needs that can be satisfied in a number
of different ways. Kodak, too, should perhaps have understood that the
customers didn’t necessarily want rolls of film or even digital cameras, they
wanted to capture and disseminate memories in a convenient way – what
Apple, Instagram and WhatsApp understood and provided.
The still abstract ‘capture value’ in our basic definition has been added
in recent years to emphasize the need to have some idea of who is expected
to pay, and how the revenue flow should be organized. In the days before
the Internet this was not an issue, so that focus was concentrated on hav-
ing some idea of a price strategy. On the web, and especially in the ‘app
universe’, we find numerous solutions for capturing value, ranging from
gratis – advertiser paid – to full-price payment by the end customer and on
top of that numerous creative ways to look at the market as a reservoir to
be tapped from different sides and generate revenue streams.

Insights 6.1
Some generic business patterns (models)
• Freemium model (e.g. Spotify): the basic version is given away
for free hoping that the customer will be attracted to pay for
the premium version.
• Free model (e.g. Google): offers consumers a ‘free’ product or
service, then follows the logic of ‘if you’re not paying you are
the product’, meaning that you are contributing with informa-
tion about you and your habits or as a viewer of ads.
• Razor and blade model (e.g. Gillette): the vital product is
cheap or given away for free, and the goods that are needed to
use it are expensive and sold with high margins.
• Access-over-ownership model (e.g. Airbnb): provide temporary
access to goods and services normally only available through
purchase. Includes ‘sharing economy’ actors.
 THE BUSINESS MODEL 169

• Ecosystem model (e.g. Apple): sell an interlocking and inter-

dependent suite of products and services that increase in value
as more are purchased.
• Hypermarket model (e.g. Amazon): use market power and
scale to override competition, often through low prices.
• On-demand model (e.g. Uber): monetizing time and selling
instant access.
• Subscription model (e.g. Netflix): the customer pays a regular
fee, typically on a monthly basis, in order to gain access to a
product or service.
• Long tail model (e.g. eBay): the main bulk of revenues is generated
through a ‘long tail’ of niche products with low individual sales.
• Auction model (e.g. eBay): selling to the highest bidder.
• Pay per use model (e.g. Car2Go): the actual usage of a service
or product is metered.

Source: Adapted from diverse sources like [Link], where you

can explore 55 models, or [Link] with 10 models.

Spotify, for example, creates an indisputable value for the company’s

approximately 400 million users (in 2021). Having users, however, is not
enough. The question is, How can the value created be translated into eco-
nomic value? The answer is not obvious. The question breaks down into
two parts: Who should pay for the service? On what basis should prices
for the service be set? The challenge is to develop a model that brings in
enough revenue in a sufficiently stable and enduring flow to cover royalties
(which claim 80 per cent of Spotify’s revenue), costs for R & D, hardware/
software, marketing, management, administration, profits and so forth.
Spotify’s formula divides the company’s customers into two categories:
users and premium customers. The latter group (175 million people in 2021)
pay a subscription fee, for which they enjoy certain privileges. The non-paying
users also generate income through their exposure to paid advertising spots,
interspersed in the service. The aggregate anticipated revenue from these two
sources are called a revenue model or revenue streams and form part of the
business model that assures that the venture will be economically sustainable
(i.e. that revenue at least will cover costs). The concepts, ‘value’ and ‘value
innovation’ will be discussed further later in this chapter.

The business model as answers to key questions

To create a comprehensive framework that will facilitate a discussion
of ways to ‘create, deliver and capture value’, the business model needs
170 THE BUSINESS MODEL

to answer a number of basic questions regarding what the customer

will be offered, who the customer is, how and with whom the product
or service will be produced and how to make the initiative financially
sustainable. These fundamental questions have inspired many different
ideas about how a business model should be structured and which of the
elements are most central. Altogether some 40 different elements have
been discussed.
The many proposals boil down to the conclusion that a business model
should contain the following dimensions:

• customer value proposition;

• key resources
• key processes; and
• profit formula.
(Johnson, Christensen & Kagermann, 2008)

Others put a stronger emphasis on the value-and-networking logic and pro-

pose the following:

• value proposition;
• value architecture;
• value network; and
• value finance.
(Al-Debei & Avison, 2010)

There have also been proposals to include other dimensions, such as envi-
ronment and competition; strategy, vision and mission; and culture and
values. Most participants in this discussion have concluded, however, that
adding these dimensions would cloud rather than clarify the focus on the
core questions about how value is created and captured.

How should it be visualized?

One of the purposes of a model is to simplify reality so that it becomes eas-
ier to understand and to discuss. The word ‘model’ itself connotes a visual
form of presentation, something that provides an logical, instant overview.
Therefore, a good amount of time and effort has been put into finding
meaning-bearing formats, and particularly formats that allow you to sketch
and experiment and that lend themselves to work in groups. Entrepreneur-
ial teams need a focus for dialogue to establish a shared understanding of
the ‘business’ in its totality, and a vocabulary and structure for that conver-
sation aid the process. The business model offers both. The model should
also invite the group to test and turn the elements around in ways that help
them work together internally and differentiate externally. In short, the
goal is to find a playground for free, but with structured discussions about
how this can be achieved.
 THE BUSINESS MODEL 171

The business model canvas

One model that, thanks to its immediate intelligibility and meaning-making
capacity, has won broad acceptance is the business model canvas (BMC).
Originating in a doctoral dissertation (Osterwalder, 2004), it was popu-
larized and made more visually expressive in 2010 through the collective
effort of 470 participants on a web-based learning platform.
The BMC is based on a structure with four main elements, as shown in
Figure 6.4.
In the BMC these four main elements become nine building blocks that
together constitute the ‘playing field’ (Figures 6.5 and 6.6).

HOW? WHAT? WHO?

RESULT?
Revenues/costs

Figure 6.4 The four basic questions in the BMC.

? ?
What?
How? Who?

? ? ? ?

? Result? ?

Figure 6.5 The four basic questions located in the nine felds of the BMC.

Key Customer
activities relationships
Value
Key proposition Customer
partners/
segments
networks

Key Channels
resources

Cost structure Revenue streams

Figure 6.6 The original BMC.

