This article by Dorie Clark first appeared at Forbes.
Jargon-loving executives and entrepreneurs throw around the term “business model” all the time, but “very few people are conscious of what their business model actually is,” says Alex Osterwalder. Even within the same company, executives generally don’t have a shared language around the concept, which can lead to misunderstandings. That’s why Osterwalder – working with Yves Pigneur, his dissertation adviser – set out to create a tool that would allow professionals to more easily sketch out and describe their business models, which became their bestselling book, Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers.
“Every organization has a business model, but it’s relatively new that people need to make it explicit,” Osterwalder told me in a recent interview. “It used to be that in one industry, you’d have a dominant business model over decades that wouldn’t change much – you’d focus on better implementation or better quality, but the business model wouldn’t change. But in the last 1-2 decades, we see different business models emerging in the same space, and also, a lot of business models expiring – think of the music industry or the news industry.” Nowadays, if you don’t think explicitly about how your company will make money and offer value to consumers, you’re likely to be overtaken quickly.
Osterwalder cites one example of what overreliance on a legacy business model can do. “Kodak had one very successful business model around analog film, and they lived for a long time off this business model,” he says. “It’s not that they weren’t innovative – they helped invent digital photography; they were investing in innovation. But the problem is, they didn’t have a business model for digital, so they almost shoveled their own grave by helping invent digital photography. People today, when you say innovation, they think about technology or product innovation, and that’s part of the equation.” But as Kodak showed, technological innovation without a business model to support it leads to failure.
Instead, it’s important to think broadly about other ways your business can thrive. “For me, ‘new’ or ‘not new’ is not that relevant” when it comes to business models, says Osterwalder. If you apply a classic business model to a new industry, you can have great success. When he runs a workshop, he has participants try to apply Nespresso’s business model – in which they sold high-end coffeemakers to the public and then, for years, had a monopoly on selling refills – to other industries. “What was powerful about Nespresso was they locked in consumers and then created recurring revenues.” Indeed, he says, while many people think about Apple’s iPod as a stunning technological breakthrough, Osterwalder also views it as a smart business model. “[Steve Jobs] created switching costs. Once you have 1000 songs on your iPod, it’s very hard to switch, and by doing that, he locked us in.” The trick, Osterwalder says, is to think about how the same principles could be applied elsewhere. “If you’re in a transactional industry like toilet paper, where there’s zero switching costs, you could ask yourself, how could I design switching costs into my business model?”
Another possibility to consider is how to get others to work for you for free – a trick Mark Zuckerberg mastered to great success. “Facebook gets a billion people to work for them for free,” says Osterwalder. “If you sketch out their business model…most of the value is from content, and that happens to be produced by people who use Facebook.” Another example is IKEA, which gets customers to assemble their own furniture.
“Today, most people are focused on product,” says Osterwalder. “But competition is not just on product, but on your business model. Why is the iPhone still ahead of everyone else? It’s not because their technology is better; it’s that they’ve built a platform, with app developers on one side and millions of users on the other side.”
These days, it’s common for industries to be roiled by dramatic changes. Unless you want to be the next Kodak, innovating in the lab but faltering in the marketplace, it’s essential to get clear on your business model – and perhaps to reinvent it. As Osterwalder says, it doesn’t have to be new. But as long as the idea is new in your industry or sphere, it might be the ticket to your company’s future success.
Dorie Clark is a marketing strategist who teaches at Duke University’s Fuqua School of Business. Learn more about her book Reinventing You: Define Your Brand, Imagine Your Future (Harvard Business Review Press) and follow her on Twitter.