Dr. Adam J. Bock is an academic entrepreneur, financier, tech-venturing expert, and co-author of a must-read book which is called The Business Model Book.
With Adam, we went in-depth into the business models world.
- How did you get into the study of business models?
- What business models are not?
- Were business models born with the Internet? (A brief history of business models)
- What are some other common myths that surround business models?
- Is business models analysis a primary tool for business experimentation?
- What’s a definition or effective definition of business models?
- What are some of the business models tools available, and how to use them?
- What are the SHaRP resources and why they matter?
- What’s the customer journey map and why it matters?
- What’s a business model narrative, and why it is essential?
- What are some of the key obstacles to designing a great business model?
- Suggested reading
How did you get into the study of business models?
Adam J. Bock: I got into the study of business models formally when I started my Ph.D. in just around 2007. I need to emphasize that that came through Professor Gerry George who at the time was at Imperial College London, he is now the Dean at Singapore Management University.
And Gerry is one of the top strategy and entrepreneurship academics and experts in the world. And I had a lot of practical experience with startup companies and venture capital, and so business models and the thinking about business models was something that I was spending a lot of time on.
And so he guided me in my Ph.D. to bring that practical experience and knowledge into a formal research process. And so, we conducted research during my Ph.D. and published papers and books on it. And ultimately that led to then The Business Model Book a couple of years after that.
What business models are not?
Adam J. Bock: In the book, we provided a much more extensive list of all the things that we felt it was important to distinguish from business models but I’ll emphasize three of them.
- Strategy: A business model is not a business strategy, it’s not a corporate strategy. A strategy is about relative performance against the competition. That’s really what strategy is. Can you outperform your competitors? And that’s not what a business model is.
- Marketing plan: A marketing plan, there are an awful lot of people who sort of see a business model and imagine that what it’s about is how you present information to your customers, how you interact with your customers. Clearly, that’s very important but a marketing plan is also not what a business model fundamentally is.
- And Revenue Model: the most common misconceptions is that a business model’s a revenue model. And this I think is one of the more pervasive misunderstandings simply because we have terminology that we use to talk about business models, the classic ones being razor blade models or a freemium business model. In the razor and blade model that you sell the razor cheap because you’ll then be selling supplies. That’s fundamentally a revenue model. It’s how you generate revenue. And the same thing with a freemium app model, where you give it away for free, and then there are upgrades or in-app purchases that people can buy. Those are fundamentally revenue models associated with how you generate sales pricing systems, and so on. And while those are useful to keep in mind, none of those things are really what encompasses an actual business model.
Those are the key ones we want to try to make sure we distinguish.
Were business models born with the Internet? (A brief history of business models)
Mention of business models according to Google books
Adam J. Bock: The story of business models goes further back than that (The Internet), a good for 10, 20 years if you look in the literature and the research. There were various times when researchers were talking about models of business.
Economic researchers were talking about models of business where they were trying to create a process model for how organizations function. And then the phrase “business model” really was generated in the late 1980s, early 1990s and it almost just emerged randomly.
We’re not even sure. We can find examples of it in the literature in which people are beginning to talk about this shorthand for value creation, something about the way that the organization works.
It picked up steam during the dot-com boom. But it was used in a particular way. It was often used to explain why dot-com companies, these companies that now we know, which were just disasters, why they didn’t have to generate value.
People were arguing that they could operate at a loss indefinitely, that they had a different business model than anything that we were familiar with in terms of pricing stock or understanding how much a company was worth.
And of course the major, the critical thing about business models out of the dot-com boom was the fact that that was fundamentally wrong.
That isn’t the way the world works. There are no exceptions for business models. Every organization, whether it’s for-profit or nonprofit; whether it’s an internet company or a biotechnology company; whether it’s going to sell products or whether it’s going to raise money from private investors and be sold through an acquisition before it ever brings a product to market.
Every organization has to create demonstrable and ultimately monetizable value, and that’s the core business model concept that every organization has to have a viable business model for it to survive.
Gennaro Cuofano: These are critical points actually to emphasize. And I guess the first lesson that we had on this was during the dot-com bubble. And now we’re seeing again today also set of tech companies which are also going to IPO and where we see those business models which, while they generate a lot of revenues, they are not yet profitable.
What are some other common myths that surround business models?
Adam J. Bock: I think that there are myths around issues of how you create new business models, what makes a business model innovative. I believe that there’s the classic one, there’s a myth that you can have a business model in which you don’t have to generate profits eventually.
