business models designing and value mapping successful business models for commercializing an...
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Business Models
Designing and value mapping successful business models for commercializing an innovation
PaxilCommercialization of an Old Invention
Commercialization – Opportunity Register Analysis
Paxil (paroxetine) antidepressant
Feature Set
1. Anti-depressant2. No chance of overdose (a serious problem for tricyclics)3. Is a form of ‘Software’ (Leschly's perspective on drugs
offered by SmithKline)4. ‘Selective serotonin reuptake inhibitor' – i.e., it is 'selective'
connoting a sort of 'cleanliness‘ ‘Off-label’ treatment features (prohibited by FDA)
1. Anti- 'panic disorder' (treating panic attacks)2. Anti- ‘obsessive-compulsive disorder’ (including sub-disorders like
bulimia and anorexia)3. Anti- 'social phobia disorder' i.e., lack of social confidence that
led its sufferers to lives of isolation, loneliness, and inability to perform many of the simplest tasks of everyday life
Paxil
The ‘Story’ for DTC In the 1960s and 70s, all drugs were prescribed under the advice of
physicians; patients were carefully guarded from knowing anything that might possibly hurt
them (or help them; or be the basis for lawsuits) This fit well with the physicians' own view of their position;
as counselors, and gatekeepers for the tools and techniques for patients to obtain and maintain health.
Direct-to-consumer advertising has been legal since the 1980s – allowed by the Food and Drug Administration
Leschly used DTC to tell "The Story" a new-age parable, often illustrated with brightly colored diagrams and cartoon
characters, unfolded like this Paxil worked on a different brain chemical system than did older drugs.
The name of this "natural" brain chemical was serotonin In some depressed patients, this chemical was lowered in volume because
a certain brain synapse was "overactive" Paxil, by "naturally" blocking reuptake of serotonin led to relief from
depression.
Attribute Map
Basic Discriminator Energizer
PositiveAnti-depressantNonnegotiable
Anti- 'social phobia disorder' Anti- ‘obsessive-compulsive disorder’Anti- 'panic disorder' SSRI‘Software’ Differentiator
No chance of overdose Exciter
Negative Tolerable
Price?Dissatisfier
(Hey, it’s an antidepressant)
Enrager
Neutral So What? Parallel
Consumption Chain
Us e
P s y c h o lo g ic a l /p h y s ic a l ad d ic tio n
P u r c h as e
D o c to r 's v is it
Aw ar en es s
Three customer groups: (1) Anxiety; (2) Magazine Ad (DTC); (3) Articles suggesting off-label use
Awareness Three customer groups: (1) Anxiety; (2) Magazine Ad (DTC); (3) Articles suggesting
off-label use Managing Awareness
a) Find ways to link discomfort of anxiety with the promise of relief through Paxilb) Magazine ads should emphasize (a)c) Minimize the dissatisfaction from Ad clutter in magazines by making ads attractive, fun and
informatived) Commission ‘independent’ research and articles to promote off-label use of Paxil
Basic Discriminator Energizer
Positive Nonnegotiable2.Magazine AdDifferentiator
Off-label useExciter
Negative Tolerable
1.Anxiety2. Clutter from AdDissatisfier
1.AnxietyEnrager
Neutral So What? Parallel
Doctor’s Visit
Managing Doctor’s Visita) Magazine Ad (DTC) links discomfort of anxiety with the promise of relief through Paxilb) Magazine Ad (DTC) emphasizes that the best solution is Paxilc) Best means ‘safest’ (cite tricyclics)d) Best means ‘clean and selective’e) Best means ‘cleaning your brain’s software’f) Make sure Dr. has lots of free Paxil samplesg) Suggest Dr. experiment with off-label prescription
Basic Discriminator Energizer
Positive NonnegotiableFree SamplesDifferentiator Exciter
Negative Tolerable DissatisfierWaiting, cost for Dr.Enrager
Neutral So What? Parallel
Purchase
Managing Purchasea) Purchase at pharmacy with prescription; assure in-stock
b) Make sure price is covered by most health care
Basic Discriminator Energizer
Positive NonnegotiableCovered by health cardDifferentiator Exciter
Negative TolerableCan’t buy OTCDissatisfier Enrager
Neutral So What? Parallel
Use Managing Usage
a) Assure dose large enough for effect
b) Refills easy
c) Off-label application easy
d) Available through mail without prescription
Basic Discriminator Energizer
Positive
Refills easyAvailable through
mail w.o. Prescription Off-label apps easy
DifferentiatorHigh doseExciter
Negative Tolerable Dissatisfier1.AnxietyEnrager
Neutral So What? Parallel
Addiction
Managing Addictiona) Dose should be adequate for psychological addiction