172 THE BUSINESS MODEL

The work to straighten out the question marks and calibrate the
responses is called business modelling or business model design.2 It is work
that has elements of both art and science in the sense that it is an analytic
process, but also calls for imagination, judgement, an eye for the parts and
the whole, in other words, conceptual thinking.
The questions posed in the different ‘building blocks’ are the same
as were posed earlier, but now we are looking more closely, with higher
resolution. The answers will depend on industrial logic, type of value
proposition and, once again, the entrepreneur’s dreams, interpreta-
tions, knowledge and will –which yield an infinite number of possible
combinations.
In IT, for example, it makes a huge difference if the model is intended
for a hardware manufacturer, a software manufacturer or a computer con-
sultancy. The solutions will be vastly different. And within each sector, the
solutions will differ according to the strategic nature of the offer and the
entrepreneur’s knowledge and perception of what the situation demands.
In time, an industrial wisdom generally develops, a set of ‘dos and don’ts’
based on general acceptance of a common business model. This, in turn,
opens up opportunities for entrepreneurs to challenge the accepted wis-
dom by doing something different, something better, something that creates
more value.
What we can say more generally about business models is that the parts
must work together, support one another and be calibrated vis-à-vis custom-
ers and other interested parties. The advantage of the model is that it pro-
vides a meaningful structure for one’s thinking, talking and testing of one’s
ideas – an intellectual backboard, so to speak. Thereafter, one can consult
textbooks in business administration to learn more about organization, mar-
ket issues and financial aspects. In the business model all these aspects are
linked together in a way that emphasizes the mutual interdependence of the
parts (Figure 6.7).
In order to understand what the nine building blocks stand for, one
may ask key questions about each one. Two basic questions apply to all
and aim to eliminate the ‘misfits’: How does this block support the value

Cost structure Revenue streams

Figure 6.7 All pieces in the BMC are linked together.

 THE BUSINESS MODEL 173

proposition? Is there support for this block in other parts of the model? Let’s
say we have chosen ‘low-price offering’, then this choice must be backed up
in other parts, so they don’t work against this strategy.
The following questions should not be considered a checklist, but rather
as suggestions to guide one’s thinking.

Value proposition: what is the ofering to the customer?

What value does it offer the customer? What does the customer value?
What needs of the customer does it satisfy? What problems does it solve
for the customer? Is there fit between the problem and the solution? What
advantages and key benefits does our proposition offer? What is unique
about our proposition? What is the compelling reason for the customer to
buy? In sum, why should the customer ‘bite’?
If part of a network, there is the additional question of what value one
contributes to key network partners.

Customer segments: who are we creating value for?

Who is our customer? What segment(s) should we serve? Is it big enough?
Who are our most important customers? What distinguishes them? What
are their needs? How do they perceive the ‘problem’? Which customers fall
outside the segment?
If you have multiple customer segments you can pick different colours
for each when designing in the canvas. For example, Uber and Airbnb
must provide benefits to two distinct groups (consumers and the service
provider) and are therefore operating a two-sided marketplace where each
side needs the other for the market to succeed (more on this later in the
chapter).

Customer relationships: how do we establish and maintain

our relation to the customer?
How do we meet our customers? What kind of relationship do members of
the segment expect (personal, customer involvement, automatized)? Can
technology and/or social media be used to create lasting bonds with the
customer? How do we position our offering in the market landscape and
the audience’s mind?

Channels: how do we communicate and deliver?

Here the focus rests on channels for sales, information, delivery, payment
and service. Through what channels can the proposition be sold and deliv-
ered in the most customer-friendly way – the web, walk-in retail shops?
174 THE BUSINESS MODEL

How should physical flows be organized – logistics, payments, post-sale

services, support? Are the choices of channel in line with the segment’s
preferences and habits?

Key activities: what activities are needed to create and deliver

our proposition?
What needs to be done to create a proposition with the above-listed com-
ponents vis-à-vis customers, relationships, channels and quality? Which of
these activities are crucial to our success? How should these key activi-
ties be organized and accomplished? How do we attain excellence in our
performance of critical key activities? Might customer participation be a
value-creating alternative?

Key resources: what resources are needed to create and

deliver our proposition?
What resources (people, competence, knowledge, capital, machine/plant,
premises, inventories) are needed to create and deliver the proposition
with the desired contents and quality to the identified target group? These
resources may be in-house or contracted, but the main question here is:
What resources are needed?

Key partners/networks: what partners and networks are

needed to create and deliver the proposition?
What individuals, suppliers, partners, networks, alliances and contracts do
we need in order for the model to work? Who do we need in order to
secure access to vital resources? Which partners are crucial to successful
execution? How do we assure access to these individuals? What role do we
play in these ‘value-creating networks’?
Membership in partner networks opens the opportunity to refrain
from owning and doing everything on one’s own and, instead, through
various forms of outsourcing concentrate on one’s own unique compe-
tence, use others’ competence and resources, which can result in reduc-
ing costs, enhancing quality and realizing economies of scale. Acting
together, it is possible to create something that would never have been
possible acting alone.

Financial aspects: do revenues and costs match?

This part of the business model shows the economic consequences of
what has been decided in the other seven blocks just mentioned. Here is
where we test the capability of the model to transform the value created
 THE BUSINESS MODEL 175

into economic value (i.e. monetize – preferably with a certain surplus).

If the model falls short in this crucial regard it is not economically viable
and must either be redesigned and developed or quit the field. This
general rule also applies to not-for-profit businesses and organizations
(so-called social entrepreneurship): money in and money out must at
least balance.
In other words, to attain economic sustainability, the costs of implemen-
tation of the business model must, in the long run, be covered by one or
another stakeholder. More on this later and in the next chapter.
This financial part of the model consists of two parts: revenue streams
and cost structure. The two are mutually interdependent and must there-
fore match each other and be seen as to parts of a whole. Without costs, no
revenue; without revenue, no ability to cover costs.
It should also be noted that with the Internet as a platform, this part
of the model may afford the greatest opportunities for novel solutions
and innovation. For some companies, new revenue models and radi-
cally revised cost structures are actually the key to their value genera-
tion rather than a passive consequence of other decisions. The Internet
offers opportunities to skip steps and various middlemen in the value
chain, thereby reaping sizeable cost advantages. In some cases compa-
nies have been able to cut almost all their interaction and transaction
costs (i.e. the costs of reaching the customer with both information
about the product/service and the product itself), thereby bringing the
company’s variable costs down to nearly zero. Web-based gaming firms,
auction sites and firms in the so-called sharing economy like Uber and
Airbnb are examples of business models that are based on this new eco-
nomic logic. On their platforms, customers and suppliers meet and all
exchanges take place digitally, without the platform owner having to
do more than provide the arena for the transaction (we will consider
platforms in greater detail later in this chapter).
Other businesses that offer fully digitizable products may have an eco-
nomic logic where the ‘first exemplar’ is extremely costly, but variable
costs thereafter are negligible. Movies, TV series, music, literature and
newspapers are some examples, albeit copyrights, royalties and licences
can alter the cost structure so that costs – and profit margins – remain
more ordinary. Netflix and Spotify can be used as examples where Netf-
lix to a high degree produce their own material and have a high-margin
business model, while Spotify struggles with high licence and royalty
costs from following a low-margin model (this explains Spotify’s recent
determined entrance into the podcast market, a change from its main
strategy).
If the company is a start-up, this financial exercise may be some-
thing of a guessing game about the future, and the more innovative the
idea, the less the certainty regarding the figures we are looking for. Still,
176 THE BUSINESS MODEL

