Biz model 2 what drives need for change

A/Prof Jeffrey Funk
Division of Engineering and Technology
Management
National University of Singapore

Change is Constant – But more specifically,
what types of changes occur?
 Technologies
 New technologies emerge
 Some technologies experience rapid improvements in performance and
cost and some don’t
 Some technologies create new industries
 Industries
 New firms are started
 Some succeed and some don’t
 Some firms are vertically integrated and some aren’t
 Some forms of vertical disintegration create new industries
 Legal and Regulatory
 Introduced, discontinued, Modified
 Markets
 New needs emerge, some end
 Some needs cause new market segments to emerge

Outline
 Technological discontinuities vs. dominant designs
 Evolution of demand, supply, markets, products
 Evolution in markets and products
 Trends in cost and performance for specific technologies
 Crossing the chasm
 Examples of new segments
 Evolution in levels of vertical (dis)integration
 How has it/they changed over time?
 How can we represent different levels of (dis)integration?
 Evolution in numbers of firms and thus numbers of
opportunities for firms
 Where are “valuable” new firms being created now?

Cyclical Model of Technological Change
Technological Discontinuity
Competition
between
Alternative
Systems or
Designs
Emergence of dominant
design/vertical (dis)integration
Incremental
Change
Adapted from (Anderson and Tushman, 1990; Tushman and Rosenkopf, 1992)

Technological Discontinuities
vs. Dominant Designs
 Technological discontinuities (Henderson and Clark,
1990) change the
 concepts that form basis of product/system or process
 linkages between major components in product/system, i.e.,
architecture
 “A dominant design is single architecture that establishes
dominance in a single product class” (Tushman and
Rosenkopf, 1992)
 Subsequent products build from this dominant design
 We focus on discontinuities because many incumbents
fail when they emerge

Basically Two Types of Technological Discontinuities
Within Four Types of Innovations
Reinforced Overturned
Core Concepts
Unchanged
Changed
LinkagesBetweenCore
ConceptsandComponents
Incremental
Innovation
Modular
Innovation
Architectural
Innovation
Radical
Innovation
Source: Henderson and Clark (1990)

Henderson and Clark’s Innovation Framework
Applied to Ceiling Fans
Reinforced Overturned
Core Concepts
Unchanged
Changed
LinkagesBetweenCore
ConceptsandComponents
Improvements
in Blade or
Motor Design
Completely new
form of motor
Portable Fans Air Conditioners

Steam-powered fire engine
Technological Discontinuities: What was change in concepts?
Old
Technology
New
Technology,
i.e.,
Discontinuity
Early Benz (1894)
Wright Brothers (1904)
Gliders (19th Century)

Old Technology New Technologies, i.e., Discontinuities
Mobile Phones for voice
and messaging
Smart Phone, Internet compatible phone
Physical book store Online book store
Printed Books E-books
Physical rentals of DVD
movies
Delivery of DVDs and Streaming of Movies
Vinyl records and CDs Online music
Analog film/cameras Digital cameras
Palm Pilot MP3 players, smart phones, tablet computers
Keyboard Interface for
Computers
Touch screen, voice recognition, gesture interface
(Leap, Kinect), Google Glasses, neural interface
Wireless Telecom System 1st generation (analog), 2G (digital), 3G (CDMA), 4G
Cathode-ray tube display Liquid crystal displays (LCDs), Organic light emitting
diode displays (OLEDs)
Other Examples of Technological Discontinuities

Technological Discontinuities
vs. Dominant Designs
 Technological discontinuities (Henderson and Clark,
1990) change the
 concepts that form that basis of a product/system or process
 linkages between major components in the product/system,
i.e., architecture
 “A dominant design is a single architecture that
establishes dominance in a single product class”
(Tushman and Rosenkopf, 1992)
 Subsequent products build from this dominant design

What physical or control aspects of DC-3 (1935) &
Model T (1908) might constitute a dominant design?

