Biz model 6 scope of activities


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These slides discuss scope of activities for a firm's business model as part of a course on business models for hi-tech products.

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Biz model 6 scope of activities

  1. 1. A/Prof Jeffrey Funk Division of Engineering and Technology Management National University of Singapore
  2. 2. Business Model  Value proposition: what to offer and how to differentiate  Customer selection: whom to serve and not serve  Scope of activities: what activities to carry out and what relationships to have  Value capture: dominant sources of revenue  Strategic control: how to sustain profitability (e.g., how to control architecture and standards)
  3. 3. Scope of Activities  Constantly changing, creating opportunities for new firms  Mostly changing towards vertical disintegration, thus enabling more firms to participate in an industry  Examples  Examples  Automobiles  Apparel  Internet  Construction  Movie Production  Agriculture?  Personal computers  Semiconductors  Broadcasting  Music  Mobile Phones  Exceptions  Hospitals?  Oil Companies?
  4. 4. Scope of Activities (2)  Extreme example: There are millions of firms in the vertically disintegrated Internet!  Facebook, YouTube, newspapers (e.g. blogs), and others have outsourced content production to users  Current big growth area is mobile phone based software, e-commerce, and consumer Internet firms  Rapid growth in users, apps, and firms - think Xiaomi, Uber, Snapchat, Flipkart, Spotify, WeWork, and many more  Many members of Billion Dollar Startup Club benefited from vertical disintegration  Many more will benefit as wearable computing and IoT experience vertical disintegration  Number of software and content firms will be much larger than hardware firms
  5. 5.  Recent Startups  with valuations over $1 Billion  and are still private (no IPO yet)  sometimes called Unicorns  97 firms as of June 2015  With 19 other firms in list, that exited in recent years due to IPOs, acquisitions or decreasing value (total of 116 firms)  High valuations mean investors believe these firms are offering something valuable, unique, and hard to copy  Some of them will  lead to creative destruction  have $100 Billion plus market capitalizations in the future, like the strongest hi-tech startups: Apple, Google, Amazon, and Microsoft Billion Dollar Startup Club
  6. 6. Many of these firms have put the puzzle together differently Created new blocks, with new interfaces Some represent more detailed modules Some have completely different boundaries
  7. 7. Outline  Definitions/Review  Scope of activities  Value configuration: chains, shops, networks  Examples  Computers  Video Consoles/Games  Music  Mobile Phones  Conclusions
  8. 8. Scope of Activities  What do you make or do, versus what do you buy or outsource?  Partly a cost decision, partly a strategic decision  Want to reduce costs  But also a strategic issue  want to develop capabilities  don’t want to become dependent on a single firm for a key component  Thus, make versus buy decisions determine the areas in which a firm intends to compete
  9. 9. Example of Strategic Issue  If an automobile supplier stops making engines, can it begin making them again?  If a leading automobile firm begins selling engines to other firms,  will this help its competitors and thus hurt its auto sales?  or will this enable greater development spending?  How about the country level?  Similar things in other industries, particularly materials industries where performance depends on close integration of everything
  10. 10. Other Strategic Issues  Part of the make or buy decision involves whether you can buy or outsource something –  this depends on the degree to which independent suppliers of components and services (i.e., vertical disintegration) have emerged  This is why one must consider the levels of vertical (dis) integration in the industry using value chains, etc when considering the scope of activities  Increasing amounts of vertical disintegration may provide firms with new opportunities for outsourcing  You must be aware of how industries are evolving when you determine your scope of activities
  11. 11. Vertical (Dis)integration  Represents extent to which work is shared among different organizations  Changes in vertical (dis)integration can come from technological, institutional, or social changes  In particular, reductions in transaction cost lower  costs of having work done by multiple firms/agents  importance of integrative capabilities  and thus facilitate the emergence of vertical disintegration (and entrepreneurial opportunities)
  12. 12. Reducing “Transaction” Costs  Emergence of standards often leads to reductions in transaction costs  Political and regulatory changes can also lead to lower transaction costs  Whether these reductions in transaction costs also lead to emergence of vertical disintegration also depends on whether  standards are open?  different capabilities required?  economies of scale or network effects exist?
