The Business Model Database (tbmdb.com) - A blog about business models

Alex Osterwalder "From Business Plan to Business Model"

2011-12-07T08:31:00.005+01:00

Alex Osterwalder author of Business Model Generation (My review) giving a lecture about business models at Summer of Startups 2011 a summer entrepreneurship program for students and researchers with an early-stage business idea from all around the Baltic Sea and the world.

See the table of contents for more videos

Adding a dimension to existing business model frameworks

2011-12-03T22:54:00.018+01:00

In one of my early blog posts in February 2009, I explained what I called the Value Proposition Explorer. The basic idea was to provide a concept to see value propositions on different hierarchical levels.

To give an example, say that you have developed software that can efficiently manage energy in electrical vehicles. Should you then try to sell the software? Combine it with hardware to provide energy management solutions? Or provide components of the software, such as the core algorithms for energy management, in a more narrow value proposition?

Applying the same concept broader

To choose which hierarchical level to position your value propositions is of course a function of many variables, in the end where you can create and capture the most value, and maintain a competitive advantage for the future. This is not just a question of value propositions, but a question involving all components of the business model.

There are many business model frameworks, with Alex Osterwalder’s Business Model Canvas being the most popular one. We can ask ourselves questions in relation to each of his business model framework elements and each hierarchical level.

Customer Segments –Who are our different potential customers in different levels? How will they use what we provide? What are their different hierarchical levels and on what level can we provide value for them? Where do they have their own resources and capabilities? What are their plans for the future, if they are moving up in hierarchy where are they going?

Would someone be interested in the algorithms alone? Are the companies providing energy management solutions developing their own software? What companies could be interested in a larger energy management solution? What if we combined our energy management solution with an energy storage solution – what customer segments could we then target?

Value Propositions – What should we provide based on what we have? Based on what we can get access to? Based on what we can provide together with partners? Should we have value propositions on more than one level, providing products, components, technologies, and intellectual property? How should we package our value propositions to hinder non-intended use of our technology?

Should we provide energy management solutions, software or algorithms? Can we combine our energy management solution with energy storage solutions? Should we provide exclusivity on some levels to one customer/partner? Should we include rights for the customer to further develop our technology within certain levels?

Channels – What will be the objects for transactions and delivery? What channels could we use depending on customer segment and value proposition? What channels exists for each level and what channels could be created?

What would be the objects for transactions the software code? Physical components? Integrated energy management systems? Energy management solutions would have physical components, software and algorithms could be delivered in physical or digital format.

Customer Relationships – What different customer relationships are possible given the customer segment and channel? What different customer relationships should we have in relation to the different value propositions we provide?

Should we keep close collaborations with customers on some levels such as optimizing some sub parts of the core algorithms? Other components in our software? Should we provide some software components online for customer download? Do we need to establish trust through personal relationships to enable access to the customer’s system to optimize the energy storage algorithms?

Revenue Streams – Can we generate revenues from more than one level? Can we provide components or generate license revenues from others including competitors? Can we generate indirect revenues through partnerships on some levels?

What revenue models are possible for algorithms? Software? Energy management solutions? What kind of revenue streams would it generate? Would it be one-time transactions of code or recurring revenues resulting from continuous improvements and support? How much more can we charge for a license where the customer gets the rights to do further development of the code? Should we provide something for free on some levels to build the markets on higher levels?

Key Resources –In what levels will it be an advantage to have internal resources? Where do we have our current assets and capabilities? Where do we need to have internal resources? Where do we have intellectual property rights?

How will the area of energy management solutions for electrical vehicles develop? What resources do we have to keep up with the big players? Should we acquire or create a joint-venture with a hardware company to get access to complementary resources? Where should we develop brand assets? Should we brand the algorithms? Technology? Software? On what level should we develop intellectual property rights? For the system? Software? Specific algorithm?

Key Activities – In what levels should we have strong positions? What activities should we have within the different levels? Where should we have product development? Where should we conduct more basic research? In-licensing? Out-licensing? Collaborations? What activities are needed?

Should we continue to develop the core algorithms, a larger software or an energy management solution including hardware? Should we create specifications for hardware manufacturers to further improve energy management? Or should we start to develop hardware? Should we try to gather data from the use of the energy management solution? From our software? Should we provide training for customers that wants closer collaboration and further develop our algorithms, software or management solution?

Key Partnerships – On which levels should we have collaborations and partnerships? Where do we need to strengthen our positions and where do we need to combine our assets and capabilities with the ones of a partner to provide something on a higher level?

On what levels should we use external organizations to provide assets and capabilities? What levels in their hierarchy are we strengthening? What assets and capabilities should we provide collaboration partners with and at what level? On what level should we share development plans? Technical details? Specifications? Should partnerships be exclusive in some levels but not in others?

Cost Structure – Which levels are more expensive to have in-house? What are the cost structure for the resources and activities needed? What will be needed in terms of investments to keep up with competition in each level? Can we share any of the costs with a supplier, partner or customer?

Is it possible to become a player also in hardware providing full energy management solutions in-house? Will we be able to fund software scale-up to meet the requirements of being a software provider? What will be the costs of closer collaborations on an algorithm level?

To be continued...
The Value Proposition Explorer is a great tool in developing value propositions on different hierarchical levels. The main idea with this post was to illustrate how the concept of hierarchical levels can be used for all parts of a business model. I plan to explore this further in posts to come.

The Business Model of Intellectual Ventures

2011-05-15T12:23:00.009+02:00

Perhaps one of the more controversial participants of CIP Forum 2011 is Intellectual Ventures, founded in 2000 by Nathan Myhrvold and Edward Jung of Microsoft, Peter Detkin of Intel and Grogory Gorder of Perkins Coie. The company has been referred to as a patent troll (see separate post on Non-Practicing Entities) and Nathan Myhrvold as the most feared man in Silicon Valley. The company and its founders claim to invest in “pure invention”.

The firm is the owner of one of the world’s largest and fastest-growing patent portfolios, and they have reportedly raised over $5 billion from companies including Microsoft, Intel, Sony, Nokia, Apple, Google, SAP, Nvidia and eBay plus investment firms. It generates revenues from licensing and technology and rights, and according to Joff Wild of the IAM Magazine, in the spring of 2010, Intellectual Ventures claimed its purchasing activity had sent $315 million to individual inventors and $848 million to small and medium size enterprises “to commercialize their inventions”. According to an article in The New York Times in 2010 the company says it has returned $1 billion to investors and collected more than $1 billion in license fees.

Since 2009 Intellectual Ventures also operates a prototyping and research laboratory where it employs scientists, engineers and patent attorneys, “to work on new inventions to help solve some of the world’s biggest problems”. To do this, the company has hired prominent scientists including Robert Langer of MIT, Leroy Hood of the Institute for Systems Biology, Ed Harlow of Harvard Medical School, Danny Hillis of Applied Minds, and Sir John Pendry of Imperial College. Intellectual Ventures claims the company files about 450 patents a year, in areas from vaccine research to optical computing.

Intellectual Ventures is constantly building its library of inventions and rights, analyzing industry trends and identifying market opportunities for the use of the inventions. Commercialization can be not only through patent licensing but through open source, joint-ventures, venture creation or sale of portfolios.

On December 8, 2010, Intellectual Ventures filed their first lawsuit, accusing Check Point, McAfee, Syamtec, Trend Micro, Elpida, Hynix, Altera, Lattice and Microsemi of patent infringement. The company has also been accused of hiding behind shell companies for earlier lawsuits.

Below is a few videos with Nathan Myhrvold and others at Intellectual Ventures presenting their business model and fascinating inventions from their research laboratory.

Business Models of Non-Practicing Entities

2011-05-15T10:16:00.023+02:00

With the upcoming CIP Forum 2011 the focus will once again be on growth from innovation and innovation-based business models.

In the discussion of organizations that provide technology or patent rights to others, Non-Practicing Entities or as some of them are called "Patent trolls" are always debated. My objective with this post is to introduce the concepts and explain the frequently disputed business model.

A few words about patents

A patent is an exclusive right to prevent others from making, using, selling or distributing an invention that is considered new, non-obvious and useful or industrially applicable. A patent does not give the proprietor of the patent the right to use the patented invention, should it fall within the scope of an earlier patent. Patents per se has nothing to do with the business model used by the patent holder or the pricing of products; Skype, Google, and other firms known for providing free services to their users, is still developing and filing patents to claim their rights to inventions, primarily to keep competitors away.

A patent is a limited right (often 20 years from the filing date) that the government offers to inventors in exchange for their agreement to share the details of their invention with the public. The patent system incentivizes organizations to invest in research and development, and to disclose instead of keeping inventions secret in exchange for exclusivity. Being able to keep competitors away for a limited time, gives the inventor the chance to recover their up-front investment in making the invention. For a new pharmaceutical drug this investment can be billions of dollars. In contrast to some granted patents covering software or business methods, the investment can in some cases be close to zero excluding the costs of patent filing. Like any other property right, a patent may be sold, licensed, mortgaged, assigned or transferred, given away or abandoned.

Monetizing innovations

A university researcher or single inventor can chose to start a company to manufacture and sell products based on its research outcome, or chose to use the exclusive right status of a patent to become a licensor. This allows the inventor to accumulate capital from licensing the invention so the inventor's time and energy can be spent on pure innovation, allowing others to concentrate on manufacturability and marketing of downstream products. This can be seen as a straight forward application of Adam Smith's division of labor that having a group of people focus exclusively on inventing new things.

There are numbers of research-based companies that develop new technology or pharmaceutical drugs just to license it to other firms to commercialize. The object for transaction can be just the right to exclude someone, or it can be drawings, data, relating non-patented inventions, knowledge in different forms, knowhow etc.

This ability to assign ownership or rights increases the liquidity of patents as property. Third parties can license or acquire patents and the same rights to prevent others from exploiting the inventions, as if they had originally made the inventions themselves. Small companies or individual inventors that don't have the funds to claim their rights against multinational companies can sell their patents to companies willing to enforce them against infringers.

Licensing of patents is nothing new. In 1894, American Bell Telephone Company's R&D department licensed 73 patents from outside inventors, developing only 12 inventions from its own employees.

Cross-licensing of patent rights

It is common for companies engaged in complex technical fields to enter into license agreements associated with the production of a single product. Scott McGregor, President & CEO of Broadcom, has said that "a cell phone these days can have hundreds of devices that are part of it; each one of those can have hundreds of aspects to it. You could literally have a million or more patents that would apply to a single handset". It is therefore common that even competitors license patents to each other under cross-licensing agreements in order to share the benefits of using each other's patented inventions and reduce the risk of being sued by the other party.

When one company sues another (Nokia vs Apple) the other company often countersues the first one (Apple vs Nokia) and the litigation process often results in that the parties come to an agreement, cross license patents, and pay licensing fees to the company with a stronger case. Counter-assertion is an important stabilizing force in many patent disputes.

Non-Practicing Entities - a question of value proposition

A non-practicing entity (NPE) is a patent owner who does not manufacture or use patented inventions but rather than abandoning the rights to exclude, an NPE seeks to license the rights to others. The value proposition is thus not a product or service, but the rights to an invention with or without supporting knowledge and know-how. A single inventor, a university, a research institute, an SME, a multinational company or an investment fund, can all be non-practicing entities, depending on their choice of business model.

The term patent troll is sometimes used for NPEs that enforce its patents against one or more alleged infringers in an aggressive or opportunistic manner. The general idea of these firms is to develop a large patent portfolio and to license these patents to companies that infringe on them or potentially filing lawsuits against these companies if they refuse to take a license. In some cases the NPE analyze popular products on the market to find remote patents that could be infringed, and approach the patent holder to acquire or get a license to sue.

In some cases these firms have as their business model to purchase patents, often cheaply from technology companies forced by bankruptcy to auction its patents, with the sole purpose to sue and enforce it against companies that manufacture or market products, potentially infringing any of the patents. Some of those accused of being patent trolls argue that they are the modern incarnation of Robin Hood helping smaller companies and inventors against large companies who have stolen their ideas.

Legal extortion or value proposition?

To seek to derive income from the enforcement of patent rights is perfectly legal but it sometimes has troubling implications for the makers and sellers of products and services. As the entity is not selling products or services, almost by definition it does not infringe on the patent rights contained by others, thus they are essentially invulnerable to counter-assertion.

This gives NPEs a position to negotiate licensing fees that could be argued to be out of alignment with their contribution to the alleged infringer's product or service. As a result, a patent held by an NPE is often considered more threatening to industry participants than the same patent held by a competitor. As a result of that, there are operating companies that sell their patents to NPEs to assert the patents without the operating company being involved.

The more dubious NPEs can see even a weak patent as a lottery ticket hoping the alleged infringer chose to pay up without completing a lawsuit. If the defendant chooses to litigate then both sides must absorb heavy litigation costs no matter who wins. As even a successful litigant must pay the costs of defending its case, and that the cost can run into the millions, operating companies may chose to pay up even though they probably would win if they take the case all the way through trial, to avoid the time, expense, and uncertainty. This is something that the more dubious NPEs take into consideration when they approach operating companies.

Revenue model of Non-Practicing Entities

NPEs generate revenues through licensing agreements or damages awarded by a court. Licensing agreements can include up-front license fees, milestone payments contingent upon achieving certain goals, and royalty revenue from the commercialization of the licensed technology. Damages are awarded on the basis of how much value the defendant is obtaining as a result of its infringing activity.

Activities performed by Non-Practicing Entities

All NPEs have to manage their patent portfolios, and identifying existing or potential application areas. Independent of being a single inventor, a university or a patent holding company, activities also involve finding potential licensees, negotiating terms and conditions and collecting license fees. Most NPEs also have internal research and development and patent filing and maintenance activities. There is a continuum from organizations that are doing substantial investments in R&D to generate inventions and patents, and organizations focusing on acquiring and aggregating others' patents.

The good guys and the bad guys

The business model of Non-Practicing Entities is widely debated and there are firms with dubious motifs. Companies that do not manufacture or intend to manufacture anything are often seen as profiting from others in a negative way (at least in the media). At the same time companies outsource or move production to low cost countries, leaving the western world to be “the innovators” where the output is innovation and intellectual property.

Good guys can be found in both ends of the scale, providing valuable inventions, knowledge, data, instructions or knowhow to manufacturing companies, or just aggregating and providing the rights reducing the time and cost for manufacturing companies to find all relevant patents covering a technology area. Without the existence of entities willing to buy patents as a last resort there’s no credible threat a single inventor can make towards a large company. A rational defendant will simply carry on knowing the patent can’t be successfully enforced, and inventors at the margins may not undertake their research in the first place.

Related posts:
The Business Model of Intellectual Ventures

Alex Osterwalder on Designing Business Models using Prototype Thinking

2011-02-09T17:47:00.005+01:00

Casadesus-Masanell and Ricart 's Business Model Framework

2010-12-18T08:11:00.011+01:00

Short description of framework: A framework illustrating how value is created and captured by an organization through the decisions made and the resulting consequences, illustrated in causal loops.

Main strengths: The framework captures what an organization is trying to do, key values the management wants to create, and the incentives for suppliers, partners, and customers. It also illustrates if management is stringent in its decisions and if different choices results in consequences that reinforce each other or not.

Background
Casadesus-Masanell and Ricart based their framework on the four major categories common to most business model definitions uncovered by Shafer, Smith and Linder in their article The Power of Business Models, from 2005.

Casadesus-Masanell and Ricart argue that “consistent with the intuitive view of the concept, a business model is defined by strategic choices, sometimes made by a network of organizations, that explain value creation and value capture by the focal organization” and conclude that one important component of business models are the concrete choices made by management. To connect the choices to value creation and value capture, Casadesus-Masanell and Ricard include consequences in their definition of a business model.

Framework details
Casadesus-Masanell and Ricart define the business model as (i) the set choices and (ii) the set of consequences derirved from those choices. They distinguish between three different types of choices: policies, assets, and governance. Consequences are classified into flexible and rigid.

Policies (Choices) Choices regarding the courses of action adopted by the firm regarding all aspects of its operation
Assets (Choices) Choices regarding tangible resources such as manufacturing facilities.
Governance (Choices) Choices regarding the structure of contractual arrangements that confer decision rights regarding policies or assets.
Flexible (Consequences) Consequences that are sensitive to the choices that generate it
Rigid (Consequences) Consequences that does not change rapidly with the choices that generate it.

Example using the framework

Casadesus-Masanell and Ricart uses a causal loop diagram, linking choices and consequences by arrows, to represent a business model. As one could make the effort of listing every choice made by management and all consequences of those choices Casadesus-Masanell and Ricart realizes the impracticality and reduces their business model framework to represent (i) choices (generally a subset of all choices), (ii) consequences (generally a subset of all consequences), and (iii) theories. The third element are suppositions on how choices and consequences are related, not a part of the business model, but theories of causality that are believed to be true by the business model designer or analyst.

In the example below Casadesus-Masanell and Ricart illustrates the business model of Ryanair using bold and underlined to indicate choices, with rigid consequences in boxes, and flexible consequences in plain text.

Video illustrating the framework:

Tools for using the framework:

Gliffy and other diagram software

Related publications of interest:

Linder, J., & Cantrell, S. (2000). Changing business models: Surveying the landscape. Accenture Institute for Strategic Change
Casadesus-Masanell, R., & Ricart, J. E. (2007). Competing through Business Models. Working paper.
Casadesus-Masanell, R., & Ricart, J. (2010). From Strategy to Business Models and onto Tactics. Long Range Planning .
Seelos, C. (2010). Theorizing and Strategizing with Models: Generative Models of Business Models. Working paper . Barcelona, Spain.

