Biz Models for High-Tech Products

BUSINESS MODELS FOR HI-TECH PRODUCTS (MT 5016):WHAT IS A BUSINESS MODEL?

A/Prof Jeffrey FunkDivision of Engineering and Technology ManagementNational University of Singapore

New Products Continually Emerge

Lots of Questions Which ones will succeed? Which ones will fail? How can we increase the chances of success? How can we increase the chances of OUR

success? How can OUR firm succeed to the extent that

OUR firm is in the top 100 market capitalization Google, Facebook, Tencent were founded in the last 15

years Microsoft, Apple, Amazon, and SAP were founded in

the last 40 years

New Product Success is not about Following Rules

It is about SETTING the rules in the new industry! Setting the rules means BREAKING the existing

rules What should the new rules be for the new industry? How should new rules be different from old rules?

This is completely different from science and engineering modules! Science and engineering modules tell you about the

rules of science

We can think of a business model as the new rules

The Concept of a Business Model

Can Help Us

Position Our Products Against other products and other firms other technologies including the old one for which customers?

Find and obtain revenues Position our product in overall value chains Think about future entrants and long-term

profitability

Module Objectives To understand

business models their impact on competition between firms how different business models are needed for

different situations what drives need for change in business

models Similarities/differences between business

models and strategies To develop a business model for a firm and

technology in a group project

Outline: Elements of a Business Model

Customer selection: whom to serve and not serve Value proposition: what to offer and how to

differentiate Value capture: what are dominant sources of revenues Scope of activities: what activities to carry out and

what relationships to have Strategic control: how to sustain profitability, create

barrier to entry

Source: Stephen Bradley’s “Capturing the Value,” HBS Video

Breaking the Rules

Customer selection: find new customers who are unsatisfied or find new needs that are unfilled

Value proposition: offer new forms of value Value capture: find new sources of revenues that are

different from ones in the past Scope of activities: participate in a different set of

activities than firms have done in the past Strategic control: create a new barrier to entry that

is different from the ones in the past

Outline: Elements of a Business Model

Customer selection: whom to serve and not serve Value proposition: what to offer and how to

differentiate Value capture: what are dominant sources of revenues Scope of activities: what activities to carry out and

what relationships to have Strategic control: how to sustain profitability, create

barrier to entry

Customer Selection

Who are the potential customers?

What are the customer needs and wants?

Do different customers want different things? How can we use this information to segment the

market (see following slides)? Are there collaborators who can also be thought of

as customers (see following slides)? Which customers will probably be the first

adopters of a new technology?

What is a Need?

Understand needs from perspective of: Economic – what are

the costs and benefits?

Functional – what does a product do?

Psychological value – how do I feel and what makes me feel better?

What is a Need?

Today’s Business

Customer Needs

Unarticulated

Articulated

Customer Types

Served Unserved

Segmentation and Targeting

Categorize customers in groups with distinct needs Understand the differences between product and

market segments Select segment (s) that have the best short

and long-term prospects for the firm If a new technology,

they must be early adopters of new technology

Many ways to segment markets

What About Collaborators?

Many products have multiple customers or collaborators who might be considered customers

Who are they? They might be

retail outlets providers of complementary

products or complementary services

How does the business model fit with these collaborators?

Outline: Elements of a Business Model

Customer selection: whom to serve and not serve Value proposition: what to offer and how to

differentiate Value capture: what are dominant sources of revenues Scope of activities: what activities to carry out and

what relationships to have Strategic control: how to sustain profitability

Source: Stephen Bradley’s “Capturing the Value,” HBS Video

Value Proposition

Value tothe

target market

Benefits tothe

target market

Price tothe

target market

= Relative to

A simple and clear statement of the intended target market, the benefits of the offering, and the priceNew technologies/products diffuse because they offer a superior value proposition to usersBut you must provide more details than just a simple and clear statement!!

Value Proposition

What constitutes a good value proposition? Speed, resolution, efficiency, energy usage? Features, aesthetics, convenience, happiness, humor? Usability, compatibility, reliability, durability?

Easier said than done! Don’t follow the old rules! Rethink your assumptions and market assumptions!

Value Proposition closely related to customer selection Different value propositions are appropriate for different

customers In a search for a good value proposition, one must consider

different value propositions along with different customers

For Your Group Presentation (1)

Choose a new technology that has recently been introduced or will soon be introduced Don’t look too far into the future

Choose an existing firm that might or should introduce the technology because the technology is consistent with the firm’s core competencies

For Your Group Presentation (2)

Defining a value proposition should help you segment and target markets

Some segments will adopt a new technology faster than will other segments You must identify and target those segments Ideally you will know the order in which segments/users

adopt the new technology Then you must contrast your firm’s product or service

with the competitors’ product or service for the target segment(s)

Justification and Quantitative Data

You must justify and/or quantify your data The justification is more important than the data Make sure you consider all the important dimensions Finding a new dimension is often a major source of

advantage in the market All dimensions aren’t created equally Quantifying each dimension of performance is useful,

albeit sometimes difficult

One Wayto CompareValue Propositions

But does this comparison tell us which product provides users with more value?