Examples of Dominant Designs in Other Industries
(or at least standards that impact on the system architecture)
 Cargo shipping – standard size containers
 Mobile Phone Systems
 air interface standards such as GSM in 2G or W-CDMA in 3G
 iOS and Android for operating system
 Computers
 IBM System/360, IBM PC/Wintel
 More recently, Linux operating system
 Internet
 Google for ads
 Facebook for social networking
 Apache Hadoop: distributed computing and data storage

Key Points
 Technological Discontinuities often cause incumbents
(existing firms) to fail
 Dominant designs demonstrate the evolution of
designs within a single discontinuity
 But it is an evolution and not the emergence of a single
design
 Most of your projects will focus on a discontinuity
 But you should recognize that there is many possible
designs for a specific discontinuity and certain designs
will succeed more than other designs

Diffusion of New
Products or Services

Rapid Changes in the Chinese Online Market
http://www.wsj.com/articles
/western-firms-caught-off-
guard-as-chinese-shoppers-
flock-to-web-1434274202

http://www.theatlantic.com/technology/archive/2012/04/the-100-year-march-of-technology-in-1-graph/255573/
Other Examples of Diffusion

For Each Category,
What were the first…
 Products/designs to diffuse?
 First value propositions?
 First designs?
 Markets to accept this diffusion?
 First customer segments?
 First customers within segments?
 First sales channels?

Quantity (Q)
Price (P)
q
p
What do Demand and Supply Curves Mean and
what do they have to do with Diffusion?
Demand
Supply

What are some problems with last Slide?

Quantity (Q)
Performance
(P)
q
p
In terms of Performance, What do Demand and Supply
Curves Mean and what do they have to do with Diffusion?
Supply
Demand

Price, Performance, and Demand
 Price and/or performance determine the amount of
demand and supply
 Price has to fall and performance has to rise before
market will grow
 The first users have either the highest willingness to
pay or the lowest demand for performance
 We will just focus on price to simplify things

Quantity (Q)
Price (P)
q
p
Diffusion starts in segments/users that are willing to pay more
for products and services than are other segments/users
Demand
Curve
Supply Curve
Typical movement of
supply curve over time Typical
movement
of demand
curve over
time

Demand and Supply Curves can Help Us Think
About Market Segments and Diffusion
Different market segments, i.e., users
 have a different willingness to pay and demand different levels
of performance
 make different tradeoffs between performance, features, price
 demand different types of features or dimensions of
performance
 fundamentally want different products
 These segments emerge over time
 Often difficult to specify them before products begin to diffuse
 Some markets have more segments (i.e., sub-markets) than
other markets
 Understanding the differences and similarities between
segments is critical for businesses

Choice of Customers
 What happens if you focus on customers that are not the first
customers for the new technology?
 Who are the lead users? Who do we focus on in order to
understand the future direction of the technology? The lead
users for a new technology were often not the lead users for
the old technology?

Demand and Supply Curves can Help Us Think
About Product Segments and Diffusion
 Different product designs
 Provide a different bundle of cost/price, performance, features
 Appeal to different types and numbers of users
 These product designs emerge over time
 Often difficult to specify them before products begin to diffuse
 Some technologies have a greater variety of successful product
designs than do other technologies
 Perhaps because they have more market segments, i.e., submarkets
 Understanding the differences and similarities in performance
and cost for different product designs is critical for businesses
 Dominant Designs are just one design in this product
evolution

Don’t Confuse Products and Markets
 Many studies will describe market segments in terms
of product characteristics
 Understanding the product characteristics is good
 But you also want to know
 who the actual users (customers) are
 the differences between them (segments)
 what they need
 There is an interaction between evolution of users
and products

Products: Example of Computers
 First products, i.e., computers in 1950s were
 large boxes (mainframe computers) that were placed in a
special room
 operated in batch mode
 Mini-computers (from mid-1960s) were
 Smaller, cheaper, and more documentation available
 More available to users such as scientists and engineers
 Personal computers were
 Still smaller and cheaper
 Available to a broader number of people
 Did not operate in batch mode; had fast response time
 Portable computers were even smaller and lighter

Customers/Markets: Example of Computers
 First customers in 1950s were large organizations
that used customers for organizational record
keeping (accounting, payroll)
 Scientific and engineering customers became
important in 1960s
 Later individuals emerged as important customers
as “personal” “computers” and applications for
them such as word processing and games became
possible
 The order of these customers was largely
determined by a willingness to pay

Many types of Interactions
 Interaction between market and product
 Emergence of market segments impacts on how
products are designed
 Emergence of different product designs impacts on how
markets are segmented
 Every technological discontinuity is a big experiment
 New products emerge and customers try them
 Products are redesigned to better meet needs
 Also an interaction between price and demand
 But what drives reductions in price, i.e., changes in
supply curve?
 Is it just due to increases in demand?

What about Wearable Computing?
 How are the products evolving?
 Portability came with laptops, personal digital
assistants, smart phones, tablet computers, smart
watches, and now wearable computing
 How are the markets evolving?
 In the past, first users were business travelers, later
other users
 Since smart phones, a new type of user has been
driving markets
 What will happen in the future
 What types of products/designs will appear?
 Why types of markets/applications/customers will
drive market for wearable computing?

