Over the last 50 years engineers have moved from building computers out of individual transistors to building with prepackaged logic gates. Then they adopted standard microprocessors (e.g. x86, ARM.) At the same time every computer company was writing its own operating system. Soon standard operating systems (e.g. Windows, Linux) emerged. In the last decade open source software (e.g LAMP) emerged for building web servers.
Each time a standard solution emerged, innovation didn’t stop. It just allowed new innovation to begin at a higher level.
In this post I want offer a solution stack for Entrepreneurship. It’s the combination of Business Model Design and Customer Development.
Business Model Design
Today every business organization from startup to large company uses the words “business model.” Some use it with certainty like they know what it means. Others use it with an implied question mark realizing they don’t have a clue to its components.
Alexander Osterwalder and Yves Pigneur defined a business model as how an organization creates, delivers, and captures value. More importantly they showed how any company’s business model could be defined in 9 boxes. It’s an amazing and powerful tool. It instantly creates a shared visual language while defining a business. Their book “Business Model Generation,” is the definitive text on the subject. (And their forthcoming Business Model Toolbox is a killer iPad app for business strategy.)
Yet as powerful as the Business Model Canvas (a template with the nine blocks of a business model) is, at the end of the day it was a tool for brainstorming hypotheses without a formal way of testing them.
Business Model Design Gets Dynamic, Customer Development Gets Strategic
One of the key tenets of Customer Development is that your business model is nothing more than a set of untested hypotheses. Yet Customer Development has no structured and systematic way of describing a business model.
In the last year I found that the Osterwalder Business Model canvas could be used for something much more than a static planning tool. I realized that it was the launch-pad for setting up the hypotheses to test, and a scorecard for visually tracking iterations and Pivots during Customer Discovery and Validation.
Meanwhile on the other side of the world Alexander Osterwalder was coming to the same conclusion: tying the two processes together would create a “strategy stack for entrepreneurship.” We got together this weekend (along with our partners Alan Smith and Bob Dorf and my student Max Marmer) to try to integrate the two.
Business Model Design Meets Customer Development
In its simplest form the way to think about the intersection of the two processes is that you start by designing your business model. Next, each one of the 9 business model canvas boxes then directly translates into a set of Customer Discovery hypotheses that are described in Customer Development and the Four Steps to the Epiphany.
Pivots and Iterations
Many entrepreneurs assume that the assumptions in their original business model (or business plan if they wrote one) will be correct. Confronting the reality that one of these hypotheses is wrong (finding out you have the wrong sales channel, revenue model, target market or customer) creates a crisis.
Tying Osterwalder’s Business Model Canvas with the Customer Development process turns these potential crises into learning opportunities called the Pivot. Customer Development forces you to get out of the building and discover and validate each one of the assumptions behind the business model. A Pivot is when reality leads you to change one or more business model hypotheses. The result is an updated business model not a fired VP of Sales.
The Pivot turns a failed business model hypotheses into insight.
The Business Model/Customer Development Stack
We’ll have more to say about combing these two methodologies in future posts.