We see right now, in particular, Uber and Lyft being perhaps our best current examples of companies with tremendous revenues but generating considerable losses in the short term. People are banking on the longterm value that those companies presumably could generate.
But I think that the fundamental myth about business models, which we probably would want to talk about in a little more detail, is this idea that you can craft a business model on paper and then evaluate it and know whether a company is going to succeed or not.
When I mentor entrepreneurs or when I’m teaching in my classes, that’s commonly my biggest concern about business models is that. Because it is a shorthand for value creation and how the organization functions, it’s easy sometimes to imagine that we can write it all down on a napkin or a piece of paper on one of these canvases.
And then just looking at that, we can somehow predict whether that’s a viable long-term business or not. And that’s the most concerning myth from my perspective.
Gennaro Cuofano: My understanding from the book is that one of the main advantages of using a business model analysis is the fact that you can create business experiments.
Is business models analysis a primary tool for business experimentation?
Adam J. Bock: That’s precisely the idea that we tried to get across in the book. I think one of the most critical uses of these business models canvases. These tools that you’re trying to make sure you haven’t missed something obvious.
You put all of this information down in, into a canvas or whatever diagram or document and hopefully that helps you look sort of at a surface level or have we missed something obvious.
But the second thing is, you want to use that to identify underlying assumptions that you have about the opportunity or the business or the organization — making those assumptions explicit.
We think customers will pay for this. We believe this is the channel that we’ll use. We believe that this is the type of resource that’s going to be to make this business model work. Once you recognize what those assumptions are, you’ve set the stage for creating the experiments that will tell you whether or not the business model is viable.
And then this gets into classic lean startup sorts of methodologies trying to find your minimum viable product and so on.
But from my perspective, it comes back to making those assumptions explicit and then using those assumptions to run fast and inexpensive experiments to confirm how that business model will work. And that’s going to be your best indicator of whether or not you have a viable business model.
What’s a definition or effective definition of business models?
Adam J. Bock: It is the question that has been plaguing academic research for about 25 years now, and there is still is in, from the academics perspective, there’s still no agreement on a precise definition for a business model.
And this was the core of my Ph.D. research, and the first major paper that I published was this concern that the way that academic researchers were thinking about business models was not the way that managers and entrepreneurs think about business models.
And so we also tried to tackle this problem and that was eight years ago, almost nine years ago, from an academic perspective, we haven’t come to a single definition. But I want to give you a couple of examples that I think are helpful.
The first example I want to give you is, as an academic, to be completely honest, the most powerful definition that we have was actually one of the very first ones that were developed by Zott and Amit, two very top-notch researchers who really published the first major study on business models, back in 2001.
The academic definition
And they defined a business model as the content structure and governance of transactions to create value in the organization.
Read the study here.
And the problem is is that that’s a non-obvious definition. It’s a very academic definition but for people who have time or MBA students who are really interested in this; it’s almost worth reading the paper and kind of thinking about it because you realize by defining it so carefully, as limited to the way that the organization manages its transactions internally and externally, it becomes much simpler and clearer to actually assess what a business model is or is not.
Now, the sad part of this is that that definition did not survive and ten years later, Zott and Amit have written multiple new articles in which they’ve gone to other definitions.
But if you wanted an academic definition that’s personally my favorite. You might find that funny because the second definition I’m going to give you is the one that Gerry and I came up with, which I think is a good one, but it comes at this from a completely different perspective.
The entrepreneurial definition
When we did our research, we tried to recognize that there was something more holistic, there was something more interpretive about business models which were important to managers and entrepreneurs.
And we were trying to get at this sense that this was about the configuration of the business, how you tie things together and it all has to be focused towards something entrepreneurial, something to generate value, where there wasn’t value previously. And some aspects of that definition still sort of part in use.
That sort of higher level framework is very much in alignment with the sort of the Business Model Canvas but the definition that has emerged in these last five to six years, based in part on the success of the Business Model Canvas is more vaguely a set of activities and resources and processes that create value.
And it’s helpful to have that definition because it’s more all-encompassing and it does align very nicely with the Business Model Canvas, and it is in fact what Zott and Amit came to, sort of this activity-based approach to a business model.
And because it’s aligned with the canvas, it’s kind of a good working perspective but the trouble with it is that it’s vague enough and it’s a little vaguer than we might like and it sometimes gets expanded even further to include things like business strategy, which is exactly where as a researcher, I would prefer not to see business models go.