What types of
designs (i.e.,
products) will work
best?
What types of
markets/customers
will buy these
products?
For more info, see:
http://www.slideshare.net/Funk98/
presentations

Quantity (Q)
Price (P)
q
p
What is Causing Supply Curve to
Move over Time?
Demand
Curve
Supply Curve
Typical movement of
supply curve over time Typical
movement
of demand
curve over
time

Costs fall as Volumes Increase
 Before products are commercialized
 Advances in science lead to new types of designs
 Other improvements in designs (e.g., better materials or
components) lead to better products
 After products are commercialized
 Economies of scale
 Equipment costs can be amortized over larger volumes
 Learning
 Firms devise methods of reducing costs in delivering
(manufacturing, distributing, etc.) the product
 Increases in R&D spending lead to better products and
processes
 All of these things are part of an interaction between
demand and supply

But some Technologies experience more
improvements than others
 Integrated circuits (ICs)
 Hard disk and optical disk drives
 And the systems that are composed of these
technologies
 Computers
 Routers
 Servers
 Mobile Phones
 Televisions, radios, MP3 players
 Synthesizers and sequencers of DNA
 This issue is covered in my MT5009 module (and
summarized in paper published in California Management
Review – on IVLE as CMR5503)

What are the Relevant Trends for Your
Technology?
 What are the relevant dimensions of performance?
 Is the technology experiencing improvements in
these dimensions or in cost?
 Do these trends suggest that the new technology (or
a component in the new system) will become
 economically feasible in the near future for some set of
users?
 economically feasible for a larger number of users in the
near future?
 Does it suggest that the design of the technology will
change in many ways and if so how? E.g., wearable
computing

Figure 2. Declining Feature Size
0.001
0.01
0.1
1
10
100
1960 1965 1970 1975 1980 1985 1990 1995 2000
Year
Micrometers(Microns)
Gate Oxide
Thickness
Junction Depth
Feature length
Source: (O'Neil, 2003)

Areal
Recording
Density of
Hard Disk
Platter

Luminosity per watt (lm/W) of lights and
displays
Organic
Transistors

Components and Systems (1)
 Some components have a large impact on
performance of a system
 When such components are experiencing rapid
improvements in cost and/or performance, they
 can have a large impact on performance and cost of
systems, even before system is implemented
 can lead to changes in relative importance of cost and
performance and between various dimensions of
performance
 Can lead to discontinuities in systems (e.g., wearable
computing)

 Improvements in engines impacted on
 Locomotives, Ships
 Automobiles, Aircraft
 Improvements in ICs impacted on
 computers, servers, routers, telecommunication systems
and the Internet
 radios, televisions, recording devices, and other
consumer electronics
 mobile phones, other handheld devices, wearable
computing
 controls for many mechanical products
 Improvements in ICs led to many discontinuities
in systems

Improvements in computations
per second of computers
Source, Koomey et al, 2011

Improvements in Computations per Kilo-Watt Hour (Koomey et al, 2011)

Speeds/Bandwidth for Wireline Telecommunication
Source: Koh H and Magee C, 20016, A function approach for studying technological progress: application to
Information technology, Technological Forecasting & Social Change 73: 1061-1983.

 Improvements in ICs (and related components) are
still driving the emergence of new electronic
systems such as new forms of
 Computers and mobile phones
 New forms of mobile phone apps and content
 Internet of Things, wearable computing
 Cloud computing
 Autonomous vehicles
 human-computer interface (touch, gesture, neural)
 Mobile phone systems (e.g., 4G, 5G, cognitive radio)
 Holographic display systems

Outline
 Technological discontinuities vs. dominant designs
 Evolution of demand, supply, markets, products
 Evolution in markets and products
 Trends in cost and performance for specific technologies
 Crossing the chasm (book by Geoffrey Moore, 1991)
 Examples of new segments
 Evolution in levels of vertical (dis)integration
 How has it/they changed over time?
 How can we represent different levels of (dis)integration?
 Evolution in numbers of firms and thus numbers of
opportunities for firms
 Where are “valuable” new firms being created now?

The Role of Chasm (s) in Diffusion of Products
 Differences between Geoffrey Moore and others
 Most marketing classes emphasize changes in customer
requirements and willingness to pay
 But Moore emphasizes that there is not a continuous
progression across segments (in many cases)
 Even if a product initially succeeds with some customers, it
must often by redesigned and repackaged for other customers
 Basic questions
 What are different segments in market?
 How are needs in each segment different?
 How do products need to be redesigned and repackaged in
order to cross chasm (s) that exist between different segments?

