Business Model Generation

Alexander Osterwalder and Yves Pigneur present a co-created handbook for designing, analyzing, and innovating business models. The book was developed with input from 470 practitioners across 45 countries who contributed through an online platform called the Business Model Innovation Hub. The authors argue that the scale and speed of business model innovation transforming industries is unprecedented, citing companies such as Apple, Skype, Zipcar, and Grameen Bank as evidence that systematic approaches to business model design are now essential.

The book is organized into five main sections, each building on the last: the Business Model Canvas, business model patterns, design techniques, strategy, and a generic design process.

The authors define a business model as the rationale of how an organization creates, delivers, and captures value. They propose that any business model can be described through nine building blocks covering four areas: customers, offer, infrastructure, and financial viability. These blocks form the basis of the Business Model Canvas, a single-page visual template on which teams collaboratively sketch and discuss business model elements. Customer Segments identifies the groups a company aims to serve. Value Propositions describes the products and services that create value for each segment through elements such as newness, performance, price, or convenience. Channels covers how a company reaches customers across five phases: awareness, evaluation, purchase, delivery, and post-purchase support. Customer Relationships ranges from personal assistance to automated services to co-creation. Revenue Streams captures cash generated from each segment through mechanisms such as asset sales, subscriptions, licensing, or advertising. Key Resources identifies essential physical, intellectual, human, or financial assets. Key Activities covers critical actions such as production, problem solving, or platform management. Key Partnerships describes the network of suppliers and allies. Cost Structure accounts for all costs, distinguishing between cost-driven models like no-frills airlines and value-driven models like luxury hotels.

Apple's iPod/iTunes business model serves as the primary illustrative case. Apple combined a distinctively designed device, iTunes software, and an online music store into a seamless experience for searching, buying, and listening to digital music, supported by deals with major record companies. Apple earned most of its music-related revenue from selling iPod hardware, using the online store integration as a competitive moat.

The second section describes five recurring business model patterns. Unbundling holds that companies contain three fundamentally different business types: Customer Relationship management, product innovation, and infrastructure management. Swiss private banks traditionally bundled all three, creating trade-offs such as product divisions pressuring advisors to sell proprietary products rather than offering neutral advice. Some banks, like Zurich-based Maerki Baumann, unbundled by spinning off their transaction platforms. In mobile telecommunications, India's Bharti Airtel outsourced network operations to equipment manufacturers to focus on Customer Relationships.

The Long Tail describes models selling large numbers of niche products in small quantities, where aggregate niche revenue rivals bestseller revenue. Lulu.com inverted traditional publishing by enabling anyone to self-publish through print-on-demand, incurring no cost when a title fails to sell. Multi-Sided Platforms describes platforms that bring together two or more interdependent customer groups, creating value by facilitating interactions between them. Google exemplifies this with three segments: advertisers who bid on keywords, Web surfers who use the free search engine, and third-party content owners who display Google ads. Google earns revenue from advertisers while subsidizing free services to the other groups. Nintendo's Wii broke the console industry pattern by targeting casual gamers with inexpensive motion-controlled hardware, earning profits from both console sales and developer royalties.

The FREE pattern covers models where at least one customer segment benefits from a free offer subsidized elsewhere in the business. Three sub-patterns are identified: advertising-based free offers, freemium models where a small base of paying users subsidizes a large free-user base, and bait-and-hook models where a cheap initial offer generates recurring purchases. Skype illustrates freemium disruption: its peer-to-peer technology routes calls through user hardware, so additional users cost almost nothing, and over 90 percent never pay.

Open Business Models draws on the work of Henry Chesbrough, the scholar who formulated the concept of open innovation, which holds that companies create more value by integrating outside knowledge and intellectual property into their innovation processes rather than relying solely on internal research and development. Procter & Gamble's "Connect & Develop" strategy exemplifies "outside-in" innovation: CEO A.G. Lafley set a goal to source 50 percent of innovations from outside partners, boosting R&D productivity by 85 percent. GlaxoSmithKline's patent pools exemplify "inside-out" innovation, placing underused intellectual property into pools accessible to other researchers.

