Diane Ragsdale pulls on the ‘broken business model’ thread in her Jumper blog, and triggers a bunch of interesting comments on the subject. She wonders what, exactly, her colleagues mean by a ‘business model,’ and what specifically is broken about it. It’s an essential conversation, and worth every moment of attention it gets (even when we don’t know how to focus that attention).
A key challenge in most ‘business model’ conversations in the arts is that they almost immediately focus entirely on revenue streams, rather than the larger integrated system of a functional and vital business model (of which revenue is certainly an essential part).
The best attempt to reframe a more coherent and systemic approach to business model discussion, analysis, and design is the book Business Model Generation, by Alexander Osterwalder and Yves Pigneur. It’s not specifically about arts organizations, creative enterprise, or nonprofits. But it sets out a useful definition of what a business model is, how it works, and how we can bring innovation and focused attention to its many moving parts.
To start, the book offers a rather useful definition of what a ‘business model’ is:
A business model describes the rationale of how an organization creates, delivers, and captures value.
Then, it describes nine essential elements (building blocks) of any business model — for-profit, non-profit, whatever — that work together as a system to create, deliver, and capture value (or not, as the case may be). These are:
- Customer Segments: The one or more customer segments the enterprise seeks to serve.
- Value Propositions: The problems the enterprise seeks to solve for those customers, or the needs it seeks to fill.
- Channels: The communication, distribution, and sales channels used to connect customers to those value propositions.
- Customer Relationships: The nature, tone, and intensity of relationships formed between and among customer segments.
- Revenue Streams: The cash or other economic value generated when value propositions successfully connect with customers.
- Key Resources: The assets required to develop and deliver the elements described above.
- Key Activities: The activities required to develop and deliver the elements described above.
- Key Partnerships: The organizations, individuals, or resources outside the organization required to make the system work.
- Cost Structure: The costs generated by the interconnection and execution of all the elements defined above.
While the above elements may seem overly focused on generating profit, the authors of the book are quite careful not to do so. They use ‘value’ as they key issue, and specifically value delivered to a defined group outside the organization. In my ongoing conversations with arts professionals, I’ve actually started to float the term ‘value model’ rather than ‘business model,’ as the latter almost always either derails the conversation into revenue, or disconnects the many for whom ‘business’ is an uncomfortable term related to their work. (The jury is still out on whether the alternate phrase is any better than the original. I’ll keep you posted.)
In a future post, I’ll explore some of the specific business model patterns identified in the book that seem most compelling to our work in the arts.
Thanks, Diane, for nudging the conversation along!
I love this definition of business models! Not only does it shift the conversation away from revenue to value, it also incorporates the balance sheet (specifically, assets). In defining the value we create and deliver in the arts, we also need to explore what resources we truly need to support that value. Most nonprofit arts organizations are mis-capitalized, meaning they lack enough of the right kinds of money to adapt their programming and operations in response to changes in the environment and demand for their work. This flexibility is very much influenced by the composition of the balance sheet. In many cases, particularly in the arts, the fixity of assets impedes adaptability. Building the right amounts of liquidity takes a backseat to other priorities. Any conversation about business models should explore the relationship between value proposition and asset composition.
I’ve used the Osterwalder/Pigneur ‘business model canvas’ with arts organisations when looking at their strategy and planning, and it works really well for getting back to basics as well as detail. I think it’s good in creating a focus on what resources (which might include assets) are needed to deliver the value, which can lead to thinking through how you build those and sustain those and what investment is needed. For non-profits I’ve added a section/conversation around mission though.
Yesterday I was facilitating a session at Mission Models Money’s Culture Change conference at which someone said they had subsidy and then a business model alongside it, which illustrated for me the distance to travel, at least in the UK.
I appreciated this post. I understand the diverse elements that comprise a business model, and I think “value model” is a nice way of describing it philosophically. But non-profit arts organizations are still businesses that cannot deliver value without capturing sufficient value in return to create and support their work. Several of the elements in the Osterwalder/Pigneur list are “levers” that when adjusted one way or the other, ultimately affect revenue, the fuel required for any business to operate. In my response to Diane Ragsdale’s great post, I pounced on revenue streams and key resources, because I think those areas are where the widest cracks exist.
I liked Rebecca Thomas’ comment that there is a problem between value distribution and asset composition. Arts organizations often don’t have the level of up-front or long-term capitalization comparable to for-profit enterprises. Second, traditional income sources (tickets, gifts, grants, events) that have sustained arts groups for years, are shrinking rapidly, for lots of different reasons. We need to adjust several of our “value model” levers in order to fix our revenue streams short-term, and build capacity to sustain arts organizations long-term. So many arts organizations are undercapitalized from their beginning, it’s difficult for them to weather an industrial storm like we are experiencing today.
It’s not necessarily any easier in the for-profit sector to open and sustain a business. Businesses open and close daily due to poor capitalization, management, rising competition, increased costs, a tough economy, etc. Arts groups are masters at reducing costs, but struggle to increase revenue because the sources are becoming ever elusive. I keep coming back to shifting revenue streams and lack of key financial resources, but the “model” drivers for revenue generation are indeed much more complex. I’m curious to read your further analyzis on this fascinating issue.
It is a well-known phenomenon that the present tends to favor, well, the present. Since the non-profit arts sector came into its own about a generation (and small change) ago, it has grown to supply value, relying on a basic assumption that institutionalized, subsidized, and tax-preferred structures would deliver a product that people wanted, but couldn’t be sustained at the market rate – or wouldn’t be available to a broad audience at the going rate.
It is very likely that 1+ generations down the road (or maybe 1/3+) this model will be passe, and that large parts of the sector as we know it will disappear. If you need a point of reference, think USSR circa 1979 to 198-…
Andrew, my experience suggests orchestra managers’ shortcomings are masked by claims of business model shortcomings. Disciplined measurement, disclosure and data supported decisions is woefully inadequate.
Orchestra managers and boards need to know, but don’t know each product’s economics; using cost accounting to allocate all institutional costs, earned and contributed revenue to each product. This is relatively easy.
New products typically loose money initially, but hopefully attract new audience, whose value can be estimated using demographic data and customer lifetime value projections. This is more difficult, but important since there is considerable product experimentation.
Hopefully your school teaches this.
Daniel Lewis