Key to repeat purchase
b) Promote this as ‘lifestyle’ drug that assures healthy brain software
Basic Discriminator Energizer
Positive Nonnegotiable DifferentiatorAddictionExciter
Negative Tolerable Dissatisfier Enrager
Neutral So What? Parallel
Moving Off-label to On-Label SmithKline’s ‘Social phobia’ launch for Paxil
Leschly's marketing department commissioned a huge publicity campaign to raise awareness of the disease
one that set the pattern for many to follow both at SmithKline and in the industry The first step involved the hiring of a public relations agency to produce a free
video on the disease And distribute it widely for use by network affiliates and independent TV stations Because health stories of any sort guaranteed a minimal audience
The second step was to underwrite studies by experts in the field, who would conclude that the disorder is debilitating and probably afflicts many more
than originally suspected Finally, while awaiting for FDA approval for a new use, underwrite a few small-
scale studies off-label (i.e., where the drug is used for other than its approved purpose, which in Paxil's case
was adult depression) Through these, SmithKline became aware of even more promising new markets in
child and adolescent depression (Adaptive Execution)
Why Business Models Matter
“During the dot-com boom, ‘Business Model’ was a buzzword routinely invoked to glorify all manner of half-baked plans”
-- Michael Lewis
Why Business Models Matter
Telling a good story Part of selling your strategy / investment
Tying Narrative to Numbers Strategy becomes less philosophy More performance and outcome
When business models don’t work It’s because the fail either
The ‘Narrative’ test Or the ‘Story’ test
A business model is not strategy
It doesn’t describe external forces: Competition Environment Scaling
It only depicts the systems that will be put into place to achieve a strategic objective
A good model is not enough The boxes on the value map need to be
understood in depth In order to develop a good strategy
R & D
C u s to m erR elat io n s h ipM an ag em en t
L ab o r C u s to m er s
F act o ry
W o r k
Production
Graphing the Value Map
External competitive environment (supply & demand curves)
Internal strategies, competencies, knowledge, assets ‘owned’
Value flows between owners and/or the external environment
E n v ir o n m en t
S tr a teg y - O w n er
Mad Catz is an example of A Network Business Models
Ag o r a Allian c e
Ag g r eg a tio n Valu e C h ain
D is tr ib u tiv eN etw o r k
Hier ar c h ic a l
S e lf -O r g an iz in g
C o n tr o l
v a lu e in teg r a tio nL o w Hig h
Taxonomy of Network Business Models
Some Network Business Models
Ag o r a Allian c e
Ag g r eg a tio n Valu e C h ain
D is tr ib u tiv eN etw o r k
Hier ar c h ic a l
S e lf -O r g an iz in g
C o n tr o l
v a lu e in teg r a tio nL o w Hig h
The Value Chain Integrator for Electronic and Logistic Networks
Ag o r a Allian c e
Ag g r eg a tio n Valu e C h ain
D is tr ib u tiv eN etw o r k
Hier ar c h ic a l
S e lf -O r g an iz in g
C o n tr o l
v a lu e in teg r a tio nL o w Hig h
C o m p o n en tS o u r c es
C o m p o n en tS o u r c es
C o m p o n en tS o u r c es
C o m p o n en tS o u r c es
C o m p o n en tS o u r c es
Valu eC h ain
I n teg r a to r
C u s to m er s
C u s to m er s
C u s to m er s
Other Network Business Models
Aggregator (e-Tailor)
Ag o r a Allian c e
Ag g r eg a tio n Valu e C h ain
D is tr ib u tiv eN etw o r k
Hier ar c h ic a l
S e lf -O r g an iz in g
C o n tr o l
v a lu e in teg r a tio nL o w Hig h
S o u r c es
S o u r c es
S o u r c es
Ag g r eg a to r
C u s to m er s
C u s to m er s
C u s to m er s
Distributive Net
Ag o r a Allian c e
Ag g r eg a tio n Valu e C h ain
D is tr ib u tiv eN etw o r k
Hier ar c h ic a l
S e lf -O r g an iz in g
C o n tr o l
v a lu e in teg r a tio nL o w Hig h
S o u r c es
S o u r c es
S o u r c es
C u s to m er s
C u s to m er s
C u s to m er sD is tr ib u tiv e
N etw o r k
AgoraPrice and Other Information Discovery
Ag o r a Allian c e
Ag g r eg a tio n Valu e C h ain
D is tr ib u tiv eN etw o r k
Hier ar c h ic a l
S e lf -O r g an iz in g
C o n tr o l
v a lu e in teg r a tio nL o w Hig h
S o u r c es
S o u r c es
S o u r c es
Ag o r a( M ar k e t)
C u s to m er s
C u s to m er s
C u s to m er s
In fo rma tio
n
I n f o r m atio n
In fo rm a tio n
I n f o r m atio n
In fo rm a tio n
In fo rma tio
n
AllianceBasis for the ‘Contribution Economy’
Concept: people from
around the world can contribute energy, ideas, and knowledge to joint projects.