Outline: Elements of a Business Model

Customer selection: whom to serve and not serve Value proposition: what to offer and how to

differentiate Value capture: what are dominant sources of revenues Scope of activities: what activities to carry out and

what relationships to have Strategic control: how to sustain profitability

Source: Stephen Bradley’s “Capturing the Value,” HBS Video

What percent of total value can a firm (i.e., seller) collect?

and itscollaborators

Old Manufacturing Uber AppleMicrosoft’s Windows YouTube, Google Facebook

IBM Linux Code Linux Kernel Wikipedia Blogs

In-house Community-Driven Value Creation

Valu

e C

aptu

reEc

o-sy

stem

Com

pany

Collaborators Create an Increasingly Large % of Value and Providers Expect Smaller % of Value

Source: Chesbrough and Appleyard, 2007

Types of Value Capture in Business Models

Revenue Model Basic IdeaCommission Fees levied on transactions where fees are

based on level of transactionAdvertising End users subsidized by advertising

Markup Value added in sales

Production Value added in production

Referral Fees for referring customers to a business

Subscription Fees for unlimited use

Fee for Service Fee for metered service

Large Changes for Revenue Modelsin Many Industries

Sources of value capture are changing in many industries including manufacturing industries

As with other elements of business models, you can’t just summarize the dominant source of revenues, you need to Find and analyze other methods Justify your choice

Creativity is an important part of a group presentation’s grade! Propose and analyze a new method of value capture

Outline: Elements of a Business Model

Customer selection: whom to serve and not serve Value proposition: what to offer and how to

differentiate Value capture: what are dominant sources of revenues Scope of activities: what activities to carry out and

what relationships to have Strategic control: how to sustain profitability

Source: Stephen Bradley’s “Capturing the Value,” HBS Video

Scope of Activities What do you make or do versus what do

you buy or outsource? Partly a cost decision, partly a strategic

decision Want to reduce costs But also

want to develop capabilities don’t want to become dependent on a single firm

for a key component Thus, make versus buy decisions determine

the areas in which a firm intends to compete But more importantly……..

Vertical Disintegration in Value Chains has been Emerging Over time

Represents the extent to which work is shared among different organizations in an industry value chain

Changes in vertical (dis)integration can come from technological, institutional, or social changes that impact on how organizations divide up work

In particular, reductions in transaction cost can reduce costs of having work done by multiple firms importance of integrative capabilities and thus facilitate the emergence of vertical disintegration

(and entrepreneurial opportunities)

Source: Christensen & Raynor, 2003

Vertical Disintegration

Another Reason for Thinking About Scope of Activities:Identify the flows of information,

money, and products in system

Outline: Elements of a Business Model

Customer selection: whom to serve and not serve Value proposition: what to offer and how to

differentiate Value capture: what are dominant sources of revenues Scope of activities: what activities to carry out and

what relationships to have Strategic control: how to sustain profitability

Source: Stephen Bradley’s “Capturing the Value,” HBS Video

Strategic Control

What enables a firm to be profitable with a new technology? First mover advantages? Good design? Good performance? These are

only important in the short run, In the long-run, most things can be copied

Why are Google, Facebook, Tencent, Microsoft and Apple so profitable and for many years? This is what drives venture capitalists!

This is the most difficult part of a business model For your group presentations, you should think about this last, after

you have determined the other elements of the business model

Barriers to Entry Determine Profitability

As firms enter, prices typically fall to a level at which “marginal prices equal marginal revenues” where Profits barely support business

So creating barriers to entry is critical for achieving having above average profits. How can this be done? Control key resource, Intellectual Property (IP), etc. Might control key resource or asset through economies of scale Control the way work is divided up among different organizations

(e.g., through control of interface standards) Network effects

Venture capitalists look for potential barriers to entry, not just good value propositions!

In Summary: For your group presentations

Tell me about the business model Customer selection: whom to serve and not serve Value proposition: what to offer and how to differentiate Value capture: dominant source of revenues Scope of activities: what activities to carry out Strategic control: how to sustain profitability

You must justify your choices! Start forming your groups (3 to 4 members) at the break (in about

45 minutes) Consistency

among elements is critical between business model and company capabilities