uncertainty is no reason to skip this ‘stress test’ of the sustainability and

realism of the venture. Applying various scenarios and sensitivity analy-
ses often makes it easier to distinguish pessimistic and optimistic from
realistic alternatives and raises awareness of economic opportunities as
well as hazards.
Just as one can test and calibrate the seven ‘hypotheses’ in the upper
portions of the BMC, it is also wise to sketch out, simulate and experi-
ment with the financial aspects, whether using pencil on paper or
spreadsheet software. Asking ‘What happens if ... ’ questions often pro-
vide insights as to what the most critical elements are and what things
have to work in order to make implementation of the business model
economically viable. Looking into the finer details in the start-up stage
is not to be recommended since the parameters involved cannot be pre-
dicted or the figures given with any greater precision.

Key partners Key activities Value proposition Customer Customer

relationships segments
Freelance fashion Sizing system Timeless, well-fitting, Attract: relevant, General mass
designers and development high-quality basics inspiring content market appeal
pattern makers at a fair price (SEM, PR, blog, but target market
Pattern making newsletter, is men 16–35 and
Apparel Problem: sensation affiliate, events) core customer is
manufacturers Manufacturing of overpaying for ’the conscious
basic apparel, Convert: ease of man’:
Fabric suppliers Order fulfilment hassle of finding use, transparency,
right size fair (web store) He is contem-
PR agencies Marketing, PR and
porary, urban,
content Gain: sizes and Retain: style conscious,
Designers fit that take into community,
CRM unpretentious,
account both body referals and rational and
Platform suppliers
type and preference, involvement (social refined
Fashion magazines fair price and great media, newsletter,
and Bloggers quality and finish events) Style-conscious
men, who value
Key resources Feels good, looks Channels quality, crafts-
Affiliate partners
good, lasts a long manship and a fair
Designs and time (both timeless Distribution/sales: price over a logo.
patterns design and durable direct to consumer Men who see their
quality) (web sales) essential garments
Website, blog and
social media Communication: as investments,
Result: making not as disposable
brand experience
Brand dressing well easier
own, ’free’ (social
for men by offering
Proprietary sizing media, PR,
timeless classics,
solution
in highest quality WOM, affiliate)
Team fabrics, produced and
and sold fairly
paid channels
(SEM, events)

Cost structure Revenue streams

Fixed: salaries, web hosting, warehousing, office rent, IT Revenue model: online sales of own
systems brand exclusively in own store, potentially
add sales of third-party accessories (e.g.
Variable: production, pick and pack, delivery, paid marketing, wallets, belts, gloves, etc.) to complement
payment costs and create newness and rotation in an
offering otherwise ’only’ consisting of
Development costs: design and pattern making, web page basic apparel
Note: economies of scope as well as scale Pricing tactics: no sales, cost-based pricing,
potentially volume discounts

Figure 6.8 Example: ASKET’s business model in the initial phase, before implementation.
 THE BUSINESS MODEL 177

In order not to break the flow and to prevent financial aspects from over-
shadowing the other building blocks in the business model, we postpone
further discussion of these aspects until the next chapter (it is a good idea
to read the chapters in tandem, as they treat two aspects of a single whole).

Improving the business model: business model innovation

A mediocre technology pursued within a great business model may be more
valuable than a great technology exploited via a mediocre business model.
(Chesbrough, 2010)

In a start-up situation the business model is created in an open process that

can be carried out more analytically at a desk or in discussions with the
team and other interested parties. Another route is what we have called a
search-and-learn process – one tries, observes and learns, again and again,
and often together with early customers. In terminology borrowed from
Sarasvathy, both causal and effectual approaches may be used – and, prefer-
ably, used together – to erase the question marks in the model.
In an existing company, on the other hand, the task is most commonly to
fine-tune existing building blocks after signals from the environment indi-
cate that something needs to be done in order to preserve one’s competitive
strength (i.e. that there is a mismatch between the offering and the market).
This work can even be initiated not by pressure from the outside world,
but by the entrepreneur’s gaze for opportunity, whereby the entrepreneur
notices early signals ‘out there’ – in technology, politics, the economy or
other conditions – that open a niche for something radically new that can
change the rules of the game in the industry or sector.

Example 6.1
The death of the salesman?
Volvo’s sister brand in the Geely Group, the new ‘Lynk’, aims to revo-
lutionize how cars are sold. Retail dealer outlets have been eliminat-
ed, which makes it possible to try out a new business model, notable
features of which are the following:

• Sales primarily take place via the Internet.

• The prime focus is on selling ‘subscriptions’ – a new form of
leasing.
• Prices are fixed quotes– no discounts.
• The car is equipped with a button for car-sharing (the sharing
economy).
• All cars are fully equipped – only a limited number of models is offered.
178 THE BUSINESS MODEL

• The customer can choose the car’s colour and engine capacity.
• The cars are delivered to the customer’s home.
• Cars are collected from and brought back to the customer’s
home before/after
• service.
• No waiting periods – all models and variants are always in
stock.
• No diesel engines (environmental awareness).
(Geely’s press conference announcing the launch)

Whether the impulse to change comes from without or within, it is natural

to continually revisit and improve the business model. ‘Maybe we could do
this instead?’ is a frequently asked question, not least among entrepreneurs.
This spontaneous method, however, has a significant drawback: over time
it tends to lead toward conservative solutions and to slow the rate of inno-
vation. In short, it fosters a tendency toward ‘more of the same’ thinking –
mainly because organizations tend to be conservative and comfortable with
business as usual. To help entrepreneurs avoid this pitfall, tools have been
devised to facilitate a more systematic questioning of the unspoken, virtu-
ally invisible, taken-for-granted elements in the existing business model. In
that way it allows for solutions that users might not have come up with,
had they worked intuitively on their own. Employing these tools so that
they become part of one’s day-to-day thinking brings one a big step closer
to achieving the entrepreneurial organization. As Joan Magretta (2002)
puts it: ‘Business modeling is the managerial equivalent of the scientific
method – you start with a hypothesis, which you then test in action and
revise when necessary.
Two such tools that are compatible with the BMC are the ‘value curve’
and the ‘four questions’. They are used to ensure that the value proposition
is sufficiently differentiated on the market, and that you do this in a way
that makes the overall proposition relevant and attractive. To these two
tools one might add the ‘value pyramid’ (discussed later in the chapter),
in order to stimulate the flow of ideas around how value is created. If the
business model is also examined in the light of what we call ‘pipes and
platforms’, the model will have a good chance of continuing to be dynami-
cally stable.
Other similar tools include SWOT analysis, which aims to identify
internal strengths and weaknesses and at the same time evaluate exter-
nal changes in terms of opportunities or threats. Examining the business
model through this lens – either as a whole or block by block – can give
rise to many ideas about eliminating weaknesses and threats and exploiting
strengths and opportunities. PESTEL analysis, mentioned in Chapter 5, can
also contribute important input in this endeavour, as the business model
 THE BUSINESS MODEL 179