De Mey and De Ridder's Business Model Framework

2010-12-15T08:33:00.001+01:00

Short description of framework: A framework illustrating how value is created and captured in the interaction between organizations through relationships and transactions.

Main strengths: The framework captures relationships, monetary and non-monetary transactions between organizations, and provides a snapshot of the interactions and dependencies on certain external actors. Transactions between several organizations in multiple steps can be illustrated, enabling a good understanding for the different revenue streams.

Background
The framework was originally created by De Mey and De Ridder (www.boardofinnovation.com) in 2009 to create a common visual language and consisted of 10 framework elements initially focusing on the sales side of a business with the only actors being the company itself and its client. The remaining 8 framework elements was items that can be transferred between the company and its client; product, service, experience, reputation, exposure, attention, money and less money.

In 2010 the business model framework was revisited and updated to include 16 framework elements to capture more aspects of a business case. Still, De Mey and De Ridder argues that they prefer not to include what they call secondary stakeholders, showing the supplier side of a business case.

Framework details
The 2010 version contains 16 framework elements, divided into players and objects to exchange further described below. De Mey and De Ridder do not provide their own definitions of the framework elements, so the definitions below are of the general meaning of the terms, based on how the objects are used by De Mey and De Ridder.

My Company - The element represents the organization being described, often at the center of the illustration.

Company - The element represents an external for-profit organization, often the customer in a business-to-business business model.

Consumer - The element represents any individuals or households that use products and services.

Supplier - The element represents any product or service provider to the organization being described.

Non-profit - The element represents organizations such as charity organizations that have an impact on the business model being described.

Government - The element represents an organization or agency, through which a political unit exercises its authority, controls and administers public policy.

Product - The element represents any physical or digital thing produced by labor or effort.

Service - The element represents the act of providing utility without the transfer of ownership.

Experience - The element represents the event of undergoing an emotional feeling.

Exposure/Attention - The element represents the event of concentrating on some features of the environment.

Reputation -The element represents a social evaluation of a person or organization.

Money - The element represents anything that is generally accepted as payment for products and services.

Less Money -The element represents a lower amount of money than the main money object.

Credits - The element represents a fictional currency that can be used as payment for certain products and services.

Data - The element represents information such as content, data and knowledge.

Rights - The element represents a legal freedom to act or refrain from acting.

Example using the framework
In the illustration below De Mey and De Ridder illustrates the business model of Niiu, a German start-up providing customized physical newspapers. Niiu will provide personalized and customized newspapers based on content from a variety of different news companies enabling the consumer to combine different sections from different newspapers. By using print-on-demand technology Niiu will create a unique paper version and deliver to each subscriber. The reader will pay for the newspaper and be exposed to targeted advertising based on their content preferences.

Video illustrating the framework:

Tools for using the framework:

Related publications of interest:

Weill, P., & Vitale, M. (2001). Place to space: migrating to ebusiness models. Boston: Harvard Business Press.
Gordijn, J., & Akkermans, H. (2001). Designing and Evaluating E-Business Models. Intelligent E-Business .
Poel, M., Renda, A., & Ballon, P. (2007). Business model analysis as a new tool for policy evaluation: policies for digital platforms. Research Paper . Emerald Group Publishing Limited.

List of Key Terms

2010-12-12T11:57:00.002+01:00

The term ‘business model’ has historically been defined differently by different academics and consultants, with no common consensus being established. It is not until the last few years that a common definition of what a ‘business model’ is has started to emerge, with an increasing number of authors emphasizing the concepts of value creation and value capture as central to the definition.

One challenge is that frameworks developed from the perspective of enabling business model innovation, are often equated with a definition of the concept of the business model itself. This creates considerable confusion in terms of the differences between the business model of a company, the business model concept as such, and ways of describing business models by adopting different perspectives and frameworks.

In order to provide posts that are easy to follow and to reduce the risk of misunderstandings and confusion, I use the definitions below:

Business model – the way an organization creates and captures value
Business model concept – the general idea of illustrating how value is created and captured
Business model element – a component of how value is created and captured by an organization
Business model framework – an abstraction to describe and represent different business models
Business model framework element (or framework element) – a component of a business model framework
Business model innovation – an innovative business model or the process of innovating a business model
Business modeling – the process of testing and simulating different business models

Please consult the list above when confused about my use of any of the terms.

Evan Williams on the Business Model of Twitter

2010-11-18T23:22:00.004+01:00

A very interesting conversation with Evan Williams, co-founder Twitter, on how they are trying different revenue models. “There’s a million ways to make money with Twitter... We’ll probably try a few more... We're surprised it's doing better than expected.”

Thoughts on New Business Models for News

2010-11-18T22:04:00.005+01:00

Some interesting thoughts on the future of news at the ReThink News summit held in Newport, Rhode Island, a summit sponsored by The School of Journalism at Michigan State University.

TED founder Richard Saul Wurman

Jim Kennedy, director of strategic planning for the Associated Press

Visual communicator David Gray, founder of Xplane

New York Times Multimedia Editor Andrew Devigal

Chris Finlay of the Business Innovation Factory

Media entrepreneur Brooks Bell

Visual communicator and designer Nigel Holmes

Related videos:

Mike Maples on pivoting business models

2010-10-23T23:47:00.007+02:00

In this presentation Mike Maples, a business angel with previous investments in ngmoco, Chegg, Digg and Odeo/Twitter, talks about developing and pivoting business models, at a Founder Institute event. Mike shares his experiences and provides interesting examples on ngmoco's pricing pivot, Chegg's product pivot, Odeo's company pivot into Twitter.

Mike shares Steve Blanks and several others’ view that “A start-up exists to do one and only one thing and that is to find a business model”. “Once a start-up has achieved a scalable and profitable business model, they are ready to transition from being a start-up to a real company”. Mike represents the business model concept with the following illustration, I believe was developed by Steve Blank and Ann Miura-Ko:

The arrows represent monetary flows in and out from the company. The pivoting starts from formulating hypothesis for each flow, testing assumptions to validate and improve the business model. This approach is very similar to the one presented in Getting to Plan B by John Mullins and Randy Komisar.

Tom Hulme on How to Visualize your Business Model

2010-09-30T16:26:00.006+02:00

Tom is a Design Director at IDEO in London, where he uses the innovation and design process to develop new business opportunities. In these videos he presents a way, very similar to The Business Model Canvas, on how to visualize a business model including the elements of growth- and competitive strategy.

Charles Baden-Fuller on why business models are so important for business success

2010-09-07T16:48:00.004+02:00

Professor Charles Baden-Fuller talks about the difference between value creation and value capture, robustness, sustainable competitive advantage today and tomorrow, and scalability.

In his recent article in Long Range Planning, Business Models as Models, Charles explores the question "Are Business Models useful?" where he points out that they act as various forms of model: "to provide means to describe and classify businesses; to operate as sites for scientific investigation; and to act as recipes for creative managers".

The Evolution of the Business Model Concept

2010-09-05T16:02:00.005+02:00

Below is a second iteration representing the evolution of the business model concept, including graphical representations, significant publications and books on the subject. Thank you everyone for your input, comments and emails with additional models and publications.

Which business model concepts are you still missing? Which significant publications? Comment below or send feedback to anders@tbmdb.com

Thanks,
Anders

Version 2:

The Evolution of the Business Model Concept (version 1)

2010-08-23T23:19:00.010+02:00

Thank you for the input to Version 1 of The Evolution of the Business Model Concept. An updated and extended version of can be found here.

The Design of Business (2009)

2010-07-02T21:16:00.021+02:00

The Design of Business: Why design thinking is the next competitive advantage, by Roger Martin was a positive surprise as it was a quick read, well structured, delivered several interesting concepts and some in depth cases on design thinking and business model innovation.

Even though several of the cases are familiar for many readers (such as P&G, Apple, Cirque du Soleil, McDonalds and RIM) Roger, who is dean of the Rotman School of Management at the University of Toronto, professor of strategic management, and author of the book The Opposable Mind, adds interesting perspectives and sometimes information from behind the scenes working as a consultant and advisor. The book is an extension of Roger's popular article (free download) from 2004 with the same name.

The book in three bullet points:

It introduces and explores the concept of the "Knowledge Funnel" describing how knowledge advances from mystery to heuristic, to algorithm for businesses to gain efficiency and lower costs, and the activities of moving across the knowledge stages (exploration) and operating within each knowledge stage (exploitation).
To accelerate the pace at which knowledge advances through the Knowledge Funnel, it presents the concept of design thinking as the necessary balance between analytical thinking using deductive and inductive reasoning (with the need for reliability and the ability to produce consistent and predictable outcomes), and intuitive thinking (with the need for validity and to produce outcomes that meet a desired objective).
It discusses challenges (primarily the results of proof-based analytical thinking) faced by organizations, CEOs and individuals within organizations, to build structures and processes that foster, support and reward a culture of design thinking, and how different CEOs have used different approaches to generate successful outcomes.

A brief summary of the different chapters:

1. The knowledge funnel: How discovery takes shape
The introductory chapter starts with a story about McDonalds journey from mystery (how and what did Californians want to eat) to algorithm (stripping away uncertainty, ambiguity, and judgment from almost all processes). It briefly discusses analytical thinking, intuitive thinking and design thinking, to solve mysteries and advance knowledge, and the fine balance between exploring new knowledge and exploiting existing one.
It introduces and explores the concept of the "Knowledge Funnel" describing how knowledge advances from mystery to heuristic, to algorithm for businesses to gain efficiency and lower costs. This is explored also in later chapters: "Mysteries are expensive, time consuming, and risky; they are worth tackling only because of the potential benefits of discovering a path out of the mystery to a revenue-generating heuristic", "The algorithm generates savings by turning judgment… …into a formula or set of rules that, if followed, will produce a desired solution" and “Computer code – the digital end point of the algorithm stage – is the most efficient expression of an algorithm”.

It also addresses the need for organizations to re-explore solved mysteries, even the founding ideas behind the business, and not get too comfortable focusing on the "administration of business" running an existing algorithm.

In addition, the first chapter presents abductive logic, and some ideas originated by philosopher Charles Sanders Peirce; that it is not possible to prove a new thought concept, or idea in advance and that all new ideas can be validated only through the unfolding of future events. To advance knowledge we need to make a "logical leap of the mind" or an "inference to the best explanation" (or "Leaps of Faith" that John Mullins and Randy Komisar calls it in the book Getting to plan B see review/summary) to imaging a heuristic for understanding a mystery. Free preview of Chapter 1

2. The reliability bias: Why advancing knowledge is so hard
The second chapter focus on the distinction between reliability (produce consistent, predictable outcomes by narrowing the scope of a test to what can be measured in a replicable, quantitative way) and validity (produce outcomes that meet a desired objective, that through the passage of time will be shown to be correct, often incorporating some aspects of subjectivity and judgment to be achieved). Roger's main point in the chapter (or even in the book) is that today's business world is focusing too much on reliability (due to three forces: demand for proof, an aversion to bias and the constraints of time), with algorithmic decision-making techniques using various systems (such as ERP, CRM, TQM, KM) to crunch data objectively and extrapolate from the past to make predictions about the future. "What organizations dedicated to running reliable algorithms often fail to realize is that while they reduce the risk of small variations in their businesses, they increase the risk of cataclysmic events that occur when the future no longer resembles the past and the algorithm is no longer relevant or useful" With the turbulent times we live in, where new mysteries constantly spring up that reliable systems won't address or even acknowledge, businesses risk being outflanked by new entrants solving old and new mysteries developing new heuristics and algorithms. "Without validity, an organization has little chance of moving knowledge across the funnel. Without reliability, an organization will struggle to exploit the rewards of its advances… the optimal approach... is to seek a balance of both"

3. Design thinking: How thinking like a designer can create sustainable advantage
Chapter three starts with an interesting case of Research In Motion (RIM) that leads into the discussion of what is really design thinking. Roger uses the quote by Tim Brown of IDEO, "a discipline that uses the designer's sensibility and methods to match people's needs with what is technologically feasible and what a viable business strategy can convert into customer value and market opportunity" and adds himself "a person or organization instilled with that discipline is constantly seeking a fruitful balance between reliability and validity, between art and science, between intuition and analytics, and between exploration and exploitation". That designers live in the world of abductive reasoning, actively look for new data points, challenge accepted explanations to posit what could possibly be true (in contrast to the two dominant forms of logic - deduction and induction, with the goal to declare a conclusion to be true or false).

The chapter ends with the first discussion on roadblocks to design thinking (many more to come), with one being the corporate tendency to settle at the current stage in the knowledge funnel, and another how "highly paid executives or specialists with knowledge, turf and paychecks to defend” has the company's heuristics in their heads with no interest in advancing to the algorithm stage, making the executives less important. This leads nicely into the forth chapter about the transformation of Procter & Gamble.

4. Transforming the corporation: The design of Procter & Gamble
A.G. Lafley's transformation of Procter & Gamble from an incumbent in crisis to an innovative and efficient organization in just a few years has been widely covered in the business literature. As a student some years back I made an internship in P&G's Connect & Develop (connect with innovators outside the company and develop their ideas for P&G products), and have since been reading up on everything I can find about the transition and why other companies have not been able to make the same transition. Roger adds interesting perspectives, from his work with the company and its first vice president of innovation strategy and design, Claudia Kotchka, to develop "a comprehensive program that would provide practical experience in design thinking to P&G leaders". One of the top-down efforts being to drive brand-building from heuristic (in the minds of scarce and costly senior executives) toward algorithm, providing less senior employees the tools needed to do much of the work previously done by high-cost elites who then could then focus on the next mystery in order to create the next brand experience. The chapter also covers the Connect & Develop initiative and how it bulked up P&G's supply of ideas in the mystery-heuristic transition where it was thin, enabling it to feed more opportunities into its well-developed heuristics and algorithms of development, branding, positioning, pricing and distribution.

Another highly interesting topic covered in the chapter is the change of processes within P&G, including the strategy review, at P&G. Lafley recognized that the existing processes was a recipe for producing reliability, not validity, "so risky creative leaps were out of the question". A transition from annual reviews with category managers pitching, "with all the inductive and deductive proof needed to gain the approval of the CEO and senior management" to "forcing category managers to toss around ideas with senior management… to become comfortable with the logical leaps of mind needed to generate new ideas".

5. The balancing act: How design-thinking organizations embrace reliability and validity
The chapter focuses on the need to balance reliability and validity, and the challenges to do so (foremost all structures, processes and cultural norms tilted towards reliability). "Financial planning and reward systems are dramatically tilted toward running an existing heuristic or algorithm and must be modified in significant ways to create a balance between reliability and validity". Roger presents a rough rule of thumb "when the challenge is to seize an emerging opportunity, the solution is to perform like a design team: work iteratively, build a prototype, elicit feedback, refine it, rinse, repeat… On the other hand, running a supply chain, building a forecasting model, and compiling the financials are functions best left to people who work in fixed roles with permanent tasks". The chapter feels somewhat repetitive, in the uphill battle for validity, and more obstacles of change are presented:

Preponderance of Training in Analytical Thinking
Reliability orientation of key stakeholders
Ease of defending reliability vs. validity

In this chapter, Roger also discusses how design-thinking companies have to develop new reward systems and norms, with an example of how to think about constraints. "In reliability-driven, analytical-thinking companies, the norm is to see constraints as the enemy", whereas when validity is the goal "constraints are opportunities" and "they frame the mystery that needs to be solved".

6. World-class explorers: Leading the design-thinking organization
In chapter six several interesting cases, and approaches of different CEOs, are presented, one being the widely covered case of Guy Laliberté, and his Cirque du Soleil. Again Roger adds to the existing body of knowledge with the twist of reliability vs. validity in creating a new market, and the knowledge funnel taking a one-off street festival into an unstoppable international $600 million-a-year business with four thousand employees. Laliberté has reinvented Cirque's creative and business models time and time again, "usually over protests that he was fixing what was not broken and that he could destroy the company". Other CEOs and cases covered in the chapter are James Hackett of Steelcase, Bob Ulrich of Target, and Steve Jobs of Apple.

The role of the CEO and different approaches to build design-friendly organizational processes and norms into companies are discussed referring to the different cases presented.

Again, Roger returns to the reliability vs validity battle, now from a CEO perspective with terms such as "resisting reliability", "those systems-whether they are for budgeting, capital appropriation, product development…", and "counter the internal and external pressures toward reliability".

7. Getting personal: Developing yourself as a design thinker
In the final chapter the focus is on how a non-CEO can function as a design thinker and develop skills to individually produce more valid outcomes even in reliability-oriented companies. Roger refers back to his previous book The Opposable Mind, and the concept of a personal knowledge system as a way of thinking about how we acquire knowledge and expertise. The knowledge system has three components:

Stance: "Who am I in the world and what am I trying to accomplish?"
Tools: "With what tools and models do I organize my thinking and understand the world?"
Experiences: "With what experiences can I build my repertoire of sensitivities and skills.

Roger then presents the design thinker's stance, key tools (observation, imagination, and configuration), and how to obtain experiences by trying new things and test their boundaries.

Roger also presents five things that the design thinker needs to do to be more effective with colleagues at the extremes of the reliability and validity spectrum:

Reframe extreme views as a creative challenge
Empathize with your colleagues on the extremes
Learn to speak the languages of both reliability and validity
Put unfamiliar concepts in familiar terms
When it comes to proof, use size to your advantage

This is a great book and I recommend business developers and business model innovators to buy it, as it is a quick read with several important concepts and interesting cases to learn from. I believe design thinking has the potential to help managers break out from the Matrix they live in and again realize the real world behind the existing algorithms.

