hello this is dr. adam jae bok in this short audio presentation we're going to begin our conversation about business models we've come pretty far in the disciplined entrepreneurship framework we're more than halfway through at this point you've learned about markets understood about the value proposition thought about end-users and mark and total addressable market calculation and now we're into thinking about business models I have to warn you that this particular topic is arguably my favorite topic and that's partly because I find it fascinating and useful in my entrepreneurial work but also because it is the subject of my research and it's what I've published most of my articles and two out of my three books about you could consider going to this website Bismol book calm that's the website for the most recent book that I wrote called the business model book there are a variety of resources there even if you haven't bought the book including worksheets on how to build business models that are free to access and use one of the fascinating things about the business model is that it's an extremely new concept up until around the 1980s and 1990s there really was no construct in that we refer to as the business model it really came into common use in the 1990s and then in the aftermath of the dot-com boom but it developed in practice unlike a lot of academic concepts where researchers defined the constructs this was really developed in practice and so one of the funny things about the business model is that the way that people think about it is surprisingly different across different groups of people and so researchers have described the business model with a variety of different definitions and explanations often dealing with transactions and frameworks and architecture and or the way that Professor Jerry George and I defined it as the design of an organizational structure to enact a commercial opportunity but in the practice world it's really come to mean something a little bit different in your book it's described as a framework by which you extract from your customer some portion of the value your product creates for them Alexander Osterwalder is very famous book business model generation describes it a little more simply as the rationale of how an organization creates delivers and captures value but there have been many other practice definitions as well McGregor defined it as the stories that explain how innovative firms succeed and grow and other researchers have described it as a system associated with value proposition and other factors it's not so much it's not so critical that you really understand all these different definitions but you should have a fairly solid sense about how what a business model is and how to use it we're also going to talk just a little bit about business model innovation in the second half of this presentation business model innovation can be a huge value creator but it's important to recognize that it's quite difficult to change an established business model for existing customers in other words this is an example where being an entrepreneur is an advantage because the companies that are already operating the field have an established business model that's probably going to be quite difficult to change and if you can develop a novel business model you often can generate success while other businesses are still trying to adapt we're going to begin this with a short video from off YouTube which I'll also post a canvas I'm hopeful that this will work effectively and you'll be able to hear this but it very quickly describes the business model canvas which has become the standard framework for creating and evaluating and communicating business models [Music] an organization's business model can be described with nine basic building blocks your customer segments your value proposition for each segment the channels to reach customers customer relationships you establish the revenue streams you generate the key resources and key activities you require to create value the key partners and the cost structure of the business model but it's not sufficient to just enumerate the nine building blocks what you really want to do is to map them out on a pre structured canvas this is what we call the business model canvas the tool that helps you map discuss design and invent new business models let's briefly go through the nine building blocks starting with the customer segments these are all the people or organizations for which you're creating value this includes simple users and paying customers for each segment you have a specific value proposition these the bundles of products and services that create value for your customers the channels described through which touch points you're interacting with customers and delivering value [Music] the customer relationships outline the type of relationship you're establishing with your customers the revenue streams make clear how and through which pricing mechanisms your business model is capturing value then you need to describe the infrastructure to create deliver and capture value the key resources show which assets are indispensable in your business model key activities show which things you really need to be able to perform one the key partners show who can help you leverage your business model since you won't own wall queue resources yourself nor you perform all key activities and once you understand your business models infrastructure will also have an idea of its cost structure so with the business model canvas you can map out your entire business model in one image this works a start-up entrepreneurs just as well as for the most senior executives there are many benefits of using a business model canvas or another canvas like the lean canvas first getting it all in one place ensures that there's a consistent logic across all the elements of your business you're much less likely to miss a key gap something about the elements of your organization that don't work together or a key assumption or idea that you really need to go out and confirm the canvas is easily