must be wide open to influences from the larger society/economy. These

tools compensate for the light emphasis on macro and environmental fac-
tors in the BMC. It also enables entrepreneurs, with their capacity to create
futures, to make use of and enhance developments and trends ‘out there’
to their advantage and thus create new opportunities. To develop this kind
of ‘environmental sensitivity’ (Chia, 2017) is a valuable resource on indi-
vidual, group and organizational levels. We will not discuss these latter two
tools any further here, since they are standard items in the management
toolbox. Instead, we will concentrate on the techniques that focus more on
questioning the taken-for-granted and more groundbreaking approaches.

Value innovation: using the value curve and the ‘four

questions’
The value curve and the ‘four questions’3 were introduced in the book, Blue
Ocean Strategy by W. Chan Kim and Renée Mauborgne (2005). There, the
authors challenged traditional market wisdom, arguing that in highly com-
petitive situations, where the pressure to cut prices is often very high, one
should not try to ‘outprice’ one’s competitors, but instead develop radi-
cally different value propositions that render the competition irrelevant.
Implementation of this approach is called value innovation, and a number
of intellectual tools have been developed to support that work. While Blue
Ocean Strategy is a book on management and strategy and does not have
start-ups and entrepreneurship in focus, the authors’ message falls well in
line with the entrepreneurial drive to create new futures rather than adapt-
ing to and fine-tuning the status quo.
The value curve is a diagnostic tool that can be used to identify the most
important value-creating factors in our proposition and to clarify its strate-
gic profile (i.e. its relative performance across identified factors of competi-
tion). The result allows comparisons with our main competitors’ priorities
or target customers’ assumed preference profile. The curve is also used to
provide input into the discussions through which the entrepreneurial team
develops a common view of the offering and its qualities. User-friendly
graphics facilitate comparisons, simulations and discussions.
The procedure is straightforward. First, identify and list the main com-
petitive factors in your industry (about 5–10). Plot them on the horizontal
axis and then, on the vertical axis, estimate and plot the level of value (from
low to high) that customers receive from our proposition across these key
factors. The rest of the procedure will vary according to whether the focus
is on your position vis-à-vis competitors or on your relation to prospec-
tive customers – or both. If more than your own curve is plotted, any gaps
between the respective curves are analysed and discussed. Do you have a
clear market position? Will the customer be interested in this profile? The
graph may be said to map the strategic profile of the offering and, if fully
worked through, the strategic landscape in the industry.
180 THE BUSINESS MODEL

A hypothetical example
If we were to describe ASKET’s initial approach to understanding the mar-
ket for T-shirts and finding an unexploited niche, the value curve might –
hypothetically – look like that shown in Figure 6.9.
Figure 6.9 shows a hypothetical value curve for ASKET’s offering. Fig-
ure 6.10 shows the ASKET curve, plus two typical competitors that they
need to differentiate from. The graph reveals that the curve for the ‘high-
end’ product is too similar to ASKET’s. The degree of coincidence leaves
no room for ASKET’s product to offer the customer any substantial advan-
tages – they are stuck in the middle. The conclusion is that either the offer-
ing has to be modified in one or more of the existing competitive factors,
or new, unique factors need to be added. This latter course is what Kim and
Mauborgne (2005) call ‘value innovation’.

High

Low
th
y

y
y

ns

ng
ice

ilit

bu
y

ve
ilit
lit

tio
ab

re
le
Pr

ab
bi

to
st
op

n
st
ra

st

ss
io

d
Du

ur
rm

ur

ce
an
sh
lo

lo

Ac
Fa
Fo

Br
Co

Co

Figure 6.9 ASKET’s frst (hypothetical) value curve with cost structure and revenues
marked. Identifcation of competitive factors before value innovation.

High
ASKET
Fine brand
Standard

Low
th

y
ns
y

y
y

bu
ve
lit

lit
ilit

ng
tio
ice

bi

bi

le
b

tre

to
op
a

ta
na
Pr

n
st

ds

ss
rs

io
ai

ur
rm

ce
sh

an
ou
st

lo

Ac
Su

Fa
Fo

Br
l

Co
Co

Figure 6.10 ASKET’s comparative value study – a comparison to competitors.

 THE BUSINESS MODEL 181

ASKET solved the problem by adding four new competitive factors

(‘value elements’): (1) an entirely new size system, with 15 sizes that make for a
customized fit; (2) presence on the web only, with quick delivery; (3) social
and ecological sustainability through a low degree of latest fashion and
European manufacturing; and (4) emphasis on ASKET’s relation to the
customer, based on full transparency and active communication via social
media.
In a value curve (sometimes called a ‘strategy canvas’ or strategy map),
these innovations result in the pattern shown in Figure 6.11.
The example in Figure 6.11 may be said to apply Kim and Maubor-
gne’s (2005) framework for value innovation, which summarizes the work
to modify the company’s competitive situation in terms of four critical
questions:
What happens if we change the offering by:

• eliminating factor X?
• reducing factor Y distinctly below the branch standard?
• increasing factor Z distinctly above the branch standard?
• adding/creating a new factor, unique in the industry?

These four questions challenge the ‘industrial wisdom’ and standard solu-
tions that prevail. Incorporating some of these changes into the business
model results in a new value curve (i.e. a new value proposition). Elimi-
nating/reducing are mostly applied to costs generated in the left-hand side
of the BMC, whereas increasing/adding focus more on customer value
(the right-hand side) (Figure 6.12).

10

6 Value innovation

0
ice

ns
th

n
e
ns
y
y
y

y
l
ve
ilit
lit
lit

im

tio
bu
ng
Pr

lit
io

tio
bi
bi

le
ab

tre

bi

yt

la
to
op
a
ra

op
n
st
st

na
ds

re
Du

io

ss

er
ur
ur
rm

sh

ce
an

ze

ai

er
liv
lo
lo

Fa
Fo

Ac
Br

st

om
Co

Si
Co

De
Su

ASKET
st
Cu

Fine brand
Standard

Figure 6.11 ASKET’s value curve after value innovation. By adding four new value ele-
ments ASKET has achieved a distinct ofering, with positive gaps vis-à-vis competitors.
The underlying presumption is that customers will value these new factors.
182 THE BUSINESS MODEL

Eliminate Increase
Reduce Add

Costs Value

Figure 6.12 The left-hand side of the BMC may be said to deal with efciency issues,
whereas the right-hand side addresses value questions.

