The module – in brief
The purpose of this module is to illustrate how to create a new digital business model based on an analysis of current or future customers, as presented in the module Customer Analysis, and based on customer needs, as presented in the module Service Design.
A stepwise presentation of the tool The St. Gallen Magic Triangle (Gassmann et. al, 2019) provides an overview of what your future digital business model might look like. With inspiration from the experts’ advice, this can be refined and elaborated on with the modules about Testing.
How to develop a new business model
Developing a new business model should rest on knowledge about the company’s current situation internally and externally as well as the needs of the specific customer or user group that you want to target. Therefore, the modules Pre-analysis of the surrounding world and Pre-analysis of the company’s situation are good starting points to get a clearer picture of your company’s current situation.
As mentioned, a business model can very simply be described as:
‘The way in which a company creates value and makes money from it’.
This very simplified definition is explained further in the module What you need to know about digital business models. Here, value proposition, value creation and value delivery as well as value capture are also further described as the basis for a business model, regardless of whether it is an analysis of the company’s current business model or design and development of your new digital business model.
The design of the new digital business model will be based on the tool The St. Gallen Magic Triangle, developed by (Gassmann et. al, 2019) businessmodelnavigator.com. As input to The St. Gallen Magic Triangle, it is recommended to use the tool to translate customer needs into solution ideas, which was introduced in the Service Design module and which is illustrated below. Further inspiration for the definition of Customer Segments and Personas can be found in the module Customer Analysis.
“Value Design” adopted from Digital Business Models for the Future under license CC BY-SA 4.0
Print-friendly version of the tool in large format.
The output from using the Value Design tool to transform customer needs into solutions is a description of specific problems experienced by a defined customer segment. These problems end up translated into specific solutions that you as a company find to eliminate the problems and seize opportunities. Thus, this insight supports and forms part of the starting point for the development of your digital business model.
The Magic Triangle
The Magic Triangle is designed not only to update current business models but equally to support the development of new business models in alignment with the changing environment. Thus, companies can better match new: trends, customer requirements and legislation, not only by focusing on product and feature development but equally through business model innovation. Thereby the company is positioned stronger to absorb changes in the market and reduce the risk of becoming redundant.
The Magic Triangle is an alternative to the classic business plan, as the idea behind it is that it must be prepared quickly and only be one page long to promote a wealth of ideas, overview and quick discarding of useless ideas.
“The Magic Triangle” by (Gassmann et. al, 2019), businessmodelnavigator.com
The Magic Triangle
Print-friendly version of the tool in large format.
Set aside 1-2 hours for analysis and description of the elements.
It will be a great advantage to involve key employees from the company’s various departments in this analysis. 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 printed version of the tool Magic Triangle, 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.
From the modules Customer Analysis and Service Design, the Customer Segmentation method and the Value Design tool, have already generated valuable information for several elements of the new business model. Hence, we can start by using the information we have arrived at through our analysis as input to fill out the elements “Who” and “What”.
1) In the element “Who”, you can insert the selected customer segment. This can be further specified and perhaps narrowed down to “early users”. Early users are the people who need the solution the most and who are the most obvious buyers/users. The early success of the business model is highly dependent on whether you manage to define and effectively target your early users optimally.
2) The “What” describes what value that is being offered to the chosen customer segment. 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 value 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. These “What” should briefly and accurately describe the most valuable and concrete benefit a customer will experience with your solution. Try to think of it as the wording of a slogan that does not describe the product or service, but the value a customer achieves based on using the solution.
You may find inspiration from the information generated with the Value design tool presented in the module Service Design which offers a way to formulate a unique value proposition based on the needs of the chosen customer segment. If you found several value propositions in the earlier process of translating customer needs into a possible solution, you can make a Magic Triangle for each of them and then compare them. Even though you may already have a favourite solution, in this phase you should avoid sticking just to this single solution. With this, you have brought the elements from the Service Design module into play and you can continue with filling in the rest of the Magic Triangle based on your knowledge about the customer segment and your assumptions about the solution. The various business models you outline here will of course have to be thoroughly tested and evaluated several times; therefore and at this early stage, it is okay to work from ideas and assumptions.
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 as a product or service, and in return pay with either a one-time payment, a monthly subscription or another type of payment agreement. Remember that the pricing of a digital solution also helps to define the branding of the company’s products and services and that it aims to capture the attention of the early users.
