What the Smartest People Focus On

Alexander Osterwalder is an expert on business model innovation. Here's what he has to say about your current business model -- and why it's not working.

Alexander Osterwalder knows what your business needs: A new business model. So he created a tool to help you map it out, the Business Model Canvas. The entrepreneur also co-authored Business Model Generation, a book about business model innovation that has become a global bestseller. Inc.’s Caitlin Berens talks with Osterwalder about why you should think twice about your business model and how to develop it for growth.

Why is it important to rethink your business model?

As an entrepreneur if you want to find a way to grow and to keep ahead of others you better think of the business model and not just your products and technology, like most entrepreneurs. The smartest people are focusing on products and the business model, it’s a combination of both, it’s not either-or, it’s and. The iPhone is a good example of this, it’s not just the technology Apple has, but also their business model that utilizes a double-sided market, developers, and hundreds of thousands of apps.

Where do many business models go wrong?

Too often entrepreneurs fall in love with their first business model, which is often a very simple one, make and sell. Making the wrong business model choices can put you into a niche rather than putting you into a multi-million dollar business. You can’t just depend on the product—even a great product with a poor business model can still lead a business to bankruptcy.

So how can you develop a business model for growth?

First, burn your business plan. Business plans are static documents where you describe an idea. We’re moving now toward a different way of thinking which is designing and testing business models. A business model is a dynamic model that you will change according to what you learn from the market until you figure out which model is best. So focus on the design of your business model; think through five to 20 different ones, make hypotheses, and then get out of the building and test them before you settle on one; just having something good on paper isn’t enough.

If your assumptions were wrong, change your business model and retest it until you have a feeling that something could work, then start investing. Accept that you need to fail a lot and you need to fail quickly. These little experiments will help you actually validate or invalidate your hypotheses, rather than wasting a lot of time and money.

But what if your co-founder or team is against the change?

Here’s the thing: Opinions don’t matter; people have opinions, “this is good, this is bad,” but what you really want to have is information from the market. It doesn’t matter what your co-founder thinks, it doesn’t matter what you think, it doesn’t even matter what your VC thinks; the only thing that really matters is what the market thinks. Get market data because the market is the ultimate judge. We’re moving away from opinion-based entrepreneurship toward more fact-based entrepreneurship where we have hypotheses that we test for feedback on what works and what doesn’t.

Why did you create the Business Model Canvas?

We’re only starting to learn how to really address this business model issue systematically, because “business model” is a word that everybody uses and nobody really understands it because it’s a buzzword. So I created the Business Model Canvas to help people visualize business models, discuss them, and ultimately invent better ones.

What makes it so successful? Describe it to me.

The Business Model Canvas is an approach that allows entrepreneurs to describe, challenge, and invent business models. At the very basic level people will use it as a checklist, so you write down and describe all of the components that are necessary to your business, like a strategic blueprint. This gives you a holistic view of what your business needs. It also helps you visualize other business model alternatives. The Business Model Canvas has been downloaded in the millions. People needed something to help them better discuss and visualize business models.

Do You Have What It Takes to Be an Entrepreneur?

In their book, Start Your Own Business, the staff of Entrepreneur Media, Inc. guides you through the critical steps to starting a business, then supports you in surviving the first three years as a business owner. In this edited excerpt, the authors offer some tips to help you determine if being a business owner is a smart move for you.

Before they get started, some people worry if they have what it takes to be an entrepreneur. If this is you, stop worrying. We firmly believe anyone with the desire and the initiative can be an entrepreneur.

A fundamental desire to control their own destinies ranks very high on most entrepreneurs’ lists of reasons for starting their own businesses. This need is so strong that entrepreneurs will risk family, future and careers to be their own boss. Unable to feel truly fulfilled working for someone else, these individuals can't be happy following someone else’s plan or taking orders from a boss. They’re often convinced they have a better way, or an idea that would really revolutionize their industry—or at least their little corner of it—and working within a corporate structure is simply stifling that improvement.

Through surveys and research, we know that successful entrepreneurs share some common personality traits, the most important of which is confidence not only in themselves but also in their ability to sell their ideas, set up a business and trust their intuition along the way. Small business is fiercely competitive, and it’s the business owners with confidence who survive.

Your strengths and weaknesses

It’s rare that one person possesses all the qualities needed to be successful in business.  What’s important is to understand your strengths and weaknesses. To do this, you need to evaluate the major achievements in your personal and professional life and the skills you used to accomplish them. The following steps can help: 

1. Create a personal resume. Compose a resume that lists your professional and personal experiences as well as your expertise. For each job, describe the duties you were responsible for and the degree of your success. Include professional skills, educational background, hobbies, and accomplishments that required expertise or special knowledge. When it's complete, this resume will give you a better idea of the kind of business that best suits your interests and experience.

2. Analyze your personal attributes. Are you friendly and self-motivated? Are you a hard worker? Do you have common sense? Are you well-organized? Evaluating your personal attributes reveals your likes and dislikes as well as strengths and weaknesses. If you don’t feel comfortable around other people, then a business that requires a lot of customer interaction might not be right for you. Or you may want to hire a “people person” to handle customer service.

3. Analyze your professional attributes. Small-business owners wear many different hats, but that doesn’t mean you have to be a jack-of-all-trades. Just be aware of the areas where you’re competent and the areas where you need help, such as sales, marketing, advertising and administration. Next to each function, record your competency level—excellent, good, fair, or poor.

In addition to evaluating your strengths and weaknesses, it’s important to define your business goals. For some people, the goal is the freedom to do what they want when they want, without anyone telling them otherwise. For others, the goal is financial security.

Setting goals is an integral part of choosing the business that’s right for you. After all, if your business doesn’t meet your personal goals, you probably won’t be happy waking up each morning and trying to make the business a success. Sooner or later, you’ll stop putting forth the effort needed to make the concept work.

When setting goals, aim for the following qualities:

• Specificity. You have a better chance of achieving a goal if it is specific. “Raising capital” isn’t a specific goal; “raising $10,000 by July 1” is.
• Optimism. Be positive when you set your goals. “Being able to pay the bills” isn’t exactly an inspirational goal. “Achieving financial security” phrases your goal in a more positive manner, thus firing up your energy to attain it.
• Realism. If you set a goal to earn $100,000 a month when you’ve never earned that much in a year, that goal is unrealistic. Begin with small steps, such as increasing your monthly income by 25 percent. Once your first goal is met, you can reach for larger ones.
• Short and long term. Short-term goals are attainable in a period of weeks to a year. Long-term goals can be for five, 10 or even 20 years; they should be substantially greater than short-term goals but should still be realistic.

There are several factors to consider when setting goals:

• Income. Many entrepreneurs go into business to achieve financial security. Consider how much money you want to make during your first year of operation and each year thereafter, up to five years.
• Lifestyle. This includes areas such as travel, hours of work, investment of personal assets, and geographic location. Are you willing to travel extensively or to move? How many hours are you willing to work? Which assets are you willing to risk?
• Type of work. When setting goals for type of work, you need to determine whether you like working outdoors, in an office, with computers, on the phone, with lots of people, with children, and so on.
• Ego gratification. Face it: Many people go into business to satisfy their egos. Owning a business can be very ego-gratifying, especially if you’re in a business that’s considered glamorous or exciting. You need to decide how important ego gratification is to you and what business best fills that need.

The most important rule of self-evaluation and goal-setting is honesty. Going into business with your eyes wide open about your strengths and weaknesses, your likes and dislikes, and your ultimate goals lets you confront the decisions you’ll face with greater confidence and a greater chance of success.