If you are successful with this value innovation, the result may be a niche
market of your own with little competition, or you may have changed the
rules of the game altogether and dominate it – think the iconic iPhone’s
entry in to the market redefining the telephone. Other classic game chang-
ers that were developed along these lines include Starbucks, Ryanair, Ama-
zon, Twitter, Ben & Jerry, IKEA, Disneyland, Tesla, Nike, Spotify, Netflix,
among many others. These companies have all asked themselves one or
more of the four questions – Eliminate? Reduce? Increase? Create? – and
left hyper-competition behind them. At least for the time being, they are
perceived as ‘something completely different’, offering the customer unique
value-bearing products/services and business models. This framework for
problematizing the preconceptions in one’s industry is very similar to, and
might even be considered a codification of, the entrepreneur’s perpetual
habit of asking, ‘Isn’t there a better way to do what we’re doing?’

Value and the value proposition: the existential core of the

business model
The concept value proposition is unquestionably central to the BMC, embed-
ded and supported by the six building blocks in the upper portion of the
canvas. The proposition formulates the advantages/values to the customer,
who, in most cases, weighs the advantages against the price and makes a
personal assessment as to whether the offering gives value for money or not.
This central part of the model is often glossed over. One reason may be
that the price in the equation is easily grasped, easily changed and therefore
gets attention, whereas ‘value’ is a more elusive concept. Discussions of
‘value’ often revolve around what the customer perceives as value, which
is a subjective judgement and will vary from person to person, making it
difficult to pin down. The value curve presented in Figure 6.11 is one way
 THE BUSINESS MODEL 183

to right the balance and gain control over several of the components that
make up the perceived value to the customer.
One attempt to enumerate the factors that contribute to ‘perceived value’
in a more systematic fashion is made by Almquist, Senior and Bloch (2016;
see also Almquist, Cleghorn and Christensen, 2018). Inspired by the logic
of Maslow’s needs hierarchy, they propose some 30 universal ‘value ele-
ments’ that together constitute the value repertoire, ranging from functional
to emotional to life-changing to social impact. This palette forms a pyramid
that can be used to compose a unique and attractive proposition – which
the authors term a value constellation. If one thinks of a smartphone as a
bundle of elements of value, delivering on all levels in the hierarchy, one can
understand its attractiveness and unprecedented acceptance on the market.
One advantage of this palette is that it compels one to go a step beyond
characterizing values in general terms like ‘quality’, ‘convenience’ and
‘comfort’ and break them down into more specific advantages, such as
‘saves time’ and ‘reduces effort’. Doing so increases the precision of the
proposition, making it more differentiated on the market. Internally, it
makes it easier to understand what one is trying to achieve and where one
should strive for excellence (Figure 6.13).
The palette can be used in the development of a new business model
or when revising an existing one, either as a diagnostic – ‘Do we offer
enough?’ – or as a source of inspiration – ‘What might happen if we added
X, or X and Y?’ Combining this exercise with the ‘four questions’ previ-
ously mentioned may yield even more alternatives to choose from in one’s
quest for the irresistible proposition and business model. So, think of the
framework as a heuristic tool for thinking about this complex value issue.

Four kinds of needs are addressed by diverse Core value elements

Make a contribution
SOCIAL Self-transcendence
IMPACT

Provide hope, self-actualization, motivation,

LIFE-CHANGING heirloom, affiliation, belonging

Reduce anxiety, nostalgia, design, aesthetics,

badge value, wellness, therapeutic value,
EMOTIONAL entertainment, attractiveness, provide access
Save time, simplify, make money, reduce risk,
organize, integrate, connect, reduce effort,
FUNCTIONAL avoid hassles, reduce cost, quality, variety,
sensory appeal, inform

Figure 6.13 Value elements sorted in a value hierarchy. The universal value elements
are grouped according to four dimensions: social impact, life-changing, emotional
and functional. The idea is to combine several elements, preferably from diferent
dimensions in the hierarchy.
Source: Adapted from Almquist et al. (2016).
184 THE BUSINESS MODEL

From ‘pipes’ to ‘platforms’: toward a new value-

driving logic?
At several points earlier in this book the linear value-chain-based approach
has run up against the more network-oriented logic of collaborative pro-
duction, and the term ‘platform’ has been used, but without any specifica-
tion. We will now take a closer look at this.
Van Alstyne, Parker and Choudary (2016) are among those who are
examining the basic logic behind the two main kinds of business models,
which they call ‘pipes’ and ‘platforms’. As they see it, we are currently wit-
nessing a major shift: platforms are in the ascendant, becoming the domi-
nant value-creating model.
The ‘pipes’ model has long been the ‘default mode’ in thinking about
business. In its simplest form, it amounts to pouring raw materials into one
end, then refining them and adding value step by step, until, finally, out
come the products at the other end, ready to be marketed and sold to cus-
tomers at a price greater than their cost – hence, the ‘pipe’ metaphor. Porter
(1985) and his value chain are the prime example of this kind of process
thinking. Controlling the flow is what management is all about, and most
production is organized along these lines: linear one-way flows with active
producers and passive receivers/customers.
Key to the ‘platforms’ model challenge to the logic of the ‘pipe’ is the
emergence of the Internet, mobile telephony and social networks. Thanks
to the ability of these technologies to connect people at low cost, platforms
are able to achieve positive network effects.4 For example, today we see
scheduled television services challenged by Netflix and YouTube; the CD
by Spotify; hotels by Airbnb; taxis by Uber; universities and colleges by
Coursera and Skillshare; retailers and others by Amazon, eBay, etc.; Wiki-
pedia has already crowded the Encyclopaedia Britannica off the market;
and Instagram and Facebook have outmanoeuvred Kodak.
Platforms afford users (producers/service providers and consumers) an
arena that creates value by facilitating interaction and exchanges between
them. Platform owners market the platform and provide a secure tech-
nical environment, in which interactions and meetings are supported by
intuitive interfaces and unequivocal ‘rules of order’. The task of conduct-
ing and orchestrating attractive meetings is called ‘platform governance’
(Figure 6.14). In the case of Uber, this means striving to create an environ-
ment in which all parties – passenger, driver and Uber as platform owner –
feel they have gained by the experience. This implies that the owner also
arranges a convenient means of payment, seeks relevant approvals, evalu-
ates satisfaction among all the parties and monitors operations, removing
cars and drivers that passengers have disapproved of and blacklisting cus-
tomers who have been disagreeable to drivers.5 All in order to optimize the
match between passenger and driver/car.
Platforms are not attractive unless many people use them. Only then
are network effects generated. Once again, we note an economy of scale,
 THE BUSINESS MODEL 185

