In 1972, a small metal forging shop in Ventura California was faced with a business dilemma. They designed, manufactured and sold products to expert mountain climbers. The founders and most of the employees were themselves great outdoors enthusiasts. Their quandary came from realizing that the more they sold iron “Pitons” for climbers to hammer into the rock face, the more they would be damaging the cliffs for the next climber. This was clearly unsustainable for the rock face, for the climbers and ultimately for the business. In their catalog that year, they published an essay entitled “Clean climbing” describing how one should not leave a trace of his passage. They began manufacturing a removable climbing equipement called a hexagonal nut that can be wedged into the existing cracks of the rock face. Because a reusable product would reduce their sales volume, they diversified by catering to the needs of outdoor sportsmen. That’s how that organization, now know as Patagonia, adapted their business model to become more sustainable. Their success still grows today because they continue to stand behind a philosophy of responsibility and values of sustainability.
Patagonia’s story is one of change in the face of clear threats to their business model. But back then, they didn’t call it a “business model”. In management literature, one of the first ways of referring to a business model was as the “theory of a business” by Drucker (1954). Since, the term business model in popular speak has often been reduced to a revenue model, which is the way an organization balances out financially. The distinction between revenue model and business model comes from a larger understanding of the creation of value by an organization. Therefore a business model includes the financial dimension but is not simply reduced to it.
Improving on the “theory of a business” is now called business model innovation. The term business model innovation might sound like yet another management trend. Or worse, it might simply be a new way to describe a familiar subject. Nonetheless, there is much to learn about business models as a means to drive change in organizations.
Since the early 2000s, a growing field of research has been devoted to the study of business models. Zott, Amit & Massa (2011) revisited the past literature to compare and contrast the different definitions of a business model. Their table is reproduced in Appendix 1. Another research that combed through existing definitions was Alex Osterwalder’s doctorate dissertation (2004). It ended up describing a business model as an abstract conceptual model that represents the business and money earning logic of a company.His complete definition is the most robust:
“A business model is a conceptual tool that contains a set of elements and their relationships and allows expressing a company’s logic of earning money. It is a description of the value a company offers to one or several segments of customers and the architecture of the firm and its network of partners for creating, marketing and delivering this value and relationship capital, in order to generate profitable and sustainable revenue streams.” (p.24)
A more synthetic definition is found in the subsequent book Business Model Generation (Osterwalder & Pigneur 2010) where they state that “A business model describes the rationale of how an organization creates, delivers and captures value.” Moreover, the widespread publication of the book has crystallized which elements can best describe a business model. The authors determined nine building blocks as the parts that make up the whole. They are: Customer Value Proposition, Segments, Customer Relationships, Channels, Key Resources, Key Activities, Partners, Costs and Revenues.
The notion of business model now clearly defined in literature (Pigneur & Osterwalder 2009), researchers now turn their attention to the process of business model change. There has been some work on the different phases to business model innovation such as experimentation, acceleration, transition as described by Johnson (2008). Other see in business model innovation following a similar process to product innovation from idea to launch (Chesbrough 2010). Our interest lies in the initial phases of the process where an organization conceptualize their business models. We are interested in the process that can help organizations question and reformulate their means of creating, delivering and capturing value.
Our interest in a design approach to business models can be explained by the popularity of business model canvas in practice. Downloaded more than 3million times from Osterwalder and Pigneur’s website, the canvas is a design tool that elegantly places these nine building blocks on a single page. It creates a sense of wholeness to fully understand the business model and more importantly, graphically demonstrate the relationships between the different elements as shown in Figure 1 below.
Illustration of the business model canvas tool
Figure 1. From Osterwalder & Pigneur 2010
The business model canvas is the tool that glues the process of designing new business models together. It is used in the first phases of the design process to communicate business ideas. This visual approach to understanding and describing a business model allows to focus on the relationships between the elements. Such a systemic perspective has proven useful in ensuing research (Zott & Amit 2007, Snuikas 2009, Nordic Innovation 2010, Sommer 2012, Kaplan 2010, Mitchell 2013) including our own.
Some criticism has surfaced regarding this condensed description of a business model into a nine box canvas. This canvas comes from an innovation bias and doesn’t account for other aspects of managing an organization, such as corporate structure, business objectives, performance measurements, strategy management and competition analysis (Rosenberg et al., 2011).
Our critique is that the business model canvas is built upon a profit first philosophy. The nine building blocks are weighted to make sure that revenues outweigh the costs in strictly financial terms. Moreover, we also see this profit first approach as influencing the general understanding of a business model too. Although the initial definition is centred around the notion of value, it is implied that financial value is the only dimension of value that will be measured in a business model. Our approach is to include social and environmental impacts and benefits to ensure the organization creates multiple forms of sustainable value for a variety of stakeholders. This shortcoming, the turn in literature towards the process and our focus on the design phase of business models leads us to our research question: how can a design process facilitate the creation of sustainable business models?