Examples: blogs, open-
source software, podcasts, and online encyclopedia Wikipedia.
Ag o r a Allian c e
Ag g r eg a tio n Valu e C h ain
D is tr ib u tiv eN etw o r k
Hier ar c h ic a l
S e lf -O r g an iz in g
C o n tr o l
v a lu e in teg r a tio nL o w Hig h
P r o s u m er s
P r o s u m er s
P r o s u m er s
P r o s u m er s
V a lu e S p a c e( I n du s try S ta n da rd o r V irtu a l Ne two rk )
Disruptive Innovation:The Disk Drive Industry
Disruptive Innovation, The Innovator’s Dilemma & Forced Reconfigurations of Markets
Change in the Data Storage Industry Storage Pre-1950: IBM M80 Sorter and M77 Collator
Storage
5 MB in 1952
5-10 Megabytes in 1973 (14”)
Shrink …shrink …shrink
20MB Seagate (5.25”) c. 1986
100MB Conner (3.5”) c. 1990
1000MB IBM (1”) c. 2000
Darwin Rules Between 1976 and 1995
129 Disk drive manufacturers entered the market 109 Disk drive manufacturers existed
1970s (after DL/1) Plug Compatible and OEM IBM,Diablo, CDC, DEC, Storage Tech, Ampex 2/3rds never introduced 8” drives
1980s (8” Winchester) Shugart Assoc., Micropolis, Priam, Quantum
1985+ (5.25” Winchester) Seagate, Miniscribe, Computer Memories, Intl. Memories
1987+ (3.5” Winchester) Conner, etc.
1989+ (2.5” Winchester) Prarietek, etc.
1992+ (1.8” Winchester) … and so forth
Tech Trajectories Disk Capacity Demanded vs. Capacity Supplied
The Industry Dynamics of ‘Attack from Below’
1. Technology Cost-to-Performance accelerates 1. At an exponential rate
2. With a constant year-on-year growth
2. Substitute products accelerate on new performance parameters1. Creating a sneak attack
2. At the low profitability end of an established firm’s market
3. As substitute technologies accelerate, they consume all of the market of established firms1. Driving previously successful firms out of business
Technologies that ‘Shrink’?
Cost-to-performance acceleration
Successful Strategy?
Defeated firms were not stupid
They were held captive by their customers While new entrants tooled for new markets And in the process consumed old markets
The only way to manage this successfully … … is Darwinian evolution
Successful Transition through Creative Disruption
Control Data 60% of 14” market from 1965-82 Missed the 8” market Set up 8” production in Oklahoma city, for successful entry
Conner for 5.25” Spin-off from Seagate and Miniscribe Compaq pushed their market
Quantum retains 80% of spin-off Plus Development Corp (for 3.5” drives) Plus consumes Quantum
1994 largest producer in world Micropolis: Transition by Managerial Force
Founded in 1978 by Stuart Mabon for 8” drives 1982, Mabon read the trajectories, and retooled for 5.25” They walked away from existing customers and nearly broke the firm
Disruptive Innovation the Excavator Industry
Incumbents fail to innovate Because they spend too much time listening to
their existing customers
Caterpillar
and the Mechanical Excavator Industry
Cable-driven Steam Shovel Mnfd by Osgood General
The first upheaval
Steam shovels (mechanical excavators) were invented in the early 1800s
The first great upheaval occurred in the 1920s When gasoline replaced
steam as a power source 23 of the 25 largest makers of
steam shovels Successfully negotiated the
transition to gasoline power There were also around 20
new entrants And innovation continued with
diesel and electric power
The second upheaval
Hydraulics developed for aircraft in WWII Percolated into industry throughout the 1950s-60s Replaced cables Only 4 of the top 30 excavator manufacturers in the 1950s survived this
transition into the 1970s The new diesel-hydraulic entrants included:
Caterpillar As well as John Deere, Drott, Ford, International Harvester, Hitachi, Komatsu, Case,
Bamford, Poclain
What happened? How did Cat get its start?
