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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