1.

1 The Business Model Canvas

1.2 Introduction

At the end of this lecture, participants will be able to:

 Argue for the need to have a business model before

starting a company;

 Formulate a business model using the inputs; and

 Analyse a case study.

1.3 Understanding the Concept of a Business Model

1.4 Answer the question

WHAT IS A BUSINESS MODEL?

Select all answers that apply.

Correct Choice

It is a miniature version of a business, built

to scale.

X It is the perfect description of the perfect

 business.

It is a description of how a business plans

to create value.

Feedback:

A business model is simply a description of how a

business plans to create value, for example, in the form
of profits. Creating a business model requires answering a
number of questions that will lead to the creation of a
unique way for a business to create value, and thus make
money.

1.5 What a business model?

A business model is a rationale for how an organization or

company creates, delivers and captures value.

Click to view a short video by Gavin Wedel, briefly

describing business models and their importance.

https://www.youtube.com/watch?v=XnLaQzi8xJc

1.6 Key questions for business models

There are a number of questions that a company needs

to ask when creating a business model. These include:

• Who are the company’s target customers?

• What customer problem or challenge will the company

solve?

• What value will the company deliver?

• How will the company reach, acquire, and keep

customers?

• How will the company define and differentiate its

offering?

• How will the company generate revenue?

• What is the company’s cost structure?

• What is the company’s profit margin?

Why is it important to answer these questions?

Without answering these questions in some form or

another, building a business plan is impossible. In turn,
without a business plan, facing unexpected headwinds
becomes very difficult. Companies need to be in a
position to plan to acquire resources and perform key
activities for their business. Without answering these
questions, how can they plan anything?What’s more,
company managers need to be able to communicate the
answers to these questions to others, in particular to
investors, partners and staff members, in order to get
their support and to mobilize them resources in the most
effective manner possible.

How likely is it that the answers to these questions will

change over time? Are such changes OK?

It is highly likely that the answers to these questions may

change over time and it is a good thing provided the
business is able to move with the change. Being ignorant
of these changes could result in going out of business.
Changes could occur due to new technologies, changing
customer needs and a host of other factors. However this
does not mean that a business model should not be
determined. It simply means the business model must be
designed with the flexibility needed to stay in business.

1.7 Introducing the business model canvas

A business model canvas is a 1-page rationalization of a

company’s business model. Its was developed by Swiss
business theorist Alexander Osterwalder as a tool to
assist both large and small enterprises to align their
activities to meet the needs and/or solve the problems of
their customers, as well as to identify what they will need
to do to achieve this.

Click to view this video by Petar Ninovski, introducing the

concept and the advantages of a Business Model Canvas.

https://www.youtube.com/embed/MxgqrDv7g0I?start=0
&end=145
1.8 Answer the question

IN YOUR UNDERSTANDING, WHAT IS THE DIFFERENCE

BETWEEN A BUSINESS MODEL CANVAS AND A BUSINESS
PLAN?

Feedback:

Thank you. The obvious difference is the level of detail. A

business plan has much more detail than a business
model canvas. As we discussed in the previous lecture, a
business plan stretches over several pages, while a
business model canvas can be done in just one page.
However, the differences do not end there; they are also
philosophical and practical. A business plan tends to be
static, whereas a business model canvas tends to be
dynamic.A business plan spends a lot of time justifying
assumptions, while a business model canvas spends its
time testing assumptions without having to justify them.
Business plans are usually thought of as finished items. As
such, if things don’t work out, it means that the business
or the product/service was bad. A business model canvas,
on the other hand, is supposed to change. This helps
create the mindset that things are just getting started and
moving through a process. In a business model canvas,
change is both expected and welcome. Thus, while a
business plan is a finished document, a business model
canvas is the first step in perfecting the business. A
business model canvas provides a company with greater
flexibility and creates a philosophy of betterment for its
activities.

1.9 The Building Blocks of a Business Model Canvas

1.10 Answer the question

WHICH OF THE FOLLOWING ARE THE BUILDING BLOCKS

OF A BUSINESS MODEL CANVAS?

Select all answers that apply.

Correct Choice

X Key activities

X Key resources

X Partners

X Cost structure

X Value proposition

X Customer segments

X Customer relationships

X Channels

X Revenue sources

Feedback:

All the above are the building blocks of a business model

canvas.