  13. 13. Bottom-Up vs. Top-Down  Much of vertical disintegration has emerged from bottom-up  For example, firms must design their electronic systems around available microprocessors, operating systems, and other ICs and software  This is because specific ICs and OSs have become “standards” with large network effects (session 5)  As all mechanical products and systems become connected e.g., wearable computing and Internet of Things), vertical disintegration will occur and it will probably occur through bottom-up and not top-down  This is very different from how systems engineering and systems architecture modules are taught  Suppliers of ICs and software will continue their efforts to make their products standards and venture capitalists will reward promising firms
  14. 14. As an Aside  How is Horizontal (Dis)integration different from Vertical (Dis)integration?  Most profitable firms are usually more vertically integrated than other firms
  15. 15. Horizontal (Dis)integration  Scope of products that a firm offers  Similar to narrow or broad market scope that were discussed in first Week  Apple offers many kinds of electronic products  Desktop computers, laptop computers  MP3 players, Phones  Tablet computers  Televisions
  16. 16. As an Aside  Most profitable firms are usually more vertically integrated than other firms  Thus, although these slides emphasize vertical disintegration, this is only because new entrants pursue this strategy due to lower barriers to entry  Examples of profitable vertically integrated firms  IBM  Intel  Big chemical and oil firms  Samsung
  17. 17. Outline  Definitions/Review  Scope of activities  Value configuration: chains, shops, networks  Examples  Computers  Video Consoles/Games  Music  Mobile Phones  Conclusions
  18. 18. Firm infrastructure activities Human resource management Research, development and design Purchasing, inventory holding, materials handling Manufac- turing Outbound logistics Market- ing & Sales Dealer support and customer service Support activities Primary activities Purchasing Vendor relations Inbound logistics Inventory holding Materials handling Raw materials Capacity Location Parts production Assembly Prices Advertising Promotion Sales force Packaging Brand Sales Channels Inventory Warehousing Transport Warranty Speed Captive/ independent Value chains Issues
  19. 19. Value Chains for Individual Firms Exist within Larger Value Chains Supplier Firm Channel Buyer Value Value Value Value Chains Chain Chains Chains
  20. 20. The Degree to which One Firm does all these activities is Called “Scope of Activities” or Vertical Integration (the opposite is vertical disintegration) Some people use the term industry architecture to describe the level of vertical integration Supplier Firm Channel Buyer Value Value Value Value Chains Chain Chains Chains
  21. 21. Value Shops  The primary activity is finding out what the customer wants and how to fulfill it  Examples  Health care  Travel agencies  Real estate companies  Financial institutions  Education  Technology, in particular the Internet is changing the way value shops can be managed
  22. 22. Value Networks  Firms operate as brokers between buyers and sellers in a value network  Network effects play a larger role in value networks than in value chains or value shops  Examples  Before the Internet: banks, stock brokers, newspaper classified ads, video games  Change to value network or increased importance of value network by the Internet: employment sites, E-Bay, real- estate sites,  Many successful Internet sites are value networks
  23. 23. Scope of Activities  Firms operating in value shops or value networks must also think about their scope of activities  Vertical disintegration has emerged in many of value shops and value networks at a global level (Internet is a big facilitator). Examples:  U.S. hospitals outsource medical decisions to Indian doctors by using the Internet  Universities outsource courses to contract professors that teach in class or over the Internet  This vertical disintegration increases the number of choices for firms with respect to scope of activities
  24. 24. Impact of Vertical Disintegration on Other Aspects of a Business Model (1)  Vertical disintegration complicates the choice of value capture, customer selection, value proposition by increasing the number of firms involved with delivering value to the final customer  Firms must consider impact of their choices (methods of value capture, customer selection, value proposition) on their suppliers, customers, and other firms (e.g., collaborators) that supply complementary products
  25. 25. Impact of Vertical Disintegration on Other Aspects of a Business Model (2)  If suppliers of complementary products do not focus on same customers or value propositions, or implement complementary methods of value capture, then your business may not grow  If your method of value capture prevents  suppliers of complementary products from making money, complementary products will not emerge  retailers or distributors from making money, they will not distribute your products  Many of the examples below involve these issues
