Executive Digest: managing resources, managing the crowd and disrupting industries http://jaegriffinpark.com/projects/cmr-digest/CMR_Digest_57_4.pdf

CaliforniaManagementReview
ExecutiveDigestVol. 57, No. 4

California Management Review Executive Digest Summer 2015 // Vol. 57, No. 4
2
Table of Contents
Balanced Workplace Flexibility: Avoiding the Traps 3
by Ellen Ernst Kossek, Rebecca J. Thompson, and Brenda A. Lautsch

Consumer Markets for Remanufactured and Refurbished Products 6
by James D. Abbey, Margaret G. Meloy, Joseph Blackburn, and V. Daniel R. Guide, Jr.
CGIP: Managing Consumer-Generated Intellectual Property 8
by Pierre Berthon, Leyland Pitt, Jan Kietzmann, and Ian P. McCarthy
Crowdsourcing-Based Business Models: How to Create and Capture Value 11
by Thomas Kohler
Overcoming Barriers to Entry in an Established Industry: Tesla Motors 14
by Kai Hockerts
Castlight Health: Disrupting the Healthcare Industry 17
by Kristiana Raube

3
Introduction
Many employees are reporting increasing pres-
sure to effectively manage both work and personal re-
sponsibilities, stating that work has started “interfering
with life.” This trend is the result of a variety of contrib-
uting factors, including growing elder care demands,
greater competition within the labor market as more
women work begin working full time, and an increase
in dual career and single parent families. To address
these pressures, many companies have instituted work-
place flexibility policies like telecommuting, leveraging
the increased portability of work by allowing employees
to work virtually anytime and anywhere. In 2012, 63%
of U.S. employers allowed at least some employees to
occasionally work from home. However, organizations
such as Yahoo and Best Buy have made headlines re-
cently with their decisions to retract flexible workplace
policies, as researchers have begun questioning the use-
fulness of flexibility for all employees.
Flexibility Traps
Flexibility policies and practices are doomed to fail un-
less the interests of all stakeholders -- flexibility users,
non-users, and the organization itself -- are respected
and addressed. There are three main traps that organi-
zations will experience when implementing new flexi-
bility policies.
The Altered Work-Life Relationship with Unintended
Consequences Trap
Flexible working arrangements can alter work-life rela-
tionships in ways that produce unintended consequenc-
es for users and that often go unaddressed. Research has
demonstrated that flexible work arrangements general-
ly have the effect of reducing the amount of physical
contact and interaction between co-workers, between
flexible employees and their supervisors, as well as be-
tween clients and the rest of the organization. For this
reason, employees with flexible work arrangements
may feel isolated and distant from the social life of the
firm. These employees generally felt less respected, and
felt less like full members of the organization. They may
also feel anxious about damaging their career prospects.
By being left out of key meetings, they may be passed
over for promotions and other opportunities. Flexibility
arrangements also pose problems for managers trying
to manage the performance of their employees. Manag-
ers may be unsure of how to support, monitor, and elicit
performance from virtual workers. In addition, flexibil-
ity can sometimes also change work-life relationships
to increase job or family creep: one study found that
employees who identified highly with both work and
family roles viewed themselves as “reactors,” constant-
ly responding to interruptions from work within their
personal life, and from their personal life during work
hours.
Balanced Workplace Flexibility:
Avoiding the Traps
by Ellen Ernst Kossek, Rebecca J. Thompson,
and Brenda A. Lautsch
Work-life balance has become more of a concern in the modern workplace. A
June 2014 White House report entitled Nine Facts About American Families and
Work revealed that 46% of working Americans said their job demands interfered
with their family life“sometimes or often.”
Tom à La Rue, Flickr (2011)

4
The Fairness Trap
The second type of trap relates to fairness. Many orga-
nizations have distributed flexibility options unevenly
creating “haves” and “have-nots” by allowing unequal
access to workplace flexibility. Tensions may emerge if
non-flexibility users feel that their own jobs and rela-
tionships have worsened as a result of their colleagues
flexible arrangements. Supervisors often serve as gate-
keepers, deciding whether or not individuals should
have access to telecommuting. If the decisions of these
supervisors appear arbitrary or do not afford all workers
access to some form of work-life flexibility, resentments
and perceptions of unfairness may damage workplace
relationships. It is common, for example, for managers
to think that flexibility is only for employees with visible
family demands, or superstar employees, or employees
with jobs that are less central to the main business. But
taking a case-by-case need-based approach to flexibility
access can create conflict among employees who want
flexibility but do not appear to “need” the arrangement
as much as others. In reality, a growing number of em-
ployees today want “a life outside work,” and managers
should not let a particular employee’s family status fac-
tor into the decision-making process in regard to flex-
ibility.
Culture of Unbalanced Flexibility Trap
It is necessary to create an organizational culture that
is “supportive,” or that encourages and enables individ-
uals to take advantage of the flexibility policies that are
available to them. It is clear that employees will not feel
free to use flexibility policies if they feel the programs
are inconsistent or unbalanced with work norms, likely
to damage career prospects, or in subtle (or not so sub-
tle) ways discouraged by supervisors. Flexible work ar-
rangements can actually undermine culture if they are
viewed as too one-sided in the social exchange of the
employment relationship, either in favor of employees
or employers.
Lesson One: Become“Flex-Savvy”
The first step to overcoming these flexibility traps is for
managers to become savvy about the different types of
flexibility options.
Flexibility in time allows employees to choose how
their total weekly work hours are allocated relative to
a traditional work schedule. Some examples include
flextime (different hours during the day), compressed
work weeks (like a 9/80 schedule), flexible shifts, and
part-year/seasonal work. Flexibility in time means em-
ployees may not overlap in the times of day they are
available for work tasks. Some employees may find that
there is a certain stigma attached to working non-tradi-
tional hours -- a common trap that can make it difficult
for flexibility users and non-users to effectively working
together.
Flexibility in location allows employees to choose where
they conduct their work relative to the main work site.
This allows employees to work away from the office,
supported by electronic resources, for some or all of
their work week. Examples include telework and remote
work. One trap commonly associated with flexibility in
location policies includes increased perceptions of iso-
lation and an unsupportive workplace culture. Cowork-
ers and clients may be reluctant to reach out to or call
colleagues at home. Similarly, flex nonusers may feel
unable to work remotely on projects with flexplace us-
ers as they may prefer face-to-face interaction.
Amount of work policies involve employees engaging in
part-time work, reduced-load, and job sharing. Con-
tinuity of work flexibility allows employees to modify
their work arrangement or even their career trajectories
in order to accommodate temporary events or challeng-
Telecommuting, a flexible location arrangement, allows employees to
work from home.
Mike McCune, Flickr (2015)