1.11 Answer the question

As we saw earlier in this lecture, a business model canvas

is a 1-page rationale showing how an
organization/company creates, delivers, and captures
value.

It is divided into 9 “building blocks”, or components, as

shown below.

Click on each of the building blocks of the business model

canvas to learn more about them.

1. Value proposition:

A value proposition is the most basic requirement of any

business model and, indeed, of any business plan. It
should consist of a short statement that summarizes a
company’s target customers, the problem that it solves
for them, as well as the solution it is offering and the
specific value it is providing.

Most importantly, when writing a value proposition, it is

important to keep into account that customers care more
about their own desires and benefits than they do about
the functions of a product or the details of a service.

For example: As we saw in the previous lecture,

Africano’s value proposition is to provide a “third place”
for young people across Africa. For her business to
succeed, Abeba Bekele must do her research and make
sure that that African youths actually want such a service!
If not, they will not value her company’s offering, no
matter how appealing she tries to make it.

2. Customer segments

Here, a company must ask itself who its customers are.

Are they individuals, businesses, or both? Where do they
live? How old are they? How much do they earn? Can
they afford the product/service? How will they interact
with it? And what would cause them to choose
competitors over the company in question?

For example: At a basic level, Africano’s main customer

segment consists of African youths. However, this is not
enough. Abeba Bekele needs to think more deeply about
who her customers actually are. What economic segment
of Africa’s youths does she want to target? What
geographic areas will she focus on? How will she
differentiate herself from her competition in these
youths’ minds? And could targeting non-youth segments
of the population potentially dilute her business’ appeal
for her core consumer base? These are all questions that
Africano needs to answer if it is to succeed.

3. Channels

In this context, a “channel” refers to a way for a company

to reach customers to sell its products/services, share
information, and receive feedback/complaints. Examples
of channels can include retail outlets, supermarkets,
online platforms, SMS services, telephone calls, etc.

In this component, some of the main questions that a

company should ask itself are:

• What are our customer segments’ preferred channels?

Are these channels the same for our enterprise and our
individual customers?

• How are we currently reaching our customers?

• Are there ways in which we can create synergies or

integrate our various channels?

• Which channel is the most cost-efficient?

• How can we integrate our channels into the routines of

our customers?

For example: Africano’s main channels are its retail coffee

shops. However, Abeba Bekele could also consider
opening other channels, such as a social media page,
which her company could use to communicate with its
customers remotely. She could also think of strategies to
synergize her social media presence with her retail
footprint.

4. Customer Relationships

A company needs to manage its customer relationships in

order to keep and grow its customer base. In this
component, it is important to think about the kind of
relationship that each customer segments expects. While
some customers prefer an “arm’s length” relationship, for
example, others want a closer, more “informal” type of
relationship.
Here, it is also crucial to consider the costs associated
with each type of relationship, as well as the ways in
which these relationships could be integrated with the
rest of the business model. For example, would a certain
type of relationship be a better fit for the company’s
value proposition, image or brand?

For example: Abeba Bekele will need to think about the

frequency and type of outreach that her company will
make towards her target customers. She will have to
think about her brand and the type of image that she
wants to have in her customer relationships.

5. Key activities:

“Key activities” are activities that a company is required

to do as a result of its value proposition, channels,
customer relationships, or revenue streams. They can be
divided according to value proposition, channels,
customer relationships, and revenue streams.

Value proposition activities:

These are the activities that are a direct result of a

company’s value proposition. For example, if Africano’s
value proposition is to provide a “third place for young
people in Africa”, then activities such as looking for store
locations, hiring real estate agents, setting up the stores,
arranging for interior decoration, fundraising, etc. will all
be required.

Channel activities:

These are the activities that become necessary because

of a company’s distribution channel(s). For example, if
Africano’s distribution channel is to sell its products at its
chain of stores, then activities such as ensuring supply to
these stores and performing quality control will be
required.

Customer relationship activities:

These are the activities required to maintain a company’s

relationships with its customers active and healthy. For
example, Africano might want to think about starting a
social media account, as well as engage in more
traditional advertising methods, such as handing out
flyers to its customers to inform them of limited-time
discount offers.