Geoffrey Moore’s Chasm (s)
Managing the transitions between different types of adopters
and in particular the transition from early adopters to early
majority are critical

Differences Between Visionaries (early
adopters) and Pragmatists (early majority)
The Visionaries
 Value Newness in
technologies
 Prefer radical changes
 Do not expect much from
existing support
 Do not expect producers to
take full responsibility of
implementation failure
The Pragmatists
 Value peer
recommendations
 Prefer minimum change
 Demands for established
standards and support
 Prefer not to deal with
unproven products

What are the implications of these differences
between visionaries and pragmatists?
 For product offerings?
 For product support?
 For standards?
 For where we meet potential customers?
 For how we make sales?

What are the implications of these differences?
For Visionaries Pragmatists
product offerings? Don’t need
complete
solution
Need more
complete
solution
product support? Expect little Expect a lot
standards? Expect to set
them
Expect them to
exist
where we meet
potential customers?
Technology
conferences/
exhibitions
Industry-specific
conferences/exhi
bitions

Of the Products Liked by Visionaries in the mid-1990s,
only one was adopted by Pragmatists, which one?
Product Pragmatists Visionaries?
Microprocessor Intel AMD
OS Windows UNIX/Linux
Database Software Oracle Sybase
Engineering Software SAP QAD
Groupware Lotus Notes Novell
Printers HP Lexmark
Workstations Sun Silicon Graphics

Failure to Cross Chasm
 How did some of the manufacturers of these products
fail to cross the chasm?
 Laptop computers
 Personal Digital Assistants
 RIM Blackberry
 Calculators
 Digital cameras
 MP3 Players
 Hint: think about what these products could have
become

Will these products cross the chasm?
(all sold by members of Billion Dollar Startup Club)
 Wearable computing
 Jawbone
 Fitbit
 GoPro
 Mobile apps
 Airbnb
 E-commerce: fashion, interior design
 Peer-to peer lending
 New social networking sites
(other than Facebook)

Many businesses provide products or services
that reside in the “Long Tail”
%
of
sales
X= product; they are ranked by salesSource: Anderson, 2006,
The Long Tail

Examples
 Internet sites
 Books
 Videos
 Music
 News
 Emergence of large department, grocery
stores, supermarkets, and malls
 Cable TV in 1990s
 All of these changes bring new opportunities
for firms

Drivers of Long Tail
 Better logistics
 Better information systems
 Better transportation systems
 Emergence of and improvements to Internet
 Broadband
 Faster servers
 More memory
 Larger storage capacity in computers and digital video
recorders
 What will happen next?

On the Other Hand……
 While the Long Tail enables more niche products, the
Internet has enabled creation of superstars and super
products
 Top 10% of one publisher’s books generate 64% of costs but
126% of profits
 102 of the 8 million digital musical tracks generated almost
1/6 of the sales
 Similar conclusions were reached with movies
 Why the difference in conclusions between this book and
the Long Tail?
Source: (Blockbusters: Hit-making, Risk-taking, and the Big Business of Entertainment)

Example of Another New Segment
 Wealthy older people
 In many rich countries, people over 65 represent an
increasingly large percentage of populations
 These people have lots of money, time, and
unfortunately, deficient capabilities
 Sensory
 Physical
 Cognitive
 Designing your products and services for them is a
major challenge
 http://www.youtube.com/watch?v=eo2MlU32lRI&list=UUVa
6r3FhSZE3SwcWqIV7mag&index=1&feature=plcp

Scope of Activities
 Many strategic issues involved with defining an
organization’s scope of activities for a specific product;
these are covered in Week 6
 What does the supplier of the final product do? Design and
manufacture of final product, components, software,
manufacturing equipment, materials processing and mining?
 How about retail?
 But one issue is whether independent suppliers of
“modules” exist and thus whether there is vertical
disintegration
 These slides summarize emergence of vertical
disintegration and how this emergence impacts on
scope of activities

Vertical (Dis)integration (1)
 Represents the extent to which work on a specific
product is shared among different organizations
 How are vertical and horizontal integration different?
 Changes in vertical (dis)integration come from
technological (standards and economies of scale –
covered in Week 5), institutional (new regulations),
and social changes (covered in Week 6)
 For example, reductions in transaction cost can
reduce
 costs of having work done by multiple firms
 importance of integrative capabilities
 and thus facilitate the emergence of vertical disintegration
(and entrepreneurial opportunities)