5
READ FULL ARTICLE ►
es outside of work (e.g. death in the family, illness, di-
vorce, and personal time). Users of these types of flexi-
bility policies may experience unsupportive workplace
cultures as well as negative effects from non-users. Co-
workers may feel that they have to “pick up the slack”
when other employees work a reduced load, and may
therefore be less supportive of those colleagues.
Lesson Two: Effective Workplace Flexibility
Implementation
Many managers think about workplace flexibility ac-
cess as an individual accommodation. A more effective
option is to consider the whole workplace as a social
system and to implement flexibility across it, but not
in a one-size-fits-all manner. This systemic approach
to flexibility is a paradox: a whole-systems perspective
of work that allows for customized work arrangements
for individuals in order to maximize productivity for
the organization as a whole.
Northern Trust is a large global bank that successful-
ly implemented a company-wide flexibility initiative
called Worksmart. The company initiated Worksmart
because of rising costs of real estate and office space
expansion in urban locations, the need to work across
many global time zones, and employees’ growing com-
mutes and desires for flexible arrangements. Rather
than initiating telework in response to individual em-
ployee requests or based on each manager’s leadership
style, whole work groups undergo an analysis of busi-
ness processes before migrating to a Worksmart ar-
rangement. During analysis, workers and teams were
surveyed and answered questions about their work
styles catered to designing the best arrangement. A key
requirement was for managers to develop formal rules
and team charters for “working smart.” These rules es-
tablish protocols to be used for communication pro-
cesses, ensuring security, and delineating daily work
locations.
Implications
Workplace flexibility initiatives are increasingly seen as
a critical component of a results-driven organization.
TheNorthernTrustcaseillustratesabalancedapproach
to flexibility. It demonstrates that implementing flexi-
bility isn’t necessarily about reducing restrictions -- in
fact, formal rules and policies are absolutely necessary.
Without a shared understanding of how work is to be
completed, and confidence in the ability of colleagues
to take over, it is difficult for dedicated individuals to
take advantage of flexibility. Whole-systems flexibility
requires balance across the interests of all stakeholders,
who by nature have different preferences about how to
blend their work and personal lives. An ideal system
combines rules to facilitate continuous coordination
across staff, and yet manage boundaries between home
and work in ways that make sense for individual iden-
tities and personal commitments. Developing metrics,
common protocols, conducting risk analysis, and im-
plementing outcomes-focused assessment programs
can help ensure an effective rollout of balanced flexi-
bility policies. ■

6
Consumer Markets for
Remanufactured and
Refurbished Products
by James D. Abbey, Margaret G. Meloy, Joseph
Blackburn, and V. Daniel R. Guide, Jr.
Introduction

Product returns are no longer a trivial matter in the
United States, with retail returns representing a stag-
gering 8.60% of sales ($267.3 billion worth of returned
products) in 2013. In many cases, consumer returns
are not due to a defect in the product, but are instead
perfectly functional “convenience returns,” which
occur when someone changes their mind about a
purchase. These types of returns are called false fail-
ures, and can represent up to 80% of returned cus-
tomer products. The products retain significant value
-- many are effectively still new products -- and repre-
sent a major opportunity to generate additional profit
through remanufacturing. However, remanufacturing
has multiple barriers that must be understood and
addressed.
The Remanufactured Product Paradox
Remanufacturing is a direct form of reuse that con-
verts returned products into “like new” condition for
resale. In recent years, remanufacturing has taken
on many names, such as reconditioned, refurbished,
recertified, certified pre-owned, and more.
Unfortunately, from a manufacturer’s perspective, the
sale of recovered goods is often a source of anxiety --
but for two seemingly opposing reasons. First, product
managers fear that consumers might find remanufac-
tured products unappealing, leading to difficulties in
marketing. And second, managers also harbor con-
cerns about cannibalization, worrying that remanu-
factured products will directly compete with the sales
of their new, higher priced products. Research shows a
seeming paradox in that both of these views are cor-
rect.
A better understanding of this paradox comes from an
analysis of consumer responses across five major areas:
pricing, branding, quality perceptions, green consumer
perceptions, and the unexpected perception of repul-
sion or disgust found among certain consumers. While
many consumers saw the positive aspects of remanu-
factured products and were more likely to buy -- good
value, “like-new” quality -- there were also a significant
number of negative associations that made people less
likely to buy -- in particular the associations of “dirty,”
“worn,” and “disgusting.”
Drivers of Consumer Demand:
Quality Perceptions and Pricing
The two greatest drivers of consumer demand in mar-
keting remanufactured products are quality percep-
tions and pricing. First, ensuring that consumers know
that the remanufactured product is of good quality
through advertising and education is crucial. As noted
earlier, some consumers will never believe that the
remanufactured product is of equal quality. But for a
sizeable portion of the consumer market, improving
quality perceptions played a dominant role in encour-
aging interest. Next, understanding how to strategically
price new and remanufactured products in an overall
portfolio is very important. Strategically discounting
off the suggested retail price of new products greatly
increased consumer interest in remanufactured prod-
ucts. One key finding suggests that discounting only
increases the desirability of the remanufactured prod-
uct up to approximately 40% off full price before the
benefits of additional discounting leveled off.
Barriers to Adoption: Segments, Branding,
and Green
Analysis also revealed some surprising insights about
the barriers to purchasing remanufactured products.
First, as noted, a sizeable portion of consumers will
not consider purchasing a remanufactured product at
any price -- even at a 95% discount. This could be the
result of deeply ingrained beliefs held by an estimated
20-40% of the consumer population. Second, brand-
ing for new and remanufactured products appears to
function in different ways. For new products, high
brand equity distinctly improved perceptions of quality
and trustworthiness. Yet, when those same brands

