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
New Products Continually Emerge
 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
Microsoft, Apple, Amazon, and SAP were founded in
the last 40 years
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

We can think of a business model as the new rules

 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
 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
 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 Bradleys Capturing the Value, HBS Video

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
 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
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?
 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?
 What is a Need?

Un
ex
p
Unarticulated

lo
ite
Customer Needs

d
Op
po
Articulated
Todays

r tu
Business

ni
ty
Served Unserved

Customer Types
 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
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?
 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 Bradleys Capturing the Value, HBS Video

Value Proposition

Benefits to Price to
Value to
= the Relative the
the
target target
target to
market market
market

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!!
 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! Dont 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
 For Your Group Presentation (1)

Choose a new technology that has recently been

introduced or will soon be introduced
Dont look too far into the future
Choose an existing firm that might or should introduce
the technology because the technology is consistent
with the firms core competencies
 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 firms product or service
with the competitors product or service for the target
segment(s)
 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 arent created equally
Quantifying each dimension of performance is useful,
albeit sometimes difficult
One Way
to Compare
Value
Propositions

But does this

comparison
tell us which
product
provides
users with
more value?
 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 Bradleys Capturing the Value, HBS Video

 What
percent of
total value
can a firm
(i.e., seller)
and its collect?
collaborators
Collaborators Create an Increasingly Large % of
Value and Providers Expect Smaller % of Value
Company
Old Manufacturing Uber Apple
Microsofts Windows YouTube, Google
Value Capture

Facebook
Eco-system

IBM Linux Code Linux Kernel

Wikipedia
Blogs

Source: Chesbrough
In-house Community-Driven
and Appleyard, 2007
Value Creation
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
 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 cant
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
presentations grade! Propose and analyze a new
method of value capture
 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 Bradleys Capturing the Value, HBS Video

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
dont 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..
 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
(and entrepreneurial opportunities)
 Vertical Disintegration

Source: Christensen & Raynor, 2003

Another Reason for Thinking About Scope of Activities:
Identify the flows of information,
money, and products in system
 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 Bradleys Capturing the Value, HBS Video

 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
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!
 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