Vertical (Dis)integration (2)
 Many changes in vertical (dis)integration over last 100
years
 Emergence of vertical integration in late 19th century,
described by Arthur Chandler (Harvard) in many
books
 Telephone
 Automobiles, Bicycles, and other assembled products
 Chemicals
 Steel and other Materials
 Vertical integration peaked in mid-20th century – since
then move towards vertical disintegration

Extreme Example of Vertical Integration: Ford’s Rouge River Plant
Contained river docks, electricity plant, iron ore processing, parts production,
assembly plant, and interior railroad track
In 1947 it contained 90 miles of railroad tracks, 27 miles of conveyors, 53,000
machine tools and 75,000 employees

Large Changes in late 20th Century (1)
 River Rouge Plant represented the most extreme
example of a move towards vertical integration and
scale that had started in the late 19th century
 Vertical disintegration subsequently emerged in
automobile and other industries
 Computers/Information Technology (IT)
 Electronic Systems and Semiconductors (Integrated Circuits)
 Broadcasting
 Mortgage Banking
 Movie and Music Production and Distribution
 Mobile Phones and Systems
 These changes impacted on business models for firms and
thus created opportunities

Large Changes in late 20th Century (2)
 River Rouge Plant represented the most extreme
example of a move towards vertical integration and
scale that had started in the late 19th century
 Vertical disintegration subsequently emerged in
automobile and other industries
 To what extent will it continue to emerge or will the
pendulum swing back the other way in the future?
 How industry specific is this issue?
 How life cycle dependent is this issue? Is vertical
disintegration more common right after a
technological discontinuity occurs and then vertical
disintegration slowly emerges?

Main Points of Following Slides
 The following slides will show examples of vertical
disintegration
 Weeks 5 (standards) and 6 (scope of activities) will
discuss some of these examples in more detail
 Here I merely want to demonstrate the prevalence of
changes in vertical (dis)integration
 Mostly towards more vertical disintegration
 Some moves back to vertical integration
 Increasing vertical disintegration reduces barriers to entry
and thus creates opportunities for new entrants including
entrepreneurs
 But most profitable firms are more vertically integrated than
less profitable firms

Source: Christensen & Raynor, 2003
Vertical Disintegration
Vertical Disintegration in Microprocessor-Based Computers

Semiconductor Sector
 Separation between
 Electronic Systems
 Semiconductors
 Within Semiconductor Sector, separation between
 Design
 Manufacturing
 Equipment suppliers
 Material suppliers

Broadcasting Sector
 Separation between hardware (receivers) and
programming (content)
 Hardware
 Production of receivers
 Sale of receivers (retail)
 Programming
 Delivery of programs (broadcasting)
 Distribution of programs to broadcasters (initially via
telephone lines)
 Production of programs (very disintegrated)
 Financing of programs

Program Production
 For television (broadcast, cable, satellite), movie
theaters, DVDs
 For each of them, vertical disintegration has
emerged between
 Film companies (distributors)
 Property/Film location
 Lighting
 Recording
 Film editing
 Film processing
 Market research
 Representatives of artists

Mobile Phones
 Separation between
 Mobile phone manufacturers
 Service providers
 Retailers of phones and/or services
 What will happen with content?
 Independent content providers will most likely emerge
 But who will control their access to customers?
 Service providers
 Phone manufacturers
 Other firms such as Google

Apple Reintroduced Vertical Integration into
Software (Music) and Hardware (Players)
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

One Result of Vertical Disintegration in Electronic
Products: Most Costs are Standard Components
1 Values as a percent of total and material costs
2 Excludes mechanical components, printed circuit boards, and passive components
Type of Product Cost of Final
Assembly
Cost of Standard
Components
Smart Phones 4.2% 76%, 79%
Tablet Computers 3.1% 81%, 84%
eBook Readers 4.9% 88%, 88%
Laptop Computers 2.9%
Game Consoles 2.4% 64%, 70%
MP3 Players 3.4% 74%, 75%
Large Screen
Televisions
2.4% 82%, 84%
Internet TVs 5.7% 57%, 61%
Google Glass 2.7% 62%, 64%

Types of Standard Components in Most
Electronic Products
Type of
Product
Memory Micro-
Process
or
Display Camera Connect
ivity &
Sensors
Battery Power
Manage
ment
Smart
Phones
15% 22% 22% 8.2% 7.9% 2.3% 3.8%
Tablet
Comp.
17% 6.6% 38% 2.9% 6.3% 7.3% 2.5%
eBook
Readers
10% 8.1% 42% .30% 8.3% 8.3% NA
Game
Consoles
38% 39% none none NA none 5.8%
MP3
Players
53% 9% 6% none NA 4% 3.5%
TV 7% 4.0% 76% none NA none 3.0%
Internet
TVs
16% 31% none none 10.5% none 3.5%
Google
Glass
17% 18% 3.8% 7.2% 14% 1.5% 4.5%