7
were associated with a remanufactured product, the
benefits of high brand equity vanished. Some brands
handle the potential negative effects of selling reman-
ufactured goods on their brand image by outsourcing
their consumer product remanufacturing operations
and sales. Finally, it has been demonstrated that there
was very little increased appeal for remanufactured
products among environmentally conscious consum-
ers. Though consumers and businesses have embraced
both recycling and reduction, reuse has been employed
less frequently.
Strategic Implications for the
Product Portfolio
These findings present challenges and opportunities
for managers developing a product portfolio that in-
cludes remanufactured products.
Discounting is an effective means of increasing the
desirability of remanufactured products. But instead
of heavily discounting the remanufactured product
initially, research suggests that slightly increasing the
price of the new product when the remanufactured
product becomes available will counteract the effects
of cannibalization.
Establishing green initiatives can also be very effective.
Though not found to be the most critical determinant
in the purchase of a remanufactured product, the lack
of green interest is likely due to the fact that many
consumers do not think of remanufactured products as
green products. After reminding / educating consum-
ers that remanufactured products are environmentally
friendly as a form of reuse and landfill avoidance, the
majority of green consumers found the remanufac-
tured products more appealing. As such, education
through appropriate packaging, advertising, and green
certifications may hold promise for reaching the grow-
ing green consumer segment.
Managing perceptions is also critical. The disgust
perception played a prominent role in reducing over-
all interest in remanufactured products. Reducing the
perception of disgust is not easy, but it has been shown
that certain types of products elicit a greater disgust
reaction than others. Remanufactured earbuds, razors,
and electric toothbrushes were not desirable. Reman-
ufactured laptops and other appliances, on the other
hand, could be made more appealing through effective
advertising.
Implications
Offering remanufactured products as part of an over-
all product portfolio can generate significant benefits.
Many companies -- such as Dell, HP, and a host of
third-party remanufacturers -- have improved profit-
ability with remanufactured product offerings that can
allow competitive positioning with products targeting
a wider swath of consumer segments. The biggest chal-
lenges involve overcoming consumers’ perceptions of
remanufactured products as being of inferior quality,
or even worse, disgusting or unpleasant. But through
effective discounting, and positive marketing that em-
phasizes a remanufactured product’s quality, value, and
environmental friendliness, these products can repre-
sent another powerful source of revenue for product
managers. ■
Remanufactured products, like this Apple iPod, are sold at discount prices,
increasing their appeal to consumers. Electronics and appliances remain the
most desirable candidates for resale.
FHKE, Flickr (2006)

8
CGIP: Managing Consumer-
Generated Intellectual Property
by Pierre Berthon, Leyland Pitt, Jan Kietzmann, and
Ian P. McCarthy
Introduction
Two related trends characterize the recent past: value
propositions are migrating from the physical realm
to the informational, and value creation is shifting
from firms to consumers. These two trends meet in
the phenomenon of “consumer-generated intellectual
property” (CGIP). In 2009, when Facebook was in its
infancy, its management was amazed to discover that
Vin Diesel, the cult movie star, had over one million
“likes” (he now has well over 86 million). This number
was an order of magnitude more than that of any
other person, and the traffic generated by Vin Diesel’s
content alone undoubtedly contributed to the social
network’s viral growth. “Facebook owes me billions
of dollars for boosting its profile,” he later remarked.
While Diesel obviously benefitted by gaining exposure
for his personal brand, he didn’t receive any money
from Facebook. Worse yet, due to Facebook’s IP policy,
the content that he created and shared on the site was
no longer exclusively his -- it now also belonged to
Facebook.
This is not an uncommon story: much of the value
and intellectual property in the 21st century lies in
information generated by customers, consumers,
and users, rather than by firms themselves. Today,
information is increasingly the basis of value, and
consumers are sometimes considered co-creators.
Clearly, there is value in the intellectual property that
customers generate. The dilemma that firms face is
in managing that IP. With little management, firms
risk losing control over the potential innovations and
revenue streams from CGIP. On the other hand, there
is the very real possibility of alienating consumers,
especially the most creative consumers, by appearing to be
dictatorial and acting like a bully. Being too controlling
might easily reduce the submission of the best content
and ideas.
CGIP and the Creative Consumer
While consumer creativity is not a recent phenomenon,
CGIP is a far more prevalent issue today. This is a result
of the popularity of powerful networking systems (like
the Internet), product malleability, and the ready avail-
ability of inexpensive creativity tools.
The valence of consumer creativity and its effects on
a firm’s own proprietary offerings can vary from the
negative to the positive. When methamphetamine was
banned following World War II, the demand for it as
a recreational drug inspired its production by creative
A participant at the DroidCon Berlin 2015 hackathon interacts with her robot. Platforms like Lego
Mindstorms allow consumers to produce meaningful IP on their own.
droidcon, Flickr (2015)