Revenue stream activities:

These are the activities required by the way in which a

company receives payment from its customers. For
example, if the majority of Africano’s customers pay by
cash, with a minority preferring to pay by card, then the
company will need to both collect and manage cash, as
well as take the appropriate measures to open a card
payment terminal.

6. Key Resources:

Resources are inputs. They include financial resources,

such as cash; human resources, such as employees;
physical assets, such as land; and organizational
resources, such as a company’s capacity to innovate.

Here, it is important to ask what key resources a

company’s value proposition, its distribution channels, its
customer relationships, and its revenue streams require.

For example: Africano’s financial resources consist of

whatever cash Abeba Bekele has on hand, as well as any
financing she was able to gather from her friends and
family. The company’s human resources, meanwhile,
consist of Bekele herself, as well as any employees which
she eventually hires. Its physical assets consist of
Africano’s retail coffee shop, as well as any additional
property which the company buys in the future. As
Africano is still very new, its organizational resources are
not yet developed.

7. Revenue Streams:

Simply put, revenue streams are ways in which a

company makes money. When evaluating these, it is
important to consider more than just the ways in which
customers are paying for products or services (e.g. cash,
online payments ,credit cards, etc.). It is also important to
look at the ways in which customers would prefer to pay,
as well as to assess what they would potentially be willing
to pay for. In addition, it is useful to perform an analysis
of each revenue stream’s contribution to a company’s
overall revenue.

For example: Africano’s revenue streams consist of selling

coffee and snacks. As such, it would make sense for
Abeba Bekele to evaluate how people are paying for
them, as well as each stream’s overall contribution to the
company’s cash inflow.

8. Key Partnerships:

All companies depend on certain key suppliers or

partners, be they individuals or businesses, to perform
their activities. Understanding the identity of these key
partnerships, as well as what they provide, is crucial to
establishing an effective business model.

For example: Africano has certain key suppliers: it has a

supplier for its coffee beans, for its roasting machines, as
well as for its interior decoration. The company may also
have some key partners if it decides, for instance, to sell
another company’s products in its retail outlets.

9. Cost Structure:

A company’s cost structure refers to the types and

proportions of fixed and variable costs that it incurs.
Here, it is important to consider the costs that are
involved in obtaining the key resources and performing
the key activities that a company requires.

For example: Africano’s cost structure depends on a

number of factors. At this point, Abeba Bekele can
already begin considering the fixed costs (i.e. rent, taxes,
etc.) associated with her envisaged retail location, as well
as the costs involved in sourcing coffee beans, roasting
machines, and other necessary inputs for her company.
1.12 Assessing the attractiveness of a business model

In business, an attractive business model should focus on

increasing profitability.

Since “profits = revenues - costs”, an attractive business

model should thus focus on either increasing revenues, or
reducing costs. Simply filling in the details of the 9
components of the Business Model Canvas is not enough
to achieve this. We have the following recommendations,
separated for each component:

Customer Segments:

Having a large customer base is a good idea. If a company

is dependent on just a few customer segments, these
customers gain bargaining power, thus allowing them
exert pressure to obtain reduced prices (especially in B2B
activities).

Customer Relationships:

Here, companies should strive to increase their

customers’ “switching costs”. This means that customers
should find it difficult to switch to a competitor.

For example: Africano could offer loyalty programs or

“points rewards” that would increase the switching costs
of its customers.

Key Partnerships:

Companies should strive to lower their dependency on

their partners. Being too dependent on a partner can lead
them to have a high bargaining power, thus increasing
the cost of business with them.

For example: If Africano is too dependent on its supplier

for coffee beans, the supplier may become able to dictate
prices for its shipments. In such a scenario, Abeba Bekele
might want to consider having multiple suppliers to
reduce her company’s dependency on a single supplier.

Channels and Key Activities:

Long and convoluted channels are a source of costs.

Attractive business models have simple channels that
allow companies to reach their customers easily and
effectively.

Similarly, key activities are also a source of costs:

companies should strive to establish efficiencies in their
processes to reduce the costs of performing their key
activities.

Value Proposition:

A good value proposition should give a sustainable

competitive advantage. When looking at a business
model, ask yourself: how does the company set itself
apart from its competitors? A clearly differentiated
company will be difficult to imitate, and will thus tend to
have a more attractive value proposition.

Key Resources:

Acquiring and maintaining key resources involves costs.

