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3 Developing and articulating the business model: the lean canvas approach

3 Developing and articulating the business model: the lean canvas approach

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Key partners

Who are our key partners?

Who are our key suppliers?

Which key resources are

we acquiring from our

partners?

Which key activities do

partners perform?



Key activities

What key activities does

our value proposition

require?

Our distribution

channels?

Customer relationships?

Revenue streams?



Key resources

What key resources does

our value proposition

require?

Our distribution

channels?

Customer relationships?

Revenue streams?



Value proposition

What value do we deliver to

the customer?

Which one of our

customers’ problems are we

helping to solve?

What bundles of products

and services are we offering

to each segment?

Which customer needs are

we satisfying?

What is the minimum viable

product?



Cost structure

What are the most important costs inherent to our business model?

Which key resources are most expensive?

Which key activities are most expensive?



Customer relationships

How do we get, keep and

grow customers?

Which customer

relationships have we

established?

How are they integrated with

the rest of our business

model?

How costly are they?



Customer segments

For whom are we

creating value?

Who are our most

important customers?

What are the

customer archetypes?



Business plan basics for engineers



The Business Model Canvas together with the questions that could help clarifying the key

components of a business plan at the early stages of a business



Table 2.1



Channels

Through which channels

does our customer segment

want to be reached?

How do other companies

reach them now?

Which ones work best?

Which ones are most costefficient?

How are we integrating them

with customer routines?



Revenue streams

For what value are our customers really willing to pay?

For what do they currently pay?

What is the revenue model?

What are the pricing tactics?

27



Osterwalder, A., Pigneur, Y., 2010. Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers. John Wiley & Sons; Blank (2013).



28



Start-Up Creation



start-ups or new product development projects where the managers need a tool for

framing their initial hypothesis and documenting their learning, as they iterate through

the early stages of their business. The lean canvas approach is more flexible and rather

holistic as compared to the direct focus on writing a business plan. Rather than

engaging months of planning and research, managers accept that all they have on

day 1 is a series of untested hypotheses and, instead of writing an intricate business

plan, entrepreneurs summarize their hypothesis on the canvas. As the hypothesis get

tested and validated the canvas is used as a way to evolve the business rather than

to come up with a fixed solution.

The traditional and most popular canvas is the business model canvas (BMC)

developed by Alexander Osterwalder (Osterwalder and Pigneur, 2010). Table 2.1

shows its nine building blocks together with a number of questions that could help

in the process of their formulation. The BMC provides the main structure of a business plan with a focus on ease of use, flexibility, and transparency, including the key

drivers of a business: customer segments, value propositions, channels, customer

relationships, revenue streams, key activities, key resources, key partnerships, and

cost structure.

There are two important practical points that should be mentioned with respect to

the use of the BMC. First, the BMC is just a tool that helps the initial formulation and

the continuous refinement of the business model as a key component of the business

plan. It is not the filling up of the building blocks on the canvas that will make a

business successful, but the proper managerial actions and activities corresponding

to them. Second, the BMC is not a dogmatic framework but just a starting point

that could be modified or refined depending on the specific business context, technological solution, or customer base. This is why there are publications suggesting

modified versions of the canvas that could be better adapted to specific business

circumstances. Examples of such modified versions are the lean canvas (Maurya,

2012) and the business model snapshot (Furr and Dyer, 2014). Both of them focus

on providing more systematic tools to mitigate risk in new product, service, and business development. The lean canvas approach proposed by Ash Maurya (Table 2.2)

appears to be more intuitive and better suited to address the multiple uncertainties

and risks (Section 2.1.1.1) that are typical of the context of new technology

start-ups and engineering professionals in technology-based businesses. The main

objective behind its introduction was to make it as actionable as possible while staying as close as possible to the entrepreneurial context. The way to making the canvas

actionable was to focus its intended use on capturing which was most uncertain and

most risky.2

The lean canvas is shown in Table 2.2. It helps in deconstructing the business model

into nine distinct subparts that are then systematically tested, starting from the highest

and moving to the lowest risks. Following the road map proposed in the lean canvas

approach, it is important to emphasize one of its key assumptions: your product is not

the technological solution you are providing; your product is the business model. Ash



2



http://leanstack.com/why-lean-canvas/.