changed if new information suggests that there's a better way or a preferable way to actually set up your venture the canvas can be used as a basis for generating your financial model since all of the information about how your business will actually operate is in one place it's a relatively easy to use framework hopefully that means you get time more time to spend thinking about and talking with customers your business model is only going to be as good as the information that you've gained about what your customers actually want and finally it's become a bit of an industry standard this makes for efficient communication the odds are good that if you start a venture someone's going to ask about your business model and you might show them the canvas or otherwise give them information about how the business model actually works at the same time you need to be careful just filling in the canvas ism is the starting point not the destination just because you've written something down on a piece of paper doesn't mean that it's right you need to test and validate the assumptions that bate that your business model is based on and finally you really will need to generate a bottom-up incredible financial model based on how the business is actually going to operate let's think about this for a few moments in the context of Southwest Airlines hopefully most of you are familiar with Southwest Airlines but there are other low-cost carriers like Southwest around the world these are airlines that tend to have only one type of airplane they usually only have economy class the fares tend to be relatively low sometimes they fly into less populous cities or secondary airports in some cities for example Southwest primarily flies into Midway Airport instead of O'Hare Airport in Chicago and so all of these things are set up to help create a low-cost business and if you mapped it all out on the business model canvas you'd see that for example Southwest Airlines does not serve champagne on its flights why because that's a high-cost item that doesn't fit with the way the rest of the business model works so some things can be very simple but others are a little more complex for example Southwest Airlines consistently spends more on employee training than almost any other airline and you might say to yourself well that doesn't make a lot of sense this is a low-cost airline it should provide the minimum amount of training that it thinks is necessary but the airline industry is a little tricky this way and we have to think carefully about how business models actually function in the airline industry the cost of making a mistake can be incredibly high imagine for a moment that you're getting on your flight and then it turns out that there's a bag in luggage in the compartment luggage compartment of the airplane that doesn't seem to be attached to a passenger this seems like a fairly minor mistake in the grand scheme of things but of course it's a situation that the airline is going to have to deal with immediately it's going to have to get that bag off the airplane it might have to check all of the bags on the airplane again it might go through a complex check to make sure that it can identify which passengers every bag belongs to that bag might need to be searched and in the meantime you're still waiting and the plane hasn't left the gate yet if it's delayed long enough and your flight is significantly late it could result in for example people missing their connections at the next flight or people having to stay overnight at an airport or and the airline might have to purchase meals and hotel rooms for them and that while that plane is waiting other traffic is backing up that gate was needed to be used by another plane and if their people are delayed and they hold flights at the next at the next airport you're going to air additional flights could be delayed as well and so the cost can cascade significantly from one small mistake and Southwest Airlines realized very early that's a run a low-cost operation they needed to minimize those mistakes as much as possible and the way to do that was in fact to spend more on training so we really need to be careful about how we put these business models together and that we think beyond just the surface your next activity is to build a business model you're going to use a tool called canva Nizer which is a free tool online all the instructions are available in the assignment in canvas you're going to pick a local business a company that you have direct experience with whether you're a customer or even an employee or maybe it's a business run by family members or something like that a good example would be Ian's pizza which many uw-madison students are familiar with but I'm asking you if you're a uw-madison student watching this please don't do en spits ax but what you'd want to do then is use the canvas to build out the elements of for example the resources the customer segments the value proposition think a little bit about how they generate revenues and costs and so on and so forth there's often a temptation by students to pick a much more exciting company like say Apple but those are incredibly difficult businesses to canvas on a business in the business model canvas you really want to pick something small and local because really big multinational corporations are incredibly difficult to sketch out there so that'll be your assignment you can do that either immediately after this or after the other videos but please do take a shot at that and submit the information here's the linked canva Nizer it's also available in the assignment itself once you've had a chance to do that or perhaps a little later on take a look there's some additional information on the following slides in this presentation not the audio version of the presentation but in the one that's available to you in canvas that may help you think a little bit more about business model elements and then the next presentation will show you a little bit about good and bad business model canvases and we're also going to talk about business model innovation