How to build a business model

Let's cut the noise and get right to the chase. Fact is, all businesses need to do three things:

1. Create value

2. Deliver value

3. Capture value

But there's an unhealthy obsession in boardrooms, among investors and in the marketplace on how businesses capture value. Not much is said on how they create and deliver value. More on that later.

Now, the reason a business model exists is because it articulates how a business creates, delivers and captures value. This is vital. Then why aren’t there as many books on business models as there are on strategy?

The answer is perhaps linked to another question—why don’t organizations devote attention to their business models as they do to their strategy?

There are many reasons:

• Not understanding what a business model is.

• A tendency to confuse business models with business strategy.

• And importantly, due to the fact that businesses could succeed by innovating on products, services or strategy even as they left their business model untouched.

But the last 20 years have witnessed disruption across industries on the back of innovative technologies and led to the development of new business models.

A study by the Monitor Group on sources of innovation reveals that the most successful innovations share two traits:

1. They focus on shifts in the business model and customer experience

2. They employ multiple kinds of innovation—frequently six or more—making them new and different business models

I am a fan of Duolingo, the free gamified language learning service. It has a remarkable business model: as you learn a language for free in an engaging and fun way, you are given translation assignments as homework. Their ingenious algorithm merges translations from several such students and sells them to clients like CNN and Buzzfeed. Rather than being freemium or ad-supported, their model thus has invisible sponsors who enable a world-class, category defining experience for free.

Zenefits, Google, Apple, Amazon, Airbnb, Uber, Tencent, Netflix, eBay and IKEA are all examples of successful businesses whose innovative business models disrupted the marketplace. Aravind Eye Hospitals, InterviewStreet, Zipdial, Freecharge are some examples from India.

That brings me to business strategy. How is it different from business models? Strategy explains how a business is distinctive about how it creates, delivers and captures value to successfully compete in the marketplace. In the future though, success will be determined not as much by strategy, but by how innovative a business model is.

How do you prepare for this? Simple. Improve our knowledge and understanding of business models and learn to design and develop them. Allow me recommend some starting points.

Books: Start with 'Business Model Generation' by Alexander Osterwalder & Yves Pigneur. This book introduces a very useful tool called the 'Business Model Canvas'. It allows you map nine key building blocks of a business on one page.

Then there is Ash Maurya's 'Running Lean' which presents the Lean Canvas, his adaptation of the Business Model Canvas. In this, Maurya guides the reader through every step of a building block and how to iterate until you arrive at a model that works.

'The Startup Owner's Manual' by Steve Blank and Bob Dorf shows 'how startups search for a business model using Customer Development'.

'Risk Driven Business Model' by Karan Girotra and Serguei Netessine offers useful examples and insights with the four Ws approach to developing the business model.

In 'The Business Model Navigator', the authors offer a framework to adapt and innovate with 55 business models responsible for 90% of the world's most successful businesses.

Articles: Some articles I think interesting on the theme include: 

• What is a business model by Andrea Ovans

• How to design a winning business model

• Why business models matter

• Business Model Innovation: Creating Value in Times of Change

• The business model: Recent developments and future research

• Clarifying business models: Origins, present and future of the concept

• The best digital business models put evolution before revolution

• The St. Galler Business Model Innovation Navigator

Websites: I’ve come across a lot of compelling material online to which the pointers are here.

• Alexander Osterwalder & Yves Pigneur offer an online course that teaches how to design, test, and build Business Models and Value Propositions 

• BoardOfInnovation.com offers examples of Business Model types, tools, cases and resources. It also offers a paid business model kit that you can use to develop your business model.

  University of St Galler's BMI Lab site offers a great worksheet and resources for innovating business models:

• There's an excellent answer that can be found around the theme at Quora.com on unique business models with examples and trends

• Yet another question on Quora generated answers that points to a set of useful tools and frameworks. 

This article was published concurrently in Mint on March 24, 2015