Business plan basics for engineers



29



The lean canvas (the numbering indicates the order in

which the different building blocks are usually addressed)



Table 2.2



1. Problem



4. Solution



Top 3 problems Top 3 features



3. Unique value

proposition



5. Unfair

advantage



Target customers

Single, clear compelling Can’t be easily

message that states why copied or bought

you are different and

worth paying attention



8. Key

metrics

Key activities

you measure



2. Customer

segments



9. Channels

Path to customers



7. Cost structure



6. Revenue streams



Customer acquisition costs

Distribution costs

Hosting

People etc.



Revenue model

Life time value

Revenue

Gross margin



Maurya, A., 2012. Running Lean: Iterate from Plan a to a Plan that Works, O’Reilly Media, Incorporated, Sebastopol, CA.



Maurya has built the road map based on the three key stages of a start-up: problem/

solution fit, product/market fit, and scaling. Every start-up runs through each of these

stages where risk mitigation through each stage should be the main focus of its activities. In the problem/solution fit stage the focus is on finding out if there is a problem

worth solving. The first stage can be navigated without even building a product.

Instead a demo can be developed (a screen shot, video, or a physical prototype) that

could engage customers in sharing their vision about how to solve the problem. The

demo should help the customer visualize the solution by demonstrating the unique

value proposition (UVP). During this stage, entrepreneurs attempt to answer the key

question (the existence of a problem worth solving) by using a combination of qualitative customer observation and interviewing techniques on the basis of which they

derive the minimum feature set to address the right set of problems, which is also

known as the minimum viable product (MVP). The problem/solution fit is validated

when you repeatedly get the customers to accept the UVP.

During the second stage (product/market fit) the key question is whether the company has built something that people want. Once there is a problem worth solving and

an MVP has been built, we need to test how well the solution solves the problem. The

first significant milestone is achieving market traction. At this stage, the initial plan

should start workingdthere are customers who are signing up, the company retains

them, and gets paid.

The third stage (scaling) focuses on acceleration, growth, and scaling the business

model. Before product/market fit, the focus of a start-up centers on learning and pivots

(substantial changes in the initial idea). After product/market fit, the focus shifts toward

growth and optimizations. In this sense, achieving product/market fit is the first significant milestone of a start-up, which greatly influences both its strategy and tactics.



30



Start-Up Creation



The overall framework is organized around three metaprinciples: (1) documenting

your plan A; (2) identifying the riskiest part of your plan; and (3) systematically testing

your plan. Documenting plan A is a snapshot of the initial plan. Entrepreneurs start by

documenting their plan A, focusing on the identification of a potential customer

segment and then continue sketching out their first guess at the business model for

each customer segment, potential solution, or customer channel. When this first step

is done, an entrepreneur will have multiple versions of plan A, which is ready to be

prioritized in terms of risk in the next step. Having developed multiple canvases,

the focus in the next step is on prioritizing where to start. The prioritizing should be

undertaken by focusing on ranking the business models in terms of lowest risk. The

objective is to find a business model with a big enough market that can be reached,

with customers who need the product, around which a viable business can be built

(Maurya, 2012).

The weighting criteria for prioritizing the risk are the customer pain level (the problem), the extent of reach (the channels), the price/gross margin (revenue streams and

cost structure), market size (the customer segment), and the technical feasibility (the

solution). These criteria are evaluated against the three types of risks suggested by

Maurya (2012): product riskdgetting the product right; customer riskdbuilding a

path to customers; and market riskdbuilding a viable business. The lean canvas automatically captures uncertainties that are related to risk in terms of loss of opportunity

costs and real costs. The final result is a lean canvas that captures the key business

components that could be further tested and validated. Systematically test the initial

plan is the third step, where all assumptions made during the articulation of the business model are transformed into hypotheses that can be either validated or invalided

through running experiments with customers.



2.4



Scaling up the business



Once the business model has been developed and validated it is time to grow the business. Following a method such as the lean canvas approach the managers will get past

the early stages of growth. However, the transition from focusing on exploration to

execution of a business model will change the company in fundamental ways, which

involves new challenges.

