Business Model Discovery by Technology Entrepreneurs

Strategy and innovation scholar Henry Chesbrough writes: “A business model has two important functions. It must create value within the value chain; and it must capture a piece of value for the focal firm in that chain” (Chesbrough et al., 2006; tinyurl.com/8x8byvv). Though debate continues among researchers and practitioners about precise operational definitions and rival classification schemes, consensus has gradually emerged that understanding how a particular firm creates and captures value is central to a full understanding of how and why that firm's revenues exceed its costs over time.


Introduction
Strategy and innovation scholar Henry Chesbrough writes: "A business model has two important functions.It must create value within the value chain; and it must capture a piece of value for the focal firm in that chain" (Chesbrough et al., 2006;tinyurl.com/8x8byvv).Though debate continues among researchers and practitioners about precise operational definitions and rival classification schemes, consensus has gradually emerged that understanding how a particular firm creates and captures value is central to a full understanding of how and why that firm's revenues exceed its costs over time.
Value creation and value capture establish a deep connection between business models and technology entrepreneurship.In the February 2012 issue of the TIM Review, guest editor Tony Bailetti defined technology entrepreneurship as an investment in a project that as-sembles and deploys specialized individuals and heterogeneous assets that are intricately related to advances in scientific and technological knowledge for the purpose of creating and capturing value for a firm (Bailetti, 2012; timreview.ca/article/520).According to Bailetti, the ultimate outcomes of technology entrepreneurship are value creation and value capture, and the sources of value creation and value capture may not be the same over the long run.Nonetheless, little is known about the processes by which technology entrepreneurs produce successful business models that both create and capture value.Although 22 of the 93 technology entrepreneurship articles identified by Bailetti examine themes of revenue generation, cost reduction, operations, and business transformation, the specific ways in which technology entrepreneurs discover alternative new approaches for value creation and capture, and the ways in which they select between alternatives, received little attention in these articles.
Value creation and value capture are central to technology entrepreneurship.The ways in which a particular firm creates and captures value are the foundation of that firm's business model, which is an explanation of how the business delivers value to a set of customers at attractive profits.Despite the deep conceptual link between business models and technology entrepreneurship, little is known about the processes by which technology entrepreneurs produce successful business models.This article makes three contributions to partially address this knowledge gap.First, it argues that business model discovery by technology entrepreneurs can be, and often should be, disciplined by both intention and structure.Second, it provides a tool for disciplined business model discovery that includes an actionable process and a worksheet for describing a business model in a form that is both concise and explicit.Third, it shares preliminary results and lessons learned from six technology entrepreneurs applying a disciplined process to strengthen or reinvent the business models of their own nascent technology businesses.
There is considerable evidence that business success depends as much on organizational innovation, for example, design of business models, as it does on the selection of physical technologies.

David Teece
Researcher, Consultant, and Professor

Steven Muegge
This article makes three contributions to the ongoing conversation about business models and technology entrepreneurship, with each contribution presented in its own section.The first section develops and articulates a cogent argument that business model discovery by technology entrepreneurs can be a disciplined process, where discipline refers to both intention, in the sense that opportunities for learning arise through deliberate design, and structure, in the sense that activities are organized as a project work plan to produce specific deliverables.The second section presents a tool for disciplined business model discovery by technology entrepreneurs.The third section shares preliminary results and lessons learned from six technology entrepreneurs applying this tool with their own nascent technology businesses.A final section concludes the article.

Business Model Discovery
In Seizing the White Space, Mark Johnson (2010; tiny url.com/7a9jcyw) defines a business model as the way in which a company delivers value to a set of customers at a profit.In this view, all firms have a business model, regardless of whether that model is explicit and codified, or implicit in employee behaviours and tacit operating procedures, or at some midpoint along a spectrum between those two poles.Alternative perspectives and definitions of a business model include the story of how a business works, the map linking technological potential to economic outcomes, and the explanation for how a company is expected to make money.Other metaphors include blue print, architecture, logic, and narrative.

