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Services Science and Business Models
Henry Chesbrough
Executive Director, Center for Open Innovation
Haas School of Business – UC Berkeley
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The Productivity Paradox: Eric Brynjolfsson
“We see the benefit of IT investment everywhere, except in the statistics”: Robert Solow
Brynjolfsson’s Research Program resolved the productivity paradoxPartly a measurement problem
Partly a management problem: Companies greatly improved their productivity with IT spending, but only when they deployed new business processes to exploit that IT investment
(adding IT investment to legacy processes did NOT increase productivity)
Research Implication: one cannot understand productivity increase without developing a deep understanding of the underlying business processes
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The State of Play in Services Industries Today
In many leading companies, services are more than half of the company’s revenue, and usually the fastest growing part
IBM, GE, Xerox, GM Yet companies who sell services innovation offerings to
corporate and government clients admit they lack a powerful conceptual model underneath their offerings
“Best practices”, separated into vertical markets
The shoemaker’s children are barefoot Paul Horn’s problem at IBM: $6 billion of R&D, but little of that
money is advancing the services portion of IBM’s business
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The Impact of Academic Research on Industrial Performance
National Academy of Engineering Study (2003): 5 sectorsNetworking and Communications
Medical Devices and Equipment
Aerospace
Financial Services
Transportation
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The Impact of Academic Research on Industrial Performance
National Academy of Engineering Study (2003): 5 sectorsNetworking and Communications
Medical Devices and Equipment
Aerospace
Financial Services
Transportation Found significant impact from academia on the first three, and much more
limited impact on the last two sectors“…the academic research enterprise has not focused on or been organized to
meet the needs of service businesses” (p.8) DARPA gives more to consultants than academia in services NSF funding structure badly lags industry evolution Yet long term university-sited research is vital to long term industrial
innovation performance
Pro
duct
Ser
vic
e
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A (Very) Brief History of Diabetes Treatment
Pre-1920s: Starvation 1920s: discovery of animal insulin
Life saving
Serious side effects: in-patient treatment 1930s – 1970s: refinement of insulin
Side effects reduced: outpatient treatment 1980s: Human Insulin, Type II Diabetes
Patient behavior now critical to treatment
More convenient modes of therapy
Treatment now by nurses, nurse practitioners 2000-Today: Emergence of Insulin Pumps
Automatically senses blood glucose levels
Applies insulin as needed via algorithms
Patent rarely sees doctor, after initial insertion
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By understanding and accelerating work evolution, Service Science will impact productivity of human-tool systems
Collaborate(incentives)
Augment(tool)
Automate(self-service)
Delegate(outsource)
ToolSystem
HumanSystem
Help meby doing some
of it for me(custom)
Help meby doing allof it for me
(standard)
Organize People(Socio-economic models with intentional agents)
Harness Nature(Techno-scientific models with stochastic parts)
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Z
Collaborate(1970)
Augment(1980)
Delegate(2000)
Automate(2010)
Experts: High skill people on phones Tools: Less skill with FAQ tools Market: Lower cost geography (India) Technology: Voice response system
Example: Call Centers
Source: IBM Research
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What is Unique about Services (vs. Products) from a theoretical viewpoint?
- the close interaction of supplier and customer (Fitzsimmons & Fitzsimmons 2001- intangible inputs used to create intangible outputs (Vargo & Lusch, 2004)- the simultaneity of production and consumption (Sasser, Olsen, Wyckoff, 1978)- the combinations of knowledge into useful systems (Herzenberg, Alic, Wial, 1998)- the decomposition of the exchange into business processes and experience points (Pine & Gilmore, 1999)- the absence of artifacts (which complicate the transfer of tacit knowledge) (Nonaka and Takeuchi, 1995)
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Robert Glushko’s Model of IT-Enabled Business Models
Strategic/PolicyIssues
Business Processes
Information/Data Structure
ConceptualModel
PhysicalModel
ImplementedModel
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Challenges in Designing and Managing Business Models
Strategic/Policy
Business Process
Information/Data Structure
ConceptualModel
PhysicalModel
ImplementedModel
Top Mgmt
IT Mgrs
How to connect?
