- Business Model Innovation
- Learning Module
The module – in brief
A company’s business models, current as well as new ones, all contribute to the overall ability to create value. However, before developing new business models, you should be able to fully understand and navigate the existing ones of your company. Therefore, this module offers a step-by-step guide to drawing and describing an existing business model to get an overview of all of the company’s business models.
This overview can be used to assess possible synergies across the business models, as well as to test whether individual elements in an older business model can be updated to the advantage of the company.
The existing business model
As described in the module What you need to know about digital business models, the vast majority of companies apply several business models simultaneously. All these business models contribute to the company’s general ability to generate value: value for customers, the organisation’s ability to create and deliver value, as well as capturing value for the company itself, e.g. money on the bottom line.
Therefore, a description of current business models can provide insight into how to create synergies among business models in the best way – for example by designing a new digital business model that can close a gap in the form of a problem experienced by a known customer segment in another business model of the company. Likewise, it is also possible to take an existing business model under the microscope and figure out if adjustments should be made by changing a single or some of the elements of the business model. Perhaps it is relevant to create a different cost structure in a business model through new partnerships or to attract new customers through a new earnings model, which could, for example, include the rental of products.
To get an overview of the current business model to be analysed, the St. Gallen Magic Triangle (Gassmann et. al, 2019) is a useful tool.
The St. Gallen Magic Triangle
The St. Gallen Magic Triangle (Gassmann et. al, 2019) is characterised by its simplicity and ease of use while simultaneously providing a clear picture of the business model architecture. The purpose of the St. Gallen Magic Triangle (Gassmann et. al, 2019) is to enable a better understanding of the key drivers behind successful business models, and moreover to encourage business model innovation through a structured approach. For further information regarding the vision behind the tool, go to businessmodelnavigator.com.
As the St. Gallen Magic Triangle provides an outside-and-in perspective for companies to understand and assess innovative business models, you can also use it for developing new business models, as it is described in the module Designing a new digital business model.
Below, the tool the St. Gallen Magic Triangle is illustrated.
“The St. Gallen Magic Triangle” by (Gassmann et. al, 2019), businessmodelnavigator.com
The Magic Triangle
Print-friendly version of the tool in large format.
The St. Gallen Magic Triangle should be seen as a template that contains the elements of a company’s business model that all influence each other. In the process of assessing these elements, the tool helps you to generate an overview of the current business model that you have chosen to explore. This implies that, when the template is filled out, you will have a keyword description within each element, which all together illustrates how the company works optimally.
Set aside 1-1.5 hour for analysis and description of the business model elements.
It will be a great advantage to involve different key employees in this process. Firstly, because different people bring different ideas and points into play; secondly, because employees in different jobs together will create a more detailed and complete analysis, and last, but not least, because the analysis process itself is an excellent way to create a common understanding of what changes the company must go through as well as why and how.
You will need a digital or printed version of the tool in large format, a lot of self-adhesive paper slips (post-its) and pens (one for each participant). In principle, the results of the analysis can be written directly into a blank document on a computer, but it is highly recommended to perform the analysis on paper, as it is much more flexible and makes it easier to stay focused.
1) The first element in the tool, the “Who”, refers to the customer. Being aware of who your target customers are is a key element in creating a successful business model. Here you shall decide which customer group this business model is designed to target.
The target customer segment can be both in the business-to-business segment and Business-to-consumer segment. Thereby the customers might be end users, but can just as well just be customers, with their own customers, further down the value chain.
You can find a helping hand when defining your target customer group in the module Customer Analysis. This module includes insights into using Personas, as well as defining current and new Customer segments.
2) The “What” describes what value that is being offered to the customer. Here you shall formulate the value proposition, which is the unique value that you want to offer to the customer segment chosen in “Who”. Here it is key to consider what the chosen target customer finds valuable. Hence, this underlies the importance of not falling into the trap of perceiving the value of your business model in terms of what your company finds valuable, but remember to use the Outside-in Principle that was presented in the module Basic Principles and take the viewpoint of your customers.
In the module Service Design, the Value design tool offers a way to formulate a unique value based on the needs of the chosen customer segment.
3) The “How” grasps all the activities and processes of the company as part of the effort to build and distribute the chosen value proposition to the target customer group.
Here you shall formulate all activities related to the company’s value chain and all resources needed to sustain these activities. This will include both physical assets such as buildings and technology, and human assets in terms of people with the general or unique skill-sets to build and deliver the value proposition. Equally, you must remember to include the suppliers and know-how that is needed within the supply chain.