Business Model Discovery by Technology Entrepreneurs
Steven Muegge The framework has four components.The first component is the importance of the customer "pain point", expressed as an underlying job-to-be-done, a problem-to-be-solved, or an unmet need.Christensen and colleagues (2007; tinyurl.com/6nqm652)argue that a customer perspective on the marketplace, anchored around a job that the customer needs done, is more effective than traditional marketing management that segments around customer demographics and differentiates one offer from competing offers by adding product features and functions.A job that the customer needs done -that pains the customer because that job is not being done -is the starting point and the conceptual bedrock of a strong business model.
The second component is a set of stakeholder value propositions (SVPs).According to Anderson and colleagues (2006;tinyurl.com/6tmrqvv),strong value propositions are based on "points of difference" and "points of parity" with competing solutions.Customers are one important group of stakeholders, but support from other stakeholder groups, each with its own motives and each ap-propriating different stakeholder value, may also be critical to success.Likewise, there may be multiple segments of customers with differing value propositions.This component makes all of that explicit by identifying the critical-to-success stakeholder group and articulating a compelling value proposition for each.
The third component is an explanation of the revenues and costs of delivering on the SVPs, and an explanation of why revenues exceed costs in a way that produces attractive profits.Johnson and colleagues (2010; tinyurl .com/yen7bkz)call this component a profit formula.The metaphor is of a chemical formula rather than a mathematical formula -it is a succinct explanation in words rather than a spreadsheet of sales and expense numbers.The first part of the profit formula identifies the revenue trigger and the stakeholder who pays.In the traditional view of neoclassical economics, the business firm is a merchant-producer that takes inputs from suppliers, transforms those inputs into a product, and sells that product to a customer through a market exchange.Product sales to customers are one possible revenue trigger, but increasingly, many technology entrepreneurship opportunities are more complex.Multi-sided platform opportunities (tinyurl.com/prdzqj)bring together multiple stakeholder groups that each benefit in different ways.For instance, Iyer and Davenport (2008; tiny url.com/3954du2) describe the Google advertising and search platform as bringing together four stakeholder groups: consumers searching for information, content providers with information, advertisers, and innovators of new products and services.Some stakeholders may pay, others may participate for free, and others may need to be paid to contribute.The second part of the profit formula explains the cost structure -where money must be spent to deliver on the SVPs.The third part explains why these revenues and costs will produce attractive profits.In other words, why revenues will exceed costs over the long term to an extent that justifies investment and continued operation.Offering product at a low price is not a sustainable competitive advantage, but a cost structure that allows a company to earn attractive profits at a lower price point can enable a winning business model that competitors cannot imitate.
The fourth component is an explanation of the criticalto-success capabilities needed to deliver on the SVPs while earning attractive profits, and an explanation of how the firm will obtain access to those capabilities or prevent access by rivals.Capabilities can include re- ) developed detailed case studies on six of these spin-off firms and concluded that significant transformation occurred in the business models of successful spin-offs, while search and learning in failed ventures were quite limited.
In summary, extant research suggests that technology entrepreneurs who can discover and implement stronger business models for their firms are more likely to achieve higher levels of success.Thus improving the process of business model discovery is of high relevance to both research and practice.The next section proposes a tool for business model discovery disciplined by both intention and structure.

A Tool for Disciplined Business Model Discovery
The tool described here is comprised of two parts: an actionable five-step process (Figure 1) and a worksheet for specifying a business model (Box 1).Box 1 provides a worksheet for writing down the four components of a business model in a form that is at once concise, precise, and explicit.It was developed initially for the Lead to Win entrepreneurship program (leadtowin.ca), then adapted for use within the business model projects of Carleton University's Technology Innovation Management program (TIM; carleton.ca/tim).For each component, the worksheet explains the form that the answer should take, and the limited writing space enforces clarity and parsimony.The research collectively argues that good business models are simply and clearly stated using no more words than necessary to convey a message.