Hydraulics
The first hydraulic excavator was developed in 1947 Limited by the power and strength of available hydraulic pumps’ seals, the capacity of early machines was minuscule And of no use in the major markets
Excavation Sewer contracting
Entrants like Cat developed new applications for their small capacity hydraulic excavator As attachments for the back of small industrial and farm tractors They called them ‘backhoes Useful to residential contractors, farmers, etc. to dig narrow ditches for sewer,
cable, etc. Jobs done by hand in the past and too small for the imprecise cable driven excavators
Stealthy Cat
Entrants like Cat developed new metrics to advertise their products Rather than measuring the quantity of earth that could be
moved as the cable-driven manufacturers advertised
Their product literature emphasized Shovel width (narrow being better for contractors) Speed and maneuverability of the tractor
So the bigger companies like Link Belt Didn’t even perceive Caterpillar as a competitor
Because they spoke a different language To different customers
Hydraulics and Performance Trajectories in the Mechanical Excavator Market
Caterpillar’s Climb By 1974, the hydraulic excavators
Had the muscle to lift 10 cubic yards of dirt A rate of improvement that outstripped demand in any of the
excavator markets In contrast, the largest makers of cable-driven excavators
Bucyrus Erie and Northwest Engineering Built better cable-driven machines, for their most profitable customers Because to do otherwise was not profit-maximizing
They logged record profits until 1966 When hydraulic excavators rapidly took over all the excavation
markets
Two Tragedies
(1) Not reaching your goal (2) Reaching your goal
Once a goal is reached Direction is lost Until another goal is set
Encore Problem: Once you’ve succeeded, How do you convince others that your success is
‘sustainable’ and not just luck
New Entrants went HydraulicMajor companies never introduced a successful hydraulic excavator
Why Cable went Bust Once both cable-driven and hydraulic-driven excavators could
satisfy all of the mainstream markets Excavation contractors no longer needed to base their choice of equipment
on which had longer reach and greater bucket capacity
Both were good enough, and cable vs. hydraulic became irrelevant
Contractors found that hydraulic machines were much less prone to breakdowns
than cable-driven excavators Not to mention the loss of life and limb resulting from a cable snapping
Cable’s demise was not due to poor knowledge or strategy
How Japanese Manufacturers Sneaked up on Cat
Entrants like Komatsu developed new metrics to advertise their products Caterpillar measured
Amount of earth moved Shovel width (narrow being better for contractors) Speed and maneuverability of the tractor
Komatsu’s product literature emphasized That Komatsu equipment needed far less service Making them less dependent on their local dealer
Since Caterpillar’s strength was its dealer network Komatsu’s new and distinctive strategy Disrupted their customer reach Kept customers out of Cat’s showrooms And convinced customers that this was good
Caterpillar didn’t perceive Komatsu as a major competitor Because they spoke a different language To different customers
Mad Catz Game ControllersCommercialization with Rapid Innovation
Mad Catz’s Products
Controllers, Joysticks, memory chips, cables, power supplies, etc. Anything you could add onto a game console
Question: How do you make money on this market?