These Changes are Still Occurring
 Firms create new electronic products from these
standard components
 Wearable computing
 Internet of Things
 Vertical disintegration continues to spread
 Internet startups combine and recombine open-source
software, cloud computing services, and social
networking services to come up with new services
 Many new services are application programming
interfaces, mini-platforms that form the basis of another
digital product
 Very low barriers to entry!
Source: http://www.economist.com/news/special-report/21593583-proliferating-digital-platforms-will-be-heart-tomorrows-economy-and-even

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 chain for a firm
Issues

Value Chains for Individual Firms Exist within
Larger Value Chains
Supplier Firm Channel Buyer
Value Value Value Value
Chains Chain Chains Chains

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

Value Configuration
 Not all industries can be easily analyzed in terms of value
chains
 Other forms of value configuration
 Value shops
 Value networks
 Concepts of “scope of activities” and vertical integration
and disintegration can be applied to value shops and value
networks

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

Problem Finding
• Collect patient history
• Patient examination
• Diagnostic tests
• Maintain patient data
Problem Solving
• Generate treatment plans
• Evaluate treatment plans
Control/Evaluation
• Monitor patient history
• Maintain patient data
Execution
• Treatment
Choice
• Choice of
treatment plan
Value Shop of a General Practitioner (Health Care)

Value Networks
 Firms operate as brokers between buyers and sellers
 Network effects (Week 6) play a larger role in value
networks than in value chains or value shops
 Examples of value networks
 Before the Internet: banks, stock brokers, real estate agents,
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, Amazon.com
 Many successful Internet sites are value networks

Film
Companies
(563, 709, 1473)
The Television Programming and Movie Industry is a Value
Network (Number of Firms in Parentheses for 1966, 1974, and 1981)
Artists
Representatives
(242, 359, 344)
Film
Processing
(43, 76, 55)
Recording/
Sound
(20, 33, 187)
Lighting
(2, 16, 23)
Editing
(4, 31, 113)
Properties
Firms
(66, 33, 184)
Rental
Studios
(13, 24, 67)
Market
Research
(3, 5, 24)
Total
1966: 956
1974: 1281
1981: 2470
1999: 9500
Source: Storper and Christopherson, 1987 (for 1999 figure: Scott, 2002)

Consumers
Developers
Tools and
Middleware
Providers
Console Maker
Publishers
Content
Providers
The Video Game Industry is also a Value Network
Games
Consoles
& Games
Royalties
Content
Financing
Games
Games

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:
 Health Care: U.S. hospitals outsource medical decisions to
Indian doctors by using the Internet
 Education: Universities outsource courses to contract
professors that teach in class or over the Internet (massive
open online courses)
 This vertical disintegration increases the number of
choices for firms with respect to scope of activities

For Your Group Projects
 I recommend that you draw these diagrams for
your technology so that you understand the
 Different activities
 Who carries out these activities
 Who are customers, who are collaborators and who are
suppliers
 What do these customers, collaborators, and suppliers
want?
 Different ways that these activities can be reorganized

Source: Klepper and Simons, Industry Shakeouts and Technological Change

Similar Results Across
Multiple Countries
Source: Kenneth Simons

Looking at just
automobiles in U.S.

Implications of and Reasons for Shakeouts
 Number of firms is measure of opportunities; if number of
firms is growing, new opportunities are emerging
 Shakeouts in number of firms suggests there is a narrow
window of entry for firms
 Firms should probably enter before a shakeout occurs
 Reasons for shakeouts
 Many reasons but economies of scale is probably most
important: economies of scale in manufacturing, sales,
distribution, purchasing, R&D (research and development)
 These economies of scale emerge as similarities in the different
designs emerge (dominant design?)
 Some industries exhibit economies of scale more than do other
industries

Scale often Increases over an Industry’s Life
 Economies of scale favor largest firms
 Largest firms can expand scale more quickly than smaller firms
 This leads to lower costs, higher sales, and thus opportunities
for greater scale
 Thus scale is one method of strategic control (one part of
biz model); one way to ensure above average profits
 This is one reason why
 firms with largest share often have the highest profits
 GE’s Jack Welch (was most famous CEO in U.S. for many
years) required GE’s businesses to be #1 or #2 in market