Business Model Discovery by Technology Entrepreneurs
Steven Muegge

Steven Muegge
The five prescriptive steps of the process are as follows.
Step 1. Write down the initial business model.For clarity, we label this "Model 1" and explain how the business works using the four-part business model framework described earlier and the worksheet of Box 1.The intent at this step is making explicit what is known and unknown about how the business works.
The initial business model may be complete, with clear explanations for each part, or it may be incomplete, with gaps and unknowns, guesses and unsupported assumptions, or enumerated lists of possibilities with no clear decision rule or winner -either case is fine.If the best explanation at this time is "I don't know how to price my offer" or "We have identified three jobs-to-bedone by the customer, but we haven't decided which to address first", that is what you write down.
Step 2. Identify specific target areas to improve, identify a set of discovery-driven activities to strengthen the business model in the target areas, and develop a work plan for implementation.This step groups together several interconnected tasks that collectively form a plan of action and make that plan explicit.First, candidly assess the strengths and weaknesses of Model 1 to identify the areas most needing improvement.Assessment tools may sometimes be helpful, such as the tool for assessing business model strength published in the February 2009 issue of the OSBR (Bailetti, 2009;timreview.ca/article/226).
Based on your objectives, the context, and the results of your assessment, select one or more target areas of the business model to deliberately strengthen.Depending on the completeness of the initial business model, im-proving target areas may require generating new options, collecting information and reducing uncertainty, or selecting among a list of known options.Because each part of the framework builds on and depends on previous parts, it may make sense to work on strengthening earlier parts before proceeding to later parts.Next, identify a set of activities to deliberately strengthen the target areas.Examples of possible discovery-driven activities include direct interaction with stakeholders (e.g., interviews or focus groups), collection and analysis of publicly available information (e.g., competitive analysis), structured data collection (e.g., a large sample questionnaire), multiple parallel market experiments, and development of concept prototypes or beta products.Finally, structure these activities into a project work plan, with a distinct beginning and end point, and a clear set of specific, measurable, and actionable deliverables.The work plan should explicitly include activities to collect missing information and analysis activities to process and learn from that information after it is available.Be diligent about writing everything down -you will need this information later.
Step 3. Execute on the work plan.Complete the discovery-driven activities to produce the deliverables.The plan of action developed in step 2 may change in response to new information or to take advantage of opportunities discovered while executing on the plan.
Step 4. Write down the new business model.For clarity and consistency with previous steps, we label this "Model 2" and employ the same business model framework and worksheet format as in step 1.

Steven Muegge
Step 5. Compare the two business models and clearly articulate lessons learned.Review your notes from previous steps and try to clearly articulate i) how Model 2 is different from Model 1; ii) what was learned between Model 2 and Model 1; and iii) what actions would need to be undertaken to implement Model 2. As with each prior step, continue keeping comprehensive written notes.Accurate and extensive notes of steps 1 through step 4 are needed to complete step 5.These five steps can be iterated again to discover "Model 3", or enfolded into an ongoing continuous improvement process to discover "Model n+1", and good notes about step 5 may be valuable in future iterations.
Also important is candidly assessing whether Model 2 is, in fact, an improvement over Model 1 or is merely different.The ultimate test of a business model is whether or not it makes money over time by both creating and capturing value.Without a field trial to actually implement the new business model, there are at least three complementary, evidence-based approaches to assessing improvement.A first approach is weight of evidence.For example: "I have now spoken with XXX customers in YYY categories about value propositions and willingness to pay; previously I had spoken only to ZZZ users in the same category" or "I ran four experiments, and scenario 3 had better measurable results than the others, including the scenario of my initial business model."An entrepreneur who can make statements like these may have higher confidence in Model 2 than in Model 1 due to the accumulating weight of evidence.A second approach is increased knowledge and reduced uncertainty.List the "unknowns" for Model 1 and Model 2 and determine whether the second list is shorter than the first list.Some subjectivity and interpretation is required here in assessing knowledge and uncertainty.For example, the discovery-driven activities of business model discovery may actually uncover "unknowns" that were not previously recognized in the list for Model 1.If so, the list of "unknowns" might actually become longer.In the sometimes awkward language of decision theory, overall uncertainty could be reduced by transforming "unknown unknowns" into "known unknowns" that can be further investigated.Alternatively, or

Applying the Process and Worksheet
Table 3 presents summary results of six projects of disciplined business model discovery undertaken by six technology entrepreneurs.Some of these entrepreneurs had successful companies that they wanted to grow to the next stage, either by scaling what they had or by transforming their business into something very different.Some were in the early days of launching their first company and sought to grow from the first paying customer to the sustainable revenues that could bootstrap further growth.One was making a decision whether or not to enter a new market and sought to assess whether or not there was a viable business model in this new space.All six entrepreneurs were also graduate students in Carleton University's TIM program and I was the faculty supervisor for each of their applied research projects.In that capacity, I worked with each entrepreneur to clearly specify the objective, deliverables, relevance, and contribution of their applied research

Box 2. Graduate studies in technology innovation management
Technology Innovation Management (TIM; carleton .ca/tim) is a research-based graduate program at Carleton University in Ottawa, Canada.One option for graduate students earning a Master of Engineering degree is to complete an applied research project that solves a problem for a client company.Some TIM graduate students are entrepreneurs with their own companies and some of these students become their own clients and undertake applied research to strengthen their company's business model.