The third section introduces six design techniques adapted from the design profession. Customer Insights emphasizes viewing the business model through customers' eyes, using tools like the Empathy Map to profile what customers see, hear, think, feel, and do. Ideation addresses generating and selecting ideas through four epicenters of innovation: resource-driven (Amazon Web Services built atop retail infrastructure), offer-driven (Cemex promising four-hour cement delivery), customer-driven (23andMe bringing DNA testing to consumers), and finance-driven (Xerox leasing its 914 copier instead of selling at a prohibitive price). Visual Thinking argues that sketches and Post-it notes make business models tangible by turning tacit assumptions into explicit information. Prototyping treats business model prototypes as thinking tools for exploring directions rather than rough drafts of a final product. Storytelling makes unfamiliar models tangible through narratives told from company or customer perspectives. Scenarios provide concrete context through customer usage scenarios and future environment scenarios imagining possible competitive landscapes.

The fourth section reinterprets strategy through the Canvas. The authors map the business model environment across market forces, industry forces, key trends, and macroeconomic forces. They combine SWOT analysis with the Canvas for building-block-level assessment. Amazon.com's 2005 model illustrates the approach: its strengths were customer reach and IT excellence, while thin margins represented a weakness. Amazon responded in 2006 by launching Fulfillment by Amazon and Amazon Web Services, building on core strengths while targeting higher-margin markets.

The authors blend Blue Ocean Strategy, developed by scholars W. Chan Kim and Renée Mauborgne to advocate creating uncontested market space through value innovation, with the Canvas. Blue Ocean's Four Actions Framework asks what factors to eliminate, reduce, raise, or create. Cirque du Soleil exemplifies the approach: it eliminated costly elements like animals and star performers, added artistic elements like themed environments and dance, and shifted its target to theatergoers willing to pay premium prices.

Addressing the challenge of managing multiple business models, the authors examine three cases. Under Nicolas G. Hayek, SMH (later Swatch Group) chose integration, launching the low-cost Swatch alongside luxury brands while centralizing manufacturing and R&D. Nestlé chose separation for Nespresso, creating a wholly-owned subsidiary with a direct-to-consumer model distinct from Nescafé's mass-market approach, achieving 35 percent average annual growth. Daimler deferred the decision for its car2go minute-rental service, piloted in Ulm, Germany, until field testing could clarify the new model's relationship to its core vehicle manufacturing business.

The fifth section proposes a five-phase design process: Mobilize (framing objectives and assembling a diverse team), Understand (immersing in customer knowledge and environment while avoiding over-research), Design (brainstorming, prototyping, and selecting bold ideas while resisting the urge to water them down), Implement (translating the model into a plan with milestones, legal structures, and budgets), and Manage (continuously monitoring the model, adapting to market feedback, and potentially overseeing a portfolio of models). The authors emphasize that progression through these phases is rarely linear: understanding and design often proceed in parallel, and prototyping may trigger new research.

The Outlook section extends the book's content to additional topics, including beyond-profit business models such as Grameenphone's triple bottom line model, which pursues profit alongside social and ecological goals by providing rural Bangladeshi women with income-earning opportunities through microloans for mobile phone purchases. The section also addresses computer-aided business model design, the Canvas as a foundation for business plans, organizational implementation aligned with organizational theorist Jay Galbraith's Star Model (a framework organizing strategy, structure, processes, rewards, and people), and IT-business alignment through Enterprise Architecture, a framework connecting business, application, and technology perspectives.

The Afterword reveals that the book itself was produced using an innovative model. The authors rejected traditional publishers, financing production through Hub membership fees, advance sales, and fees for customized corporate versions. The first print run of 5,000 copies sold out in two months with no marketing budget, spreading entirely through word of mouth and social media.