Economies of Scale in R&D
 R&D is a fixed cost in many industries
 Firms must spend a certain amount on R&D just to introduce
good products and participate in industry
 Largest firms can spend more on R&D and thus
introduce more products and obtain higher shares
 Positive feedback between R&D, new products, and share
 Initially successful firms can spend more on R&D, which
lead to better products, higher profits, more money for R&D
 But it is not just a matter of producing more products!
 you must sell products with a good value proposition to the
right customers and with the right method of value capture!
 and the products must require similar R&D

Many Examples of Economies of Scale in R&D and
thus a Shakeout in the Number of Firms
 Examples
 Automobiles, typewriters, television receivers, TV Picture
tubes, Movies (think about sequels)
 Hard disks, mobile phones, video recorders/players, nuclear
power equipment suppliers, commercial aircraft
 Implications
 Most firms end up losing money and exiting industries
 Even if you are making money, if you are small, it may be
better to try and be acquired
 Another option is to find a niche (i.e., submarket) that
requires different forms of R&D, manufacturing, sales, etc.

Shakeouts Do Not Always Occur (1)
 Steven Klepper’s (1997) study found that a shakeout only
occurred in 27 of 46 industries
 Klepper Received Global Award for Entrepreneurship Research
in 2011 (100,000 Euro prize)
 Economies of scale did not emerge when
 different market segments require different types of R&D –
these differences reduce the economies of scale from R&D in
e.g., lasers and business jets
 vertical disintegration emerges and enables new entry by firms
from other industries or entrepreneurial startups
 Interestingly, emergence of similarities in laser designs
(tunable laser) has subsequently led to shakeout
 Source: Klepper S and Thompson 2006. Submarkets and the Evolution of Market
Structure, The RAND Journal of Economics 37(4): 861-886.

 Klepper’s (1997) analysis of vertical disintegration
focused on equipment suppliers for manufacturing plants
 process specialists/independent suppliers of manufacturing
equipment for zippers, petrochemicals, and diapers
 Reduced the scale of R&D needed for final product
manufacturers and thus enabled the entry of new manufacturers
 This module will look at many forms of vertical
disintegration and
 But vertical disintegration may have larger impact on
electronics industries
 Reduces the scale of R&D needed to introduce new products
and thus enables entry of new suppliers of ICs, software, and
final products

Sector # of firms Sub-markets Vert. Disintegrat.
IT >100,000 Applications
End Users
In every type of
computer
ICs/Semi >1000 in U.S. Electronic
products
Systems & IC
Design & foundry
Broad-
casting/
program-
ming
>10,000 radio
>1000 TV
>10,000
programming
(U.S.)
Different
locations and
genres for
programming
Between
manufacturers
broadcasters, and
program producers
Internet uncountable uncountable Many

 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
 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
The Data: The Billion Dollar Startup Club

The Top 27 Firms as of May, 2015
Company Latest Valuation Total Equity Funding Last Valuation
Xiaomi $46.0 billion $1.4 billion December 2014
Uber $41.2 billion $4.6 billion December 2014
Palantir $15.0 billion $1.0 billion September 2014
Snapchat $15.0 billion $815 million March 2015
Flipkart $15.0 billion $3.0 billion April 2015
SpaceX $12.0 billion $1.1 billion January 2015
Pinterest $11.0 billion $1.3 billion February 2015
Airbnb $10.0 billion $800 million April 2014
Dropbox $10.0 billion $607 million January 2014
Lufax $9.6 billion $488 million March 2015
Theranos $9.0 billion $400 million June 2014
Didi Dache-Kuaidi Dache $8.8 billion $828 million April 2015
Spotify $8.4 billion $921 million May 2015
DJI $8.0 billion $105 million May 2015
Meituan $7.0 billion $1.1 billion January 2015
Square $6.0 billion $495 million August 2014
WeWork $5.0 billion $569 million December 2014
Zenefits $4.5 billion $584 million May 2015
Cloudera $4.1 billion $670 million March 2014
Dianping $4.0 billion $1.4 billion March 2015
Stripe $3.5 billion $190 million December 2014
Jawbone $3.3 billion $531 million February 2014

Billion Dollar Startup Club by Category
Software, Big Data, Cloud Computing (33)
e-commerce (25)
Consumer internet (22)
Financial services (11)
Hardware: phones, wearable computing (10)
Healthcare (5)
Energy (3)
Entertainment and Games (2)
Aerospace and defense (1)
Real Estate (1), Education (1)
Note: this includes
firms that exited
for total of 114 firms