As such, it is paramount that companies ensure that they
do not waste their key resources and, if possible, even
put them to multiple uses! An attractive business model
makes the fullest use of the resources available.

Revenue Stream:

To be attractive, a business model must show high and

predictable revenue growth.

Cost Structure:

An attractive business model must have high margins.

This means that the company’s cost of production must
be much lower than its selling price. If a company is
playing a “low price” game, then its business volume
should be large enough to ensure high overall margins.

1.13 Completing a Business Model Canvas

Click on the image to view the video of Petar Ninovski

explaining how to complete a business model canvas.

https://www.youtube-
nocookie.com/embed/MxgqrDv7g0I?rel=0&start=153

1.14 Answer the question

VIEW THE BUSINESS MODEL CANVAS FOR AIRBNB AND

MATCH BUILDING BLOCKS WITH ASPECTS OF THE AIRBNB
BUSINESS MODEL.

MODEL ASPECTS BUILDING BLOCKS

Design for trust Value proposition

Home owners Key partners

Well-designed website Key resources

Booking fees Revenue streams

 1.15 Answer the question

VIEW THE BUSINESS MODEL CANVAS FOR UBER AND

MATCH BUILDING BLOCKS WITH ASPECTS OF THE AIRBNB
BUSINESS MODEL.

MODEL ASPECTS BUILDING BLOCKS

Design of the service Value proposition

Drivers Key partners

Mobile app Channels

Dynamic pricing Revenue stream

1.16 Ask the expert

Question: How can companies in emerging markets, such

as Africa, identify their value proposition?

This is a very interesting question. The context of

emerging markets, such as India and Africa, is a bit
challenging. Unlike developed markets, accessing
customer information is relatively difficult. This means
that companies in these locations can sometimes find it
tough to identify their value proposition.

What’s more, entrepreneurs and business owners in

emerging markets sometimes have to “discover” the
value for their prospective customers. By this, I mean that
the customers themselves don’t realize what their needs
are. To give you an example, Aravind Eye Care is a very
popular eye care hospital in India, with a very attractive
business model. Its main value proposition is to “treat
cataracts for poor people for free, or at a very low cost”.

However, interestingly, when the hospital’s founders

approached their target customers to convey their value
proposition, they found that the poor villagers to whom
they talked didn’t think much of it. Apparently, they
simply thought that blindness came with age, and that it
was just a natural part of growing old.

The hospital’s founders were surprised that the villagers

didn’t appreciate their value proposition, in spite of the
fact that they were offering cataract treatments for free!
They realized that their target customers would have to
be educated and convinced that undergoing these
treatments could improve their lives. This is called “value
discovery”, and refers to the process of convincing
customers that there is a need for a certain
product/service.

Indeed, the standard view is that entrepreneurs and

companies should create their value propositions based
on information gathered from their target customers,
since the whole point is to address and meet their needs.
However, in emerging markets, potential customers
sometimes have a very limited exposure to the world,
and may not realize certain needs that they otherwise
would have. Thus, it might be necessary for
entrepreneurs and companies working in emerging
markets to “go the extra mile” to discover value for their
target customers.

1.17 Completing a Business Model Canvas for a

Proposed Start-up
1.18 Instructions

Completing Your Own Business Model Canvas

Now it is time for you to fill out your own Business Model
Canvas!

To do so, just go to the next slide and fill in the fields with
content appropriate for your own business idea. To save
each answer, click on the green SAVE ANSWER button.
Once you are done, simply click the SUBMIT button and
your Business Model Canvas will be outputted to you as a
PDF file.

IMPORTANT: Please note that you will need to upload

this PDF file in the “Upload Your Business Model Canvas”
activity on the course main page in order to receive your
certificate.

If you have any issues with accessing the Business Model

Canvas on the next slide, a word version of the Business
Model Canvas is also available in the “Resources” section
on the course main page.

1.19 Your Own Business Model Canvas

This exercise is not available in the offline version of this

lecture.
1.20 Key Points

Remember:

• A business model is a rationale for how an organization

or company creates, delivers and captures value.

• The Business Model Canvas is made up of nine

components, all of which should reinforce each other
and work in sync.

• All nine components of the Business Model Canvas

should be clear and written in detail.

1.23 Thank you for completing the lecture