  26. 26. Outline  Definitions/Review  Scope of activities  Value configuration: chains, shops, networks  Examples  Computers  Video Consoles/Games  Music  Mobile Phones  Conclusions
  27. 27. Computers  Many changes in computer sector over last 60 years – including changes in leading firms  In discontinuities (relevant to value propositions): mainframe, mini, personal, portable  In lead customers  from accounting departments to  scientists and engineers to  Small firms, professionals, and home professionals  mobile professionals  In methods of value capture  from leasing and/or selling them with a sales force to  selling them through a retail outlet to  selling them online to  licensing software
  28. 28. Other Changes (1)  Emergence of relatively open interface standards between  computers and peripherals  computers and remote services  computers, LAN, and Internet  operating system and application software  in some cases operating systems and microprocessor  Rising development cost for OS, application software and microprocessors  6 Billion USD to develop Windows Vista, the 2007 Windows operating system  Between 100 Million and 1 Billion USD to develop high-end microprocessor  Emergence of these standards (and high development costs) supported emergence of vertical disintegration
  29. 29. Other Changes (2)  Political/regulatory decisions  US government forced IBM to unbundle hardware and software in late 1960s  But didn’t force Microsoft to unbundle operating system and application software in 1990s, as European Union did  U.S. government supported the development of open standards and commercialization of the Internet  Universities defined open standards for the Internet  These decisions also enabled vertical disintegration to emerge
  30. 30. Emergence of Vertical Disintegration  Enabled smaller scope of activities, lower development costs and thus reduced barriers to entry  And thus impacted on business model  In combination with other changes (e.g., changes in value capture, changes in lead customers, dimensions of performance), led to dramatic changes in the leading firms
  31. 31. Source: Christensen & Raynor, 2003 Vertical Disintegration Emergence of Standards Drove:
  32. 32. The Computer Industry: 1980 Top 10 Public Companies in US Computer Industry (Area reflects market capitalization value in constant US $) Services S P Systems Integration E R R Applications Layer Y D CVC Middleware Layer U H E Operating Systems IBM N P C S Hardware Y XRC S AMP Components TI Intel XRC: Xerox; Source: Source: Carliss Baldwin and Kim Clark
  33. 33. The Computer Industry: 1995 Top 10 Public Companies in US Computer Industry (Area reflects market value in constant US $) Services First Data Systems Integration EDS Oracle I CA Applications Layer B MSFT Middleware LayerM Operating Systems Hardware: Printers HP Hardware: Servers IBM Hardware: Routers Cisco Components Intel Micron S P E R R Y D CVC U H E IBM N P C S Y XRC S AMP TI Intel Abbreviations: CA (Computer associates); EDS (Electronic Data Systems); MSFT (Microsoft); Source: Carliss Baldwin and Kim Clark 1980
  34. 34. The Computer Industry: 2004 Top 10 Public Companies in US Computer Industry (Area reflects market value in constant US $) Services First Data ADP Systems Integration Oracle Applications Layer IBM Middleware Layer MSFT Operating Systems Hardware: Printers HP Hardware: PCs Dell Hardware: Servers IBM Hardware: Routers Cisco Components Intel TI Abbreviations: ADP (Automatic Data Processing); MSFT (Microsoft); Source: Carliss Baldwin and Kim Clark 1995
  35. 35. Market Capitalization in 2007  Microsoft - $264B  Google - $210B New to list  Cisco - $189B  Apple Inc. - $162B New to list  IBM - $159B  Intel - $155B  HP - $112.57B  Dell - $45.09B Source: technology_companies_by_market_capitalization
  36. 36. Rank Company Market Capitalization Type of Business 1 Apple $742 Billion Hardware 3 Google $375 Billion Search 4 Microsoft $360 Billion Software 21 Facebook $211 Billion Content 26 Oracle $192 Billion Software 30 Amazon $177 Billion Online Sales 37 Intel $171 Billion Integrated Circuits 39 Samsung $162 Billion Electronics 40 IBM $158 Billion Hardware 41 Tencent $156 Billion Internet content 43 Comcast $153 Billion Cable TV, content 51 Cisco $150 Billion Hardware 53 TMSC $122 Billion Integrated Circuits 57 Qualcomm $117 Billion Integrated Circuits 98 SAP $92 Billion Software Top IT Firms Among Top 100 - Market Capitalization (17 Feb 2015) http://www.corpo rateinformation.c om/Top- 100.aspx?topcase =b%3b+http%3a %2f%2fwww.lib. %2fbusiness%2f 2011%2f04%2f0 8%2ftopglobal10 0companiesbyma rketcapitalization. html
  37. 37.