If you find this book review/summary helpful, please go to the Amazon book review page and rate my identical review "Helpful" Thanks!

Disclaimer: I read the book at the beautiful cliffs of Vernazza in Italy, and was in a very good mood. I actually read the book twice.

Other book reviews/summaries:
Business Model Generation (2009)
Getting to Plan B (2009)
Seizing the White Space (2010)

Alexander Osterwalder on the story behind the Business Model Generation book

2010-06-14T17:58:00.006+02:00

Alexander Osterwalder presents the interesting project that resulted in the Business Model Generation book (see review/summary). He covers several examples and topics such as the importance of getting customers involved through conversations and to launch products with new business models.

ngMoco, Guitar Hero and EA Sports in panel discussion on the monetization of games

2010-06-13T14:02:00.006+02:00

A nice panel discussion at the Play Conference about the monetization of games moderated by Douglass Perry, covering topics such as Old versus new distribution models, Usage at the center of the business model, Monetizing usage vs downloads, User experience based on platform, Competing with other forms of entertainment, Selling where the customer is and Dynamically and remotely optimization of games and business models. Also interesting to hear how accessories and physical products are affecting business models of software companies that are used to not having any inventory.

Participants:
Neil Young, CEO ngMoco
Kai Huang, Founder Guitar Hero
Peter Moore, President EA Sports

Related videos:

Randy Komisar on Getting to Plan B

2010-04-28T08:08:00.004+02:00

Randy Komisar, partner at Kleiner Perkins Caufield and Byers, and co-author of Getting to Plan B (see review/summary here), discusses the main ideas from his book.

Related posts:
Getting to Plan B (2009)

Is Android Evil?

2010-04-23T17:55:00.009+02:00

This is a guest post by Andreas Constantinou, an expert in the ecosystems of network operators, handset manufacturers and mobile service providers, research director at VisionMobile and a frequent speaker on the topic of mobile open source.

You thought Android was open? The Android governance model consists of an elaborate set of control points that allows Google to bundle its own services and control the exact software and hardware make-up on every handset. All this while touting the openness rhetoric that is founded on the Apache permissive license used in the Android SDK.

Whereas Android is completely open for the software developer ecosystem, it’s completely closed for the handset OEM (pre-load) ecosystem. There is no other platform which is so asymmetrical in terms of its governance structures.

Indeed, Google’s mobile platform is the smartest implementation of open source designed for driving commercial agendas. But before we dig into why, it’s worth discussing why Android’s success has very little to do with open source.

What makes Android tick

Despite early skepticism, Google’s Android operating system has been unequivocally supported by the mobile industry, including more network operators and handset manufacturers than one can count – with the stubborn exception of Nokia. Android managed to ramp from 1 handset model in 2008 to 50+ models announced for 2010 launch, leaving most industry observers in awe.

The Android success has nothing to do with open source; it’s owed to three key factors:

- Apple. As strange as it might seem, Android owes much of its success to one of its arch-rivals. Let me explain. With the unprecedented success of the iPhone and the take-it-or-leave-it terms dictated by Apple to network operators, the carriers have been eagerly looking for cheaper alternatives; as such the tier-1 operators have been embarking on Android projects to produce iPhones for people who can’t afford the iPhone and more importantly, without forking out the 300EUR+ subsidy needed to remain competitive in an iPhone market.

- Network operators/carriers around the world are eager to differentiate. Android provides the allure of a unified software platform supporting operator differentiation at a low cost (3 months instead of 12+ months offered by SavaJe, which was also aimed at the MNO customisation market). For larger operators with a software strategy, Android also presents a safe investment, as the mainstream option for bringing down the cost of smartphones. That’s why most Android handset projects are backed by a commercial bipoles of operator + OEM deals, with purchase commitments and NRE fees coming from the operator.

- Qualcomm. The $10B chipset vendor has been paramount to Android’s ramp up; manufacturers can take Qualcomm’s hardware reference design which is pre-integrated with Android and can go to market within an estimated 9-12 months (down from 16 months for the Motorola Cliq handset and 24+ months for the HTC G1). Besides Qualcomm we should also mention TI’s OMAP3 platform (on which Moto Droid is based) and ST Ericsson and Broadcom who are ramping up to offer chipsets with out-of-the-box support for Android.

In other words, in an Android handset, most of the OEM budget goes into differentiation; compare that to Symbian where most of the OEM budget goes into baseporting (radio and functional integration of hardware) due to historical choices made by Symbian in 2001. All-in-all, Android allows OEMs to reduce their R&D budgets and invest in differentiation, which is mana from heaven to manufacturers.

We should also not forget the ‘free factor’ (technically zero per-unit royalties for the public SDK) which stirred the emotional hype around Android handsets.

All in all, the ‘open source’ marketing moniker has been very successful at triggering major industry disruption – incl. Nokia ’s acquisition of Symbian and the derailment of Windows Mobile. Perhaps more importantly, the openness rhetoric and the Google aura has attracted thousands of developers on the platform, at a time when the money equation is sub-par; consider that – compared to the Apple devices – Android handsets are around 9x less in volume and paid-for apps are available in 6x fewer countries.

Behind the Open Source facade

What’s even more fascinating is how closed Android is, despite Google’s old don’t be evil mantra and the permissive Apache 2 license which Android source code is under. Paraphrasing a famous line from Henry Ford’s book on the Model-T, anyone can have Android in their own colour as long as it’s black. Android is the best example of how a company can use open source to build up interest and community participation, while running a very tight commercial model.

How does Google control what services, software and hardware ships in Android handsets? The search giant has built an elaborate system of control points around Android handsets.

To dig deeper we spent two months talking to industry sources close to Android commercials – and the reality has been startling. From a high level, Google uses 8 control points to manage the make-up of Android handsets:

1. Private branches. There are multiple, private codelines available to selected partners (typically the OEM working on an Android project) on a need-to-know basis only. The private codelines are an estimated 6+ months ahead of the public SDK and therefore essential for an OEM to stay competitive. The main motivation for the public SDK and source code is to introduce the latest features (those stemming from private branches) into third party apps.

2. Closed review process. All code reviewers work for Google, meaning that Google is the only authority that can accept or reject a code submission from the community. There is also a rampant NIH (not invented here) culture inside Google that assumes code written by Googlers is second to none. Ask anyone who’s tried to contribute a patch to Android and you hear the same story: very few contributions get in and often no reason is offered on rejection.

3. Speed of evolution. Google innovates the Android platform at a speed that’s unprecedented for the mobile industry, releasing 4 major updates (1.6 to 2.1) in 18 months. OEMs wanting to build on Android have no choice but to stay close to Google so as not to lose on new features/bug fixes released. The Nexus One, Motorola Droid, HTC G1 and other Experience handsets serve the purpose of innovation testbeds for Google.

4. Incomplete software. The public source code is by no means sufficient to build a handset. Key building blocks missing are radio integration, international language packs, operator packs – and of course Google’s closed source apps like Market, Gmail and GTalk. There are a few custom ROM builders with a full Android stack like the Cyanogen distribution, but these use binaries that are not licensed for distribution in commercial handsets.

5. Gated developer community. Android Market is the exclusive distribution and discovery channel for the 40,000+ apps created by developers; and is available to phone manufacturers on separate agreement. This is one of the strongest control points as no OEM would dare produce a handset that doesn’t tap into the Android Market (perhaps with the exception of DECT phones, picture frames, in-car terminals or other exotic uses of Android). However, one should acknowledge that Android’s acceptance process for Market apps is liberal as it gets – and the complete antithesis of the Apple vetting process for apps.

6. Anti-fragmentation agreement. Little is known about the anti-fragmentation agreement signed by OHA members but we understand it’s a commitment to not release handsets which are not CTS compliant (more on CTS later).

7. Private roadmap. The visibility offered into Android’s roadmap is pathetic. At the time of writing, the roadmap published publicly is a year out of date (Q1 2009). To get a sneak peak into the private roadmap you need Google’s blessing.

8. Android trademark. Google holds the trademark to the Android name; as a manufacturer you can only leverage on the Android branding with approval from Google, much like how you need Sun’s approval to claim your handset is Java-powered.

In short, it’s either the Google way or the highway. If you want to branch off Android you ‘re completely on your own and you need resources of the size of China Mobile (see their OMS effort) to make it viable (hint: China Mobile is the biggest network operator bar none).

The Open Handset Alliance is another myth; since Google managed to attract sufficient industry interest in 2008, the OHA is simply a set of signatures with membership serving only as a VIP Club badge.

Another big chapter in the Android saga is the CTS (compatibility test suite) which is the formal testing process by which a handset passes Google requirements. According to our sources, CTS extends significantly beyond API compliance, and into performance testing, hardware features, device design, UI specs and bundled services. CTS is based on the principle of ensuring baseline compliance, so it’s ok to add features, but it’s not ok to detract; compare this with Apple’s no-Flash policy. Note that beyond CTS compliance, there are additional commercial licensing agreements that OEMs have to sign for Google services and private line access.

CTS hampers Android’s progress as well, as it precludes OEMs from creating stripped-down versions of Android that would fit on mass-market phones – those shipping in the 10s of millions. CTS – and forward compatibility to the pool of 40,000+ apps – is Google’s main challenge for hitting a 2-digit market share in the smartphone market. These restrictions – and frienemy relationship between Google and its OEM partners – have stirred up discussions of an ‘Android foundation‘ within OEM circles

The Google Endgame

With Android, Google aims to deliver a consistent platform to its own revenue-generating services. For now, this is the ad business. But in the future, Google is aiming at voice (reaching the billions who don’t have a data connection) and Checkout (i.e. becoming the Visa of mobile).

Yet whatever the endgame, it’s worth realising that [from the manufacturer perspective] Android is no more open – and no less closed – than [licensable operating systems like] Windows Mobile, Symbian and BREW; it’s the smartest implementation of open source aimed at driving commercial agendas. Android is much less about the do-no-evil rhetoric that the PR spinners in Mountain View would like us to think.

So, is Android evil? No, it isn’t. It has done no harm – quite the contrary, Android has boosted the level of innovation on mobile software. The point of the article is not to vilify Google or concoct visions of Darth Vader; but to balance the level of openness hysteria with a reality check on the commercial dynamics of mobile open source.

Jeff Jarvis on New Business Models for News

2010-04-21T17:26:00.003+02:00

Jeff Jarvis, professor of journalism at CUNY, on business models for news and hyper personal news streams.

Dwayne Spradlin on The Power of Open Innovation

2010-04-21T08:51:00.004+02:00

Dwayne Spradlin, CEO InnoCentive, on Open Innovation and the power of getting the crowd to work.

"Two skills that organizations need are:

They need to understand how to engage communities, communicate with them, build communities and trust, and that does require effort by organizations to do it well.
Organizations need to understand how to ask and how to process their own problems and prioritize those in ways that they typically never done before."

Seizing the White Space (2010)

2010-03-07T18:39:00.021+01:00

The book, Seizing the White Space: Business Model Innovation for Growth and Renewalby Mark W. Johnson, is a rather quick read and primarily for people who have not read Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengersby Alex Osterwalder, Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevantby W. Chan Kim and Renée Mauborgne, and Clayton M. Christensen's The Innovator's Dilemma.

For people who have followed the development of the business model concept, and read case studies such as Southwest Airlines, Hilti, Xerox, Kodak, DEC, FedEx, and Tata, this book is a bit of a disappointment. I looked forward to reading this book and wanted it to be a 5 star experience, but after reading it I have more questions about the author and the writing of the book, than about any new content or ideas.

The book in three bullet points:

It presents the concept "White Space" defined as an area where new or existing customers are served in fundamentally different ways and there is a poor fit with the current (incumbent) organization; "The range of potential activities not defined or addressed by the company's current business model".
It provides a business model framework, "The four box business model", comprising a customer value proposition, a profit formula and key resources and processes, very similar to the model presented in the 2008 HBR article Reinventing Your Business Modelby Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann, with the focus point on the customers' job-to-be-done .
It briefly explores the circumstances when a new business model might be needed, being when you must change your current profit formula (overhead cost structure, resource velocity or both), develop many new kinds of key resources and processes, and/or create fundamentally different core metrics, rules and norms to run your business.

A brief summary of the different chapters:

1. The White Space and Business Model Innovation

Introductory discussion on core vs. non-core business, defining the white space that lies far outside an organization's usual way of working, where assumptions are high and knowledge is low. In contrast to the Blue Ocean concept, described in the book Blue Ocean Strategy by W. Chan Kim and Renée Mauborgne, (not mentioned in Seizing the White Space), the white space focus on what a specific organization can do, whereas blue ocean is about doing things differently than competition to be in uncontested markets. In the first chapter Mark includes a nice table on companies founded in the last quarter century that have entered the Fortune 500 in the last decade.

The book contains some questionable statements without references or discussion and chapter one is no exception: "Most successful innovative business models are forged by start-ups" (p. 18) - I would like to see the reference and discussion (and definition of "successful", "innovative" and "start-up") as most examples and discussions covered in this book are not on start-ups.

2. The Four-Box Business Model Framework

The chapter starts off with the discussion about the lack of a shared vocabulary, "No one to my knowledge squarely focuses on the elements in the business system that are central to value's creation and delivery and the way those elements work together to ensure or impede the overall success of the enterprise" (p. 23) I laughed out loud when I read the references related to the statement above, all from the same page: Peter Drucker (Harvard Business Review), Joan Magretta (Harvard Business School, former strategy editor Harvard Business Review), Henry William Chesbrough x2 (Harvard Business School Press). I would argue that the MAIN reason why there is a lack of shared vocabulary regarding business models is due to academics/consultants that ignore the work of other academics/consultants working in other schools/companies than their own.

The first element of Mark's Four-Box Framework is the Customer Value Proposition (CVP), an offering that helps customers more effectively, reliably, conveniently, or affordably solve an important problem (or satisfy a job-to-be-done) at a given price. In some versions of the model, such as Figure 9, 19, 20 and 24, there is no explicit customer mentioned in the CVP. In other versions, such as Figure 21 and in the model presented in the 2008 HBR article "Reinventing you business model", a target customer is included. The second element is the Profit Formula that defines how the company will create value for itself and its shareholders. It specifies the revenue model, the cost structure, target unit margin and how quickly resources need to be used to support target volume. The third element is Key Resources, the people, technology, products, equipment, information, channels, partnerships, funding, and brand required to deliver the value proposition to the customer. The fourth and final element is Key Processes such as design, development, sourcing, manufacturing, marketing, hiring and training by which a company delivers on the customer value proposition. Readers familiar with popular concepts such as Osterwalder's business model canvas recognize most terms and ideas.

3. The White Space Within: Transforming Existing Markets

Chapter three discuss business model innovation opportunities within existing markets by delivering new customers value propositions, something Mark argues often relate to predictable shifts in what customers are willing to pay a premium price for (at least the primary basis of competition). He presents an argument based on one example on how companies compete and differentiate with different forms of innovation according to the figure below. The references used for the "predictable shifts" are to colleague Christensen's The Innovator's Dilemma, and Geoffrey A. More's Crossing the Chasm, a book about selling disruptive products to mainstream customers. I would love to read more about these shifts, the research behind it, and how for example design and the use of brands affects the shifts in the basis of competition?

The chapter contains a nice case study on Dow Corning and Xiameter (mostly covered in HBR article from 2009), and the more classical case studies on Hilti, FedEx and IKEA.

4. The White Space Beyond: Creating New Markets

Seizing the white space beyond means developing new business models to serve entirely new customers and create new markets, often where large groups of potential customers are shut out of a market because existing offerings are too expensive, complicated or that the potential customers lack access. In the chapter Mark provides a table of archetypal business models and a nice case study on Hindustran Unilever and the Shakti Initiative together with some shorter versions covering MinuteClinic and SAP.

Obvious concepts to discuss in relation creating new markets are the tools, frameworks and methodologies presented in Blue Ocean Strategyby W. Chan Kim and Renée Mauborgne. Even though the Blue Ocean Strategy concepts are trademark protected, registered by ITM Research (INSEAD), other authors have been able to refer to the concepts and tools presented in the book.

5. The White Space Between: Dealing with Industry Discontinuity

Chapter five focus on the uncharted territory between what was and what is to be, after game changing events such as the commercialization of Internet technology or the push to address greenhouse gas emissions. Mark presents ideas in relation to unpredictable or radical shifts in market demand, in technology and in government policy targeted at the business environment. Examples are in the defense industry (transformative market shifts), Encyclopaedia Britannica (technology driven shifts), and Better Place (shifts in government policy and regulation). The chapter also contains a nice table including the industries and infrastructure of each technological revolution, from Carlota Perez' Technological Revolutions and Financial Capital.

6. Designing a New Business Model

In the chapter Mark discusses the business model innovation process from identifying a job-to-be-done to creating the customer value proposition, and compares the new business model that would be required with the existing model. When searching for unfilled jobs-to-be-done Mark puts emphasis on not only functional aspects of a job but also its social and emotional aspects, together with a short reflection on that Web 2.0 tools give businesses the ability to deeply understand their customers through increased interaction, with Threadless as an example. He introduces a way to use levers to contrast offerings, and mentions the reverse income statement to working up the projections for a business with a new profit formula. This chapter also contains an original and interesting case study from a project undertaken by Innosight with the customer name changed for purposes of confidentiality and a table with business model analogies.

