Business Models: How Organizations Turn Resources into Value

Organizations are social and economic structures that coordinate (organize) resources to create, deliver and return value consistent with its mission and goals.  A business model is a conceptual model that “describes the rationale of how an organization creates, delivers and captures value”.^[1] So a business model explains the logic of how an organization operates: how it connects with and creates value for customers, how it connects with partners (stakeholders) who provide the resources to design, develop, produce and deliver that customer value in exchange for value in return, and how it connects with governments, which offer opportunities to access societal resources and set constraints on their use.

To be successful, a business model must simultaneously address three interdependent challenges: desirability, feasibility and viability^[2]. Not surprisingly, organizations often structure themselves with specialized teams who focus on strategies to address each of these challenges, and who interact with external markets and stakeholder partners relevant to addressing them (see Table 1). Organizations then need a way to integrate and coordinate the separate teams in the organization that are focused on each challenge. The business model is a tool to help integrate the efforts of these teams into a common strategy.

The Nine Building Blocks of the Business Model Canvas

The business model canvas is a tool for describing existing business models, and organizing assumptions about potential new business models into testable hypotheses. It contains nine building blocks, organized into three clusters associated with the strategies to address each core challenge.

Marketing Strategy: Choices that address desirability (value creation) by designing and delivering offers that customers want

Four building blocks are the primary focus of an organization’s marketing strategy, including its product development, marketing, and sales activities, ensuring that the organization is designing and delivering offers that customers want.  They include the external customer segment building block, and building blocks that make up the design of the offers we make to those customers.

	Customer Segments: the different groups of people an organization aims to reach and serve with its offers
	Value Propositions: the bundle of products and services that create value for a specific customer segment
	Channels: the touchpoints an organization uses to reach and communicate with its customer segments
	Customer Relationships: the quality and pattern of interactions an organization has with its customer segments

Operating Strategy: Choices that address feasibility (value delivery) by designing and delivering offers sustainably at scale

Three building blocks are the primary focus of an organization’s operating strategy, ensuring the organization can build and maintain an infrastructure to sustainably deliver offers at the intended scale.  In particular, an organization must define which key activities and resources are core competencies that will be done by the organization, and which will be outsourced to partners.

	Key Activities: the most important things that must be done in order to make a business model work
	Key Resources: the physical, financial, intellectual and human resources required to make a business model work
	Key Partnerships: the network of suppliers and partners that make a business model work

Because employees are always key business partners, offering their time and expertise to the organization, human resource strategy is always a key pillar of operating strategy. IT strategy, production strategy and research & development (R&D) strategy are other key pillars.

Financing Strategy: Choices that address viability (value capture) by designing and delivering offers with sufficient return

Two building blocks are the focus of an organization’s financing strategy, ensuring an organization has enough cash to sustain itself.  An organization must balance the revenues generated by a business model with the costs required to generate those revenues, sustain and grow key activities and competencies, and provide a return to key partners.

	Revenue Streams: the total cash returned from all customer segments served by offers
	Cost Structure: the full costs incurred to design, develop, produce and deliver offers to customers sustainably at scale

In for-profit business models, owners and financial investors are key business partners, and the financial strategy must generate sufficient returns to be able to compete for their financial capital.  In nonprofit organizations, organizations often generate financial resources from mission-focused grants and donations, and must be able to show that these resources are being used appropriately towards their missions.

Organizations must return value to (pay) all partners supplying resources at levels sufficient to enable those resources to continue to be available to it. In market economies, employees are always key business partners: to sustain themselves, organizations must be able to generate sufficient resources to compete in labor markets.   Finally, in nearly all economies, private organizations and public government entities transfer financial resources among themselves in the form of taxes to account for shared societal resources provided and protected by governments, and grants to provide cash to fund otherwise unprofitable societal goals.

Sustainable Business Model Fit

At any point in time, organizations with marketing, operating and financing strategies that are more internally aligned will be more successful at making use of their and their partners’ resources to create, deliver and return value.  This alignment is referred to as business model fit.

However organizations are embedded in a physical, economic and social environment that provides opportunities and constraints that are constantly changing.  So to be sustainable over time, business models must also be able to adapt to fit with its environment.^[3]  In particular, organizations must be able to innovate what they offer to the market and how they offer it, and return value to the society in which it is embedded.