9
individuals who used over the counter cold medicine to
cook “crystal meth” at home, leading to a prohibition of
popular medications from well-known brands such as
Sudafed, Advil, and Theraflu. On the positive side, Toy-
ota -- a company that used to frown upon modifications
to its products -- had to take notice when Prius owner
Ron Gremban altered his car to achieve far superior en-
gine performance and driving distance, along with the
ability to charge within his garage.
In addition, the nature of consumer creativity ranges
on a spectrum from simple to complex. When Sony
launched their AIBO electronic pet in 1999, AIBO
could perform certain movements and behaviors. Per-
haps bored with the limited range of actions, hackers
quickly accessed AIBO’s operating system to make their
cyperpets dance and perform a wide range of “unau-
thorized” actions, for which Sony threatened legal ac-
tion. The complexity of the dilemma depends on the
nature of the consumer’s creativity. Consumers hacking
the product and sharing this information as a member
of a community built around the product/brand would
probably find their efforts more valuable than someone
not in a community. The stakes are highest for both the
consumer and the firm when the consumer not only
hacks the firms product, but then broadcasts and dis-
tributes this by selling the hack.
Sharing Information and Creations
A firm has two basic options with regard to CGIP: it can
either be positively or negatively disposed to it.
Positive responses include cultivating, under which a
firm helps consumers generate IP without any attempt
to capture and control it (Lego Mindstorms), coordi-
nating, under which the firm facilitates creation in the
interest of using CGIP as a means of attracting more
customers (Facebook), and cooperating, when a firm
encourages consumer creativity in order to share the
returns of CGIP between the firm and the customer
(T-shirt design competitions on Threadless). Finally,
firms can also respond by capturing, encouraging con-
sumers to generate CGIP that it can then convert into
its own IP (Quirky).
Negative responses include condoning, in which a firm
may actually be negative to CGIP, but chooses to turn a
blind eye, condemning, under which firms clearly dis-
approve of what they perceive to be infringements on
their IP (Apple’s stance on “jailbreaking” their devices),
crushing, in which firms take decisive action against
perceived IP violations (Sony’s reaction to AIBO hacks),
and finally copying, under which firms ignore the cus-
tomer and simply appropriate his or her invention by
copying it without explicit permission.
Intellectual Property and Emotional Property
Increasingly in the modern world, we view information
as a mode of engagement that can be seen as contain-
ing both an emotional (visceral, subjective) as well as an
intellectual (factual, objective) component. Information
is both comprehended and felt, and as a result, effective
management of CGIP without recognizing the emo-
tional aspect can be problematic. Thus consumer gener-
ated intellectual property could be said to be emotional
property. Viewed this way, the backlash against certain
companies’ appropriation of CGIP is understandable.
Soby’s AIBO ERS-110, an animatronic“pet,”was sold in 1999 and subsequently
hacked by enthusiasts.
Morgan, Flickr (2010)

10
As a result, the manner in which CGIP is appropriated
and to what ends it used become important consider-
ations. Recognizing the de facto existence of consum-
ers’ emotional property is the first step. Then manag-
ers must understand the range of values in emotional
property -- from low to high. A simple product review
on Amazon may represent low emotional value to the
poster. In contrast, a piece of music that a consumer has
composed, recorded, and posted on YouTube is very
likely to have high emotional value to the creator. Firms
usually only care about intellectual property and their
control over it, while the consumer’s emotional proper-
ty should factor in equally when determining a course
of action.
Strategic Responses
Where the creation has a low emotional property value
to the consumer, as well as low control over intellectual
property value by the firm, the strategic options are to
condone or to condemn. When someone uses a copy-
righted song in a wedding video uploaded to YouTube,
a media company may condone or condemn the usage.
Taking aggressive legal action would not only be too
time-consuming, it could also potentially damage the
company’s reputation.
Wherethecreationhashighemotionalpropertyvalueto
the consumer, but the firm has limited potential to con-
trol the intellectual property, the strategic options are to
cultivate or coordinate. Lego cultivated the creativity of
their consumers by creating a community where users
could share designs. Facebook coordinates the collec-
tion of millions of photographs every day, which have
low inherent value to the company but serves to attract
more customers.
Where the creation has low emotional property value to
the consumer, and the firm has high potential to con-
trol the intellectual property, the strategic choices are
to crush or to copy. Sony perceived that the hacks by
individual owners of its AIBO product had low emo-
tional property value, and chose to crush their efforts by
issuing cease and desist letters.
Finally, in the instance where the creation has high emo-
tional property value to the consumer and the firm has
high potential to control the intellectual property, the
strategic choices are to cooperate or to capture. Thread-
less chooses to cooperate with its customers, because it
realizes that their designs hold high emotional property
value to both the creators and the firm.
Implications
CGIP raises critical issues for managers who need to
consider how their firms are going to deal with the myr-
iad dilemmas and opportunities that emerge as a result.
A firm’s stances toward CGIP can be either positive or
negative, and there are four positive and four negative
strategies that firms can implement when addressing
this type of IP. CGIP is plentiful, in part because in-
formation -- unlike a physical product -- can be given
away by the consumer. This is particularly true now that
consumers can easily communicate, share, and improve
on their ideas. Beyond information alone, intellectual
property increasingly gains emotional aspects of attach-
ment, and creations could be said to have emotional
property. Firms should take emotional property very
seriously, because failing to respect the emotional value
a consumer places on his creation can have damaging
legal and financial consequences for a firm. Astute man-
agers will look beyond the boundaries of the organiza-
tion to evaluate not only the intellectual, but also the
emotional property of creative consumers, and select
their CGIP strategy accordingly. ■