7. Implementing the Model

For the implementation of a new business model, Mark describes three stages: incubation (1-3 years), acceleration (2-5 years), and transition (1-3 years). Incubation is the process of testing (early, cheaply and often) to identify and verify the assumptions most critical to success. Once the new model is proven viable, the Acceleration stage focus on setting up processes, together with rules, norms and metrics, to make the business model profitable. The final stage addresses the question if the new business can be integrated into the core or if it must remain a separate unit in order to thrive. Mark also discusses acquisitions and some successful and less successful examples.

8. Overcoming Incumbent Challenges

In the final chapter Mark describes three dangers incumbent face when implementing new business models: 1) Failure the allocate resources, 2) The Urge to cram new opportunities into the existing business model, and 3) Impatience for growth. He also briefly addresses the problem of the existing rules, norms, and metrics used by the company something that would be very interesting to dig deeper into.

My main questions after reading this book:

Why do Mark ignore existing body of knowledge and obvious references when defining the White space and his business model framework, and instead almost exclusively refer to his own or colleagues' work? Why does he focus so much on old examples, already covered in other books and articles, without using his frameworks to provide more depth into the cases? Why not look at modern examples of companies pushing its core business into new areas? Why are several included figures not referenced in the text, nor referenced for source?

A quick comparison with some other popular books on business models:

Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers by Osterwalder and Pigneur is the obvious book to compare with. It also aims to introduce a standard language, a business model framework, and ideas on how to develop, test and implement new business models. In contrast to Seizing the White Space, Business Model Generation uses many sources and refers to popular management concepts, including Blue Ocean Strategy when looking at new market opportunities. Osterwalder focus much more on the customer and customer segments, and have that as a very explicit element of the business model framework. For me, Business Model Generation is a more original and content rich book. See my review here
Getting to Plan B: Breaking Through to a Better Business Modelby John Mullins and Randy Komisar focus more on the financials and the start-up situation. It defines the business model slightly different from the two books above but shares the idea to experiment and adjust the business model as you learn new things. See my review here
The Profit Zone: How Strategic Business Design Will Lead You to Tomorrow's Profitsby Slywotzky, Morrison and Andelman, has a heavier focus on profitability and the changing areas in which high profit is possible to keep, it is a quick read. See my review here
Open Business Models: How to Thrive in the New Innovation Landscapeby Henry Chesbrough has a heavier focus on technological innovation in the context of business models and also covers the important area of Intellectual Property in relation to open business models.

All in all, Seizing the White Space is a good book, containing many valuable lessons. It will not WOW you, and it presents surprisingly few new case studies. One of the most important (implicit) lessons from the book is that business models need to be consciously designed and that companies must always stay on their toes looking for new opportunities around their core business, but also in the white space.

If you find this book review/summary helpful, please go to the Amazon book review page and rate my identical review "Helpful" Thanks!

Albert S Humphrey's business model elements from 1968

2010-02-13T22:41:00.004+01:00

Albert S Humphrey (1926-2005) who during his work at the Stanford Research Institute developed SOFT analysis that was later developed into SWOT analysis, also outlined an early version of the business model concept in 1968. For a business to be successful, Humphrey defined six inter-related areas which had to be developed simultaneously:

Products & Services - What are they, how do they work, and when and how should they be improved
Process - How the products and services are to be made and/or assembled, including subcontracting and purchasing labor and machinery
Customer - Who will buy the products and services and how will customers be persuaded to buy them
Distribution - How the product and services be warehoused, transported and delivered
Finance - Where will the money come from and how will the cash flow be controlled
Administration - How the organization will be managed, the management style, the organization structure and the people skill required

This was part of TAM (Team Action Management), a step by step method for improving company performance. The inter-related areas above are almost identical to modern definitions and elements of the business model concept. To read more about TAM see this article.

Mark Johnson on Business Model Innovation and his new book Seizing the White Space

2010-02-12T19:28:00.009+01:00

Mark Johnson, chairman of Innosight and author of Seizing the White Space: Business Model Innovation for Growth and Renewal (see review & summary here), explains his version of the business model concept "The Four-Box Business Model" comprising the Customer Value Proposition, the Profit Formula, and the Key Resources and Processes. This model was also the topic of yesterday's discussion at Innochat, see transcript here.

"Where are there opportunities to deliver new value propositions, where are there important unmet jobs that this company has the potential to make a successful product or service to address."

"Think about where these opportunities are and then allow the organization the flexibility to start devising ways at which it could deliver on that value proposition, that may not be the traditional way it does business"

Related videos:

Clayton Christensen on jobs needing to get done
Scott Anthony on Disruptive Innovation

Net Working Capital - Inventory & business models

2010-02-10T22:03:00.016+01:00

In the last post, introducing Net Working Capital (NWC), some of the conclusion were that money tied up in working capital is money not available to grow the company, that different business models need different amounts of working capital, that organizations that need lots of working capital will have to raise it from somewhere and that capital always comes at a price.

Also, we saw that NWC can be measured in days, in what is called the Cash Conversion Cycle (CCC) and that the noncash portion of NWC can be both positive and negative:

Positive NWC:

Negative NWC:

In this post I will focus on inventory and the role it has in different business models, and how different organizations have reduced their working capital by reducing DII, days in inventory.

Keeping an inventory

Businesses with value propositions that directly or indirectly involve physical products generally need to have some form of inventory. This can be divided into raw materials, work-in-process, finished goods, goods for resale and spare parts. Determining the optimal level of inventory requires that the benefits and costs are measured and compared.

DII - Days in inventory

Days in inventory measures the number of days inventory stays in the system. The lower the inventory days, as long as there is enough inventory on hand to meet customer demands, the better. In some businesses such as wholesaling and retailing inventory constitutes a very large percentage of total assets, and a difference in DII can spell the difference between success and failure.

Benefits of holding inventory

The reasons for keeping an inventory of raw materials and components are to meet uncertainties in demand, supply, production, and movements of goods, to get quantity discounts, to give the organization flexibility with the respect to timing the purchase of raw materials, scheduling production facilities and employees. If rising prices, shortages of specific items, or both are forecasted for the future, maintaining a large inventory ensures that the company will have adequate supplies at reasonable costs. Work-in-process inventory give each operation in the production cycle a certain degree of independence and minimize costly delays and idle time. The benefits of having finished goods inventory are to be able to fill orders promptly, minimize lost sales, and avoid shipment delays and damaged reputation due to stock-outs. Spare parts are kept to minimize costly delays and idle time.

Costs of holding inventory

There are a number of inventory-related costs, including ordering costs, carrying costs and stock-out costs.

Ordering costs are all the costs of placing and receiving an order from an external or internal source. When ordering from an external source there are costs such as preparing purchase requisitions, expediting the order, receiving and inspecting the shipment, and handling payment. Costs within a company can be production setup costs such as expenses incurred in getting the plant and equipment ready for a production run.

Carrying costs represent all the costs of holding items in inventory and include storage and handling costs, obsolescence and deterioration costs, insurance costs, taxes, and the cost of the funds invested in inventories. The later in the production process, the more funds have been invested in the inventory and the more working capital is tied up:

Stock-out costs are incurred whenever a business is unable to fill orders because the demand for an item is greater than the amount currently available in inventory. A stock-out in raw materials generates expenses in placing special orders and expediting incoming orders, in addition to the costs or any production delays. When a stock-out in work-in-process occurs, stock-out costs include the costs of rescheduling and speeding production, and may also result in lost production costs if work stoppages occur. A stock-out in finished goods inventory may result in customers deciding to purchase the product from a competitor and in potential long-term losses if customers decide to order from other companies in the future.

Business models using Just-in-Time inventory

With just-in-time inventory management, required inventories are supplied to the manufacturing process at precisely the right time. This reduces the need for inventory, making the production more agile and able to adapt to changing customer needs. The concept, also known as lean manufacturing, was developed Toyota Motor Corporation in the 1950's, and often requires that the supplies are standardized, that the suppliers are highly trustable and close to the manufacturing plant. As there is very little buffer inventory between work stations, the quality and timing must be precise to prevent stock-outs.

Business models reducing product uncertainty

In most business models future sales is uncertain resulting in high inventory of some items and stock-out in other items. To take the apparel industry as an example it is difficult to create hit products on a continuous basis, and predict the demand down to the style, color and size, resulting in inventory of unwanted clothes. Threadless' business model uses an online community to contribute and vote for t-shirt designs, and only produce the ones that becomes highly popular. Threadless t-shirts are run in limited batches with 9 new designs a week, and when sold out reprinting only occurs when there is enough demand for a new batch.

Zara, on the other hand, is a vertically integrated retailer with that can go from design to finished goods in stores in as short as two weeks. Shop managers report back every day to designers on what has and has not sold, information that is used to decide which product lines and colors to keep or alter, and whether new lines should be created. Reducing the time to get the clothes into the shelves and the batches of clothing in small quantities also keeps the costs down by keeping stocks low, and if a design doesn't sell well within a week, it is withdrawn from shops, and further orders are canceled.

Business models where customers pay in advance

Getting paid before producing anything is the main ingredient in the recipe for Negative Net Working Capital, but also for limiting the need for inventory. Dell revolutionized the computer industry when it in the 1980s pioneered the configure-to-order approach, delivering individual PCs configured to customer specifications. It could thus keep a minimal inventory in an industry where components depreciate very rapidly.

The subscription revenue model is another way of getting paid in advance and to get information about the quantity to produce. The subscription-based periodical publishing industry has for a long time been able to have Negative Net Working Capital, keeping inventory to a bare minimum and with large current liabilities for all issues due for the rest of the subscription period.

Business models reducing the need for spare parts

Some business models require an inventory of spare parts to assure customer satisfaction and minimize costs and delays if something needs replacement. Maintaining inventory of spare parts has associated costs. The decision what to keep "just in case" is thus a compromise between inventory cost and the probability and cost of failure. One way to reduce inventory of spare parts is to reduce the number of different types of equipment for which spare parts is needed. To keep its operating model lean Ryanair only fly one model of airplane, a stripped-down Boeing 737, reducing its inventory of spare parts and reducing the need to train its maintenance staff.

Analyzing the need for inventory

So what is it in your business model that requires inventory? What is the reason for having it? What would you need to do to lower or reduce it? What would happen if you reduced it too much and could there be other ways to compensate for stock-out that is more cost effective?

Analyzing the customer

Do some existing customers or market segments result in higher needs for expensive inventory? Do customers appreciate all versions of the products and services or can it be reduced? Do customers realize (and perhaps pay for) the service of getting extra orders or spare parts in short time? Would some customers even be willing to pay more if you held the right inventory? What creates value for them?

Analyzing the value proposition

Would it be possible to configure value propositions to reduce the need for inventory? Would it be possible to create value propositions due to the fact that you keep inventory? What are the level of service commitments you make to your partners and customers? Is it possible to modularize components and products and perform final assembly later in the process? Is it possible to deliver in any other way reducing the days in inventory? Can someone else, such as suppliers, partners or customers keep your inventory? Could you reduce someone else’s costs by holding their inventory and charge for it?

Analyzing resources and activities

What are the activities that need expensive inventory? Can the activities be made more lean without disrupting operations? Can better information on how much will be needed control production? Is there an inventory policy on what products or components to keep in inventory? Can it be bought instead of manufactured?

Analyzing suppliers and partners

Can suppliers and partners be the ones that keeps inventory? Would other suppliers or partners be willing to do it? What if we change specifications? What if we change batch sizes from supplier or internal processes? Do we keep inventory due to uncertain delivery from suppliers? Could this be changed? What if we configure the value network in a different way? Could we get quantity rebates? Are we being fooled by quantity rebates? Could we negotiate lower minimal order sizes?

Every dollar freed from inventories contributes to the cash flow of the company. But the reduction of Net Working Capital not only generates cash, it also forces companies to produce and deliver faster and run their businesses more efficiently.

Further reading:

Net Working Capital - a reflection of the design and execution of a business model

2010-01-28T09:11:00.007+01:00

An organization can improve its financial performance without increasing revenues or lowering costs. With two organizations generating the same revenues and costs, the one that needs the least financial investments will generate the highest return on investments, and have the highest freedom of action. Many interesting and innovative business models implemented by companies such as Dell, Southwest Airlines, Toyota and Zara, have at its core an effective Net Working Capital model. This post is an introductory to the concept and will be followed by a post exploring it further, with examples from different industries.

What is Net Working Capital?

Net Working Capital (NWC) is defined as current assets minus current liabilities and is a financial metric which represents operating liquidity available to a business. It indicates the firm's ability to convert its resources into cash and by quickly turning resources into cash, have the ability to put the cash to use again, ideally to reinvest and make more sales.

Current Assets comprises of cash and cash equivalents, inventory, and accounts receivable. To take a manufacturing company as an example: it needs cash to buy raw material or components (inventory), use the material in production (work-in-process inventory) to produce finished-goods (finished-goods inventory), to sell to customers who might get some days to pay (creating accounts receivables).

Current Liabilities includes accounts payable for goods, services or supplies that were purchased for use in the operation of the business. In the case with the manufacturing company above perhaps it didn't have to pay cash for the raw material or components, but had some creditor days (creating accounts payable).

Net Working Capital can thus be positive or negative depending on when raw material is paid to suppliers, how long the goods are in inventory and when goods are paid by customers.

Positive NWC:

Negative NWC:

Let's assume that the manufacturing company buys raw material and convert it to products which it sells on average after a total of 20 days in inventory, plus providing customers with 20 days to pay, creating total current assets (other than cash) of 40 days.

Scenario 1 - Positive NWC: The manufacturing company needs to pay its suppliers in an average of 30 days. The cash it takes to finance the business is 10 days multiplied by average sales per day.

Scenario 2: Negative NWC: The manufacturing company needs to pay its suppliers in an average of 60 days. The company has 20 days multiplied with the average sales per day in cash surplus, cash that can be used for other things.

Funding growth

If the company in Scenario 1 is growing rapidly, increasing amounts of cash will be needed to pay its suppliers and eventually to hire more people, and the cash from sales will never be able to catch up thus other sources of cash is needed. Failing to find additional sources of cash, profitable companies sometimes go bankrupt. If the company in Scenario 2 is growing rapidly, increasing amounts of cash will be available to fund the growth and other initiatives.

Capital always comes at a price

Different business models require different amounts of working capital depending on things such as the need for different inventory, when customers pay and when suppliers are being paid. Companies with business models that can use cash from customers require less investment and can thus generate higher return on those investments. Companies with business models that need lots of working capital will have to raise it from somewhere and capital always comes at a price.

How much NWC is needed?

All components of a business model have an effect on NWC and every organization needs enough cash and inventory to do its job. Reducing inventory too much and the production might be interrupted, push the suppliers too hard and they might run out of cash and perhaps go bankrupt, push the customers too much and they will go to someone else, too much leverage using other organization's assets and you might lose control. Finding the right balance is a challenge and using the business model concept to identify tied up cash can be a very useful exercise.

Using the business model concept

In the next post I will exemplify how the business model concept and business model innovation can have a huge direct effect on Net Working Capital but also have indirect effects such as improved efficiency, quality or customer satisfaction. It will be a "How to" post with questions to ask to find where money is tied up, and money tied up in working capital is money not available to grow the company.

Further reading:

Bob Iger, President and CEO Walt Disney on Digital Business Models

2010-01-16T18:07:00.006+01:00

Bob Iger, of Walt Disney, in an interesting interview with Fortune's Richard Siklos.

"When we think about monetization we look at advertising, micropayments, paid-for-content and subscription"

"We believe that anything that serves consumers better is a good thing so consumers who have subscribed to multi-channel services, being able to watch those programs and those channels online, we think is a good thing. We do believe though that it is something that should be charged for."

"You have to have one hand in the future and one hand in the present, if you have two in one place then you fail. If you have two in the future then you are not managing your business day to day and that's a big problem operationally, and if you are just managing today, you will miss out opportunities or you will completely ignore significant threats and not prepare yourself for that, so this notion of protecting the present is something that I talk about a lot at the company"

"The most important thing is what is the consumer doing and where the consumer is going"

"The record industry was propped up by a business model selling a 15 song CD for $15, that wasn't sustainable because the price to value relationship was not there, and the other thing that was really interesting was that consumers knew that they could access music in much more convenient ways online and they ended up getting angry that the retailers or the record industry wasn't providing that experience"

Related videos:

Getting to Plan B (2009)

2010-01-16T16:16:00.013+01:00

The book Getting to Plan B: Breaking through to a better business model, written by John Mullins and Randy Komisar, contains several important lessons, primarily for start-up entrepreneurs, on developing successful business models. Though very repetitive around a few key ideas, the book is well worth reading especially for those who want to better understand how the business model is reflected in the different financial statements. with interesting examples from: Amazon, Apple, Celtel, Costco, Dow Jones & Company, eBay, GlobalGiving, GO airlines, Google, Oberoi Hotels, Pantaloon, Patagonia, Ryanair, Shanda, Silverglide, Skype, Southwest Airlines, Toyota, Walmart, Zara and ZoomSystems.

The book in three bullet points:

The business model concept is in the book defined as the pattern of economic activity comprising of five key elements that together determines the viability of any business. The five key elements being the revenue model, the gross margin model, the operating model, the working capital model and the investment model. Companies are successful when the five elements work together.

Getting to Plan B is about the process of discovering a business model that works, with the assumption that the initial plan is most often wrong. The discovering process can be made systematic by constantly formulating different hypothesis and measurements and continuously follow up and iterate the business model into a new Plan B.