For MBAs, it’s probably useful to recognize two or three things here.
- One that we are talking about a set of elements. We’re talking about a set of different aspects of the organization, activities, resources, processes.
- Number two that we need to have all of this linked to value creation. That’s kind of really where all of this comes back to.
- Number three, it’s useful to remember the design piece of this, right? This is about designing how organizations function.
I think if MBAs and managers and entrepreneurs keep those things in mind, I believe that even if we don’t have a single perfect definition for a business model, I think that there’ll be able to work with what’s available, to use the canvases and so on.
What are some of the business models tools available, and how to use them?
Adam J. Bock: I love the Business Model Canvas, and Alexander Osterwalder did just a phenomenal job and researching and developing and, and building that. But it does have limitations.
If you are an early stage venture or you’re not even, you don’t also have a company yet; you’re just trying to think about an opportunity, there’s a lot of information that would need to go into Osterwalder’s Business Model Canvas, that you might not have.
The lean canvas as an early stage business model tool
And so the two additional tools that I think are helpful, one is the lean canvas, which was developed by Ash Maurya. And I love the lean canvas, I use it very consistently in my classes and students like it.
It’s very focused on the customer problem and the solution to that problem. And so it’s very intuitive for students. So I, in the book and in practice, I recommend that the lean canvas is handy for very early stage companies.
Teams and organizations that are at that very initial stage of getting launched will find the lean canvas to be a very helpful, straightforward tool for putting together the elements of their business model.
RTVN framework for a very early stage venture
Source: bizmodelbook.com, RTVN framework worksheet here
But if you’re even earlier than that, I mean you’ve come upon this idea that you think might be innovative or it might have a market opportunity, even the lean canvas might be a little more than you’re prepared to develop. Because it does require you to think in at least a little bit of depth about channels and customer relationships and cost structures and you just might not be there yet.
And so for that, we recommended this model (RTVN), which stands for resources, transactions, value, and the narrative. And it’s meant to be an extremely simplistic way to get started with a business model.
Think about the essential resources that you’ll need. What is it that creates value? What are the transactions that take place? Who do you interact with? Whether it’s suppliers, customers, partners, how is value created and then captured? And that those are not necessarily the same thing.
How you create value and then how you monetize that and capture it may be slightly different. And then surrounding that, we encourage early entrepreneurs to make sure they do think about the narrative.
What’s the story that ties all of this together? Because maybe the single most important thing about business models, if we could jump ahead 50 years and think about how business models changed management, it might be that the ability to use a business model to tell a straightforward and clear story about why an organization is going to be successful is really what makes it work.
And so you make sure that as you think about these elements; the resources, transactions, values, or if you use the lean canvas or if you use Osterwalder’s Business Model Canvas, that you always have in the back of your mind, what’s the underlying story here?
What’s the compelling way to explain, whether to employees or partners or investors or customers or suppliers. What is that story that shows why this business works?
Gennaro Cuofano: There is also another part where you say to focus on actually the resources which you call SHaRP resources.
What are the SHaRP resources and why they matter?
Adam J. Bock: The SHaRP resources perspective is a variation of a more longstanding approach to resources in strategic management and corporate strategy.
There’s a framework called the V-R-I-N or the VRIN framework based off of the resource-based view of the firm, which is this long-running strategic framework in the academic literature.
When we were thinking about what we did want to make sure that we distinguish this a little bit from a business model perspective simply, again, to kind of make sure that we didn’t get too caught up in links with strategy.
The SHaRP resources framework helps to emphasize that organizations gain advantages and are successful because of the various resources within the organization. And resources is a very generic term, it can refer to human capital, it can refer to financial capital, physical assets, capabilities, skills, knowledge.
We wanted to make sure that people had a relatively straightforward way to think about those and to assess them in a relatively simple way.
And so SHaRP stands for:
- Specific: They’re going to be the people or the assets, or the way money is used that are specific to that particular opportunity in that industry.
- Hard to copy: They need to be hard to copy. Because if anybody can get access to them, then your advantage is going to be limited either in time or in geographic scope.
- Rare: They need to be rare. They need to be something that once you access, they become something that other organizations can’t as easily also generate.
- And precious: They have to be valuable in some specific way.
