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Biz Models for High-Tech Products

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These slides introduce a course on business models. The slides for subsequent sessions can also be found on this slideshare account.

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Biz Models for High-Tech Products

  1. 1. BUSINESS MODELS FOR HI- TECH PRODUCTS (MT 5016): WHAT IS A BUSINESS MODEL? A/Prof Jeffrey Funk Division of Engineering and Technology Management National University of Singapore
  2. 2. New Products Continually Emerge
  3. 3. Lots of Questions  Which ones will succeed?  Which ones will fail?  How can we increase the chances of success?  How can we increase the chances of OUR success?  How can OUR firm succeed to the extent that OUR firm is in the top 100 market capitalization  Google, Facebook, Tencent were founded in the last 15 years
  4. 4. New Product Success is not about Following Rules  It is about SETTING the rules in the new industry!  Setting the rules means BREAKING the existing rules  What should the new rules be for the new industry?  How should new rules be different from old rules?  This is completely different from science and engineering modules!  Science and engineering modules tell you about the rules of science
  5. 5. The Concept of a Business Model  Can Help Us  Position Our Products Against  other products and other firms  other technologies including the old one  for which customers?  Find and obtain revenues  Position our product in overall value chains  Think about future entrants and long-term profitability
  6. 6. Module Objectives  To understand  business models  their impact on competition between firms  how different business models are needed for different situations  what drives need for change in business models  Similarities/differences between business models and strategies  To develop a business model for a firm and technology in a group project
  7. 7. Outline: Elements of a Business Model  Customer selection: whom to serve and not serve  Value proposition: what to offer and how to differentiate  Value capture: what are dominant sources of revenues  Scope of activities: what activities to carry out and what relationships to have  Strategic control: how to sustain profitability, create barrier to entry Source: Stephen Bradley’s “Capturing the Value,” HBS Video
  8. 8. Breaking the Rules  Customer selection: find new customers who are unsatisfied or find new needs that are unfilled  Value proposition: offer new forms of value  Value capture: find new sources of revenues that are different from ones in the past  Scope of activities: participate in a different set of activities than firms have done in the past  Strategic control: create a new barrier to entry that is different from the ones in the past
  9. 9. Outline: Elements of a Business Model  Customer selection: whom to serve and not serve  Value proposition: what to offer and how to differentiate  Value capture: what are dominant sources of revenues  Scope of activities: what activities to carry out and what relationships to have  Strategic control: how to sustain profitability, create barrier to entry
  10. 10. Customer Selection  Who are the potential customers?  What are the customer needs and wants?  Do different customers want different things?  How can we use this information to segment the market (see following slides)?  Are there collaborators who can also be thought of as customers (see following slides)?  Which customers will probably be the first adopters of a new technology?
  11. 11. What is a Need?  Understand needs from perspective of:  Economic – what are the costs and benefits?  Functional – what does a product do?  Psychological value – how do I feel and what makes me feel better?
  12. 12. What is a Need? Today’s Business Customer Needs Unarticulated Articulated Customer Types Served Unserved
  13. 13. Segmentation and Targeting  Categorize customers in groups with distinct needs  Understand the differences between product and market segments  Select segment (s) that have the best short and long-term prospects for the firm  If a new technology, they must be early adopters of new technology  Many ways to segment markets
  14. 14. What About Collaborators?  Many products have multiple customers or collaborators who might be considered customers  Who are they?  They might be  retail outlets  providers of complementary products or complementary services  How does the business model fit with these collaborators?
  15. 15. Outline: Elements of a Business Model  Customer selection: whom to serve and not serve  Value proposition: what to offer and how to differentiate  Value capture: what are dominant sources of revenues  Scope of activities: what activities to carry out and what relationships to have  Strategic control: how to sustain profitability Source: Stephen Bradley’s “Capturing the Value,” HBS Video
  16. 16. Value Proposition Value to the target market Benefits to the target market Price to the target market = Relative to A simple and clear statement of the intended target market, the benefits of the offering, and the price New technologies/products diffuse because they offer a superior value proposition to users But you must provide more details than just a simple and clear statement!!
  17. 17. Value Proposition  What constitutes a good value proposition?  Speed, resolution, efficiency, energy usage?  Features, aesthetics, convenience, happiness, humor?  Usability, compatibility, reliability, durability?  Easier said than done! Don’t follow the old rules! Rethink your assumptions and market assumptions!  Value Proposition closely related to customer selection  Different value propositions are appropriate for different customers  In a search for a good value proposition, one must consider different value propositions along with different customers
  18. 18. For Your Group Presentation (1)  Choose a new technology that has recently been introduced or will soon be introduced  Don’t look too far into the future  Choose an existing firm that might or should introduce the technology because the technology is consistent with the firm’s core competencies