11
net’s high degree of openness has stimulated many new
models of participation. Third, these business models
transfer value-creating activities to a crowd. As the plat-
form leader, the company facilitates interactions and
exchanges along the entire process of value creation.
Extrapolating from these elements, it is possible to de-
rive three types of platform business models geared
toward external innovators. In the integration platform
model, the platform takes contributions from the crowd
and sells them to consumers. With the product platform
model, creators build on top of a technology or a basic
product and then sell the resulting products to the con-
sumer. In this model, creators directly transact with end
customers. On two-sided or multisided platforms, cre-
ators and customers interact directly. The two sides can
overlap when the producers are also consumers.
The success of companies embracing crowdsourc-
ing-based business models illustrates their effective-
ness in enabling significant value capture. Threadless
is built upon a creative and passionate art community
of 120,000 designers who compete for designs that will
be produced by the company. Lego Ideas is highly prof-
itable by sourcing product ideas from the community
and then selling them through their existing mass-mar-
ket channels. And many two-sided platform also suc-
cessfully restructured value capture. The iOS App Store,
for instance, operates as a marketplaces that takes a cut
from each transaction, which goes to the bottom line.
But not all companies that try to develop a crowd-based
platform as so successful. CrowdSpirit, praised back in
2007, failed by 2013. Myoo Create failed even more rap-
Introduction
Technology has transformed individuals from mere
consumers of products into empowered participants in
value co-creation. While numerous firms experiment
with involving a crowd in value creation, few companies
turn crowdsourcing projects into thriving platform with
a powerful business model. Crowd-based businesses
enable organizations to embrace open innovation and
to harness the collective energy of a large number of
contributors. They capture a share of the value created
as profit and, depending on the platform model, share
revenue with the crowd. This model represents a funda-
mental shift in the way business is done.
A number of prominent new ventures have made
crowdsourcing the backbone of their business models,
and because of the participation and collaboration of
their networks, these organizations are rapidly trans-
forming industries. Successful crowdsourcing-based
business models are hard to replicate because of their
inherent community dynamics. Creating a thriving
business built around the crowd is difficult -- the goal
should be to engage an audience that has both the will-
ingness and capability to participate in value creation.
Crowdsourcing-Based Business Models
A business model represents the architecture of value
creation, delivery, and capture that an enterprise em-
ploys, and positions the firm within a surrounding eco-
system of competitors and collaborators. Crowdsourc-
ing-based business models consist of three elements.
First, companies building their business upon the crowd
need to adopt an open business model. Opening up cer-
tain processes and resources can transform a product
into an interactive platform. Second, crowdsourcing
platforms leverage technology to exploit social networks,
peer-to-peer technologies, user-generated content, and
mobile connectivity to invite participation. The inter-
Crowdsourcing-Based Business
Models: How to Create and
Capture Value
by Thomas Kohler
Flickr is a popular online photo-sharing and storage solution. All of Flickr’s
content is user-generated as part of its open platform.
Alexander Kaiser, Flickr (2008)

12
idly, in only two years. Even initial traction with crowd-
sourcing projects does not necessarily translate into
the type of thriving platform that is needed for success.
This is because crowdsourcing relies on a complex ar-
ray of human actions that require different sets of skills.
In transitioning to a business model based on crowd-
sourcing, certain key challenges include: embracing
customers as co-creation partners, enabling interaction
as opposed to selling products, promoting networked
value-creation, and relying on distributed value capture
strategies, where power is shared between the company
and the crowd.
Creating Value with the Crowd
Every crowdsourcing platform has three main actors:
the company, creators, and consumers. The role of the
company is to enable interactions with creators as well
as between creators and consumers. Thriving platforms
have enough consumers to make it worthwhile for cre-
ators to create; a lack of consumers discourages creators
and the platform will collapse.
Value Proposition
To begin, companies must identify a clear value prop-
osition to attract a crowd to participate. The core value
unit can be content (videos on YouTube), information
(description of how to solve a problem on Innocentive),
products (t-shirts on Threadless), technology (Kaltura’s
video platform) or designs (logos on 48hourslogo). In-
tegrator platforms make the process of creation more
efficient. The company should seek to perform a rele-
vant technical function and solve a business function
better than the competition. The core of Twitch’s value
proposition is the ability to effectively broadcast games.
It provides the crowd of creators with robust tools, and
an audience to help users achieve their goals.
Key Activities
But market-based mechanisms are not always sufficient
to ensure a strong value proposition. What unites crowd
members isn’t necessarily the company or a product, but
instead the promise of collaboration around a shared
purpose. The core goal of any crowdsourcing model
should be to connect interested parties, enabling cre-
ation, curation, and consumption related to that shared
purpose.
Customer Relationships
Crowdsourcing companies need to clarify the types of
relationships they want to establish with creators and
consumers. These relationships are driven by two main
motivations: attracting and engaging the crowd. One
method of scaling interaction is empowering top cre-
ators. This strategy brings creators closer to the com-
munity and can help in community growth -- manag-
ers should seek to highlight participatory behavior that
they want to see amplified.
Channels
All platforms have an infrastructure that provides the
basis for interactions. Often, these channels are a web
The“League of Legends”World Championship draws thousands of spectators
each year. Twitch is a popular open platform that enables the live-streaming of
video games.
artubr, Flickr (2012)