One of the main challenges for managers of new technology-based or engineering

firms is managing the transition to growth. At this stage a start-up should have nailed

the product and the business model and many unknowns should have been clarified. In

this sense, the amount of uncertainty declines and so does the reason for applying

purely entrepreneurial management practices. The focus shifts on applying more traditional management principles focusing on execution, value capture, and optimization.

However the start-up may enter a transitional phase where neither entrepreneurial nor

traditional management alone is appropriate. In order to master the scaling process the

start-up needs to blend in the two management practices as it transitions to a mature

business (Furr and Dyer, 2014).



Business plan basics for engineers



31



Chasm



MAP



MVP



Innovators



Whole

product solution



Early

adaptors



Early

majority



Late

majority



Laggards



Figure 2.1 Minimum viable product (MVP) and minimum awesome product (MAP) versus

whole product solution across the technology/product adoption life cycle.

Adapted from: Furr and Dyer (2014).



The transition from a start-up to a mature business requires going through several

stages, leading to fundamental changes in the way it operates. While there are a lot of

tools available on how to develop a business, there are very few tools dealing with how

to manage the scaling process in a systematic way. There is, however, an agreement

among practitioners that the growth and scaling process can be organized around three

key areas: market, processes, and team transitions.



2.4.1



Market scaling



The main challenge for new technology firms is crossing the chasm. Geoffrey Moore

(1991) argues that the gap between early adopters and early majority provides a significant challenge for companies because these groups are quite different and require

completely different marketing strategies. While early adopters are willing to try something entirely new, the early and late majority wants a product solution that is error-free

and full-featured. The only way to cross the chasm is to put all your eggs in one basket,

meaning that the strategy should be to identify a niche segment among the early majority and focus all efforts on developing the whole product solution by serving this

particular segment. When this particular customer niche has adopted the solution,

the firm can focus its effort on a second customer niche. The key to getting a foothold



List the tasks to

be done in order

to execute the

business model.

Assign each task

to individuals.



Have each team

member to write

a description of

the most critical

processes, noting

the links and

relationships.



Figure 2.2 Scaling the process.

Adapted from: Furr and Dyer (2014).



Create a visual

diagram of the

most critical

processes noting

the links and

relationships.



Link tasks and

processes to

performance

metrics and

assign

responsibility to

individuals.



32



Start-Up Creation



in the mass market is to use the initial customer segment as reference customers.

Thereby the firm can start shaping all marketing communications to position itself

as a market leader in order to derisk mass-market adoption. The key to successfully

redefining the market or create a market leader position is to choose an unoccupied

space where there is a legitimate market need (Furr and Dryer, 2014) (Moore, 1991).

In order to attract the first customer niche among the early majority, the firm should

focus on developing a minimum awesome product (MAP) (Furr and Dryer, 2014).

While the MVP is used for validating the core assumptions during the initial stages

among the innovators and early adaptors, the MAP is a solution that is extraordinary

on the dimensions that customers value the most (Fig. 2.1). The point is to use the

MVP to improve the key attributes of the solution that can evoke positive emotions

and thereby turn it into a MAP by focusing on the functional, social, and emotional

dimensions of the solution. While using the MAP to get the solution adopted by the

early majority, the firm can move to a second customer niche. In parallel to that the

MAP is further developed into the whole solution that could address the needs of

the main market.



2.4.2



Process and team scaling



As a newly created technology firm grows it will begin to see the same types of problems cropping up again and again. These issues indicate a need for standardization of

its processes and workflow. As the market grows, tasks and workflow need to be standardized in order to continually deliver a quality product (Furr and Dyer, 2014). In

order to introduce scalable and standardized processes in an organization, a simple

four-step road map can be used as a guiding tool (Fig. 2.2). The process starts by

creating a list of tasks to be done in order to execute the business model. Each of these

tasks is assigned to an individual. The objective of the next step is to create a common

understanding among the employees. Each team member has to write a job description

for the assigned task and by reviewing each of the descriptions together in the team,

people agree on how to perform certain tasks and who is responsible for what. The

third step is about visually mapping out the most critical processes in order to detect

critical linkages. The diagram will help establish a common understanding about the

most critical aspects of the processes as well as make sure that someone is assigned

the responsibility for each of the key processes. The last step is to establish key metrics

for the tasks and the processes and make sure someone is accountable for those

metrics.

