Biz model 1.2 why are they important

Business Models (MT5016):

Why are they important?

A/Prof Jeffrey Funk

Division of Engineering and

Technology Management

National University of Singapore

Why Business Models?

• They have a big impact on business success

– Many examples of why some firms succeeded more than

others can be explained in terms of business models

• Business models need constant modifications as changes

in technology etc. occur

– But many firms do not modify their business models

– One example of how business models require change can be

found in so-called disruptive technologies

• Changes in business models can also explain growing

success or failure of certain countries

• The variety (and pace?) of technology change and thus

need for new business models may be accelerating

MT 5016 Addresses Success or Failure of

Firms in Many Industries

• Computer-related

• Video-game

• Mobile Phones

• Other Consumer Electronics

• Internet

• Broadcasting

• Semiconductor

• Transport

• Medical Equipment

One Reason why Biz Model Impacts on Success

and Failure is… (1)

• They need constant modifications particularly when

there are changes in

– Technology

– Customer needs

– Market segments

– Performance, price, and costs

– Levels of vertical (dis)integration

– Number of firms in industry

– Regulations and laws (e.g., deregulation)

– Scale (e.g., more or less economies of scale)

– Stage of industry lifecycle

One Reason why Biz Model Impacts

on Success and Failure is… (2)

• But many firms do not modify their business

models as changes occur

• And thus they

– they lose market share

– they are acquired or gradually disappear





• Business models need constant modifications as

changes in technology etc. occur






• The variety (and pace?) of technology change may be

accelerating

Disruptive Technologies

• Many argue that disruptive technologies are a trivial

technology that requires a new business model

(Andrew Grove, CEO of Intel)

• Low-end innovations involve

– new value proposition (always)

– new customer selection (always)

– often new method of value capture (sometimes, e.g., lower

gross margins)

– may have less scope of activities (because new entrants)

– may involve new method of strategic control













accelerating

Biz Model can also Partly Explain Success

and Failure of Countries

• Success of Japanese firms partly came from new

business model that involved:

• Value proposition

– emphasize quality including reliability, durability, and low

number of internal defects

• Scope of activities

– vertically integrated in firm or business group (keiretsu)

• Method of strategic control

– high quality in both design and manufacturing

– low inventory (just-in time manufacturing)

– Kaizen, continuous improvement


and Failure of Countries (2)

• But many changes have occurred over the last 20

years

– U.S., Taiwanese, Singaporean and other firms have learned

about quality, inventory control, and Kaizen

– They have used low-cost and relatively high-quality

manufacturing from China to reduce importance of Japan’s

advantages in manufacturing

• Result is products from other countries have quality

(and often lower cost) that is comparable to Japanese

quality



• Other changes have also occurred

– Emergence of vertical disintegration enabled entry of new

firms that have lower scopes of activities in computers,

semiconductors, consumer electronics, etc.

– Japanese firms have been slow to reduce their scopes of

activities partly because there are no startups in Japan

– But U.S., Taiwan, and Singapore have startups in

semiconductor, computer, and biotechnology sectors

• This vertical disintegration has been accompanied by

emergence of standards, some of which are open……..



• But not all standards are open and certainly not

completely open

• These complex values and the varying degree of

openness in the standards has caused focus of strategic

control to changed to interface standards and industry

architecture

• Result is falling shares for Japanese firms in

– Computers

– Semiconductors

– Consumer electronics













accelerating


• Finally, Technology Change may be

Accelerating

– Frequency of discontinuities is increasing

• These discontinuities often require changes in

business models

• Understanding how and when changes in

business models are needed, is essential to

business success

Industry Examples

Photography 1. Movement from film to digital bits and packets

2. New devices (e.g., camera phones)

3. New methods of transferring the data between individuals (fixed

versus wireless Internet transfers) and between devices (e.g., PCs

and cameras) that are owned by an individual (e.g., with USB and

memory cards)

Television 1. Movement from analog to digital and to high-definition

television

2. Movement to a new generation of digital video disks (DVDs)

3. New methods of broadcasting such as over the Internet

4. New mobile devices (e.g., digital tuners in mobile phones)

Music 1. Movement from CDs (compact discs) to MP3 players

2. New mobile devices (e.g., i-Pod type devices and mobile

phones)

3. New methods of transferring data between mobile and fixed

devices (e.g., USB, memory cards, wireless)

Examples of Technological Changes Currently Occurring (1)

Industry Examples

Books 1. Emergence of e-books

2. Use of laptops and i-Pad to read books

Computer/

IT

1. Much cheaper laptop computers

2. New “computers” such as tablet computers and smart phones

3. Utility computing/cloud computing/software as a service

4. Networks of RFID tags and smart dust

Human

Computer

Interface

1. From keyboards to touch displays

2. Gesture-based interfaces

3. Voice-recognition; 4. Neural interfaces

Telecom/IT 1. New forms of mobile phones, applications for mobile phones,

or wireless networks (e.g., WiFi, ultrawideband)