13
or mobile application. In addition, there are many dif-
ferent interfaces between the company and crowd that
serve as “interaction points,” and companies should
seek to develop multiple interaction points both on and
offline.
Key Resources
Effective business models built upon the crowd don’t
consider the crowd as an external entity from which to
source cheap labor, but rather as an integral part of their
business.
Key Partners
Partnerships can contribute trust and legitimacy to a
new platform. Partnerships with the goal of growing
and supporting the base of creators, extending the value
of the platform by integrating third-party products or
services, or developing new avenues of distribution are
the most effective.

Capturing Value with the Crowd
Once value is created, the question for the company
is how to capture part of that value as revenue. Typi-
cal monetization strategies are often not applicable to
crowd-based platforms. One option is for companies to
reduce operating costs -- this can be accomplished by
promoting more transparent usage rights that are favor-
able to the crowd. It is also possible to generate new rev-
enue streams. The most prominent are product sales,
where integrator platforms sell products co-created on
the platform, subscription fees, licensing, API usage
fees, selling complementary services (like consulting
and support), transaction fees, advertising, service fees,
and donations.
It is important for crowd-based platforms to always ca-
ter toward the motives of their creators. There are two
main ways to involve the crowd financially in value
capture: revenue sharing and prize money. But often
money alone is not what motivates a creative individual
-- recognition and respect within the community can
become an equally powerful form of currency.
Implications
Crowdsourcing raises a new set of strategic choices re-
lated to how value is created and captured by an orga-
nization. Crowdsourcing platforms have emerged over
the past decade as some of the most powerful and valu-
able business models to date, but achieving success as a
platform is not without obstacles. As a platform grows
and the market environment changes, the value cre-
ation and value capture processes should continuously
evolve. When making any changes to the business mod-
el, managers should be aware that subtle changes can
affect the crowd’s value creation in complex ways. By
studying crowdsourcing platform strategies that have
worked, managers can find ways to optimize their busi-
ness models for prosperity and durability. ■


14
Overcoming Barriers to Entry in
an Established Industry: Tesla
Motors
by Kai Hockerts
Introduction
Are certain industries so difficult to enter that they are
destined for lower levels of entrepreneurship and inno-
vation? The automobile industry’s high costs of entry,
economies of scale, and network effects from distribu-
tion, fueling, and service have led many to conclude that
new entrants have no chance. Tesla Motors has over-
come many barriers as a pioneer in bringing all-electric
consumer vehicles to market, scaling rapidly to twice
the market capitalization of Fiat Chrysler and half that
of General Motors or Ford, producing a top-selling lux-
ury car and proving that a startup can disrupt the status
quo in one of the most established industries.
Founded in July 2003, Tesla produced its first car, a
$110,000 Roadster, from 2008 through 2012. The com-
pany’s second car, the four door Model S, has been in
production since 2012 and has accelerated Tesla’s as-
cension within the industry. Prior to Tesla’s success, it
was widely assumed that the high costs of entry in the
auto market would allow incumbents to crush any new
competitors. “The higher the capital requirements, the
higher the barriers to entry… then you don’t see new
entrants, and you don’t see innovation,” observed Sili-
con Valley entrepreneur Elon Musk, Tesla’s initial inves-
tor, co-founder, and CEO. This observation didn’t deter
Musk, who viewed all of the barriers to entry in the auto
industry as ones that could be overcome.
Perspectives on Entrepreneurship in
Silicon Valley
Although other parts of the country and world are im-
portant sources of innovation, only Silicon Valley can
be rightly be called the “capital of technology.” As Musk
himself stated, “Silicon Valley has evolved a critical
mass of engineers and venture capitalists along with all
the support structure -- law firms, real estate, etc -- that
are actually geared toward being accepting of startups.”
When asked about the future of the automobile indus-
try, including the possibility of self-driving cars, Musk
noted, “Tesla’s a Silicon Valley company. If we’re not the
leader, shame on us.”
Musk’s perspective on entrepreneurship is rooted in the
startup mentality dominant in the Valley. In the world
of startups, Darwinian processes require that firms con-
stantly innovate and prune excesses in order to survive.
Musk turned his attention to developing electric vehi-
cles because he perceived that the “single largest macro
problem” affecting the world was the development of
sustainable alternative sources of energy. Rather than
waiting for a solution, Musk noted that “the only way
I could think to address [the problem] was through in-
novation.”
California’s Silicon Valley is a hotbed of entrepreneurial activity. Tesla CEO Elon Musk
attributes Tesla’s success within the automobile industry to the power of this region’s
culture of disruptive innovation.
Wonderlane, Flickr (2013)

15
When considering whether to enter an established and
competitive market, Musk maintained that it was crit-
ical to envision the state of the industry as it could be,
as opposed to how it is currently, while simultaneous-
ly ensuring that any vision could be converted quickly
into actionable ideas that could be readily implement-
ed. Due to the initial constraints common to all startup
companies -- limits in technology and initial capital --
Tesla began by developing a minimum viable product
that was costly and low volume: the Roadster. Their goal
was to bring a quality but niche product to market that
could be profitable at low volume and start generating
revenue for the young company. “The reason for [that]
strategy is that in order to take any technology to mass
market, it takes time and [many] design iterations,” said
Musk. “You also need economies of scale, so you’ve got
to have much bigger factories. In order to afford those
factories you have to raise a ton of money, and people
will only give you money if you have shown some prior
success.”