Producer Consumer

Value and data exchange

Platform owner
• Interface
• Payment
• Marketing
overn ance’
• Law
’Platform g
• Trust
• Meeting rules

Figure 6.14 Platform governance – directing and orchestrating the place where pro-
ducers, consumers and the platform owner create value (van Alstyne [Link]., 2016). Here
we fnd so called two-sided marketplaces like credit-card companies, eBay, Spotify
who provides benefts to two distinct groups. The Financial Times Lexicon defnes it
as, ‘a meeting place for two sets of agents who interact through an intermediary or
platform’.

where the volume of users is value-driving. The greater the number of

users on both sides, the better the matches, and the more attractive the
venue becomes. A Facebook page, dating site or real estate site with only
few users generates little, if any, value. Volume also creates positive rein-
forcing loops where, to take Uber as an example, more drivers mean
shorter waiting times for the customer, which leads more customers to
recommend the service to others, which means more bookings, which
makes it possible to reduce prices, which increases demand, which means
more drivers and so on.
This volume imperative has been characterized as the conundrum of
the ‘chicken or the egg’. No volume, no attraction; without attraction, no
volume. How do you become big and attractive when you have to start out
little and unattractive? In most cases the solution will be that the platform
owner subsidizes one or the other side of the equation (the customer or the
producer) to get the ‘loops’ started, but that requires stable financing and
long-term commitment. We touched on this problem earlier in the chapter
in relation to Spotify. A less costly approach might be to start local and
achieve dominance on the local market, and then scale up, successively
accepting more domains. Facebook, for example, started by offering its
services to Harvard students, extending thereafter to other top American
universities and then to the world.
Entrepreneurs who do not take note of this new way of thinking, orga-
nizing, co-producing and exploiting network effects risk finding themselves
186 THE BUSINESS MODEL

outmanoeuvred by others who have a business model that does. The risk is
more than theoretical. In 2007, Nokia, Samsung, Motorola, Sony Ericsson
and LG together earned 90 per cent of profits in the mobile industry world-
wide. Apple introduced iPhone on to the market that same year and in
2008 the App Store was launched, inviting both app developers and users
into a fabulously value-generating pas de deux. In 2015, Apple accounted
for 92 per cent of profits in the sector, and several of the former ‘big five’
are no longer manufacturing phones (van Alstyne et al., 2016).
We should recall that the choice between ‘pipe’ and ‘platform’ need not
be a question of ‘either-or’, nor does the solution necessarily need to be
totally digital. A company can very well combine the logics of both pipe
and platform in its value proposition, and a platform can be something as
‘analogue’ and tangible as a shopping centre. Digital platforms – of possi-
bly global scope – are, however, necessary in order to achieve full network
effects.
The main point of the foregoing discussion is that entrepreneurs, when
working out their business model, should devote a good deal of thought to
their competitive strategies and decide whether some form of platform or
collaborative strategy may be appropriate. Porter had no concept of net-
works and could not see actors out there on the market as potential assets
and partners in value-generating collaborative and innovative strategies.
Whether called a platform, network, alliance, joint venture, collaboration,
sharing economy or ‘open innovation’, we now know that open co-pro-
duction and co-consumption can open the door to radical and innovative
features in a business model. This kind of innovation is referred to as ‘col-
laborative entrepreneurship’ (Miles, Miles & Snow, 2006) and has been
recommended, particularly for contexts where social entrepreneurship is
in focus (Figure 6.15).

Closed logic Open logic

The smartest people in the business are already We need to work together with the smartest people,
working for us, so we have what we need in-house both in-house and outside the company, even
customers
In order to take maximum advantage of R & D we External R & D can create a lot of value integrated
have to invent, develop and market our products into our structure, but in-house R & D is needed to
ourselves understand and capture the value
If we do the best research in the field, we will be first We don’t need to have done the research in-house to
and win be able to take the advantage of it
If we have the most or the best ideas in the industry, If we use ideas, be it in-house or from outside, we will
we will win win
We have to control our innovation process and We should be able to profit from others’ use of our
intellectual property (IP) so that our competitors innovations and use others’ innovations if it fits our
cannot profit by our ideas business model.

Figure 6.15 Open and closed logics of innovation. Two innovation processes, repre-
senting contrasting innovation principles or logics. The open process has been deemed
to be better adapted to conditions in a knowledge-based and innovation-driven
economy.
Source: Osterwalder and Pigneur (2010) and Chesbrough (2003).
 THE BUSINESS MODEL 187

Social business models: social enterprises

The concepts of ‘social enterprise’ and ‘social entrepreneurship’ have
inspired much interest in recent years. The terms suggest that it is pos-
sible to conduct socially beneficial work using many of the same ideas and
tools that make entrepreneurship economically sustainable and efficient. It
means that people see new opportunities to solve social problems in new
ways, that resources are deployed in new combinations and new ways and
that the new vision is pursued in ways that create social value. Another
inviting description of the concept has been proposed as ‘doing good by
doing new things together with others’.
The activities and social enterprises vary widely, ranging from combat-
ting unemployment among suburban youth, providing better services to the
aged in rural areas, securing access to good drinking water in communi-
ties in India, to making micro-credits available to women with ambitions
in Bangladesh or reducing the problem of loneliness and isolation among
elderly people in urban areas. In recent years relieving the effects of sudden
crises, like the Coronavirus pandemic, have also boosted a cascade of entre-
preneurial initiatives. Often it is a question of supplementing commercial
or public institutions that either do not offer the services or fall short of
meeting everyone’s needs (Figure 6.16).
The main difference in relation to traditional enterprise is the motive
behind the venture. Social entrepreneurs are not primarily motivated
by profit. Instead, their aim is to solve a societal problem (e.g. social or