Business Model Discovery by Technology Entrepreneurs
Steven Muegge and a viable work plan to produce the deliverables, advised them on data collection, analysis, and interpreting their results, and helped them clearly communicate what they did and what they learned as a concise project report.Individually, each project discovered a business model to exploit a business opportunity.
Collectively, this set of projects contributes to an ongoing research program on the business models and strategic decisions of technology entrepreneurs.
Each technology entrepreneur completed the five-step process outlined in the previous section.The details of each business model are the intellectual property of the entrepreneurs, so only summary information is reported here.The projects varied widely in the completeness of their initial business models: some began with all four parts of the framework fully specified, while others began with large gaps, unknowns, and lists of possible alternatives.The projects also varied widely in the areas targeted for improvement: most focused on improving two areas of the business model framework, but the target areas collectively spanned the entire fourpart framework.The work undertaken to improve the business models likewise varied, with discovery-driven activities including loosely-structured interviews with potential customers, a structured online survey of a customer segment, a "lead user" study of individuals whose needs are far ahead of the mainstream market, analysis of competitor pricing and business models, and the construction of concept prototypes and earlystage "alpha" products.One project was completed in December 2011, four projects are in their late stages with completion expected in April 2012, and one earlystage project expects to complete in August 2012.
The lessons learned from these projects varied widely.Two entrepreneurs refocused their business models on different customer problems: the first discovered an adjacent problem that was more lucrative than the original focus and the second discovered that the initial target problem was actually several closely related problems with interdependencies, complementarities, and economies of scope.Another entrepreneur discovered new revenue opportunities through technology licensing that could supplement their revenue stream of product sales.Two entrepreneurs redefined the ways in which they were segmenting stakeholders, resulting in sharper and more compelling value propositions.Three entrepreneurs learned about the buying behaviour of customers, which allowed them to improve their profit formulas.Two entrepreneurs developed requirement specifications for the minimum viable product demanded by their target customers and developed plans to acquire that functionality.

Conclusion
This article has examined the process of business model discovery by technology entrepreneurs.It has argued for the efficacy of a disciplined approach, provided a tool comprised of an actionable five-step process and a business model worksheet, and presented preliminary results and lessons learned from application of the tool by six technology entrepreneurs with nascent technology businesses.All projects examined here employed a four-factor business model framework described in this article, but nothing precludes an entrepreneur from employing a disciplined discovery process using a different business model framework.Likewise, all projects examined here were conducted as applied research projects within Carleton University's TIM program, but nothing precludes others seeking to exploit a business opportunity from employing a disciplined discovery process in other settings.The key points advocated here are intent to learn quickly through deliberate action, and a structure similar to the way in which engineers and scientists approach product development and other critical business functions.Although preliminary, these early field results provide some empirical support for the argument that discipline of intent and structure can help technology entrepreneurs think more clearly about their businesses and channel effort into discovery-driven activities more likely to achieve desired outcomes. www.timreview.ca

Business Model Discovery by Technology Entrepreneurs
Steven Muegge

Figure 1 .
Figure 1.A disciplined five-step process for business model discovery Table 1 summarizes excerpts from the small but growing research literature on business models.
tioner articles published the TIM Review (e.g.,Bailetti,  2009; timreview.ca/article/226),and the experience of the author and his colleagues from delivering the Lead to Win program (http://leadtowin.ca) and mentoring nascent technology entrepreneurs.The next subsection provides more information on business model frameworks and the particular framework employed for this article.

Table 1 .
Excerpts from the management research literature on business models Business model frameworks provide a common vocabulary and structure to discuss and compare business models.An ideal business model framework would be intuitively understandable, as simple as possible, and yet retain just enough complexity and nuance to sufficiently capture the operationally and strategically relevant aspects of the business.Many different frameworks have been proposed in the management research literature and the popular business press with no shared consensus on which framework is best, or even which circumstances would favour one framework over another.This article employs a four-factor business model framework intended to specifically address the main concerns of technology entrepreneurs.
www.timreview.caBusinessModelDiscovery by Technology Entrepreneurs It is adapted from multiple sources, including three frameworks in the practitioner literature: the "fourbox" framework of Mark Johnson and the Innosight consulting company (seizingthewhitespace.com),thesixfunctionframework from Henry Chesbrough's research on open innovation (tinyurl.com/2ow32e),andtheBusiness Model Canvas (tinyurl.com/2b6qfcy) of Alexander Osterwalder and Yves Pigneur.It draws also on the business models research literature (e.g., Table1), practitioner articles in the Open Source Business Resource and TIM Review, and the experience of the author and his colleagues working with early-stage technology entrepreneurs.

Model Discovery by Technology Entrepreneurs
www.timreview.caBusiness

Table 2 .
Comparison of this framework with three other business model frameworks www.timreview.caBusinessModelDiscovery by Technology Entrepreneurs Steven MueggeBox 1. Worksheet for specifying a business model

Table 3 .
Summary of six projects of business model discovery