Silicon Valley Practices in the Auto Industry
Tesla states that its culture is to “move fast” and “con-
stantly innovate.” This agility and flexibility is central to
the company’s ability to react quickly and maneuver in
a space with many established incumbents with greater
resources and experience. Rapidly bringing their first
vehicles to market helped Tesla prove to consumers
and investors that relatively high-performance electric
cars were a viable possibility. In 2009, Robert Lutz from
General Motors stated, “All the geniuses here at GM
kept saying lithium-ion technology is 10 years away,
and Toyota agreed with us -- and boom, along comes
Tesla. So I said, ‘How come some tiny little California
startup, run by guys who know nothing about the car
business, can do this, and we can’t?’”
The company’s success is the result of several key choic-
es that reduced financial barriers to entry during the
early years of Tesla’s growth. In 2004, Tesla approached
Lotus to propose a partnership that would involve de-
sign, engineering, and contract assembly. Lotus also as-
sisted in supply chain analysis, and Tesla relied heavily
on the partnership for issues related to structure and
safety, even sourcing components from the same sup-
pliers. This modular relationship between the two or-
ganizations saved time and money during the develop-
ment of the Roadster. Further agreements with Daimler
in 2009 and Panasonic in 2010 established drivetrain
and battery agreements for the then upcoming Model
S. Toyota also played a pivotal role in 2010 by investing
$40 million for shares in Tesla’s IPO, and sold Tesla its
current manufacturing plant in Fremont, California for
$42 million.

Tesla implemented innovative and effective new policies
in its distribution, service, and charging infrastructure.
Tesla vehicles are delivered directly to customers, and
are sold at company owned-and-operated storefronts or
online -- avoiding existing dealerships entirely. Because
they are based on electricity, their cars only have a lim-
ited range that they can be driven before needing to be
recharged. The growing charging network that Tesla is
subsidizing was spurred by the “Destination Charging”
program that subsidizes the installation of $750 Tes-
la Wall Connectors at participating hotels, resorts, and
restaurants. Tesla is also constructing a network of
much faster charging stations (there are 445 now) that
charge at zero cost to the consumer -- this model is
based on the view of the charging network as equivalent
to “software” within the “hardware-software” paradigm
that Tesla has applied to its cars. Apart from charging,
another common concern about buying a Tesla vehicle
was service. Musk moved to quell concerns by instruct-
ing each of Tesla’s owned-and-operated service centers
to “never make a profit,” keeping the cost of service
low. By subsidizing one aspect of the ownership experi-
ence, Tesla is working to maximize the value of both its
“hardware” and “software,” cementing those benefits in
the minds of consumers.
Another novel aspect of Tesla’s approach was its deci-
Tesla’s Model S at a Delaware Lithium-Ion charging station.
Jeff Cooper, Flickr (2013)

16
sion to make all of its patents open source. This decision
flies in the face of theories that assume that businesses
must rely on restrictions to protect their market posi-
tion. “Our true competition is not the small trickle of
non-Tesla electric cars being produced, but rather the
enormous flood of gasoline cars pouring out of the
world’s factories every day,” Musk explained. “We be-
lieve that Tesla, other companies making electric cars,
and the world would all benefit from a common, rapid-
ly evolving technology platform.”
Implications
Tesla has shown that a Silicon Valley startup can enter
one of the most established industries of all. Rather than
looking at the market and assuming that it was too es-
tablished to disrupt, Elon Musk and the Tesla team saw
an unmet need and used innovation to fill it. By starting
with a minimum viable product, partnering with other
firms, recycling capital, and subsidizing aspects of the
electric vehicle network, Tesla has altered the landscape
of the auto industry. ■