  38. 38. New Additions to Top 10 Firms Benefited from Emergence of Vertical Disintegration Year Firm Vertically disintegrated layer 1995 First Data, EDS Remote services Oracle, Comp. Assoc. Application software Cisco Routers, emergence of Internet Microsoft Operating systems 2004 ADP Remote services Dell Personal computers 2007/ 2010 Google Internet and search engines Apple Internet: computers and content SAP AG Application software, Tencent Internet and Internet content Comcast Cable TV, content
  39. 39.  Cloud Computing: Dropbox, Pure Storage (also hardware), Nutanix, Jasper Technologies (IoT), AppDynamics, Box  Big Data: Palantir,, Deem, New Relic  Open Source: Cloudera, Automatic, Hortonworks  Online Ads: InMobi, AppNexus, IronSource  Security: Tanium, Good Technology, Lookout  Database: MongoDB, MarkLogic  Integration Platforms: MuleSoft, SimpliVity  Tools (for individual and enterprise): Zenefits, DocuSign, Slack, Sprinklr, Actifo, Qualtrics, Shopify, Cloud Flare, Evernote Software Suppliers in Billion Dollar Startup Club Benefit from Vertical Disintegration
  40. 40. Why Big Changes in Leading Firms  Because change creates opportunities for new firms  Changes in Technology (value propositions, discontinuities): mainframe, mini, PC, portable, Internet, smart phone, tablet  Changes in lead customers for hardware  from accounting departments to  scientists and engineers to mobile professionals  Changes in methods of value capture  from leasing and/or selling them with a sales force to  selling them through a retail outlet to  licensing software  Changes in levels of vertical disintegration  Challenged incumbents and enabled many firms to co-exist
  41. 41. Why are Some Firms Most Profitable (Method of Strategic Control)  Controlled key interfaces (standards) at some point in time  IBM: interfaces in mainframe computer  Microsoft and Intel: operating system and microprocessor in PC  Cisco: IOS in routers  Very innovative  Apple in i-pod, i-phone, and i-pad  Benefited from Network Effects, Switching Costs, Lock-in  IBM in mainframe; Microsoft and Intel in PC (Wintel)  Cisco: in routers; Google in search  Oracle and SAP: application software for big clients  Apple in i-pod, i-phone, and i-pad  Next week, we talk about Method of Strategic Control
  42. 42. Outline  Definitions/Review  Scope of activities  Value configuration: chains, shops, networks  Examples  Computers  Video Consoles/Games  Music  Mobile Phones  Conclusions
  43. 43. Outline  Definitions/Review  Scope of activities  Value configuration: chains, shops, networks  Examples  Computers  Video Consoles/Games  Mobile Phones  Mobile phone apps, e-commerce, and software  Implications for IoT and Wearable Computing
  44. 44. Video Consoles and Games  How are video consoles similar to PCs?  Vertical disintegration has also emerged in video consoles  But  Less vertical disintegration in video consoles than in PCs  And manufacturers make more money than do software (game) providers  Why these differences?