The starting point for a new business model is to learn from successful examples worth mimicking in some way and examples to which you explicitly choose to do things differently, where the ultimate judge is the customers and the cash flow generated from your business model.

A brief summary of the different chapters:

1. Don't reinvent the wheel, make it better - the concepts of analogs (successful predecessors), antilogs (predecessors that you want to differ from), and Leaps of Faith (beliefs about answers with no evidence) is covered with the key take out to learn, mix and match to create your own business model, to experiment to test different hypothesis to prove or refute them.

2. Guiding your flight progress - the concept of dashboarding (a systematic way to guide experiments and track results) is presented with examples showing that measuring of specific parameters or results increases the focus of the company's activities, and that the dashboards, including parameters and goals, need to evolve over time based on the learnings they uncover.

3. Air, food and water - the chapter, focusing on revenue models, hits home two important points: the importance of resolving customer pain or providing customer delight, and the need for actual evidence of how customers are likely to respond. To develop a revenue model questions that need to be asked are: Who will buy? What will they buy? Why will they buy? How soon, how often, and how many will they buy? With what effort and cost on your part? At what price will they buy, and on what basis will they pay?

4. Avoiding rocks and hard places - the topic for the chapter is gross margin models; the spread between the price at which products and services are sold and the cost of selling those (COGS). The key messages with the chapter are that digital technology enables gross margin models in which COGS approaches zero, that a superior gross margin model creates leverage that can be applied differently depending on strategy, and finally the fact that pricing decisions should be value-based and not cost-based.

5. Trimming the fat - is a short chapter on operating costs; all the day-to-day costs that must be incurred in addition to COGS. Key ideas are that by doing things differently in relation to other actors in the industry, operating cost can be lowered or eliminated, and by starting the analysis at the most costly or scarcest resources in the industry areas for business model innovation might occur. Another key point is that adding costs might also enhance the customers' experiences and willingness to pay premium prices, so cost cutting is not always the answer to profitability.

6. Cash is king - is according to me one of the more important chapters in the book as the balance sheet, working capital and cash management is often forgotten in business model discussions. Different industries and business models requires different amount of working capital (the cash a company needs to keep the business running) and all elements in the business model have implications for the cash generated and the cash consumed. From page 139: "Failure to earn a profit won't put you out of business, as long as you still have cash. But if you run out of cash, even if you are profitable, you'll be gone in a heartbeat"

See my related blog posts:

7. It takes money to make money - focus on the investment needed to get the business started and through the period until it can generate enough cash itself, and the general goal (there are exceptions) is to find a way to get to breakeven with as little investment as possible. The authors mention some of the many trade-offs involved with external funding from different sources, but primarily focus on venture capital. The conclusions are: Less investment means giving away less of the business, less credibility lost when leaving a business model for another, and fewer sleepless nights if you've mortgaged your house.

8. Can you balance a one-legged stool? - tries to summarize, at least on a conceptual level, the different elements of the authors' definition of a business model, and their implications on one another. The conclusion is that the revenue model, gross margin model and operating model directly affect the working capital model, and these four models directly affect the investment model.

9. Getting started on discovering your Plan B - ends the book where it started with a focus on the talented and visionary entrepreneur. In the beginning of the book there were statements such as "Intuitively, as is almost always the case for committed, passionate, entrepreneurs, they felt that the answers to all five questions were yes" (p29) and in the end "dreaming your entrepreneurial dream" (p214)...

A quick comparison with some other popular books on business models:

Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengersby Osterwalder and Pigneur, atempts to introduce a standard language and format for analyzing and innovating business models based on the business model canvas. Getting to Plan B define the business model concept in financial terms and is not overlapping with this book. See my review here

Seizing the White Space: Business Model Innovation for Growth and Renewalby Mark W. Johnson, explores the circumstances when a new business model might be needed from an incumbent perspective, with several classic examples. See my review here

Open Business Models: How to Thrive in the New Innovation Landscape by Henry Chesbrough has a heavier focus on technological innovation in the context of business models and also covers the important area of Intellectual Property in relation to open business models.

The Ultimate Competitive Advantage: Secrets of Continually Developing a More Profitable Business Model by Mitchel, Coles, Golisano and Knutson, has a heavier focus on marketing with some ideas and questions relating to one-sided business models, so if you are looking to "sell more" perhaps you like this book. See my review here

The Profit Zone: How Strategic Business Design Will Lead You to Tomorrow's Profits by Slywotzky, Morrison and Andelman, has a heavier focus on profitability and the changing areas in which high profit is possible to keep, it is a quick read. See my review here

All in all, the book is somewhat repetitive and rather long for the ideas it delivers, but with many interesting examples and important chapters on gross margins, operating costs and cash flow, it is well worth reading and a good complement to other books on business models not going into the financial details.

If you find this book review helpful, please go to the Amazon book review page and rate my identical review "Helpful". Thanks!

10 Initiatives using the crowd to generate new ideas

2010-01-14T00:00:00.013+01:00

The crowd has been used for idea generation for a very long time with idea boxes, surveys and various competitions and awards. Early examples were the reward offered by the British government in 1714 for a simple and practical method for the precise determination of a ship's longitude, with over £100000 given in the form of different encouragements and awards, or the Orteig Prize of $25000 won by Charles Lindbergh offered by hotel owner Raymond Orteig in 1919 to the first allied aviator to fly non-stop from New York City to Paris or vice-versa.

Recently there have been a growing number of initiatives combining awards, the "American Idol" concept with social networking platforms for idea generation, marketing and recruitment purposes. Below are 10 examples of traditional and non-traditional corporate initiatives:

Cisco I-Prize was an idea competition where the winning team got the opportunity to be hired by Cisco to found a new business unit and share a $250000 signing bonus. Cisco also committed it may invest approximately $10 million over three years to staff, develop and go to market with a new business based on the winning idea. Ideas were posted and commented by others and refined by the community, forming new teams of all-stars sharing similar ideas. More than 2500 idea providers from 104 countries presented 1200 ideas. Winners of the different phases were given access to Cisco's collaboration tools and experts and in the end 12 finalist teams presented for a judging panel. The winning team, based in Germany and Russia presented Cisco with a business plan that improves energy efficiency by using the network as a platform for visibility, manageability and control of energy-consuming systems.

Dell IdeaStorm is an initiative and an online community for anyone to share ideas with Dell and vote for the ones they like. Dell's objective is to connect with its users and get ideas for new products, services and "the way we do business". So far, more than 10000 ideas have been submitted and nearly 400 ideas have been implemented. In addition to the open discussion Dell posts specific questions and areas for customers to submit ideas. There are no material rewards associated with IdeaStorm.

Electrolux Design Lab is an annual global design competition open to undergraduate and graduate industrial design students who are invited to present innovative ideas for household appliances of the future. There are different themes every year and visitors of their online webpage can vote for statements to indicate desire for future themes. Finalists are invited to participate and present their ideas to a jury of high-level designers and experts. Electrolux awards three prizes: 1st place is 5000€ and a 6 month paid internship with accommodations at one of Electrolux global design centers. The 2nd place winner receives 3000€ and 3rd place 2000€. The competition is very much promoted as a way to get jobs and business opportunities and several finalists are currently employed by the company.

Goldcorp issued a now famous challenge to the world's geologists when they provided all their data on the Red Lake mine online if the contestants showed them where they would be likely to find the next 6 million ounces of gold. The prize was a total of $575000 with a top award of $105000. More than 1400 scientists, engineers, and geologists from 50 countries downloaded the company's data and started their virtual exploration. The winners, who had never even seen the mine, were a collaboration by two groups in Australia which together developed a 3D graphical depiction of the mine, used geological-modeling software and database mining tools to find the gold. According to Fast Company Goldcorp has drilled four of the winners' top five targets and have hit on all four.

IBM Innovation Jam has become a famous example where the company's researchers, employees and outside experts are invited to join in a virtual brainstorm session, posting their ideas, commenting and voting for their favorites. The jam consists of interlinked bulletin boards and related web pages on IBM's intranet, supported by systems for centrally managing activity and extracting useful answers to important questions. In the 2006 edition, the largest IBM online brainstorming session ever held, there were 150 000 participants from 104 countries and 67 companies. As a result 10 new IBM businesses were launched with seed investment totaling $100 million.

My Starbucks Idea is an initiative and an online community to gather product ideas, experience ideas and involvement ideas from the crowd. Visitors can share their ideas, view other's ideas, comment and vote to make ideas popular. There is also a blog on ideas in action for users to see how Starbucks is putting top ideas into action. Ideas are chosen based on algorithm (number of votes, comments and recency of post) and by "Idea Partners" inside Starbucks. Providers of ideas that get implemented may be given credits on the site but won't be compensated in any other way.

Netflix Prize is an open competition to improve a collaborative filtering algorithm helping Netflix customers find new movies they would like. In the first challenge the company provided a data set of 100 million of the ratings customers previously supplied and made it available to any programmer together with a baseline of prediction accuracy to beat. To win the competition, the programmers needed to share their methods with Netflix, describe the algorithm for the world and provide a non-exclusive license to Netflix. Every suggested algorithm (more than 44000 valid submissions) was broadcasted on a leaderboard to fuel competition. The grand prize, $1000000, was reserved for the entry which could improve Netflix's algorithm for predicting ratings by 10%. As long as no team won the grand prize, a progress prize of $50000 was awarded every year for the best result thus far. The competition took place between October 2006 and July 2009. In August 2009 Netflix announced it would run a second competition with shorter time spans and the challenge based on demographic data rather than previous ratings.

Nokia Mobile Games Innovation Challenge invites developers to submit mobile gaming concepts to any Nokia N-Gage, Java or Symbian-based Series 40 or S60 device. The three most innovative game concepts are offered Nokia Publishing pre-production contracts, targeting publication or winning concepts and the first winner is awarded with 40000€, the second 20000€ and the third 10000€ for further development of game concepts. The winning participant must agree that Nokia has the right to acquire, subject to a mutually acceptable agreement, the intellectual property or exclusive license to the game concept.

P&G Open Innovation Challenge are events that so far have taken place in the UK where design professionals and entrepreneurs are invited to submit propositions for products which fit P&G's criteria and have the potential to build businesses worth over $100m. To protect the idea providers' intellectual property, ideas are not seen by P&G but are reviewed by its partners National Endowment for Science, Technology and the Arts (NESTA), British Design Innovation and Oakland Innovation. Up to ten of the most promising ideas are given access to feedback, advice and up to £25000 in financing to develop the ideas into a stage at which they can demonstrate commercial viability. Up to five of the strongest applicants are then given the chance to present their finalized ideas to P&G which may decide to invest in the idea and sign contracts. If P&G doesn't invest the creator is free to take the proposition to other brands and or investors.

Virgin Earth Challenge is a science and technology prize to find a viable technology which will result in the net removal of anthropogenic, atmospheric greenhouse gases each year for at least ten years without countervailing harmful effects. The individual or group that is able to demonstrate a commercial viable design will be awarded $25 million, making the award the largest science and technology prize in history to be offered. The challenge will initially be open for five years with the judges including Richard Branson and Al Gore, meeting annually to determine whether a design has been submitted during the previous year that should win the prize.

Etsy - Mass customization of arts and crafts

Lego - Turning users into product developers
Threadless - Dressing the long tail in user design
Value network analysis and positioning

Aravind: How low-cost eye care can be world-class

2010-01-11T20:00:00.005+01:00

Thulasiraj Ravilla, executive director of the Lions Aravind Institute of Community Ophthalmology, talks about the highly interesting business model of Aravind providing free eye surgery for the poor in India.

Relevant posts:
Aravind and Free Eye Surgery
Freemium Business Model
50 Business Models built on Free

Using the crowd as a part of the business model

2010-01-06T08:58:00.012+01:00

Crowdsourcing or mass collaboration has become popular words for using an external group of people as part of the value creation and value capturing process. Organizations have for a long time used groups of external participants for various contests and market research activities, what is new is the scale, speed and cost of conducting such and other activities.

Enabled by computers and the Internet a virtual crowd of people has the ability to access information and easily interact with organizations to help solving problems, contribute with information and ideas, suggest improved or new designs, comment or vote for new ideas, or test new products or services. Organizations at the same time have the ability to occasionally provide and seek for value in different crowds or integrate it as part of their business models.

Who are the people participating?

Using an external group of people as part of the value creation or value capturing process can take many different forms and the crowd may be big or small, and comprise of amateurs working in their spare time or professionals participating as part of their business model. It is often people that in one way or another are related to the organization or its value network such as customers or community stakeholders, but with the use of intermediary platforms, solutions to an organization's problem might come from people in completely different industries and technology areas.

Money is not important

People partake for different reasons in different activities but also for different reasons within the same activities. A common denominator for partakers is the pleasure and satisfaction to be involved and contribute, to solve challenges, especially when participators have a common vision with the organization. One example is when improving a product or service that the participator wants to use, not only providing value but also receiving value. In addition, recognition and status from the organization or other participants, when showing off creativity, problem solving skills or expertise is often argued highly important incentives for voluntary participation. Other non-financial incentives can be learning from doing, learning from others, and access to exclusive prototypes or versions.

Show me the money!

Organizations seeking help in the crowd often combine different non-financial and financial rewards. Getting an award for solving a problem, a cash bonus for generating a winning design, a price cut on the final product, invitation to exclusive events, gift cards or a royalty based on future product sales are common financial rewards for participation. InnoCentive, an intermediary platform connecting companies, academic institutions, public sector and non-profit organizations, rewards solution providers between $5000 and $1000000 for solving problems.

Some examples where organizations use the crowd to create and capture value:

Understand and stay relevant to customers; test new ideas, products and services, discover emerging market needs and trends in user behavior, test and assess brand perception and appeal of marketing material. Example: Nokia Concept Lounge
Funding of new ideas; use community to decide investment strategy for mutual funds, provide means for a crowd to make commitments for future products or services. Example: Sellaband
Find answers to complex problems not solvable internally; research and discovery and access expertise from other industries. Example: Goldcorp
Innovate faster and more profitable; using the crowd to rank and prioritize new ideas, detect challenges. Example: Spreadshirt
Improve current products and enhance customer experience; using power users with high demands, basic users with basic needs, non-users with no current needs, using the crowd to openly review products and services, allowing users to customize their products. Example: Lego Factory
Create the product or service itself; using user generated content as major part of a value proposition in the business model. Example: iStockPhoto
Market and distribute ideas and products; using social platforms and the fact that participation often creates a sense of ownership. Example: Business Model Generation Book

Questions before using the crowd

Will the expected output answer key business needs?
What will be the value proposition towards participants?
Will the organization be able to motivate and incentivize participation?
Are the tasks suitable for distributed activities?
Can the tasks be broken into small chunks?
Are there adequate resources and capabilities within the organization to manage the process?
Are there effective filters, such as the crowd itself that can effectively identify what is valuable and what is crap?
What will be the added costs and risks from the activity?
What would happen if other actors in the value network or competitors knew about or participated in the activity?
Will the organization be able to manage the costs and risks?
Will the business benefits exceed the added costs and risks?
Should the invitation be open or closed?
Can anyone participate or should there be criteria of approval?
What information should be provided and what should be kept secret?
Should the participants see each other’s ideas or contributions?
Should it be possible for participants to build on each other’s ideas?
How should own and participant's intellectual property rights be managed?

Scott Anthony on Disruptive Innovation

2009-12-31T11:11:00.004+01:00

An interesting interview with Scott Anthony, president of Innosight, on disruptive innovation.

"Disruptive innovation is a particular type of innovation that occurs when an innovator brings to a market an innovation that is simple, convenient, accessible, and affordable; changing the game"

"Disruptive innovation will result in major changes but they don't often rely on technical innovation, in fact many times the technology is quite trivial, it's the business model, the way a company organizes and acts that drives disruption"

Questions to identify opportunities for disruptive innovation:

"Look for markets where there is some kind of constrains that inhibits consumptions, where is there something that makes it difficult for people to solve problems in their life. Sometimes they don't have skills, money, access to the solution and sometimes it just takes too long."
"Try to identify where people have important unsatisfied jobs to be done, where there is a problem that the customer can’t adequately solve today. If you can find that frustrated customer and ease their pain, you often times have the ticket to disruptive innovation."

"After you have looked for constraints consumptions and you have targeted that job to be done, think about how you can play the innovation game differently. Remember is not about doing it better, it’s about making it simpler, cheaper, more accessible, and more affordable, that's what disruption is all about"

"Think about the markets that you are going to analyze, looking not necessarily at the most demanding customer today, but thinking about people who are relatively undemanding, or people who are not consuming anything at all"

"Focus groups can be a simple way to begin a conversation with customers. Customer observation can be really powerful, because sometimes the customer simple can't tell you what you want. Sometimes you got to give customers something, a very early prototype and let them co-develop the product or service with you. Sometimes you got to do more detailed quantitative research to really pinpoint what are the points of frustration in the market and where are opportunities to do things differently"

"Take a simple first step. Invest a little, learn a lot. Don't spend huge money upfront because the only thing you can be sure of is that your first strategy is wrong, so if you invest too much too soon, you are looking into a path that is fatally flawed"

More videos on disruptive innovation:

Clayton Christensen on jobs needing to get done

Value network analysis and positioning

2009-12-28T11:16:00.011+01:00

There is an increasing need for companies to gain insights into what is actually happening around them and where value can be created and captured. Linear value chains have in many cases been replaced by complex, interdependent and dynamic relationships between multiple sets of actors in different industries, different parts of the world, using different business and revenue models.

