Neil Tarallo has more than two decades of entrepreneurial experience under his belt and is a senior lecturer at Cornell’s Hotel School as well as the director of the Cornell Entrepreneurship Bootcamp for Veterans with Disabilities.
But that doesn’t mean that he can simply come up with an idea and magically turn it into a successful startup. When Tarallo brainstorms ideas, he leans heavily on the Business Model Canvas. Created by Alexander Osterwalder, it is arguably the most important innovation in entrepreneurship and strategy in quite some time.
Tarallo joined eCornell’s Chris Wofford to discuss the Business Model Canvas as part of the Entrepreneurship webinar series. An abridged version of their conversation follows.
Tarallo: Entrepreneurs are problem solvers. We solve problems in a marketplace, and in doing so we create businesses. For us as entrepreneurs, it’s important to understand exactly who is feeling the pain, so to speak, that has been created by that problem. One of the nice things about the Business Model Canvas is it really helps us focus on that.
When I talk to entrepreneurs around the world about their businesses, one of the things they tend to miss is the value that their solution creates for their customers, and exactly what those customers think about that value.
People get a little upset with me sometimes when I say these things but products and services don’t create markets. Solving problems in markets, and creating value, allow us to create new markets. But in order to have a sustainable business, you have to solve real problems for real people and understand what that solution means to them.
It’s really not about your products or your cool technology or how great your food tastes. It’s always about how you create and capture value for your customers. So that’s what we want to focus on and I think one of the great things about the Business Model Canvas is it really helps us focus on that important element of our business.
There’s no shortage of new products. It’s not even cool anymore just to have a new product or new technology. There’s so many of them out there, but very few of them really bubble up to the top. That’s because the manufacturers misinterpret what it is that they’re trying to do. There’s that old adage: Build it and they will come. Whenever I hear that, I run as fast as I can and you should too because you need to do more than just build it. You need to make that connection and that’s really what the Business Model is about. It’s all about how a business captures and delivers value to the customers.
Wofford: Before we go much further, perhaps we better get into what the Business Model Canvas actually is and how it works.
Tarallo: OK. The Business Model was created by a guy named Alexander Osterwalder. He was doing his Ph.D. and his interest was in business models. What he discovered as he was doing his research is that when he would ask people about business models, no two people could define it the same way.
I give him a lot of credit for seeing that. I think it’s something that all of us who teach and talk about entrepreneurship over the last 15 or 20 years have encountered but we just never identified it.
Osterwalder wrote his dissertation, ‘The Business Model Ontology – a proposition in a design science approach’, about how we build and generate business models. His premise was that we need to have a common understanding of what a business model is and that we need sort of a shared language around it.
So he created this tool called the Business Model Canvas and that was followed shortly thereafter by another canvas called the Value Proposition Canvas. We won’t spend as much time on the Value Proposition Canvas today but it has also become a fundamental tool in innovation.
The Business Model Canvas has nine building blocks and we’re going to quickly go through each of those building blocks. In the very center of the canvas is the Value Proposition. This is where we articulate the problem that we’re solving as well as how we are solving it for our customers. It is the first building block and is at the dead center of the canvas because it is central to everything that we do.
All the way over to the right is Customer Segments. We need to understand, as specifically as we can, who the customers are. Who will be interested in our solution and what value do they see in what we propose for them? Continuing on, building block number three is Channels, and that’s how customers actually get and access our Value Proposition. It could be online, it could be in our store – there are a whole bunch of variations on how we do that.
Next, Customer Relationships, which is primarily the marketing component of what we do. Moving to the left on the canvas, we have Key Resources, what we need in order to deliver our value proposition. Above that is Key Activities, where you identify what activities your business engages in on a daily basis that deliver the Value Proposition.
All the way on the left is Key Partners and those are other organizations or people that we can work with to help us deliver our Value Proposition. An example there might be, if I sell coffee, coffee growers may be a key partner for me because I have to bring them on board.
The bottom of the campus is all about the financial aspects of our business. To the right, we see Revenue Streams, and that’s those unique products or services that generate revenue for our business. To left is Cost Structure, or what it costs us to deliver our Value Proposition.
Notice that when I talk about each of these building blocks, I’m always referencing the Value Proposition. The activities that happen within these building blocks are central to that. Everything I talk about on the Business Model Canvas focuses on that Value Proposition.
Wofford: Yes, I did notice that you were really driving that home.
Tarallo: Now, if you look at the layout of the canvas, what you really see on the right side is what we call front stage operations or what we call front of house in the hospitality industry. These are the forward-facing activities that customers see and feel and touch. On the left side of the canvas are what we call backstage or back of house operations and those are the things we do behind-the-scenes that customers don’t necessarily see that support the delivery of our value proposition.