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 where 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 customers that provide different kinds of value.
Now you should have an overview of your company’s new business model including what value you create, how you create it, who you create it for and why you are able to make money from it.
After describing the four dimensions of the Magic Triangle, a physical picture of the business model has been created. The result will be that you now have a well-thought-out starting point for a new digital business model.
This picture also highlights the complexity of designing and maintaining a business model, as there are so many interdependencies between the elements and beyond. Even small changes in the market or in the value chain can have a high impact on your business model.
Common to all the elements in your Magic Triangle is that they can always be changed and, therefore, they are not fixed. So, now it would be a good idea to test your business model against any assumptions you might have included in the above process of defining your business model. Read more about the Development Process and testing of business models in the modules Early usability testing and pretotyping as well as Internal validation.
Additional resources and knowledge
A range of tools exists to describe a business model or to design and test a new business model. Common to these is that they aim to provide an idea and an overview of value and value creation, as described in the module What you need to know about digital business models. Such tools, including canvases, are easier to work with than describing your business models in a written report because a better overview promotes opportunities for collaboration and development. These tools include, for example:
- Business Model Canvas (Strategyzer.com, 2008)
- The LEAN Canvas (Ash Maurya, 2010)
- Value design (Westerlund et al., 2014)
- IDEO BM framework (Tom Hulme, 2010)
- BCG Business Model framework, (BCG and MIT, 2013)
- IoT BM framework, (Chan, 2015)
- Business Model Navigator, wich includes patterns for revenue model design by (Gassmann et. al, 2019), businessmodelnavigator.com
- Spend time defining, validating and communicating PURPOSE. Initially, decide why, then how and finally what to do. Thus, your business development will be in line with the company’s vision, mission and goals, and everybody will be able to understand what to aim for.
- Take your starting point in the customers’ needs and in your surroundings. Start from the outside and work your way in. In this way, you will from the very beginning design solutions and business models, which are viable in the real world, and which meet real customer needs. It can be riskier to develop business from the inside out, as you can end up in a dead end of solutions based on assumptions and internal optimisations that no customer is willing to pay for.
- Business development and ideas for new digital business models can come from many different sources inside and outside the company. You can also start at different points and move in different directions, as no single standard solution suits all companies.
- A unique competitive advantage is difficult to copy or buy and could be insider information, personal authority, a competent team, large network, patents etc. In other words, you need to identify the factor or factors that will make you more successful than others in producing, marketing, delivering and monetising the solution.
- Do not copy the competitor or the neighbour – but feel free to learn from them. There are some really good digital business models on the market today where the combination of various existing technologies and business models are being launched into new markets. Or perhaps a business model or concept existing in one industry is ‘translated’ into another industry.
- Do something better than all others. Be unique in a carefully selected area. You cannot create business by being the best at everything, but by knowing your business area and doing one thing, which strengthens the business, better than others do.
- To measure your success with the new solution, relevant “Measurement points” can be established. Try to identify a couple of the units of measurement that are most important (but keep in mind that these can change as the solution is developed). One measurement point, which is usually relevant, is profit – how much do you earn from the solution? The number of sold solutions may be relevant, but a high number is not necessarily good if you do not earn anything at all. Similarly, it is not certain that customer satisfaction is a relevant measurement point if you do not make money from satisfying your customers. This will support your further work with the business model in the module Internal validation.
- Work experimentally, iteratively and agile. Be investigative and questioning, and test throughout the process of developing and launching a new business model. Read more about this in the module on Early usability testing and prototyping.
Although the process of developing a new business model is based on knowledge about a specific customer segment, market knowledge and knowledge of own internal strengths, the outlined business model should still only be considered as a basis for ideas since it must be tested to validate that it will work in reality.
In other words, you MUST test your newly designed business model externally with the customers, and then you must make it clear whether the business model can be accomplished internally in the organisation or in a partnership in the relevant market or ecosystem. Hence, the next step is to test your possible future business models to see which ones hit the spot. A business model may be a good idea on paper, but it may still turn out to be too early or too late in the market or may only be relevant for a different segment than first assumed.
From here, you can continue reading more about testing your new digital business models in the modules Early usability testing and pretotyping and Internal validation.
The 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.