The increased turbulence creates threats and opportunities for organizations to respond to and quickly reconfigure its business models and with that its different roles in relation to external actors. To capture opportunities more quickly than rivals do, organizations must have agile business models and constantly analyze where value can be created and captured.

An intricate network of roles and relationships

The value network surrounding an organization comprises of different stakeholders and organizations (nodes) that have an effect on the outcome of the organization's activities. Between the nodes are different forms of formal and in-formal relationships connecting the nodes, forming the network. In contrast to linear value chains and One-Sided Business Models, such as buying ingredients to sell lemonade on the driveway, the number of different actors having multiple roles creates an intricate network of roles and relationships.

Nodes with multiple roles

One actor in the value network can simultaneously be a value provider (e.g. out-licensing important technology, co-educating customers, partner in working towards establishing a standard, co-developing new technology, supplier of services, providing user data), a value recipient (e.g. in-licensing technology, buying products and services, having access to process knowledge and technical know-how, benefiting from complementary products and services), a value neutral (e.g. competing with similar products and services, providing substitute technology, products or services, non-connected experts, authorities and regulators, standardization bodies). Additional to the complexity of nodes having multiple roles is that roles, relationships and business models are constantly changing.

Different business and revenue models

Each of the actors in the value network has its own business and revenue models and actors outside the industry may at any time enter with business models disrupting the whole industry, such as Apple entering the music industry or Google entering the navigation technology industry. Organizations need to constantly monitor actors in the value network, at the edges of the industry and potential outside actors that could for example provide something at a much lower cost or even for free. A good question to ask is what an industry outsider would do to take advantage of the weaknesses in existing value network and business models? Some examples of potentially disruptive business models:

Give away or subsidize hardware to sell software or services
Give away or subsidize software to sell hardware or services
Give away or subsidize services to sell hardware or software
Give away one version of the hardware, software and/or service to sell another
Give away or subsidize hardware, software and/or services, supported by advertising
Give away or subsidize hardware, software and/or services, sell access to 3rd party

For more examples: 50 Business Models built on Free

Mapping the value network

To understand the value network, an organization should for every value proposition map out each and every actor that could have an effect on the outcome. This should initially be done as broadly as possible generating a very long list of actors. Different approaches can be used to identify actors such as:

Roles in relation to one’s own organization "all suppliers, partners, competitors, customers, substitutes…"
Type of organizations "all incumbents, SMEs, start-ups, research institutes, university research groups, governmental organizations…"
Different forms of activities or expertise "content idea, content creation, publishing, distribution, content aggregation…"

The next step is to categorize each actor in the list to make it more manageable. This can be done in the style of a mind-map or in Excel lists that are perhaps more easy to sort and filter. The way to categorize and group actors is very situational specific and the approaches above can be used as a starting point.

Analyzing the value network

It is important to understand how value is converted from one form to another across the value network. Ideally each actor and relationship should be analyzed and a starting point is to analyze each group of actors and each identified key actor:

How do value move through the network?
Where are the bottlenecks?
Who are benefiting from whom?
What values are provided from each actor?
Who are the main value creators?
What are their objectives and strategies?
Where are the unique assets and capabilities?
How well are assets being used?
How well are the values being realized?
Who are the main value recipients?
What do the value recipients need to compromise?
What social value or cost is generated by each actor?
Where are the main costs and risks of each actor?

With an understanding of the value network the next step for an organization is to analyze its own position in the value network.

Analyzing one’s own position

Based on the value network analysis the organization can start evaluating its own situation and different alternatives for adjusting its position in the value network:

What roles and relationships is it dependent upon?
What are the value propositions (including benefits) it provides to other actors?
How are different external offerings affecting own value propositions?
What are the financial and non-financial transactions in these relationships?
How will success increase other actors' success and vice-versa?
How will the organization enable other actors to win versus their competition?
How can it change the game to its own and others advantage?
How will its position evolve over time?

Positioning through strategic moves

Based on the existing and sought for position, the organization can then use strategic moves to affect identified actors, formulate alliances and partnerships and change its business models, to manage the value network:

Who to collaborate with, for what purpose, in what form?
Who to form strategic alliances with?
What to bring to the table and what to expect from the collaboration?
What actions to take to affect other organizations or relationships?
How to adjust value propositions and business models?

Turning turbulence into an advantage

To understand the current and future capability for value creation, it is essential for every organization to understand the surrounding value network and how value is converted from one form to another across the network, and adjust its business models accordingly.

Opportunities arise from strategic moves and from pure luck. The challenge is for organizations to have agile business models to be able to act on these opportunities. I believe that organizations that really understand their different roles and surrounding value networks can turn the turbulence into an advantage.

Clayton Christensen on jobs needing to get done

2009-12-27T01:12:00.009+01:00

Some great and entertaining thoughts by Clayton Christensen in short sound bites presented at TechPoint's Innovation Summit on September 29, 2009.

"Very often why companies found that they have lost their ability to innovate, isn't that there aren't good ideas coming in, but it's the shaping process confirms everything to what the company is good at doing, instead of what fits the market needs"

"The idea that we should focus on understanding the customer and give the customer what she needs actually contributes to the failure of new innovations. The unit of analysis in coming up with great ideas are the jobs that are sitting out there needing to get done for which our products or services might get hired"

"I wonder what job people hire a milkshake to do for them..." "...it turns out that the competitor is not Burger King milkshakes but bananas, donuts, bagels, snickers bars and boredom"

Related videos:

Emmanuel Faber, Co-Chief Operating Officer, DANONE on the profit that you accept NOT to do

2009-12-20T11:57:00.008+01:00

An interesting presentation from HEC Social Business Conference, by Emmanuel Faber, Co-Chief Operating Officer, DANONE, on “How to manage business objectives and social objectives?” - a question that Emmanuel rephrases into "How can you achieve business objectives without also perusing social goals?"

"The goal of a company is to serve society through the people that it serves in its interaction with those people. Whether they are consumers, customers, employees, shareholders, suppliers, they are people and these people are the ones who ultimately judge whether the company is efficient or not efficient, each of them having their own stakes."

"The real value of the company is not what derives from the valuation of its profits, or the actualization of its profits on the long term, what really makes a company valuable is the profit that it accepts not to do. What really makes a company a solid company is the profit you accept not to do, the profit that you accept to share with the stakeholders of the company."

"There is a possibility that in the next 2-3 years the stock market valuation will have to take into account more than just how the profit evolve whether they go up or down, what is the PEG to growth ratio etc. I think that there is a likelihood that the market will be requiring a better understanding of what fundamentally these companies are about. Are they based on sound business models that make sense from the community in which it engages."

How to motivate employees to take social issues into account

How to help this blog

2009-12-19T14:55:00.003+01:00

Thank you for reading this blog!

One year from the creation of TBMDB, I am still surprised and humbled about the large number of weekly returning visitors, the time spent per visitor and the wide geographical distribution!

I have invested serious time and effort in creating and updating the blog in parallel with 60-80h work weeks, to keep myself and others updated in the subject, find and present interesting concepts, presentations and videos, and answer related questions by email. I have a limited time for the blog and have prioritized content before marketing.

If you like this blog and you're willing to chip in a few minutes of your time, you could help improving the content of this blog and help it reach more people.

Please consider doing any of the following:

To improve the content of this blog:

Comment the content on the blog, to @sundelin or to anders (@) tbmdb.com
Notify me if you read or watch something that could be relevant for the readers of this blog
Send me an email of what you like and don't like, so the content and structure can be improved

To increase the number of readers:

Post about or link to this blog on Twitter, Facebook, your own blog or webpage
Recommend the blog to coworkers, friends, class mates, or others you think could be interested
Recommend the blog to people you know at other blogs, newspapers or magazines

These little things can make a huge difference. It gives me moral support to continue to provide resources for your personal development and business model innovation.

Thanks for your help and support.

Anders

Business Model Generation (2009)

2009-12-16T08:45:00.006+01:00

The book, written by Alexander Osterwalder and Yves Pigneur, co-created by 470 practioners, is a fascinating book for several reasons and I highly recommend people interested in learning about business models to buy it. It is a compilation of 10 years of work on a simple idea; on how to capture the essence of how an organization creates and captures value. It is a book that I believe many will read and keep handy for reference.

The book in three bullet points:

It presents a business model framework, based on nine building blocks, that is widely used by practioners today and it summarizes many popular management theories using the same framework.
It uses visual thinking and design in a way that is novel in business literature, and provides several workshop ideas for companies that want to get their hands dirty applying the tools presented
It provides many interesting examples of companies that have successfully innovated their business model

The business model canvas

At the core of the book is the business model canvas, developed by Alex during his PhD work, and it's included in one form or another, on almost every page of the book. It is a graphical representation of the 9 business model components that Alex argues describe the rationale of how an organization creates, delivers, and captures value. It has created a shared language for describing, visualizing, assessing, and changing business models, and is widely used by business model innovation practioners.

The structure of the book

The book is divided into five main sections that can be read on their own:

The business model canvas including definition and the nine building blocks: Customer Segments, Value Propositions, Channels, Customers Relationships, Revenue Streams, Key Resources, Key Activities, Key Partnerships and Cost Structure.
Popular business model patterns including concepts from popular management literature such as Unbundling Business Models, The Long Tail, Multi-Sided Platforms, FREE as a Business Model and Open Business Models.
Business model design, using concepts such as customer insights, ideation, visual thinking, prototyping, storytelling and scenarios.
Strategy, including the business model environment, evaluating business models, business model perspective on blue ocean strategy and managing multiple business models.
Business model design process, including a 5 step process: mobilize, understand, design, implement and manage.

One book to rule them all

Alex and Yves covers a lot of management concepts in the book and use the business model canvas to illustrate key ideas from publications such as Unbundling the Corporation by John Hagel and Marc Singer (1999), The Long Tail by Chris Anderson (2006), Free: The Future of a Radical Price by Chris Anderson (2008), Co-Opetition by Adam Brandenburger and Barry Nalebuff (1996), Blue Ocean Strategy by Cahn Kim and Mauborgne, and Open Business Models by Henry Chesbrough (2006). The focus is very much to make complex things simple and understandable which is great for most readers!

Visual thinking

Another strong focus of the book is the visual thinking, the analogies to architecture and design, using concepts such as ideation, prototyping and storytelling. The best way, according to the writers, is to print out the canvas on a large surface, put it on a wall and let people jointly sketch or use post-it notes to discuss and analyze business models. Alex has for several years worked together with designers and the design of the book is very different from traditional management literature and share more similarities with books such as The Back of the Napkin: Solving Problems and Selling Ideas with Pictures by Dan Roam. Alan Smith of The Movement, has really done a wonderful job designing the book.

Many interesting examples

The book contains many interesting examples from companies such as Lulu.com Lego, Google, Nintendo Wii, Apple, Metro, Flickr, Red Hat, Skype, Rega, Gillette, Procter & Gamble, GSK and Innocentive. It uses the business model canvas to explain the rationale of each company's business model and sometimes including the differences with traditional companies within the same industry.

Hands-on tools

Besides the business model canvas the book comprises several hands-on tools such as The Empathy Map developed by XPLANE, "What If" questions, The Silly Cow Exercise, Techniques to develop stories, and questions to perform a detailed SWOT analysis of each business model component. It has a very practical focus and it is easy for companies to pick up the book and do some workshops on their own.

In relation to other books

The Business Model Generation gives a fresh perspective on business models and it provides an introduction to many concepts, of which the reader can dig further into in other books. A quick comparison with some other popular books on business models:

Getting to Plan B: Breaking Through to a Better Business Model by John Mullins and Randy Komisar, focus more on entrepreneurship and start-ups and on learning from experimentation and adjusting the business model, also with more focus on financials. A good complementary book to Business Model Generation. See my review/summary here

The Design of Business: Why Design Thinking is the Next Competitive Advantage by Roger Martin, explores design thinking, and advocates using intuition combined with analytical thinking to innovate business models. It is a great complementary to Business Model Generation. See my review/summary here

The Ultimate Competitive Advantage: Secrets of Continually Developing a More Profitable Business Model by Mitchel, Coles, Golisano and Knutson, has a heavier focus on marketing with some ideas and questions relating to one-sided business models, so if you are looking to "sell more" perhaps you like this book. See my review here

The Profit Zone: How Strategic Business Design Will Lead You to Tomorrow's Profits by Slywotzky, Morrison and Andelman, has a heavier focus on profitability and the changing areas in which high profit is possible to keep, it is a quick read and perhaps complementary to The Business Model Generation that focus less on profitability. See my review here

Open Business Models: How to Thrive in the New Innovation Landscape by Henry Chesbrough has a heavier focus on technological innovation in the context of business models and also covers the important area of Intellectual Property in relation to open business models.

All in all, The Business Model Generation is a great book and everyone interested in the subject should have a copy of it. Download the preview and buy it .

Full disclosure: I was one of the 470 practitioners contributing to the book.

If you find this book review helpful, please go to the Amazon book review page and rate my identical review "Helpful". Thanks!

Business Model Examples

2009-12-10T12:10:00.027+01:00

There are many examples of inspiring business models and business model innovators described and referenced on this blog and elsewhere. To provide a quick read with popular examples, a list of business model innovators is presented below. Please feel free to comment or contact me on great business model examples that you find missing.

Amazon - Leveraging assets

Launched in 1994 as an online book seller, Amazon has constantly altered its business model leveraging its assets and capabilities to generate new business… Read more

Apple - Providing convenient solutions

Apple has revolutionized the computer industry, the music industry and now the mobile phone industry, and the classic example is iPod and iTunes… Read more

Better Place - Using per-distance fees

Better Place aims to use the margin between electricity and gas to subsidize the cost of new electric cars, even providing electric cars for free... Read more

Etsy - Mass customization of arts

Aggregating the long tail in an online marketplace for handmade goods with the goal to enable people around the world to make a living making things… Read more

Gillette - Razor and blades

Gillette's success with its razors and blades is a story about superior technology, design and the use of control mechanisms, foremost patents… Read more

Lego - Turning users into developers

Lego has turned its most loyal users into designers and co-creators of their own products. More than 30000 kits have been shared so far… Read more

Tata Motors - Modular distribution

Tata Nano is not only cheap to buy it is constructed of modules that can be built and shipped separately to be assembled in a variety of locations.… Read more

Threadless - Dressing the long tail

Threadless was one of the first firms to systematically mine a community for designs, a trend that today can be seen in various industries… Read more

Xerox - Business Innovation in 1959

The company decided to lease the equipment, instead of selling it, at a relatively low cost and then charge a per copy fee for copies in excess of 2000 copies per month… Read more

Zara - a devastating business model

Zara has managed to substantially shorten the time to develop a new product and get it to stores, and in doing so it can react quickly to changing market trends… Read more

More inspiring examples will come, send me your suggestions!

Further reading:

Using the crowd as a part of the business model

10 Initiatives using the crowd to generate new ideas

Business model example: Zara - A devastating business model

2009-12-10T12:09:00.003+01:00

Zara, owned by Inditex, has been described by Daniel Piette, fashion director LVMH, as "possibly the most innovative and devastating retailer in the world" and is a vertically integrated retailer controlling the design, manufacturing and distribution of clothing itself. This is very different from most clothing retailers that outsource much of their manufacturing to developing countries. Zara has managed to substantially shorten the time to develop a new product and get it to stores, and in doing so it can react quickly to changing market trends. From design to finished goods can be made in four to five weeks, and modification of existing items can be made in as little as two weeks. It produces about 11,000 distinct items annually compared with 2,000 to 4,000 items for its key competitors, constantly updating its range of clothes. Zara shop managers report back every day to designers on what has and has not sold, information that is used to decide which product lines and colors to keep or alter, and whether new lines should be created. Reducing the time to get the clothes into the shelves and the batches of clothing in small quantities also keeps the costs down by keeping stocks low, and if a design doesn't sell well within a week, it is withdrawn from shops, and further orders are canceled. Where most retailers have different "seasons" Zara keeps no design on the shop floor for more than four weeks, encouraging customers to make repeat visits. Popular items appear and disappear within a week creating an image of scarcity. Some customers know exactly when new deliveries arrive at their local shop and turn up before opening time to pick up the latest fashion. Zara uses no advertising or promotion, and 50% of the products are manufactured in Spain, 26% in the rest of Europe, and 24% in Asian and African countries and the rest of the world.

Further reading:

Business model example: Xerox - Business Model Innovation in 1959

2009-12-10T12:08:00.002+01:00

The business model around Xerox Model 914, introduced to the public in 1959, has become a classical example of how a new technology sometimes needs a new business model to become successful. The Xerography technology, to produce images using electricity that avoids the use of wet chemicals, was superior to other available methods, but also very expensive. When Haloid (later renamed Haloid Xerox and then Xerox Corporation) tried to find marketing partners for its Model 914 the company was constantly turned down by the likes of GE, IBM and Kodak. Haloid decided to lease the equipment, instead of selling it, at a relatively low cost and then charge a per copy fee for copies in excess of 2000 copies per day. The company provided all the required supplies, service and support and the customer could cancel the lease on only fifteen day's notice. This was a bold move given that the average business copier at that time produced an average of 15-20 copies per day. Haloid took a large risk as customers were only committed to the monthly lease payment and paid no more unless the performance of the Model 914 led them to make more than 2000 copies. The Model 914 became a huge success, with customers averaging two thousand copies per day (instead of month) and the company sustained a compound annual growth rate of 41% over a 12 year period. Also, the company became highly incentivized to develop faster machines that could handle high volumes with maximum machine uptime and availability.