17
Castlight Health: Disrupting the
Healthcare Industry
by Kristiana Raube
Introduction
Based in San Francisco, Castlight Health offers web-
based consumer comparison tools that show price and
quality metrics for tests and other medical procedures
performed by healthcare providers. Castlight offers
its tools through a business-to-business subscription
model, where the employees of its clients can research
health care costs before receiving care. The compa-
ny has received praise for its innovative approach
to health care price transparency. Founded in 2008,
Castlight grew rapidly; by 2014, the organization had
filed for its initial public offering, finalized a key da-
ta-sharing arrangement with Leapfrog Group Partners,
and had launched a new reference-based pricing (RBP)
product. The company gambled on the potential of
its RBP product to substantially increase operational
efficiency within the U.S. healthcare industry, claiming
that organizations could cut employee health costs by
$10,000 per worker by allowing them to transparently
select health care options based on capped prices. The
question was whether healthcare reference-based pric-
ing was a short-term trend or a sustainable long-term
model. While the company had shown that consumer
growth had been rapid, the organization had yet to
turn a profit and was operating at a loss of over $62
million on only $13 million in revenue in 2014.
Challenges in the U.S. Healthcare System
In 2013, healthcare expenditures in the United States
reached $3.1 trillion, or nearly 20 percent of gross do-
mestic product. However, the high cost of care did not
necessarily correlate with high quality of care. In fact,
the United States regularly lags behind other developed
countries in terms of quality and efficiency.
The U.S. healthcare industry is affected by the mis-
alignment of incentives among key stakeholders:
providers, payers, and consumers. Providers are the
physicians, pharmacies, and hospitals that deliver
services to consumers. Payers are the private insurance
companies, government agencies (like Medicare and
Medicaid), and self-insured employers that reimburse
providers for care. The industry operates on a fee-for-
service reimbursement model, paying providers for the
services performed, and thereby incentivizing them
to emphasize volume over value. Furthermore, there is
little transparency in the relationship between payers
and providers, leading to high variations in the price
and quality of service. Economic incentives for con-
sumers are also misaligned, as patients have typically
been shielded from full financial responsibility for
their care. These misaligned incentives cause problems
-- providers often over-prescribe services to increase
reimbursement without justifying the appropriateness
of care, and consumers can often demand additional
services because they are not directly responsible for
payment.
Price Transparency
In 2007, the National Center for Policy Analysis out-
lined a case for improved healthcare quality and lower
Giovanni Colella, Co-founder and current CEO of Castlight Health.
Christopher Michel, Flickr (2013)

18
costs resulting from increased patient consumerism.
The key to realizing the value of consumerism was
two-fold: first, patients needed to act as consumers
since they would be paying a larger out-of-pocket pro-
portion of their health care; second, consumers needed
access to pricing information before any service was
rendered. The Institute of Medicine defined healthcare
transparency as making available to the public, in a
reliable and understandable manner, information on
the health system’s quality, efficiency, and consumer
experience with care, including price and quality data,
so as to influence the behavior of patients, providers,
payers, and others to achieve better outcomes. The
potential for savings from improved price transparen-
cy was significant: an estimated $105 billion in annual
waste in healthcare spending could be attributed to
lack of competition and excessive price variation.
Organizations such as Castlight Health, HealthSparq,
and ClearCost Health represented a segment of a
growing industry providing web-based price transpar-
ency applications. In addition, some health plans like
Aetna and Cigna have developed their own internal
health transparency tools. In theory, price transpar-
ency tools create value for key stakeholders, including
consumers, employers, health plans, and governments,
increasing efficiency by reducing the amount of waste-
ful expenditure. These tools empower consumers to
make informed decisions based on cost and quality of
care, which is especially important given the increasing
burden of health care costs for consumers.
Castlight’s Strategy
Todd Park, Bryan Roberts, and Giovanni Colella --
the founders of Castlight Health -- had a simple but
far-reaching dream: to transform health care in the
United States by unleashing the power of market forces
through greater transparency and better alignment of
economic incentives among all stakeholders. By late
2009, Castlight was defining its initial go-to-market
strategy while still developing its core product -- ini-
tially, a simple cost equality tool that would allow
consumers to more easily shop for healthcare.
After the development of an initial product, the or-
ganization needed to find potential partners for its
commercial launch, which begged the question --
should Castlight focus on health plans or large em-
ployers? They decided to partner with Safeway, a large
self-funded employer, for their commercial launch,
a decision that contributed to the company’s initial
success. Soon, other large employers like Wal-Mart and
Microsoft signed on as customers. Castlight had cre-
ated a new category of cloud-based software tailored
primarily to the needs of large self-insured companies
and their employees.
While growth was steady, Castlight’s initial focus on
large self-insured companies resulted in a high de-
Castlight’s initial strategy targeted large, self-funded employers like Wal-Mart.
Mike Mozart, Flickr (2013)

19
pendence on a few key customers. At the end of 2012,
the top 10 Castlight customers accounted for roughly
93% of revenue. This left the company in a potentially
precarious position.
Reference-Based Pricing Model
For Castlight to realize its goal of dramatically im-
proving efficiency within the U.S. healthcare indus-
try, it needed to find success with its newest effort: a
reference-based pricing application that would allow
users to specify a cap price and discover alternative
viable options for care (like generic prescriptions, for
instance) that could save money. One difficulty arose
surrounding the availability of data: pricing was often
obscured by confidentiality agreements and other con-
tractual restrictions. While certain states have taken
an aggressive stance by mandating that hospitals and
clinics provide transparent information about their
prices, data remains difficult to access.
Despite the difficulties in obtaining pricing data,
competition was also a key issue for Castlight during
development. Large and deep-pocketed health insurers
would give away these pricing tools for free as a vehicle
to sell more health insurance or services, which put
pressure on Castlight’s business model, which required
subscription payments.
Implications
Castlight’s initial focus on price transparency for the
employer market proved to be a good intuition, and
led the company to early success. But to preserve its
rate of growth, the organization needed to innovate: by
gambling on the reference-based pricing model, it was
assumed that RBP could usher in substantial improve-
ments in the efficiency of the healthcare system by
allowing consumers to easily view and compare costs
from a variety of providers by specifying an initial
amount. But the road was fraught with difficulties, as
pricing data remained difficult to obtain and other
companies threatened to upset Castlight’s subscription
model. Ultimately, as is the case with the healthcare
services it hopes to facilitate, the company’s success
will be determined by the strength of its value proposi-
tion and the positive impacts it can have on its stake-
holders. ■

Executive Digest: managing resources, managing the crowd and disrupting industries http://jaegriffinpark.com/projects/cmr-digest/CMR_Digest_57_4.pdf

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