4) The fourth element is “Why”, which refers to the profit mechanism of the business model, and the venue for securing the company a desirable value. Often, the company will make money through a revenue model that offers customers to purchase the offered value proposition through a product or service, either with a one-time payment, a monthly subscription or another payment agreement.
When choosing your business model’s revenue model, try to consider how to straighten your business model and eliminate risks through the chosen value capture mechanisms or revenue model: If the business model for example relies on a high initial investment, you should focus on a revenue model that secures the highest possible revenue as fast as possible. Or if it is more important for business to keep a close relationship to the customers, as part of a data-driven business model were critical mass is essential, then a monthly subscription with services that ties the customers to the company might be better.
Note that some companies have multiple business models with different revenue models with the aim to attract different kinds of value.
Now you should have an overview of your company’s business model including both internal and external factors as customers, suppliers and partners. In today’s ever-changing markets, there are many different ways of designing a company’s business model, and optimising the four elements to jointly support the highest possible value for the company through the chosen revenue model. The St. Gallen Business Model Navigator describes these patterns in more detail.
The result of working with the St. Gallen Magic Triangle is that a practical overview has been generated and a common understanding has been established of what your company’s current business model looks like. An important point in the process of filling in the canvas is also to allow for an open dialogue on different perceptions. Perhaps this leads to new insights into the actual costs of specific customer segments, or maybe it becomes evident that you need to get clarified exactly what your customers perceive is the value you deliver.
Thus, the snapshot of the business model and the common understanding do not only make it possible to rethink individual elements and develop the business. The model can also bring questions and issues to the surface through the joint analysis and dialogue.
Updating the business model
After drawing up the current business model, you have the opportunity not only to evaluate it in the light of your plans for new digital business models but also to see if elements of the current business model need renewal or a practical update.
When working with the analysis of a current business model based, the whole mind-set around value is what forms the backdrop of the process. What value do you as a company offer? What is this worth to customers or users? Depending on the answer to this, you can address all the elements of the St. Gallen Magic Triangle and ask yourself: Can this factor be optimised?
Thus, you will get two perspectives on renewing your business model:
- Can we do it cheaper or more efficiently? And, thus, increase earnings through the existing business model.
- Can we do it better or with greater effect? And, thus, increase the value proposition for the customers, which will either maintain your position in the market, have the effect that you can charge a higher price or attract new customers.
Thus, the analysis will be based on a number of questions, which can be answered either internally or through interviews with customers, users or by uncovering the possibilities in your company’s partnerships.
For each of the four elements of the business model, different tools will be relevant to use, depending on whether the answer you are looking for is managerial, HR-related, financial, technical, value-based or something completely different. This will depend on exactly what the analysed business model contains and where your discussion has highlighted new opportunities or deviations between different perceptions.
Even small changes in a current business model can have a big impact. Therefore, it is always important to examine – to validate – that the company can continue to deliver the value on which the business model is based. A natural next step will be to test any changes in relation to customers and to validate that they hit the spot regarding the current needs of the customer or user group in question.
A study of the value proposition among existing customers can also lead to new inspiration for unmet needs where they can create a new digital business model that can be included in the current. In other words, a changed business model must be tested internally and with some customers before it can be decided whether to implement it.
Even small changes in a current business model can have a big impact. Therefore, it is always important to examine – to validate – that the company can continue to deliver the value on which the business model is based. This is described further in the module Internal validation and testing. Likewise, a natural next step will be to test any changes in relation to customers and to validate that they hit the spot regarding the current needs of the customer or user group in question as described in the module Early usability testing and pretotyping. A study of the value proposition among existing customers can also lead to new inspiration for unmet needs where they can create a new digital business model that can be included in the current. In other words, a changed business model must be tested internally and with some customers before it can be decided whether to implement it. For inspiration, please also consult the module Designing a new digital business model.
The St. Gallen Magic Triangle have kindly been made available by the businessmodelnavigator.com
The other content elements above have been developed through two projects:
‘Digital Business models for the Future’ by Aarhus University, Aarhus School of Marine and Technical Engineering and Danish Technological Institute supported by The Danish Industry Foundation. The material from this project has been adopted in alignment with CC BY-SA 4.0
‘EU-IoT’ by Aarhus University, Martel Innovate, Netcompany-Intrasoft, Fortiss, BluSpecs and funded by the Horizon 2020 Framework Programme under topic ID ICT-56-2020, grant ID 956671.