Further reading:

List of business model examples

Business model example: Threadless - Dressing the long tail in user design

2009-12-10T12:07:00.003+01:00

Challenges in the apparel industry are to find designers that can create hit products on a continuous basis, to predict the demand down to the style, color and size. Threadless started as a hobby inviting anyone to submit artworks for t-shirts to an online platform, a community to rate and the best t-shirts to be printed. Today, the company is the biggest community-based t-shirt store on the web, selling more than 100 000 t-shirts per month. It is one of the most famous examples of "crowdsourcing" inviting everyone to design and assess new t-shirts. Members, some 900 000, download a template and upload a design, around 150 submissions per day, and a small percentage are selected by the visitors and members of the community to be printed and sold through the online store. Creators of the winning designs receive $2000 in cash, a $500 gift certificate and a membership to a monthly subscription-based line of t-shirts. Threadless t-shirts are run in limited batches with 9 new designs a week, and when sold out reprinting only occurs when there is enough demand for a new batch. Producing a predetermined demand keeps costs low and margins high, and because community members tell the company which t-shirts to produce Threadless never produces t-shirts that are not sold. In addition to being designers, voters, and buyers, community members get t-shirt credits by sending in digital pictures of themselves wearing purchased t-shirts if featured, and for recommending t-shirts to people in their social networks when purchased through a referral link. Threadless was one of the first firms to systematically mine a community for designs, a trend that today can be seen in various industries.

Further reading:

Business model example: Tata Motors - Inexpensive cars for modular distribution

2009-12-10T12:06:00.004+01:00

Tata Motors is India's largest automobile company, the world's fourth largest truck manufacturer, the second largest bus manufacturer and the developer and manufacturer of Tata Nano, listed in the Guinness Book of World Records as the world's cheapest car. The Tata Nano, that has received media attention due to its low price, started to be delivered to customers after July 17 2009, with a starting price of Rs 100,000, which is approximately equal to UK£ 1,360 or US$ 2,171 as of October 2009. When competing in the Indian market the Tata Nano is not primarily competing with other cars but with motorcycles used to transport entire families. Making a car affordable for families with low incomes the launch of Tata Nano is believed to expand the Indian car market by 65%. Boston Consulting Group predicts that by 2015, 100 million households in the developing world will be able to afford cars priced between the Nano and the more expensive Renault Logan ($6000). So how could Tata create such a low cost car? Tata refined the manufacturing process breaking down every component of the car into its smallest pieces eliminating everything that is absolutely necessary and predominantly outsourcing its manufacturing to a limited number of suppliers. The number of parts have been reduced with changes such as one windscreen wiper instead of two, no power steering, three lug nuts on the wheel instead of four, no tubes in the tires, only one side mirror and the basic version has no air conditioning, no power windows, no fabric seats, radio or central locking and the seats are fixed except for the driver's which is adjustable. What is really fascinating is how the Nano is constructed of modules that can be built and shipped separately to be assembled in a variety of locations. It can be sold in kits that are distributed, assembled and serviced by local entrepreneurs in rural areas, adjusting the car for local needs adding value to the product or receiving replacement modules for broken cars. To ease assembly, body panels are glued instead of welded. Still, the car meets all Indian emission, pollution, and safety standards. Tata is also developing electrical versions of the Tata Nano that will probably become the world's cheapest electric car when launched.

Further reading:

Business model example: Lego - Turning users into product developers

2009-12-10T12:05:00.002+01:00

Lego has turned its most loyal users into designers and co-creators of their own products. The toy manufacturer providing a building system based on interlocking bricks patented in 1958 begun to run into difficulties in the late 1990s. Lego's product development had become increasingly complex with many product ranges and at one stage Lego had 11000 contractors -more suppliers than Boeing used to build its airplanes. At the same time a change in customer behavior from building models to computer games together with low cost competition made the company increasingly losing money and market share. With a new CEO and the injection of turnaround funding, the company rationalized its supply chain and factory location, reduced the number of unique pieces, in-licensed the rights to use characters from blockbuster movies and developed new ways of working with users as designers as part of the new product development process. The latter is what has made Lego famous in business model innovation (even though the in-licensing has proven to be the main revenue generator). An early product involving users, launched in 2000, was Lego Mosaic, which allowed users to upload photographs to Lego's website. The company would digitize the picture and calculate the bricks required to build the mosaic. In 2005 Lego launched Lego Factory where users can design, share and purchase custom models. The user downloads a virtual building program to design 3-D models with virtual bricks and elements and depending on the creation, a price is dictated by the size and elements used. A community of builders shares their virtual creations, more than 30000 kits uploaded so far, and download the building instructions to build from their existing Lego collection or purchase someone else's model for themselves. In parallel to the sharing platforms Lego launched its MIndstorms Robotic Invention System (RIS) product, aimed at competing with computer games. MIndstorms is a sophisticated kit with a programmable brick, various sensors and actuators to build models that can carry out various movements. One of the key limitations of the original Mindstorms was the complexity of the programming language and Lego discovered that users were hacking the software and developing applications and extension to the original code. Within weeks of the original Mindstorms’ debut, a user had reverse engineered the system and posted all of his findings including information on the underlying firmware, online. Lego concluded that limiting creativity was contrary to its mission or encouraging exploration and ingenuity, and rather than sending out cease and desist letters, Lego decided to write a "right to hack" into the software license. More than 40 guidebooks providing step-by-step strategies were developed by external users and hardware developers designed sensors far more sophisticated than the included ones. When Lego later developed the next generation Mindstorms (NXT), key developers driven by interest and involvement were recruited into a Mindstorms user panel in exchange for Lego sets and NXT prototypes.

Further reading:

List of business model examples

Business model example: Gillette - The razor and blade business model

2009-12-10T12:04:00.002+01:00

The name Razor and Blade business model refers to Gillette's use of razor handles, sometimes given away for free, and high margin disposable blades. Gillette has used the razor-and-blade business model since the first model with disposable blades was launched in 1902, with granted patents in 1904. Since then several different generations of razors have been developed, patented and released and razors has become one of the most heavily patented consumer products with more than 1000 granted patents. Gillette's success with its razors and blades is a story about superior technology, design and the use of control mechanisms, foremost patents, to ensure market dominance. Gillette who spends huge amounts on R&D and patenting, has fine tuned its business model and patenting activities, and never releases a new razor until the next generation is already in development. It has continuously developed and heavily patented its products, replacing old models just when patents have started to expire. As patents per definition becomes publicly available, and is used for competitive intelligence, Gillette, instead of filing own patents when inventions are discovered, awaits the right time to file large batches of patents to be published in perfect timing for the launching of new products. In 1998, after more than $750 million of research and testing, Gillette introduced Mach3, with innovations such as the triple blade, the single-point cartridge docking, the indicator lubricating strip to signal when to replace cartridge and the diamond-like carbon-coated DLC blade edge (three times stronger than stainless steel, made with chip-making technology). The company made sure to patent every design and engineering feature resulting in a wall of more than 50 patents surrounding the product. Seven years later the Gillette Fusion was launched with new inventions protected by more than 70 patents.

Further reading:

Business model example: Etsy - Mass customization of arts and crafts

2009-12-10T12:03:00.003+01:00

Customization has traditionally been costly with plenty of long-tail producers and customers spread out over the world, too small to set up shop on the average city street without expensive pricing. Etsy aggregates the long tail in an online marketplace for handmade goods with the goal to enable people around the world to make a living making things. The company provides a platform for users to buy and sell items listed under broad categories and user-defined tags. Where Ebay attracts brand-name bargain-hunters, people go to Etsy looking for something handmade, something unique, and find more than 250 000 sellers from around 100 different countries. The company collects a 20 cents listing fee and a 3.5% commission on each item sold, and sells slots in a showcase (internal advertising program for sellers to show off) of featured items for $7 a day. Etsy offers workshops to help entrepreneurs sell their stuff on its platform and market their products using social media such as Twitter and Facebook.

Further reading:

List of business model examples

Business model example: Better Place - Introducing per-distance fees

2009-12-10T12:02:00.003+01:00

For many years the car manufacturers have struggled with that electric cars are too expensive to sell in comparison to current cars, due to the very expensive battery. At the same time car manufacturers have been aware of the margin between what electricity costs and what is paid today per km gas. The performance of the battery has also been limited, reducing the range for which the car can be used between charging and the time it takes to charge the battery has been considered too long. While car manufacturers are waiting for battery companies to develop the technology for future cars, Better Place has developed a business model for electric cars and infrastructure that is being tested in Israel, Denmark and Hawaii - small geographical markets with special tax policies for zero-emission cars. Better Place is not focusing solely on the cars but on the system including charge spots, battery-switching stations, and grid-management software. Redefining the electric car, where customers are not allowed to purchase battery packs, the company is able to use a business model similar to how mobile phones are sold. The company then uses the margin between electricity and gas to subsidize the cost of new electric cars, providing electric cars for free, for customers signing up to costs similar to the costs they have for gas today. The costs, or per-distance fees, cover battery pack leasing, charging and battery switching infrastructure.

Further reading:

Video:

Shai Agassi on the business model of Better Place

Business model example: Apple - Providing convenient solutions

2009-12-10T12:01:00.003+01:00

Apple has a history of design-driven product innovation and has introduced a number of high-end products such as personal computers, media devices, accessories, peripherals as well as media and software to support their products including operating systems, applications for areas such as music and video. Apple has revolutionized the computer industry, the music industry and now the mobile phone industry. The classical example of business model innovation is related to Apple's iPod and later the iPhone. Launched in 2001, the iPod was a standalone product, but when Apple launched the iTunes Music Store in 2003, it provided cheap music for buyers of their physical products, turning Apple into the world's largest online music retailer. The same strategy was applied to provide a convenient solution for applications to its iPhone when the App Store for iPhone was launched in 2008, establishing Apple as a broker of application, collecting a 30% royalty on each application sold.

Further reading:

List of business model examples

Business model example: Amazon - Leveraging assets

2009-12-10T12:00:00.003+01:00

Amazon was launched in 1994 and established itself as an online book seller providing books but also an online community for customers to share information and opinions about books with one another. The company soon realized the potential in leveraging the platform and infrastructure to offer new categories of products, turning into an online department store. Amazon also supplies e-commerce services and features to power other companies' web sites. Another way of leveraging its software is the supply of e-commerce services to syndicated stores that sell Amazons products on other companies' web sites resulting in distributed distribution channels. To provide the largest catalog possible on its platform, other companies including competitors are allowed to utilize the platform establishing Amazon as a broker of transactions and leaser of web space to other retailers. By bringing buyer and seller together, collecting the buyer's funds when the order is placed, and maintaining advantageous payment terms with suppliers, Amazon has done with online retailing what Dell did with computers. Further leveraging its assets and capabilities Amazon started to offer a number of services such as storage services, the lease of computing power, together with an end-to-end product sales and logistics platform, handling orders, payments and shipments.

Further reading:

List of business model examples

Muhammad Yunus - Creating a World Without Poverty

2009-12-01T23:41:00.004+01:00

An inspirational presentation by Muhammad Yunus, the Bangladeshi banker and economist, developer of the microcredit concept, founder of Grameen Bank awarded with the Nobel Peace Price, for "creating economic and social development from below".

"We reverse what the traditional bank does. The basic principle of banking is the more you have the more you can get. The less you have the less interest you get. We reversed that basic principle to the less you have the more attractive you are, if you have nothing you get the highest priority"

Full length video at FORA.tv

Related posts:

Videos from Real-Time CrunchUp SF

2009-11-21T08:49:00.006+01:00

Real-time streams will fundamentally alter the way we communicate and interact with one another. At the Real-Time CrunchUp, held in San Francisco November 20th, some of the leading companies shared their views on real-time services and business models around that.

From RSS To Realtime:

A Conversation With Twitter COO Dick Costolo

Roundtable:

Filtering The Stream. Getting Rid of the Noise.

Chris Cox, VP of Product, Facebook
Amit Singhal, Google Fellow, Google
Loic Le Meur, CEO, Seesmic
Edo Segal, Investor/entrepreneur, Futurity Ventures,
Ken Moss, CEO, CrowdEye
Lili Cheng, GM of FUSE Labs, Microsoft
Bret Taylor, VP of Platform, Facebook,
Jason Hirschhorn, Chief Product Officer, MySpace
Jason Shellen, CEO, Thing Labs/Brizzly
Kimbal Musk, CEO, OneRiot
Ron Conway, Angel Investor

The Social Enterprise:

A Conversation With Salesforce CEO Marc Benioff

Where is The Stream Going?

Tomorrow's Killer Apps (DEMOS) Part 1

Justin Shaffer, Hot Potato
Loic Le Meur, Seesmic
Zachary Garbow, Qwisk
Rohit Khare & Salim Ismail, Knx.to
Evan Prodromou, StatusNet

Where is The Stream Going?

Tomorrow's Killer Apps (DEMOS) Part 2

Where Is The Stream Going?

Tomorrow’s Killer Apps (Demos) Part 3

Media Streams:

Are These The Ultimate Marketing Vehicles?

Ryan Amos, co-founder, DailyBooth
Sean Rad, CEO, Ad.ly
Jesse Engle, CEO, CoTweet
Robin Bechtel, Hollywood agent, Digital strategist for Britney Spears, Warner Bros. Records
Philip Nelson, SVP strategic development, NewTek

Geo Streams:

We Know Where You Are, Right Now

Where The Realtime Rubber Meets The Road:

When Does The Serious Money Come In?

Relevant videos:

Relevant posts:

Twitter reveals details about its business model

2009-11-20T23:42:00.007+01:00

In this very interesting conversation with Dick Costolo, COO at Twitter, at the Real-Time CrunchUp Nov 20th, the company's business model is discussed, confirming that the deals with Microsoft and Google are bringing Twitter money. Costolo also answers questions about the newly turned-on Geolocation API and its possibilities.

Relating posts:

Relating videos:

The business model of API’s

2009-11-19T21:20:00.014+01:00

This is a guest post by Elias Bizannes, an expert in data portability and open standards, financial analyst at Vast.com and vice-chair of steering group at the Data Portability Project.

Application Programming Interfaces - better known in the technology industry as API's - have come out as one of the most significant innovations in information technology. What at first appears a geeky technical technique for developers to play with, is now evolving into something that will underpin our very society (assuming you accept information has, is, and will be the the crux of our society). This post explores the API and what it means for business.

What is it?

In very simple terms, an API is a set of instructions a service declares, that outsiders can use to interact with it. Google Maps has one of the most popular API's on the Internet and provides a good example of their power. Google hosts terabytes of data relating to its mapping technology, and it allows developers not affiliated with Google to build applications on top of Google's. For example, thousands of websites like the NYTimes.com have integrated Google's technology to enhance their own.

An example more familiar with ordinary consumers would be Facebook applications. Facebook allows developers through an API to create 'apps' that have become one of the main sources of entertainment on Facebook, the world's most popular social networking site. Facebook's API determines how developers can build apps that interact with Facebook and what commands they need to specify in order to pull out people's data stored in Facebook. It's a bit like a McDonald's franchise - you are allowed to use McDonald's branding, equipment and supplies, so long as you follow the rules in being a franchisee.

API's have become the centre of the mashup culture permeating the web. Different websites can interact with each other - using each others technology and data - to create innovative products.

What incentive do companies have in releasing an API?

That's the interesting question that I want to explore here. It's still early days in the world of API's, and a lot of companies seem to offer them for free - which seems counter-intuitive. But on closer inspection, it might not. Free or not, web businesses can create opportunity.

Free doesn't mean losing

An API that's free has the ability to generate real economic value for a new web service. For example, Search Engine Optimisation (SEO) has become a very real factor in business success now. Becoming the top result for the major search engines generates free marketing for new and established businesses.

In order for companies to boost their SEO rankings, one of the things they need to do is have a lot of other websites pointing links at them. And therein flags the value of an open API. By allowing other people to interact with your service and requiring some sort of attribution, it enables a business to boost their SEO dramatically.

Scarcity is how you generate value

One of the fundamental laws of economics, is that to create value, you need something to be scarce. (That's why cash is tightly controlled by governments.) Twitter, the world's most popular micro-blogging service, is famous for the applications that have been built on their API (with over 11,000 apps registered). And earlier this year, they really got some people's knickers in a knot when they decided to limit usage of the API.

Which is my eyes was sheer brilliance by the team at Twitter.

By making their API free, they've had hundreds of businesses build on top of it. Once popular, they could never just shut the API off and start charging access for it - but by introducing some scarcity, they've done two very important things: they are managing expectations for the future ability to charge additional access to the API and secondly, they are creating the ability to generate a market.

The first point is better known in the industry as the Freemium model. Its become one of the most popular and innovative revenue models in the last decade on the Internet. One where it's free for people to use a service, but they need to pay for the premium features. Companies get you hooked on the free stuff, and then make you want the upgrade.

The second point I raised about Twitter creating a market, is because they created an opportunity similar to the mass media approach. If an application dependent on the API needs better access to the data, they will need to pay for that access. Or why not pay someone else for the results they want?

Imagine several Twitter applications that every day calculate a metric - that eats their daily quota like no tomorrow - but given it's a repetitive standard task, doesn't require everyone having to do it. If the one application of say a dozen could generate the results, they could then sell it to the other 11 companies that want the same output. Or perhaps, Twitter could monitor applications generating the same requests and sell the results in bulk.