Mad Catz’ Value Map
E lec tr o n ic P ar ts
R eta ile r s( T o y s 'R Us ;
W al- M ar t)
P las tic P ar ts
P ac k ag in g M tl
HW Ven d o r s S p ec s
E lec tr o n ic sBu ild
P la s t ic D e s ig n :M a in
c o mp o n e n t o fh u ma n in te rfa c e
E lec tr o n ic sD e s ig n( c y c le :
6 0 % o f C o s t , o u ts o u r c ed
P las tic sM o ld in g
P ac k ag eD es ig n ,
G r ap h ic s
As s em b ly ,P ac k ag in g an d
S h ip p in g1 0 % o f c o s ts , inh o u s e f o r q u a lity
c o n tr o l
2 0 % o f C o s ts , o u ts o u r c ed
1 0 % o f C o s ts , in h o u s e
1 0 % o f C o s ts
50% o f D
e mand V
alue
1 0 0% c o s t
2 5 % o f D e m an d V a lu e
25% o f Dem and V
a lu e
c y c le : 2 w eek s
c y c le : 4 - 6 m o n th s
c y c le : 3 :m o n th s
c y c le : 1 w eek
Points to Noteabout Mad Catz’s Business Model
Sources of costs and revenues are different Cycle time influences revenue The product is 100% ‘human interface’
Visual Mental Tactile
Their market is driven by other vendors What does this imply about market and growth strategies
Many components of this case are typical of Pearl River Delta companies
Product Feature Map
Basic Differentiator Exciter
+ Electronics Case Packaging, Case
- Electronics Case Packaging, Case
0 Electronics
Controller Economics
Value Added Cost Added Lead Time
Electronics 0 - 20% 60% 4-6 months
Case 30-40% 20% 3 months
Packaging 40-70% 10% 2 weeks
MadCatz Controller Consumption Chain
Us e
P u r c h as e
G am eC o n s o le
O w n er s h ip
Game Ownership Managing: Game ownership is a given; MC’s problem is to find where the
owners are located, and how to reach them Two customer groups: (1) OEM (2) Aftermarket OEM must be reached through contract with game manufacturer
Basic Differentiator Exciter
+ Aftermarket
-
0
PurchaseManaging: Controllers are inexpensive and thus aftermarket controllers may have
a hard time differentiating through advertisingLocation of sale is the main way of differentiating in the purchase decision.
Stocks should be located close to places that sell the consoles, as well as game software and other consumer electronics to which players would be attracted
Packaging is a second way of differentiatingCustom logos are a third way
Basic Differentiator Exciter
+ Location PackagingLogos
-
0
Use
Managing UseReliability is essential for repeat purchases
Ergonomics are a differentiator
Basic Differentiator Exciter
+ Reliability Ergonomics
-
0
Updates to the Case Statistics
Worldwide video game industryMad Catz’s Future Market Potential
Revenues of $25 billion last year overtook movie box-office receipts
Sales are expected to climb to $55 billion by 2008
While broadcast TV audiences dwindle and moviegoing stagnates, gaming is emerging as the newest and perhaps strongest pillar
of the media world.
Videogame Economics Costs for developing games are going sky-high. Microsoft spent $40 million to create and market Halo 2;
around $160 million for Halo 3 Vs. $80 million average cost of a Hollywood movie,
but it prices most small and midsize game makers out of the top of the market. The top five game developers last year accounted for 56% of the industry's more
than $10.5 billion in U.S. sales (around $40 billion worldwide)
Only 5% of all games reaching the 1 million "hit" mark,
It's vital for game makers to build up a portfolio of winning franchises
EA has Madden and Sims, NASCAR, James Bond, and the Medal of Honor shooter series totaling 27 game titles last year that sold more than 1 million copies.
Controller Innovation
Outsourcing at Mad Catz
By outsourcing much of its production, and coordinating the entire production process Mad Catz Controlled its profitability by being a Value
Chain Integrator
It was looking for new opportunities to Control costs Speed up time to market Improve quality
By innovations in both logistics and information networks
Mad Catz: Considerations Because the product is 100% ‘human interface’
Consider the costs and benefits of professional industrial design
Look for cost – revenue spreads in the Business Model Cut costs where revenues are small Spend more if you can influence revenues with small additional cost
Cycle time influences revenue Look for possibilities for ‘Geographical Scaling’ Through improvements in Information and Logistics networks
Market is driven by other vendors (not by your decisions) Bet that Sony, Nintendo and Microsoft will be leaders, and pander to
them Consider game specific software for powerful software companies like EA
E.g., branded controllers
Innovation Workout
Use Morphological boxes to study the Commercialization of Video Game Consoles