  45. 45. Consumers Developers Tools and Middleware Providers Console Maker Publishers Content Providers Value Network for Video Consoles and Games Games Consoles & Games Royalties Content Financing Games Games
  46. 46. Business Model for Video Game Consoles  Value proposition  Provide graphic intensive game consoles  Growing niches: PC, Internet and mobile games  Customer selection  Mostly high-end graphic-loving users  Growing niches: PC, Internet and mobile games  Scope of activities  Vertically disintegrated: different firms provide hardware and software  Value capture  Console manufacturers take most of revenues including portion of independently sold game software revenues  How do they do this? Source: Pong, Chapter 6 in Invisible Engines
  47. 47. Method of Value Capture for Video Game Firms  Video game console manufacturers  Include authentication chips in the games in order to prevent unauthorized games from being played  Take a portion of game revenues (20% ?, $3-$9 per game) on their games  Discount sales of consoles by >$100  Game publishers and developers  Revenues from sales of games  Divided up between publishers, developers, and content providers (e.g., basketball player’s image)  Tool providers  Sale of tools  But must pay a licensing fee ($12,000) to console suppliers for technical information Source: Pong, Chapter 6 in Invisible Engines
  48. 48. Why Differences? Why are Manufacturers and not OS and IC suppliers dominant in Video Games? Why isn’t there as much vertical disintegration in video games as in PCs?
  49. 49. Why are Manufacturers and not OS and IC suppliers dominant in Video Games?  Vertically disintegrated layers of operating systems and microprocessors have not appeared in video consoles  Graphic performance of games depends on integral design of operating systems, processors, and other ICs (but changing)  Compatibility between users (which comes from standard OSs) is not as important as with PCs (but changing)  Pricing strategy is also different – discount consoles and charge software providers a royalty fee (razor blade strategy), partly because users buy a large variety of software  Games played on PCs (including online games) undergo a different set of competitive dynamics than those on video consoles (but becoming more important)
  50. 50.  What do you think would happen if a console supplier tried to introduce a business model like that found in the PC industry?  Open system?  No royalties?  Instead pay for software that is loaded onto computer?
  51. 51. Outline  Definitions/Review  Scope of activities  Value configuration: chains, shops, networks  Examples  Computers  Video Consoles/Games  Music  Mobile Phones  Conclusions
  52. 52. Old Business Model for Music-Related Firms (1)  Value proposition  For many years music companies bundled songs from top-name artists into record, tape, CD. Now they try to sell singles over Internet  Manufacturers focused on quality, design, and price but sales of special audio players are dropping  Customer selection  mostly young people
  53. 53. Old Business Model for Music-Related Firms (2)  Scope of activities  Vertically disintegration between music and players  Vertical integration within players and within music  Value capture  Music companies take large percentage of music sales through long-term contracts with artists  Hardware manufacturers use production business model but special purpose players are disappearing
  54. 54. Apple Changed Scope of Activities & Value Capture for Music: It sells both players and music and subsidizes music Music Companies Music Companies Consumers Consumers Old Value Chain New Value Chain Design, Make Music Players & Components Retail RetailRetail Components Design andRetail Apple Players Music Artists Composers
  55. 55. But Apple Purchased Most of the Components  Storage: Intel micro hard disk / memory chips  Battery: Sony Lithium polymer technology  Connectivity: Firewire standard  Software: ARM architecture  Microprocessor: Samsung processor  User Interface : Pixo, a cell phone software developer Source: Group 5 in past Class
  56. 56. Apple Still Purchases Most of the Components
  57. 57. Apple’s Scope of Activities  Represents a completely different level of vertical disintegration, i.e., scope of activities, from previous solutions  More investments in retail outlets than in assembly or manufacture and development of components  Thus, return on investment depends more on level of investment in retail outlets than in manufacturing  Other firms are replicating this business model  Consumer electronics firms enter retail: Nokia, Sony, and others in retail outlets  Web firms design consumer electronics but outsource manufacturing: Amazon Amazon Kindle, B&N with Nook; Google with Google TV