That's the mass media model: write once, distribute to many. And sure, developers can use up their credits within the limit...or they can instead pay $x per day to get the equivalent information pre-mapped out. By limiting the API, you create an economy based on requests (where value comes through scarcity) - either pay a premium API which gives high-end shops more flexibility or pay for shortcuts to pre-generated information.

API's are part of the information value chain

An economic concept I proposed a year ago (and am going to revise over the coming year with some fresh thought) is called the Information Value Chain. It takes an established economic theory that has dictated business in the industrial age, and applies it in the context of businesses that create products in information or computing utility.

With reference to my model, the API offers the ability for a company to specialise at one stage of the value chain. The processing of data can be a very intensive task, and require computational resources or raw human effort (like a librarian's taxonomy skills). Once this data is processed, a company can sell that output to other companies, who will generate information and knowledge that they in turn can sell.

I think this is one of the most promising opportunities for the newspaper industry. The New York Times last year announced a set of API's (their first one being campaign finance data), that allows people to access data about a variety of issues. Developers can then query this API, and generate unique information. It's an interesting move, because it's the computer scientists that might have found a future career path for journalists.

Journalists skills in accessing sources, determining significance of information, and conveying it effectively is being threatened with the democratisation of information that's occurred due to the Internet. But what the NY Times API reflects, is a new way of creating value - and it's taking more of a librarian approach. Rather than journalism become story-centric, their future may be one where it is data based, which is a lot more exciting than it sounds. Journalists yesterday were the custodians of information, and they can evolve that role to one of data instead. (Different data objects connected together, by definition, is what creates information.)

A private version of the semantic web and a solution for data portability

The semantic web is a vision by the inventor of the World Wide Web, which if fully implemented, will make the advances of the Internet today look like prehistory. (I've written about the semantic web before to give those new to the subject or skeptical.) But for those that do know of it, you probably are aware of one problem and less aware of another.

The obvious problem is that it's taking a hell of a long time to see the semantic web happen. The not so obvious problem, is that it's pushing for all data and information to be public. The advocacy of open data has merit, but by constantly pushing this line, it gives no incentive for companies to participate. Certainly, in the world of data portability, the issue of public availability of your identity information is scary stuff for consumers.

Enter the API.

API's offer the ability for companies to release data they have generated in a controlled way. It can create interoperability between different services in the same way the semantic web vision ultimately wants things to be, but because it's controlled, can overcome this barrier that all data needs to be open and freely accessible.

Concluding thoughts

This post only touches on the subject. But it hopefully makes you realise the opportunities created by this technology advance. It can help create value without needing to outlay cash; new monetisation opportunities for business; additional value in society due to specialisation; and the ability to bootstrap the more significant trends in the Web's evolution.

Relating posts:

Generating revenues from mobile applications

2009-11-16T22:49:00.004+01:00

Some interesting examples from companies such as Copilot Live, Shazam, Financial Times, and 63336.

Related videos:

Business models turning products into platforms

2009-11-14T11:06:00.015+01:00

Most products can be subdivided into smaller parts (modules) that can be independently created and then used in different systems for multiple uses. Classical examples of modular systems are complex products such as airplanes, cars and computers, comprising of many different subsystems. Technology and IP based business models take further steps breaking down each invention, algorithm or other valuable asset into the smallest possible components consisting of isolated, self-contained functional elements, to be used in different technology, products and systems for multiple uses.

What is a platform product?

A platform product can be seen as a product that enables one or more additional products or services to expand the platform product's capabilities and features such as functionality, performance or design. Digital examples are Microsoft's Windows, Google's Android platform, Facebook and Twitter, where application developers are able to develop software for users to chose, adding functionality not included in the original platform product. Some physical examples are cars, bicycles, SLR cameras or computers, with their spare parts, tuning kits, peripherals and other accessories. Increasingly physical components becomes connected and integrated with digital ones with fundamentally physical products such as houses or trucks becoming platforms for numerous of digital services for its owners, users, and other stakeholders.

Enabling flexibility and customization

Customers or users seldom want the same thing and have different price sensitivity and prioritizations for different features such as performance, design, portability or functionality of a product. At the same time few are those who are willing to pay for more things or functions than they need, unless they have to. Providing a product as a platform, it can be made more simple and flexible, often to a lower cost, enabling alternations and extensions into many different directions based on customer preferences. It might also enable upgrades and new features not yet discovered when the platform is being sold. Different components or modules can also be sold with different rights or license terms tied to them.

Platform compatibility

Different control mechanisms, such as trademarks, product design, design protection, patents and contracts are often used in combination to control the compatibility of a product platform from other companies' additional products. Depending on the competitive setting, the developed control position and chosen business strategy, the company offering both the product platform and extensions can either compete or be a monopolist in the market for platform products and/or additional products. Companies may for various reasons, such as decreasing the time of development or to provide bigger variety of additional products, chose to allow competition and allow customers to choose additional products offered by competing or complementary firms.

Closed, semi-open and open platforms

The product platform can be totally closed or totally open in many different ways such as "open for everyone to develop and sell additional products", "open for licensees signing away certain rights to develop and sell additional products", "additional products must be sold through the platform owner" or as with news platforms "open for everyone to comment", "open for registered users to comment" "open for adding of links" etc.

Ten years ago mobile phone operators wanted to provide all services to their subscribers themselves and the place to download games and ringtones was theirs. After only 8 months of operations the number of iPhone applications surpassed Windows mobile applications that had been developed for 9 years. Before the year end the iPhone app store is believed to have more than 100 000 applications, still the iPhone app store has only been semi-open and perhaps we will see an even faster development for the Google Android platform.

Actors playing multiple roles

Subdividing the value creation into smaller parts that can be independently created enables companies to focus on their core activities based on their core assets and capabilities, and use external actors to develop and provide the rest that is needed. In many cases this creates complex relationships where actors together build platforms or ecosystems of products and services, at the same time competing with their products and services. One example is Microsoft that provides the Windows platform for others to develop applications on, at the same time it competes in several application areas such as browsers and media players. Together Microsoft and external developers might compete against Apple's or Google's platforms and software applications. In technology and licensing intensive industries such as telecom each actor can any day be a supplier, buyer, competitor, partner and licensee.

Designing the value network

A key challenge for companies providing products as platforms is to design the value network surrounding the company and its value propositions. What role should the platform provider have in relation to external actors? With whom should you cooperate, how and under what terms? What are the external actors' incentives or disincentives to get a successful product platform to emerge? How do they look at your role in their business model? What are your value propositions towards the different actors that you need in your value network? How do your value propositions support customers' customers, suppliers' suppliers and partners' partners? What about your long term position in the value network?

Need for business model innovation

Think of all products that can be seen as platforms still controlled by one company where the speed of development could increase dramatically together with the available options for customers to customize and personalize the final product. This is not as much an engineering challenge as it is a business model challenge.

What products and services can be built and provided by others as add-ons to your platform product? What companies or other organizations make money or get benefits today based on your products and services? How could this be taken one step further...?

Further reading:

Shanda Literature - An interesting business model for more than 800 000 authors

2009-11-04T19:35:00.009+01:00

Shanda Literature, a subsidiary of Shanda Interactive Entertainment known for its online games, is an online publishing company based in Shanghai, with a very interesting business model.

More than 800 000 amateur authors have been providing around 50 million Chinese characters daily, to Shanda’s literature portals with around 500 million page views daily. Any writer can register with Shanda and post their works on any of its sites. Content is made available as Internet literature, mobile literature, traditional print, and Shanda has also its own E-Reader in development. Most known portals are Qidian, Jinjiang and Hongxiu, targeting different groups of readers with different types of content. Shanda Literature’s original online literature site Qidian has released more than 600 000 online novels.

Revenues are generated from micro transactions, advertising and for non-professional writers copyrights are acquired and licensed to other publishers, mobile, gaming, TV and film industries, with the great majority being from micro transactions. Readers can read the first half of a book for free and then, if they like the book, pay about 2-3 cents per 1000 characters, for the rest of the book. The total cost is about one-tenth of the paperback price to read a book online.

Revenues from micro transactions are shared 50/50 with the authors “that’s why writers in China can make a fortune” says Zhou Hongli, Chief Copyright Officer in the first video below.

The company that was founded in 2007 controls over 90% of China’s online-reading market, and generated $15 million in 2008 from a total readership of 25 million, and is still growing at 10 million new readers per year. It has received awards such as “China’s most promising enterprise”, “One of the ten best Internet brand names of China” and “China’s cutting edge media by Forbes”.

See the last 2 minutes in the video below:

Interview with Hou Xiaoquiang, CEO Shanda Literature. (noisy)

Related posts:

Twitter - a de facto standard for real-time data?

2009-10-30T08:16:00.007+01:00

I wrote a comment on Twitter's Business Model: Brilliant or Non-Existent? on the Harvard Business blog, that turned out to be rather long, so I post it here as well:

I believe Twitter has done the right thing given the funding they have had and the potential value they can create, extract and control. The potential value lies in the number of users and the number of sent messages, so by improving the user experience the number of users, and the number of messages per user, increases along with the number of applications using Twitter streams. In comparison with most other internet services, Twitter has the ability to become a de-facto standard for a new type of data to be mined. The key question is how much of the value created that will be captured and controlled by the company, and how much of the value that will be extracted by others mining their data. What I find perhaps most impressive is that Twitter has managed to get so many application developers to build applications on top of its API without an outspoken business model, assuring the continuous ability to do so with or without fees or advertising.

There are many speculating about future premium versions using a Freemium model, but with or without paid versions I believe there are so many great ways to monetize the Twitter data. Twitter is increasingly becoming a standardized platform for real-time data, now used by actors such as Microsoft and Google, and their search algorithms will probably be updated with algorithms ranking pages on links from Twitter users, RTs by other Twitter users, by the number of followers, by webpages linking to Twitter profiles etc. This is of course of great value for Internet users, as well as for search- and content companies, and brand owners, that want to know what is going on right now, what are the latest reports within a certain area, who are the people in the world that by interest or profession stay on top of everything that happens within their field, local community etc. It is of course also of great value for the Telcos getting increased amount of data transfer from mobile phones.

Content in Twitter messages will probably soon trigger other services. Say that I Twitter about a book that I have read, it would be in the interest of Amazon to ask me to comment the book on Amazon and recommend a new one, in the interest of the writer to get my feedback, in the interest of my local cinema to tell me about when the movie is coming out, and in the interest of mine to know what friends also read the book and who liked it and who didn’t. By cross-referencing twitter messages with past messages, messages by others or from friends in social networks such as Facebook or LinkedIn, there will be great opportunities for interesting services and business models.

My twitter stream (@sundelin) will probably not be ranked as high as @NYTimes for general news but perhaps my stream will be considered more important in relation to business models, where I tend to find things faster than most others.

Related posts:

Videos from the Web 2.0 Summit 09 (Day3)

2009-10-24T08:07:00.003+02:00

At the center of both the destruction and creation of new business models is the World Wide Web. At the Web 2.0 Summit, held in San Francisco October 20-22, some of the leading companies share their views on business models and what is next on the horizon. The Summit is arranged by O'Reilly Media and TechWeb, and moderated by John Battelle and Tim O'Reilly.

Videos from Day 1
Videos from Day 2

A Conversation with Paul Otellini Paul Otellini (Intel Corporation), John Battelle (Federated Media Publishing)

HOB: A Windows for the Web? Sundar Pichai (Google)

HOB: Burning Algae: The Green Crude Revolution Cynthia Warner (Sapphire Energy)

High Order Ignite - Sponsored by Omidyar Network Brady Forrest (O'Reilly Media, Inc.), Bre Pettis (I Make Things), Daniel Fletcher (CellScope), Rolf Herken (mental images GmbH), Jacquelyn Ford Morie (USC Institute for Creative Technologies), Dennis Crowley (foursquare)

A Conversation with Shantanu Narayen Shantanu Narayen (Adobe Systems Incorporated), John Battelle (Federated Media Publishing)

A Conversation with Jonathan Miller Jonathan Miller (News Corporation), John Battelle (Federated Media Publishing)

Discussion: Web Squared and the Economy of Work Liam Casey (PCH International), Maynard Webb (LiveOps), Josh Green (Panjiva), John Hagel (Deloitte & Touche)

A Conversation with Austan Goolsbee Austan (President's Economic Recovery Advisory Board), Tim O'Reilly (O'Reilly Media, Inc.)

A Conversation with Sergey Brin (Google)

A Conversation with Tim Armstrong Tim Armstrong (AOL), John Battelle (Federated Media Publishing)

HOB: An API for the English Language Erin McKean (Wordnik)

HOB: Surviving the Hype Curve: A Case Study Tom Hale (Linden Lab)

HOB: The Rise of the Network Company Sean Parker (Founders Fund)

Relating videos:

Videos from the Web 2.0 Summit 09 (Day2)

2009-10-23T15:48:00.008+02:00

Videos from Day 1

Videos from Day 3

A Conversation with Qi Lu Qi Lu (Microsoft Online Services Division), Tim O'Reilly (O'Reilly Media, Inc.)

A Conversation with Aneesh Chopra Aneesh Chopra (Federal Office of Science and Technology Policy), Tim O'Reilly (O'Reilly Media, Inc.)

HOB: Changing the Energy Equation Shane Robison (HP)

HOB: The Infrastructure of Facebook Mike Schroepfer (Facebook)

HOB: Scaling Humans and Social Nets to Answer Questions Max Ventilla (Aardvark)

A Conversation with Sheryl Sandberg Sheryl Sandberg (Facebook), John Battelle (Federated Media Publishing)

Discussion: Whither Journalism? John Battelle (Federated Media Publishing), Marissa Mayer (Google), Eric Hippeau (The Huffington Post), Robert Thomson (The Wall Street Journal), Martin Nisenholtz (The New York Times Company)

Discussion: The Future of Content Richard Rosenblatt (Demand Media Inc. ), Dan Rosensweig (Guitar Hero), Peter Guber (Mandalay Entertainment)

A Conversation with Owen Van Natta Owen Van Natta (MySpace)

HOB: A Vision for Digital Art in San Francisco: The Launch of GAFFTA Aaron Koblin (Gray Area Foundation for the Arts)

HOB: When Can We Scale in The Mobile Web? Mary McDowell (Nokia)

Discussion: Humans As Sensors Brady Forrest (O'Reilly Media, Inc.), Markus Tripp (Mobilizy), Deborah Estrin (Computer Science Department, UCLA), Sharon Biggar (Path Intelligence), Di-Ann Eisnor (Waze)

A Conversation with Brooke Burke and Mark Cuban, Introduced by Richard Rosenblatt Richard Rosenblatt (Demand Media Inc. ), Brooke Burke (Modern Mom), Mark Cuban (HDNet, Landmark Theaters, Magnolia Pictures, Dallas Mavericks, FilesAnywhere, Radical Buy)

Relating videos:

Videos from the Web 2.0 Summit 09 (Day1)

2009-10-21T23:15:00.015+02:00

Videos from Day 2

Videos from Day 3

Opening Welcome Tim O'Reilly (O'Reilly Media, Inc.), John Battelle (Federated Media Publishing)

A Conversation with Brian Roberts Brian Roberts (Comcast Corporation), John Battelle (Federated Media Publishing)

HOB: Economy + Internet Trends Mary Meeker (Morgan Stanley)

HOB: A Call to Arms for Technological Literacy Steve Schneider (WestEd)

Presentation (ppt): A Call to Arms for Technological Literacy

HOB: Do the Economics of Bandwidth Scale? Kevin Johnson (Juniper Networks)

Presentation (pptx): Do the Economics of Bandwidth Scale

HOB: The Case for Antitrust Carl Shapiro (U.S. Department of Justice)

HOB: An Open Platform For Payment Scott Thompson (PayPal, Inc.)

Presentation (ppt): An Open Platform For Payment

HOB: Casually Serving 130 Million with Games Mark Pincus (Zynga)

Presentation (ppt): Casually Serving 130 Million with Games

HOB: A Conversational Approach to Search Mark Drummond (Wowd, Inc.)

Presentation (pdf): A Conversational Approach to Search

A Conversation with Evan Williams (Twitter, Inc.), John Battelle (Federated Media Publishing)

A Conversation with Jeff Immelt (GE)

Relating videos:

Videos from New Business Models For News Summit 2008

2009-10-17T09:53:00.010+02:00

Below is a great collection (3h) of videos from New Business Models For News Summit 2008, held at University of New York’s Journalism School, organized by Jeff Jarvis. The three videos cover very interesting presentations and summaries from group discussions about network models for news and media, new structures for news organizations, new efficiencies and structures for newsrooms, new revenue opportunities and models, and public support of journalism.

Jeff Jarvis' Introduction Slides:

Part I:

Speakers:
Jeff Jarvis, CUNY
Edward Roussel, Telegraph
Dave Morgan, Tacoda
Colin Crawford, IDG
Michael Rosenblum, video training

Part II:

Speakers:
Charlie Sennott, GlobalPost.com
Mark Josephson, Outside.in
Adam Davidson, NPR Planet Money
Samir Arora, Glam
Tom Evslin, ITXC

Part III:

Speakers:
Upendra Shardanand, Daylife
Scott Karp, Publish2
Dave Chase, NextNewsNet
Adam Bly, ScienceBlogs
David Cohn, Spot.us
Jeff Jarvis, CUNY
Scott Meyer, Warburg Pincus
Benjamin Wagner, MTV
Jan Shaffer, J-Lab
John Hassell, Star-Ledger

Related posts:

Outlook for Newspaper publishing: Moving into multiple business models