Figure 6.16 The global goals. In 2015, 193 world leaders agreed to 17 global goals
for sustainable development. If these goals are completed, it would mean an end to
extreme poverty, inequality and climate change by 2030. These goals can serve as a
starting point for opportunity identifcation in social entrepreneurship.
188 THE BUSINESS MODEL

environmental) or to create value among marginalized or disadvantaged

groups. This is not to say that profit is of no interest, but the prime mis-
sion is to create social value for others rather than economic value for
those behind the venture.6 Profit is a means, not the goal. As one anony-
mous social entrepreneur put it: ‘I’m not in it for the income, but for the
outcome’.
The main line of demarcation runs between social entrepreneurship and
social and environmental activism, philanthropy, voluntary work and chari-
table organizations. The reasons for excluding these latter forms of activ-
ity, however valuable they may be, is that they do not fulfil the criterion
of entrepreneurial autonomy and/or that they normally do not represent
an innovative form of organization and activity. In other words, that the
services/activities are socially oriented is a necessary, but not sufficient cri-
terion when defining social enterprise or social entrepreneurship.
These distinctions are not as salient or important in practice as they are
for researchers (an object of study requires precise definition). With only
minor tweaks, the BMC is applicable to all of the above activities. The Sal-
vation Army, for example, uses a business model of this kind.
The ‘tweaks’ to the BMC that have been suggested consist of two addi-
tions to the lower, ‘outcome’ section of the canvas: ‘social and environmen-
tal advantages (benefits)’ and ‘social and environmental costs’. They refer
to the need for the business model to develop and evaluate how value is
created, but with less emphasis on how the value is captured in monetary
and profit terms (Figure 6.17).
More far-reaching shifts in emphasis have also been proposed, princi-
pally to include the ‘vision’ and ‘mission’ that guide these organizations,
which, of course, are often the prime source of motivation and energy. In
some countries the term for this kind of organization is, literally, ‘idea-borne

Social and environmental Social and environmental

costs/disadvantages revenues/advantages

Figure 6.17 BMC for social entrepreneurship.

 THE BUSINESS MODEL 189

Where?

Why? Who?

Veriÿable? Shared
By what?
values

With what? What?

With
whom?

Figure 6.18 A general model starting with the shared values and then everything else
is derived from this core.
Source: © Social Business Models ([Link]/en/content/social-business-
models-canvas).

enterprise’, which reflects the fact that the businesses and organizations
stand for distinct values. ‘Impact enterprises’ is another term signalling they
are in it for the intended outcome or effect, not the personal benefit.
In the early phases one may also use a simpler, circular model on the
same theme as an aid in formulating the fundamental elements in one’s
undertaking. Here, values are the central focus and all other elements relate
to them (Figure 6.18).
More elaborated, advanced and research-based efforts have also been
accomplished and are still under development, for instance under the head-
line: ‘Business model design for strategic sustainable development’.7 The
future will give us more knowledge, but the lack of a universal model for
sustainable business modelling gives us no excuse to hesitate in contributing
to build a better society through decent entrepreneurial endeavours.

Example 6.2
Ocean Sole: social entrepreneurship
Social enterprise is typified by the now famous Grameen Bank in
Bangladesh. In 2006, Mohammed Yunos, its founder, was awarded a
Nobel Prize for his social innovation, a bank that extends collateral-
190 THE BUSINESS MODEL

free micro-loans – small sums of money, perhaps enough to purchase

a couple of laying hens or a nanny goat – to women living in poverty.
Where the nation’s banks traditionally shunned the poor – and es-
pecially poor women – Yunos noted that women generally made the
most of whatever aid they obtained, and those who have taken loans
from the bank have rewarded his faith with a strikingly low rate of
defaults.
Another example that addresses several social and environmental
challenges with a novel entrepreneurial solution is the Kenyan com-
pany, Ocean Sole. Julie Church worked for the World Wildlife Foun-
dation (WWF), where she tackled the ongoing and global problem of
plastic pollution in the ocean. In 2005, she came upon a way to make
use of the litter on African beaches, while at the same time providing
a source of income for Kenyan women (i.e. creating social and envi-
ronmental value by mending the broken resource cycles that result in
pollution). The initial plan was to collect flip-flops from the beaches,
recycle the plastic and produce new products for the market, which
are marketed through multiple channels (Figures 6.19a and 6.19b).

Figure 6.19a Ocean Sole employs poor Kenyan women who comb the beaches
for discarded fip-fops.
 THE BUSINESS MODEL 191

Figure 6.19b Ocean Sole creates a broad array of items from the recycled plastic
of discarded fip-fops.

The start-up company’s first customer was WWF, but Julie Church
realized that for the project to be able to deliver long-term social value,
it needed to develop a strong commercial foundation and attract pay-
ing customers. In short, Julie’s project needed to become a viable
social enterprise, with a business model and an entire value chain/
constellation in place, from collecting discarded sandals on the beach
to selling artisan products in the company’s own shops and other
retail outlets in Kenya and worldwide via the Ocean Sole website.
Today, Ocean Sole employs about 100 people and recovers roughly
400,000 sandals each year. The company showed its first profits in
2013. Learn more in Panum and Wendelboe Hansen (2014), where
five other profitable social enterprises and their business models are
also presented.
192 THE BUSINESS MODEL

Finally, it should be noted that a perfect business model on paper is

no guarantee of success. When all is said and done, it is the execution –
that is, how one deals with the myriad of situations, events and issues
that arise to realize the aims set out in the model – that will be decisive.
One can even go so far as to say, with a thankful nod to Chesbrough
(2003, 2010), that excellent execution of a mediocre business model is
probably better than mediocre execution of even the very best of busi-
ness models.
The next chapter will examine one necessary key to be able to deliver
this excellence in execution: the financials that arise from the business
modelling. Is the business model economically feasible to execute? A touch
of financial literacy might help to answer that question.

Chapter 6 refections and exercises

Refections
1. The text stresses the idea of a business model as a value creating
system.
What is the essence of this system’s perspective?
2. The most used and accepted description of a business model is
that ofered by Osterwalder and Pigneur (2010): the rationale of
how an organization creates, delivers and captures value.
Scrutinize the three tasks this defnition assigns to the busi-
ness model (create, deliver and capture). What do they mean in
practice?
3. IKEA’s business model is described as dynamically stable. What
does this mean?
4. A frequent theme in the chapter and throughout the book is that
technology alone does not create value. Take the sentence further
and describe fully what it means and give examples from your
own experience.
5. The business model canvas (BMC) can be described as nine
hypotheses.
What is the rationale for this way of seeing (interpreting) the BMC?
What kind of actions does this view trigger?
6. The term value constellation is used in connection with the value
curve and the hierarchy of values (the value pyramid).
What can we learn from this term and the theory behind it?
How can we use this in the design of the ofering and the BMC?
7. What similarities and diferences can we fnd between busi-
ness-oriented entrepreneurship and social entrepreneurship/
enterprises?
 THE BUSINESS MODEL 193

8. What in your opinion are the prerequisites for using the terms
‘entrepreneurship’ and ‘entrepreneur’ to describe activities and
actors in the social sector? Explain your view.
9. What challenges can one expect mixing social and proft goals in
a social enterprise?