The more of those characteristics that a resource has, the more it contributes to the success of a business model. Thus, having a resource, an individual for example, who’s very specific can provide a lot of value to your opportunity, that’s very good.
But if they have unique experience, they have unique capabilities, no one else has been working on the same kinds of topics that a person has been working on, the more of those characteristics, hard to copy, rare and precious, the more likely that that person’s going to be that person, that asset, that capability, that skill will actually ensure that your business model is viable in the long-term.
What’s the customer journey map and why it matters?
Adam J. Bock: The customer journey map is one of those tools that I’m constantly surprised not to see more often. The customer journey map is a very simple thing, and this is not something we invented by any stretch of the imagination.
It’s a map or a diagram or even a narrative that explains every step that your customer takes:
- From when they first become aware of your innovation, product, company
- All the way through the educational process, the purchasing process, customer support after purchase,
- And ultimately to a point where they’re either becoming a longterm customer or also, they’re also helping refer other customers to you.
And this customer journey map is incredibly powerful for thinking about from a business model perspective because it shows you every interaction that you have with the customer and it gives you a relatively clear and testable process for thinking about all the things that your business model has to do to be successful.
And there are many versions of the customer journey map, and there are at least a dozen different templates online that you can access. But I am constantly surprised that I don’t see more entrepreneurs generating a customer journey map in conjunction with their business model because I think they go hand in hand if you know what your customer journey looks like.
What’s a business model narrative, and why it is essential?
Adam J. Bock: The business model’s narrative is a couple of things. It could be a little bit of your organizational story. It could be a simple description of how you create value. It could be in part what makes your organization unique from any other.
The way that we have tried to encourage people to think about the narrative is to tie it explicitly back to the RTVN framework.
So the narrative should encompass in some simple way the essential resources, the key transactions, and how value is created and captured. And it’s not the case that the narrative has to be perfection.
It is something that you can constantly return to say, “Is this actually what the business does and do all of the elements the business model in this canvas or in this broader analytical framework that we’ve created, do they all ultimately tie back to that?”
And this is so important because as people, as humans, we think in narratives. We automatically create stories about everything. About ourselves, about the organizations we work for.
And that is a compelling way to communicate information extremely quickly. So we feel like it’s a bit of a missing piece that a lot of entrepreneurs, they know about it, and they’re thinking about it as they build their pitches.
And so from our perspective, why not make that explicit and make sure that it matches exactly what it is that your underlying business model is doing?
What are some of the key obstacles to designing a great business model?
Adam J. Bock: I think there are three.
The first one is the unstated assumptions. Getting those assumptions and hypotheses down in the business model. I think that the most common mistake that I see is when entrepreneurs put together a business model, but they still have these assumptions in the back of their head that are driving how they think about the business model and they never get written down.
And what that means is that if you don’t write them down, you’re never going to test them. And that’s an extremely dangerous place to be. We know that from studying entrepreneurs that the assumptions that they have about how a business is going to work are often not reflected in the market reality because very often we are not our company’s primary customers and so it’s just really essential to get those assumptions written down.
The second thing from my perspective is just failing to look beyond the surface. So you look at a business model, and all the pieces seem to link up, and you just leave it there. And the reality is that business model analysis is fundamentally more complicated than that. We can look at the example of low-cost airline carriers like Southwest and Ryanair and sure, some things are obvious, they don’t serve champagne on the flights. Well, that’s an obvious element of the business model.
But you can look at a company like Southwest Airlines in the United States and they spend more on training than most other airlines do. That doesn’t seem to fit the low-cost business model concept. But you have to look deeper. Because mistakes in the airline industry are very costly. If you’ve got the bag on a wrong flight or a flight gets delayed, the costs of those mistakes are extremely high. And so training ultimately is a low-cost activity even when you spend more on it because it’s generating returns in the long haul.
And then the last thing I think is the last obstacle is missing the value needed for the customer’s relationship. Where does the need of your customer match up to the value you create in the organization? What is the value created in the business model? And again, this is where that customer journey map I think is critical because it ensures that you’re making that connection very, very explicit and there’s no shortage of other tools out there that you can use in terms of linking up customer needs with value creation.
But making sure that you’re doing that very explicitly from my perspective is a critical obstacle that a lot of entrepreneurs face in building an effective business model.
The book has a companion website which is freely available to anyone. That includes a set of worksheets that guide you through assessing and building business models. The worksheets are freely available at: www.bizmodelbook.com.
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