More Details on the Categories
 Software (33)
 Cloud computing, big data, online ads, security, database, integration
platforms, many types of tools
 e-commerce (25)
 Mostly mobile sites including specialty sites for fashion, clothing, interior
design
 Consumer internet (22)
 Taxi apps, social networking, food delivery, music, hotels, discount coupons
 Financial services (11)
 P2P lending, mobile payment, micro-financing
 Hardware (10)
 Phones, drones, wearable computing, rugged cameras, vision-based driver
assistance, thermostats
 Other (13)

 Cloud Computing: Dropbox, Pure Storage (also hardware), Nutanix,
Jasper Technologies (IoT), AppDynamics, Box
 Big Data: Palantir, InsideSales.com, 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
More Details on Software Startups
(Many reflect greater specialization/vertical disintegration -
Four focused mostly on smart phones)

 Many focus on fashion: better web experience through
improvements in Internet and access devices
 Clothing, accessories: Fanatics, VANACL, Trendy Group, Gilt Groupe,
Mogujie, JustFab, Fab, LaShou, Zalando
 Furniture, interior design: Home24, Honest Co, Beibei, FarFetch, Wayfair
 Other: Meituan, Warby Parker (eyeglasses)
 Many from Asia: Internet growth enables opportunities
 India: Flipkart, Snapdeal, Auiker (mobile classified)
 China: Koudai, JD.com
 Korea: Coupang,
 SE Asia: Lazada Group
 Others: Coupons.com, ContextLogic (optimizes adspace for
ecommerce sites)
More Details on Ecommerce Startups
(15 of 25 depend primarily on smart phone sales)

 Taxi apps: Uber, Didi Dache-Kuaidi Dache, Ola Cabs, Lyft,
Grabtaxi
 Social Networking: Houzz (interior design), NextDoor
(neighborhoods), Eventbrite (event management), Yello
Mobile (mobile shopping), Lamabang (babies)
 Food delivery/restaurants: Delivery Hero, NextDoor, Zomato
 Music, photos, video: Spotify, Shazam, Pinterest, Snapchat
 Other: Tango (video, voice calling), Rocket Internet (builds
online startups), Airbnb (hotels), Dianpping (discount
coupons)
More Details on Consumer Internet Startups
(18 of 22 depend highly on smart phones)

 P2P lending: Lufax, Prosper Marketplace,
Social Finance, Funding Circle, Lending Club
 Mobile payment: Stripe, One97
Communications, Adven
 Micro-financing: Hanhua Financial
 Other: Powa (solutions for online commerce),
Credit Karma (credit info for consumers)
More Details on Financial Services Startups (most
depend highly on smart phones)

 Wearable computing: Jawbone, Magic Leap
 Phones: Xiaomi
 Drones: DJI
 Rugged cameras: GoPro
 Game hardware: Razer
 Vision-based driver assistance: Mobileye
 Audio products: Beats Electronics
 Thermostats: Nest Labs
 Enterprise storage: Infinidat
More Details on Hardware Startups

Why so Many Internet-Related Startups?
 Growing use of Internet, from desk-top, laptop, tablet,
and smart phone (all over world)
 Increasing speed and bandwidth and falling cost of
Internet (including more free WiFi)
 Increasing performance and falling cost of desk-top,
laptop, tablet, and smart phones
 Above three drive increases in Internet usage
 Above four enable better content and services including
greater diversity of content and services

Why so Many Internet-Related Startups? (2)
 Part of this is driven by Moore’s Law
 Also driven by cheaper and better displays, magnetic
storage, lasers, photo-sensors, optical fiber
 Most of these technologies are experiencing >30%
annual improvements
 These improvements drive
 Increasing speed and bandwidth and falling cost of
Internet (including more free WiFi)
 Increasing performance and falling cost of desk-top,
laptop, tablet, and smart phones

Conclusions (1)
 We can characterize the evolution of industries/technologies
in terms of
 Technological discontinuities
 Markets and products
 Performance, price and costs
 Vertical (dis)integration
 Number of firms and thus numbers of opportunities

Conclusions (2)
 The evolution of an industry/technology impacts on the
 Type of products/value proposition that a firm should consider
offering
 Segments that a firm should consider targeting
 Scope of activities that a firm should pursue
 Method of value capture
 Method of strategic control
 Subsequent Sessions will talk about these things in more
detail

For Your Presentation
 Think about the changes that are occurring your industry or
with your technology
 Then think about the impact these changes are having on the
business model
 Don’t just describe a firm’s business model
 Understand how change creates the need for a new business
model, because these changes represent opportunities
 In any case, you must justify your decisions

Biz model 2 what drives need for change

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