It is critically important for the new firm to shift the performance metrics when

scaling. While the discovery phase should be using “love metrics” such as activation,

retention, and payment, the focus should now shift to using growth metrics. Growth

metrics are focused on determining whether the firm delivers a reliable solution

with increasing economics of scale and can include more detailed measures of users

in terms of acquisition and referral (Maurya, 2012), measures of the efficiency of

the processes and the revenue growth (Furr and Dyer, 2014). By measuring the performance around the right metrics and reporting the results, the firm can improve its

processes significantly.



Business plan basics for engineers



33



During the start-up phase the team most often consists of people who possess good

discovery skills. However as the start-up scales up, there is a need for expertise profiles

that can execute the business model. There could be a need therefore for the talent pool

to change. Building the team during the growth phase requires a mix of

discovery-oriented people and experts.

As the team grows, it is important to focus on creating a working culture around

which communication processes and activities are shaped. As the team grows it is

furthermore important to plan and structure how meetings should be organized in order

to secure that everyone is moving in the same direction.



2.4.3



The danger of getting things wrong



Even though new technology-based firms have a great potential for wealth, value, and

job creation, there is enough evidence showing that, on average, 90% of them fail.

What is the main cause of such high percentage of failures? According to the experts

at Startup Genome (https://startupgenome.co/), the failures could be related to issues

associated with premature scaling. Furr and Ahlstrom (2011) define this problem as

“spending money beyond the essentials on growing the business (e.g., hiring sales

personnel, expensive marketing, perfecting the product, leasing offices, etc.) before

nailing the product/market fit.” In addition, start-ups “are doing good things but doing

them out of order. In other words, they are doing things that seem to make sense, like

investing to build the product, hiring good people to help them sell it, developing

marketing materials, and essentially doing all the kinds of things that big companies

with lots of resources do when they are executing on a known opportunity”

(Furr and Ahlstrom, 2011). The problem is that the risk associated with these investments could be justified only by extensive preexisting market research or sales data.

Instead of assessing the risks and opportunities objectively and scaling those investments accordingly, start-ups tend to rely on guesswork without really looking into the

real facts. It is true that many start-ups bring products that are new to the market; that

is, they lack substantial market research and sales data. This is, however, exactly why

they need to manage the scaling process in a more structured way. Another study has

reported the top 20 most common reasons for start-ups to fail (CB Insights, 2014).

Some of them are as follows: there was no market need; the firm ran out of cash;

it did not have the right team; it got outcompeted; it got the pricing/cost wrong;

the product design was poor; there was a need/lack of a business model; the marketing was poor; the customers were simply ignored; and so on. Interestingly, all of

these issues could be related to the first stage (articulation and shaping of the business

model) or the second stage (the proper scaling up of the business) of the business

planning process.



2.5



A business plan template



The business plan serves as the executable plan for the start-up (Faley, 2015). While

the phrase “business plan” conjures images of 60 pages of documents full of dense



34



Start-Up Creation



charts and diagrams, the business plans of today have become a lot shorter (Blumberg,

2013; Anthony, 2014; Faley, 2015). From 60-page documents they now often come

in the form of slide decks or shorter executive summaries. Furthermore, the key of

a successful business plan in today’s rapidly changing environment is to consider

the plan as the definite pivot point of the company, which means that the business

plan should be treated as a dynamic tool by updating it as new learning emerges

(Faley, 2015).

Besides being an executable plan for a new firm another fundamental aspect of the

business plan is to keep everyone involved on the same page. For a start-up there are

two primary stakeholders to articulate the business plan to: investors and employees.

While investors focus on the size of the market opportunity and the likely revenue, employees are more interested in knowing the shape of their future work life (Blumberg,

2013). Two versions of the business plan can therefore be articulated: a version for investors focusing on the likely revenue of the opportunity and a version for employees

focusing on articulating the overall vision and strategy that guide all employees toward

the same goal during the initial phase.