Exercises
A
Ten archetypical business patterns with disruptive potential are specifed
in Insights 6.1.
(a) Give one additional example from your experience for each of the
following models:
• subscription (Netfix)
• freemium (Spotify)
• free model (Facebook)
• marketplace (eBay)
• access-over-ownership (Airbnb)
• hypermarket (Amazon)
• experience (Tesla)
• pyramid (Dropbox)
• on-demand (Uber)
• ecosystem (Apple)
(b) Following is a list of eight companies considered to be among
the most innovative companies of 2020 (see [Link] and fast-
[Link]). Match them with the business patterns just
mentioned.
Choose the one you fnd most ftting, they are often overlap-
ping. (If you don’t recognize the company, Google it, decode its
business model and match it!)
• Google
• Alibaba
• Snap
• Ryanair
• Shopify
• Girls Who Code
• 99designs
• Truepic

B
In a group, prepare two big, blank BMCs and get some post-it notes.
(a) Pick two strong competitors in a sector, decode and map
them briefy in the BMC forms (e.g. Spotify vs Apple Music,
194 THE BUSINESS MODEL

McDonald’s vs a local fne-dining restaurant, Starbucks vs a

local classic cafe, TESLA vs BMW, H & M vs Zara, IKEA vs your
best local furniture dealer). Concentrate only on the most
vital and distinguishing attributes in each block in the BMC.
(b) Compare how they difer in central assumptions across the BMC.
(c) Discuss how they are designed to create value and meet the
customer’s needs.
(d) Explain how and why there seems to be many roads to suc-
cess even in the same sector.

C
Have a BMC at the ready – preferably designed by you and your team.
(a) Expose it to a stress test by answering the following questions:

General
Do the blocks ft together and support each other, are they in sync?
Do all the blocks support the value proposition?
Are there any ‘misfts’ or loose hanging ‘orphans’ in the model?
Why you and your team?

Specifc
What is the real problem you are solving?
Does the ofering fll the customer’s needs?
If this is great, why hasn’t it been done before?
Haven’t we seen this before?
What is your unique diferentiator to competitors?
Why will the customer bite?
Are the segments you have chosen big enough?
How do the segments evolve over time?
Have you tested it to potential customers? Do they like it?
What are you replacing with your solution?
Is the technique you have chosen secured for the future?
What are the top three risk factors you face with this venture?
Is the model easily scalable?
Is the model easy to copy?
How will you make earnings? Who is paying?
Do you earn before you spend?
Are there complementary revenue streams to fnd?
Is the cost structure attractive and innovative?
(b) Expose your BMC to a context test by asking the following questions:
• Demographic trends: are there changes that will afect your
ofering?
 THE BUSINESS MODEL 195

• Rules and regulations: are new regulations/rules that afect

your ofering in sight?
• Economy: are the economic trends supportive or unhelp-
ful?
• Competition: what can we expect from competitors or new
entrants?
• Tech trends: are there tech changes in your industry? Are
you prepared?
• Consumers’ preference trends: are there consumer trends in
sight that afect us?
• Societal values: are the shifting values in society taken care
of in your ofering (gender, race, diversity, etc.)?
• Sustainability issues: are there parts risking ecological or
social goals in society?

(c) How do you plan to cope with any potential problem areas uncov-
ered in the context test in (b)?

Value curves
(a) Present the main competitive factors (value elements) in the
following industries/markets (provide about fve factors each).

• e-scooters for sharing in the city centre

• Electric cars
• Youth hotels
• Bookstores
• Tablets (like iPad)

(b) Take one of the above markets/results and practice value

innovation! That is, discuss if it’s possible and fruitful to do the
following:

• Increase factor X distinctly above the standard?

• Add/create one or more new factors, unique in the indus-
try (take help from the value hierarchy and its elements of
value)?
• Eliminate factor Y?
• Reduce factor Z distinctly below the branch standard?

(c) What, in your opinion, is the best way to diferentiate and inno-
vate in the chosen market?
196 THE BUSINESS MODEL

E
The social progress index embodies a large body of research on mov-
ing ‘beyond GDP’ and older ways to defne success in society. They have
instead identifed the social and environmental elements of the perfor-
mance of countries, aiming to inspire action and have a positive impact.
From this ‘map’ we can gather basic problems, to which we can imagine
solutions and from which we can identify entrepreneurial opportunities
and go on to design business models ready to be tested (see [Link]-
[Link] and Figure 6.20).

(a) In a group do the following:

Figure 6.20 A general starting model for social entrepreneurship.

1. Take your time investigating the components in the social prog-

ress index.
2. Pick one that engages you and where you have some insight and/
or experience.
3. Describe a specifc problem in that area.
4. Discuss tentative solutions to the problem – choose one!
5. Elaborate it further and map it in the suggested business model
for social entrepreneurship presented in the book. The general
‘wheel model’ is a good start – the full BMC is the goal.

Notes
1 The term, ‘market myopia’ (nearsightedness) was coined by Theodore Levitt
(1960).
2 Sometimes a distinction is made between the more strategic ‘business model
design’ and ‘business modelling’, which is more operations- or process-oriented.
3 Kim and Mauborgne (2005) present their tool as the ‘four actions framework’.
 THE BUSINESS MODEL 197

4 Network effects refer to the underlying economic concept: here it is the unusual
fact that higher usage makes something more valuable (i.e. the more who use
the product or service, the higher its value becomes to the group – e.g. social
networks). Two computers can make only one connection, 5 can make 10 con-
nections, and 12 can make 66 connections, etc. In 2020, for example, Facebook
had more than 2.6 billion monthly active users (≈ computers or nodes), which
in practice means infinite possible connections.
5 Some features of Uber’s business model (and, for that matter, most business
models in the sharing economy) have yet to be regulated and tested out. Con-
sequently, Uber arouses controversy and has provoked legal action in many
countries. Are drivers to be seen as employees of Uber or self-employed? Are
the services organized or spontaneous ride-sharing? These and other questions
(like taxing) are being debated and studied wherever Uber is active. More gen-
erally, legislative bodies in many countries are working to update the laws and
statutes that regulate the labour market. Existing laws do not have the scope
to handle today’s innovative frenzy in the quest for winning concepts for web-
based enterprise. It is no easy task to create institutions that protect stakeholders
and consumers, yet avoid stifling the obvious benefits that the sharing economy
offers.
6 Social enterprises operate in the borderland between profit-driven and non-
profit enterprise. They are often shareholding companies but may have rules
forbidding distribution of profits to shareholders, so that any surpluses will be
reinvested in the business.
7 See, for instance, Joyce and Paquin (2016) or França (2013).