  58. 58. Apple and Other Firms have Created Retail Outlets  Creating retail outlets is one way of enhancing brand image  Many phone manufacturers and other suppliers of consumer electronics (Sony) have created retail outlets  These suppliers now compete with traditional retail outlets (Best Denki, Harvey Norman, Courts) that also sell products from these suppliers  Even most clothing manufacturers emphasize retail more than manufacturing  Levi was the king of clothing in the 1970s and slow to create retail outlets
  59. 59. Apple has also succeeded in Content  Developed successful eco-systems of content providers for i-Pod, iPhone  Music for i-Pod  Apps for i-Phones  Can Apple create new eco-systems of content providers for  Tablet computers?  Smart watches?  Apple TV?  Apple Pay?  These skills may be as important as those for design (and certainly more important than manufacturing)
  60. 60. Outline  Definitions/Review  Scope of activities  Value configuration: chains, shops, networks  Examples  Computers  Video Consoles/Games  Music  Mobile Phones  Conclusions
  61. 61. Batteries Vertical Disintegration Existed at the Start of Mobile Phone Services in 1980s Phone Manufacturers Displays Interface defined by air-interface standards such as GSM and CDMA Chips Software Service Providers Base Stations Switching Equipment Network Software Retail Customer
  62. 62. Value Chains for Phones  Have become highly vertically disintegrated  Most variable costs are materials (see next slide)  Also encourages entry by new phone manufacturers (many in China, e.g., Xiaomi)  Development costs are also low  First iPhone - $150 million  More recent phones - $15 million  Development costs for integrated circuits are much higher  Smart phone processors - $1 billion  Simpler chips - $20 – 100 million Gizlogy, 2015. McKinsey, 2013. file:///C:/Users/etmfjl/Downloads/4_ChipDesign.pdf Vance A 2010. For Chip Makers, the Next Battle is in Smartphones, February 21, 2010. Yota, 2015.
  63. 63. Mobile Phone Manufacturers are Highly Vertically Disintegrated (Apple designs processors, but outsources all manufacturing)
  64. 64. Google’s Latest Strategy Google’s Project Ara Google defines the exoskeleton (including the APIs) and users create their own phones Users can mix and match modules, and replace them over time
  65. 65. Batteries The Big Battle is to Connect Content with Users Phone Manufacturers Displays Interface defined by air-interface standards such as GSM and CDMA Chips Software Service Providers Base Stations Switching Equipment Network Software Retail Customer Content Portals or Search Engines
  66. 66. New Eco-Systems Emerged Around Apple’s iOS and Android  Mostly in the form of apps  Thousands of apps are available  Why are apps better than accessing service provider’s menu or searching with Google?  The better value proposition of Apps caused competition to revolve around them, including network effects  How strong are the network effects with Apps?  And who is winning?
  67. 67. Google Play Now Offers More Apps than Does iOS
  68. 68. And it Has More Downloads  Android’s Google Play Store generated nearly 60% more app downloads than Apple’s iOS App Store (60% more)  And this doesn’t include sales from Amazon and Samsung stores  Most downloads  Games: Candy Crush Saga  Non-games: Facebook messenger. Facebook app, Whats App, Instagram, Skype  But revenues are a different story
  69. 69. More App Revenues for Apple  App Store generated more than 70% more revenues than Google Play  Apple paid $10 Billion to iOS developers in 2014, suggesting Google Play paid $3 Billion to developers  Payouts to developers represent 70% of App Revenues for Apple oid-ios-app-downloads-revenues-app-annie-google-play- app-store
  70. 70. The UpShot  Very vertically disintegrated system in mobile phone industry  But Apple is generating huge profits through managing eco-system  How much from design?  How much from apps and network effects from apps?  Other phone suppliers have also created large eco- systems  Xiaomi uses light asset model, even lighter than Apple  No ownership of retail stores, sells most phones online, making them cheaper than unsubsidized phones obtained through service providers  Trying to export model to other countries
  71. 71. Conclusions (1)  Most industries are highly vertically disintegrated  This enables many firms to co-exist  Reasons for this vertical disintegration include  More open standards  More electronics that facilitate standards and open standards  High development cost for electronics and software  Emergence of open standards and other changes (such as political and regulatory changes)  can reduce transaction costs and  thus enable vertical disintegration  A new scope of activities  represents a new business model and  it may require changes to other elements of the business model
  72. 72. Conclusions (2)  Vertical disintegration, which enables a different scope of activities, provides challenges for incumbents  reduces barriers to entry, and thus facilitates new entry  makes new methods of value capture possible  Vertical disintegration will likely emerge in new industries  Internet of Things  Wearable Computing  Firms should expect this vertical disintegration to emerge and plan your business model around it