This is the third post in this “Business Model Generation – The Emperor’s New Clothes?” series. (The first two articles are listed at the end of this post.)

We do not claim that Business Model Generation is an illusion. Business Model Generation certainly is a genuine and solid approach to map, simulate and develop new business ideas or improve existing businesses.  However, we will claim that it is not what most people expect or hope it is: a new short-cut to a quick fix.

When we take a close look at the business model canvass we notice the absence of some significant areas impacting our business.

Where do we deal with the competition, the technology trends, the legal and environmental issues, the global economy, etc. etc.?

No business model lives in a vacuum and the toughest part in business is dealing with the issues that we cannot control.

Separating the controllable from the uncontrollable

We have to make it to page 200 in Osterwalder & Pigneur’s book before we are exposed to what they call the business model environment.

Reading most reviews of the book and listening to consultants and other supporters of the business model approach indicates that they apparently never made it to page 200. Most probably just read the 50 pages that you can download for free from Osterwalder’s web site.

Separating what you can control, “The Business Model”, from what you cannot control, “The Business Model Environment”, is an excellent way of structuring our strategy development process.

Doing the business model canvas part only is like planning to put a man on the moon, but ignoring the weather, the earth’s gravity, the moons’ gravity, cosmic radiation, the friction of the earth’s atmosphere and probably a lot of other external factors that I don’t even know about. A business model exercise that skips the analysis of the impact from the business model environment is at best a complete waste of time and resources, and at worst is downright hazardous and dangerous.

The Business Model Environment in the future

To make things even more difficult we have to consider the business model environment of tomorrow rather than business model environment of today.

The business model environment changes continuously. The success of our business model is a result of our ability to take advantage of the business model environment, especially the changes in the business model environment.

Mitigate and exploit

The business model environment is by definition the circumstances under which we have to operate.  We basically have two options:

• 1. Mitigate the impact of the factors and changes in those factors that are working against us or are exerting risk upon us
• .
• 2. Exploit the factors and changes in those factors that could work to our advantage

Can we change the business environment?

Yes – from time to time business models permanently tweak the business environment. Microsoft, Google, Apple and Facebook are examples of companies that have changed the business model environment for a lot of other companies.

However, just because Apple & Co. did it doesn’t mean that you can/will do it, too!

Most software companies will have to develop and manage their business model under a given set of business model environment characteristics.  If your business model is so strong and successful that it changes the entire industry, then that is certainly an accomplishment that will benefit you tremendously, but don’t count on it at the outset.

The Four Business Model Environment “Forces”

The business model environment is divided into four major areas:

1. Key Trends
2. Market Forces
3. Industry Forces
4. Macro Economic Forces

Osterwalder actually names these areas “forces”, which in my opinion may confuse them with Porter’s “Five Forces” to which there is some overlap.

However, Osterwalder’s four business model environment areas are fairly comprehensive and complete and will work well for most software driven companies.

Key Trends

The key trends include:

1. Technology Trends
2. Regulatory Trends
3. Societal & Cultural Trends
4. Socioeconomic Trends

Most software-driven business models are receiving substantial impact from the Key Trends force. The software driven industry is also the main technology driver in itself, and aggregated the industry has more impact on the business model environment forces than any other industry.

The rapid proliferation of the Internet, the standardization of digital media formats, the acceptance of smart personal mobile computers (smart phones and tablets), the “invention” of apps and apps ecosystems, the development of the “cloud”, the availability of in-memory analytical tools, etc., are technology drivers disrupting some companies’ business models while enabling other companies’ business models.

Market Forces

The market forces include:

1. Market Issues
2. Market Segments
3. Needs & Demands
4. Switching Cost
5. Revenue Attractiveness

Although market forces also change over time, the main consideration here is the nature of your potential customers’ situation, needs and behaviour associated with their purchase process and decision for your type of product/service.

Key issues to consider are:

• Is there a market for your product/service?
• Is your market growing or shrinking?
• Can this market support your growth ambitions
• Are some segments of the market more attractive than others?
• Do you (in the eyes of the market) offer “must have” or “nice to have” value?
• Is it easy to identify the key decision makers for your product/service?
• What prevents your potential customers from buying your product/service?
• What is the switching cost?

The software industry is probably the greatest innovation engine the world has ever seen. New solutions to existing problems and new opportunities for completely new markets pop up every day. Although the business model innovation approach helps us analyze and optimize our business model it hasn’t eliminated gravity.

We still have to face the law of diffusion of innovation.

We still have to cross the chasms.

Industry Forces

The industry forces include:

1. Competitors (incumbents)
2. New Entrants (insurgents)
3. Substitute Products & Services
4. Stakeholders
5. Suppliers & other value chain actors

Managing your business model without an eye on your customers’ alternatives seems hazardous. You should not ignore your competitors, but you can choose to ignore the moves of your competitors, if you see no threat to your business.

Very low barriers to entry characterize the software industry. Starting a software business requires very little capital. Thus, the software industry is crowded with incumbents and insurgents in all segments. That’s not necessarily a negative thing. Having someone helping you make a market can lower your cost of sales considerably.

Stakeholders are people in organizations that have influence on your business model without being customers. Stakeholders are typically your staff, labour unions, shareholders, industry associations, the government, lobbyist, consultants, analysts and the press.

Macro Economic Forces

The macro economic forces include:

1. Global Market Conditions
2. Capital Markets
3. Commodities and Other Resources
4. Economic Infrastructure

The macro economic forces affect big companies, although smaller companies are less affected directly. As the software industry is made up of primarily small companies, and as software is mostly boosting productivity, the software industry is often unaffected by the macro economic forces.

Managing the business model environment

Osterwalder and Pigneur is making another important yet often ignored observation:  No individual alone in your organization could paint a holistic picture of your business model’s environment and design space. Only by mapping out each specialist’s knowledge can you develop a shared understanding of your environment.

Although there is nothing in the business model and business model environment approach that prevents us from keeping the strategy considerations in the board room, Osterwalder and Pigneur are passionate believers in “inclusion.” They recommend drawing on the insight already residing in the organization and bringing this knowledge into play as we review and refine our business models.

Other articles in this series:

Business Model Generation – The Emperor’s New Clothes? (Part 1)

Business Model Generation – The Emperor’s New Clothes? (Part 2)