My work with companies and with entrepreneurs tends to focus on that left side because it’s a much more difficult thing to do. I call the front stage operations low-hanging fruit: we get to talk to our customers, we get to do some research, we see what they value and what they don’t value. That’s all pretty easy to do. The interesting thing about backstage operations is that if we can figure out how to deliver value through our operations, we tend to create a competitive advantage that’s very difficult for our competitors to break into.
An example I always use for that is Disney World. It’s one of my favorite places to go because I learn so much about operations there. Disney really delivers value through their operations. They entertain you while you’re going through lines, they have a series of tunnels underneath the entire facility, so that they can get anywhere in the park in six minutes or less. Other parks can’t do that so they’re creating value through operations that really gives them a big advantage over their competitors.
Wofford: It’s fascinating, and for our viewers who are interested, just Google ‘Disney World front stage operations and backstage operations’. There’s so much stuff out there written about it.
Tarallo: Now, the lower part of the Business Model Canvas is what I call the economic model.
It’s how different elements of the cost and revenue structure of our business come into play and work together. So that’s the way I think about the model: right, left and lower side, with value being in the center of everything.
Wofford: So how does the canvas work?
Tarallo: As we build our Business Model Canvas, we really hypothesize and we’re guessing what we think is going to happen or could happen in each of these building blocks. Then our job is to go into the marketplace and test our hypotheses. We learn from those tests and we go back and we repeat this over and over again until we get it right.
Wofford: So following this model allows you to test your assumptions, right? That’s where you validate whether or not you do have unique value, whether you’ve got a competitive advantage and so on?
Tarallo: Exactly. You need to be objective. One of the big challenges for me in disseminating information about the canvas both to my students and entrepreneurs is that they’re very emotionally invested in their solution to the problem. For me, one of the measures that I use to determine whether I think somebody is in fact going to be successful as an entrepreneur is how flexible they’re willing to be in that solution.
Wofford: How do you know when you’ve got it right?
Tarallo: To be very candid with you, as much as we work on this and as much as we test, it will not be accurate. The day that we open our business is when we really find out whether it’s accurate or not. None of this is an absolute, but the canvas gets me on the right page. It gets me as close as I can so that when I have to make adjustment when I open my business, or as I’m running my business, I don’t have to take big leaps. I’m trying to mitigate risk and I think one of my favorite things about the Business Model Canvas is it lets me do that.
Entrepreneurs don’t like risk, contrary to what a lot of people believe. We understand risk. We understand it’s part of our lives and we work hard to mitigate that risk, but we don’t love risks.
Wofford: So you’re not rushing off to Vegas every chance you get?
Tarallo: Haha, no. When it comes to testing ideas we’re really trying to set up a series of controlled experiments that you can fail without jeopardizing your business. I always say that entrepreneurship is nothing more than a series of small failures. I’m very careful about how I say this though, because I think there is this belief out there that it’s good for entrepreneurs to fail big and fail fast. I’m not a fan of that. Failure is never a good thing. I want to try to control my failures so that I’m mitigating risk and I learn from my market in a way that’s not going to damage my brand or what I’m trying to accomplish.
It’s important to me to stress that in my opinion, the Business Model Canvas is not a replacement for a business plan. It’s not a replacement for a marketing plan or a strategic plan. It is an effective tool for understanding who your customers are, what they value and how you can create a solution for their problem.
One of the things that Steve Jobs was really good at with Apple was not even thinking about a product necessarily but going into the market and interfacing with the market and seeing what it is that they were struggling with. The iPod is a great example of that. He saw a problem that was happening in the marketplace and he really found it through observation and getting people to tell stories about how they get music and how they listen to music.
I contend that Apple’s business model as a whole is that they’re problem solvers. They find problems in the market that they can solve with their core competencies, which are design and technology. That’s how they come up with these really great innovative products.
I shouldn’t say this because you’re recording, but I think Apple is going to be out of the phone business before too long.
Wofford: Really? Why do you say that?
Tarallo: Because the problem is solved. It’s no longer compelling for them and for the first time ever we saw iPhone sales drop last year. If you think about the iPod, you can’t buy one of those on a store shelf anymore. Why not? Because the problem has been solved, so Apple no longer makes them. Our phones are now substitutes for iPods and I think you’ll see the same thing happen with the iPhone, perhaps sooner than a lot of people think.
Wofford: Well, if you’re right you’ll be glad we were recording this so you can pull up the video and say “told ya so”. Neil, this has been very interesting. Thank you for sharing your insights into the Business Model Canvas.
Tarallo: Thanks, Chris. I enjoyed it.
Want to hear more? This interview is based on Neil Tarallo’s live eCornell WebSeries event,Business Model Canvas: A Tool for Entrepreneurs and Managers. Subscribe now gain access to a recording of this event and other Entrepreneurship topics.
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