  19. 19. For Your Group Presentation (2)  Defining a value proposition should help you segment and target markets  Some segments will adopt a new technology faster than will other segments  You must identify and target those segments  Ideally you will know the order in which segments/users adopt the new technology  Then you must contrast your firm’s product or service with the competitors’ product or service for the target segment(s)
  20. 20. Justification and Quantitative Data  You must justify and/or quantify your data  The justification is more important than the data  Make sure you consider all the important dimensions  Finding a new dimension is often a major source of advantage in the market  All dimensions aren’t created equally  Quantifying each dimension of performance is useful, albeit sometimes difficult
  21. 21. One Way to Compare Value Propositions But does this comparison tell us which product provides users with more value?
  22. 22. Outline: Elements of a Business Model  Customer selection: whom to serve and not serve  Value proposition: what to offer and how to differentiate  Value capture: what are dominant sources of revenues  Scope of activities: what activities to carry out and what relationships to have  Strategic control: how to sustain profitability Source: Stephen Bradley’s “Capturing the Value,” HBS Video
  23. 23. What percent of total value can a firm (i.e., seller) collect? and its collaborators
  24. 24. Old Manufacturing Uber Apple Microsoft’s Windows YouTube, Google Facebook IBM Linux Code Linux Kernel Wikipedia Blogs In-house Community-Driven Value Creation ValueCapture Eco-systemCompany Collaborators Create an Increasingly Large % of Value and Providers Expect Smaller % of Value Source: Chesbrough and Appleyard, 2007
  25. 25. Types of Value Capture in Business Models Revenue Model Basic Idea Commission Fees levied on transactions where fees are based on level of transaction Advertising End users subsidized by advertising Markup Value added in sales Production Value added in production Referral Fees for referring customers to a business Subscription Fees for unlimited use Fee for Service Fee for metered service
  26. 26. Large Changes for Revenue Models in Many Industries  Sources of value capture are changing in many industries including manufacturing industries  As with other elements of business models, you can’t just summarize the dominant source of revenues, you need to  Find and analyze other methods  Justify your choice  Creativity is an important part of a group presentation’s grade! Propose and analyze a new method of value capture
  27. 27. Outline: Elements of a Business Model  Customer selection: whom to serve and not serve  Value proposition: what to offer and how to differentiate  Value capture: what are dominant sources of revenues  Scope of activities: what activities to carry out and what relationships to have  Strategic control: how to sustain profitability Source: Stephen Bradley’s “Capturing the Value,” HBS Video
  28. 28. Scope of Activities  What do you make or do versus what do you buy or outsource?  Partly a cost decision, partly a strategic decision  Want to reduce costs  But also  want to develop capabilities  don’t want to become dependent on a single firm for a key component  Thus, make versus buy decisions determine the areas in which a firm intends to compete  But more importantly……..
  29. 29. Vertical Disintegration in Value Chains has been Emerging Over time  Represents the extent to which work is shared among different organizations in an industry value chain  Changes in vertical (dis)integration can come from technological, institutional, or social changes that impact on how organizations divide up work  In particular, reductions in transaction cost can reduce  costs of having work done by multiple firms  importance of integrative capabilities  and thus facilitate the emergence of vertical disintegration
  30. 30. Source: Christensen & Raynor, 2003 Vertical Disintegration
  31. 31. Another Reason for Thinking About Scope of Activities: Identify the flows of information, money, and products in system
  32. 32. Outline: Elements of a Business Model  Customer selection: whom to serve and not serve  Value proposition: what to offer and how to differentiate  Value capture: what are dominant sources of revenues  Scope of activities: what activities to carry out and what relationships to have  Strategic control: how to sustain profitability Source: Stephen Bradley’s “Capturing the Value,” HBS Video
  33. 33. Strategic Control  What enables a firm to be profitable with a new technology?  First mover advantages? Good design? Good performance? These are only important in the short run, In the long-run, most things can be copied  Why are Google, Facebook, Tencent, Microsoft and Apple so profitable and for many years? This is what drives venture capitalists!  This is the most difficult part of a business model  For your group presentations, you should think about this last, after you have determined the other elements of the business model
  34. 34. Barriers to Entry Determine Profitability  As firms enter, prices typically fall to a level at which “marginal prices equal marginal revenues” where  Profits barely support business  So creating barriers to entry is critical for achieving having above average profits. How can this be done?  Control key resource, Intellectual Property (IP), etc.  Might control key resource or asset through economies of scale  Control the way work is divided up among different organizations (e.g., through control of interface standards)  Network effects  Venture capitalists look for potential barriers to entry, not just good value propositions!
  35. 35. In Summary: For your group presentations  Tell me about the business model  Customer selection: whom to serve and not serve  Value proposition: what to offer and how to differentiate  Value capture: dominant source of revenues  Scope of activities: what activities to carry out  Strategic control: how to sustain profitability  You must justify your choices!  Start forming your groups (3 to 4 members) at the break (in about 45 minutes)  Consistency  among elements is critical  between business model and company capabilities

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