2. New forms of wireline networks: e.g., integration of optics

and computing on the same substrate, i.e., optical computing



Industry Examples

Semi-

conductors/

Integrated

Circuits

1. New types of materials and processes such as nanotechnology

2. New types of designs such as System on Chip (SoC),

configurable processors

3. New types of applications such as micro-electronic mechanical

systems (MEMS), bio-electronic ICs such as laboratory on a chip,

DNA sequencers and synthesizers, or drug delivery via an

implanted or digested chip

Displays 1. Touch displays

2. LCDs backlit with LEDs

3. Organic light emitting diodes (OLEDs)

4. Electrophoretically Controlled Nematic (EPCN) liquid crystal

display

5. 3D Displays

6.Augmented reality

7. Holographic displays


Industry Examples

Lighting 1. Compact fluorescent light bulb

2. LEDs

3. Smart LEDs

Electricity 1. Wireless electricity

2. Renewable energy sources such as solar cells: crystalline silicon,

micro-crystalline silicon, thin film amorphous silicon, thin film

CdTe, CIGS (Cadmium Indium Gallium Selenide), organic cells,

dye-sensitized cells

3. Other renewable such as wind turbines, fusion, geothermal

4. Smart grids


Industry Examples

Automotive 1. Hybrid (battery and engine) vehicles

2. Plug-in vehicles; Hydrogen; Bio-fuels

3. Autonomous vehicles

Education 1. Internet-based education

Healthcare 1. Movement to Internet-based information systems

2. Nanotechnology-based treatments for cancer

3. New forms of surgery

4. New medical equipment

5. Obviously many more

Other

Internet

1. 3D content, video, social network

2. Social networks

3. Utility/Cloud computing (e.g., Software as a service)

4. Mashups; video conferencing

5. Business support services

U.S. Venture Capital Funding (B$) is Partly Driven by High Frequency of Technological Change

Software 5.1

Communications & Networking 3.0

Semiconductors 1.6

Other IT 2.2

Total IT 11.9

Biopharmaceutical 3.8

Medical devices 2.0

Other healthcare 1.0

Total healthcare 6.9

Other industries 3.5

Total all industries 22.3

Source: Dow Jones 2006 Venture Capital Industry Report

All Industries in 2010 26.45 Billion USD

Aerospace and defense 97

Agriculture and forestry 34

Biopharmaceuticals 3,246

Business support services (mostly Internet) 2,516

Communications and networking 1,027

Construction and civil engineering 141

Consumer information services 4,552

Electronics and computer hardware 1,282

Financial institutions and services 631

Food and beverage 100

Healthcare services (mostly Internet) 1,144

Household and office goods 71

Machinery and industrial goods 188

All Industries Billions of USD

Materials and chemicals 413

Media and content 343

Medical devices and equipment 2,249

Medical software and information services 478

Non-renewable energy 296

Personal goods 47

Renewable energy 2,118

Retailers 182

Semiconductors 764

Software 3,762

Travel and leisure 133

Utilities 141

Vehicles and parts 460

Wholesale trade and shipping 0

New Technologies, New Business

Models

• Every one of these new technologies requires a

new business model

• Finding the appropriate business model is

difficult

• This will cause incumbents and many new

entrants to fail

• This provides opportunities for firms with good

business models

On Last Reason for Why Business Models:

Business Models are Similar to Strategies

• Strategy

– Can be at corporate or business level

– At business level, strategies are classified in terms of:

• Cost vs. differentiation

• Focused vs. broad markets

– Business strategy should be consistent with

• functional strategies

• business models for each product/service

• When a business only delivers a single product/service,

a business strategy is very similar to a business model

When a Business Offers Multiple Products

and Services

• Customer selection and value proposition

– may be different for each product and service

– But probably business will focus on similar set of

customers (e.g., high- or low-end, business or

consumer)

• Value capture, scope of activities, and strategic

control

– may be the same for each product and service

– and generally should be the same

For Example, Apple’s Computer Business

• Apple sells many types of desktop and laptop

computers

• Each type of computer

– serves a different segment

– offers a different value proposition

• But all of their computers probably have similar

– Method of value capture

– Scope of activities

– Method of strategic control

In Summary

• There are many changes driving a need

for new business models

• Although technological changes are the

most obvious, there are others

• Opportunities for new entrants and

incumbents continue to be created

• The goal of MT5016 is to help you

– understand these opportunities

– their impact on business models

– create business models