2.5.1



A mini business plan for investors



Articulating a business plan to investors can be done either in a written document or by

conducting an oral investor presentation using slide decks (Blumberg, 2013). There are

several ways to structure the content of the business plan; however at this early stage

the start-up should at least be able to articulate the size of the opportunity, the competitive advantages, current status and road map from today, and the strengths of the team

(Blumberg, 2013).

Anthony (2014) proposes a structure for organizing a mini business plan, which articulates the elements of the business model and the aspects of scaling. A mini business

plan template can be downloaded at www.innosight.com/first-mile/index.cfm. It contains the following components:



















An executive summary or a pitch if presented orally to investors

The target customers and their problems

The proposed solution

The key business model elements

The plan to scale the idea

The thumbnail financials

The critical assumptions

The proposed testing plan



The insights from the early discovery-based stages as well as the required scaling

activities could be easily articulated by using this template.



2.5.2



Key points in the business plan for employees



The challenges for a company in the process of scaling up are well known. Furr and

Dyer (2014) recommended using the so-called V2MOM (vision, values, methods,



Business plan basics for engineers



35



obstacles and measures) scaling tool to simplify the process. It is a strategic planning

tool that allows a start-up or an established company to define goals and organize ways

to execute them. The V2MOM tool ensures that everyone is moving toward the same

goal, regardless of the size of the company. The tool is therefore especially well suited

for companies placed in a rapidly changing environment where there is a need to

evolve continuously.

The articulation of a vision helps define what the company wants to do. The values

refer to the principles and beliefs that guide the company toward its vision. The

methods illustrate the actions and steps that everyone needs to take to achieve the

vision. The obstacles identify the challenges and issues that have to be overcome to

achieve the vision. The measures define the results aimed to achieve. V2MOM

therefore helps the company to define where it wants to go, what things are important,

what it will do to get there, what would prevent it from getting there, and how it knows

whether it is successful or not (Furr and Dyer, 2014).

Salesforce.com used V2MOM in their early days as part of their business plan and

is still using it to guide the overall organizational goal of today (Furr and Dyer, 2014).

The structure of the tool can therefore be used in all phases of the life cycle of an

organization.



2.6



Conclusion



This chapter focused on describing the basics of the business planning process in the

context of engineering professionals. One of its key contributions is the detailed discussion of the unique characteristics and challenges of technology-driven business environments that are typical of engineering professionals. One of the key characteristics

of such environments is the combination of multiple uncertainties and risks that could

potentially affect the initiation and the evolution of a newly created technology-based

or engineering business. The main challenge in addressing the multiple uncertainties

and risks is that they have completely different sources and nature. For example, there

is interplay between the uncertainties associated with the degree of newness of the

technology and the early stage of a new technology firm. Fortunately, the recent

growth of interest in the lean start-up approach, agile technology/product development, and hypothesis-driven technology entrepreneurship has resulted in some key

publications, frameworks, and models focusing on the implementation of a rigorous

scientific approach to uncertainty management.

This chapter reflects this trend and hopes to offer a brief introduction of how it

could be implemented within the context of the business planning process. The

business planning process consists of two major parts: articulation and development

of a viable business model, and managing the growth and scaling up of the business. The development of a viable business model is described through the lean

canvas approach suggested by Maurya (2012). The lean canvas approach is specifically designed to address the unique uncertainties and risks associated with the

development and the introduction of new products by newly created firms. It works



36



Start-Up Creation



with a simple risk categorization focusing on product, customer, and market risks. It

allows us, however, to address any other types of risks such as the ones that are

discussed here and typical of technology-driven and engineering business

environments.

The growth and scaling up of the business is described as consisting of three major

components: market scale-up, team scale-up, and process scale-up. Our description

refers to a practical tool suggested by Furr and Dyer (2014), which should help the

operationalization of the business scale-up process in the context of engineering businesses. Without pretending to offer an exhaustive picture of the complex process of

business development and planning, the chapter is an expression of a vision that emphasizes the fact that business development and planning knowledge and skills should

become part of the culture of present-day engineering professionals.



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