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Challenges in Designing and Managing Business Models
Strategic/Policy
Business Process
Information/Data Structure
ConceptualModel
PhysicalModel
ImplementedModel
Top Mgmt
IT Mgrs
How to connect?-Focus on processes-Create tools-Only feasible strategiesconsidered
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Shared Data
Supplier Customer
Modeling Services Exchange BetweenCustomer and Supplier
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Shared Data
LinkedProcesses
Supplier Customer
Modeling Services Exchange BetweenCustomer and Supplier
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Shared Data
LinkedProcesses
CoordinatedBusiness
Models
Supplier Customer
Modeling Services Exchange BetweenCustomer and Supplier
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Graphic Illustration of a Generic Airline Business Model
Air Travel
Airport Aircraft, Fuel
Runway Checkin Jetway
Cleaning
Food
Passengers Revenue
Costs
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Ryan Air• Ryan Air is a regional low-fare airline operating in the United Kingdom
and northern Europe.
• Only flies into regional airports, no landing fees.
• Guarantees airport certain # passengers in their terminal
• Airport pays Ryan Air to operate out of its airport
• Airport provides Ryan Air a percentage of the revenues from shops, restaurants, car hire and hotels at airport.
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The Ryan Air Business Model
Air Travel
Airport
CheckinJetway
Parking
Shopping & Food
Car HireHotels
Aircraft, Fuel
Cleaning
Food
Passengers
Revenue
X X X
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Bus Shelters
• In the 1980’s, a manufacturing company made and sold bus shelters to communities in the United Kingdom– Their bus shelters were high quality– Their pricing was considered reasonable– They had a virtual monopoly on the bus shelter market
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Graphic of a Bus Shelter Co. Business Model
Community
Bus Shelter
Overhead
Design
Manufacture
Installation
Revenue
Costs
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Adshel’s business model
• Within a few years, Adshel came into the market, and drove the existing firm out of business– Adshel’s bus shelters were of no better quality– But their business model was entirely different
• They provided the bus shelters to communities FOR FREE- They charged advertisers for wall space on the shelters
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Graphic of Adshel Business Model
Community
Bus ShelterCompany
Overhead
Design
Manufacture
InstallationAd Company
Hanging AdAd Agency
Revenue
Costs
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The Business Model
• Identifies a market segment • Articulates the value of the proposed offering • Focuses on the key attributes of the offering• Defines the value chain to deliver that offering• Creates a way for getting paid • Establishes the value network needed to sustain
the model
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Sample Business Model Revenue Mechanisms
• Per item and “all you can eat”• Razor and razor blade• Free trial, follow on subscription (esp. for experience goods)• Free, with paid advertising (e.g., bus shelters)• Recruit your friends, and save money • Market maker/aggregator/switchboard (tolltaker)• Turn cost centers into profit centers
– Airport landing fees (Ryanair)– Hotel room: TV, phone, robes
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IBM: Its Closed Value ChainV
alue
-Add
ed A
ctiv
itie
s
Materials
Chips, devices
Computers
Operating Systems
Applications
Productivity SW
Atoms
Solutions
Value Chain
All IBM – pre 1993
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Innovating the Business ModelV
alue
-Add
ed A
ctiv
itie
s
Materials
Chips, devices
Computers
Operating Systems
Applications
Productivity SW
IBM Chain OEM Market
Materials
Chips, devices
Computers
Operating Systems
Applications
Productivity SW
Integration
Atoms
Solutions Other Integrators
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IBM’s Open Source Business Model
• Spends about $100M each year on Linux– 50% for general improvement– 50% for specific improvements for IBM gear
• Others spend another $800M a year • IBM creates value through Linux
– Also donates development tools, patents
• IBM captures value through value-added services and software “up the stack”
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Aligning Business Models
Aligned Models• As costs go down for
supplier, customer benefits too
• Supplier has rights in some markets, customer has rights in others
• As one makes money, the other makes money too
Misaligned Models• Both invest, but only
one benefits• Supplier cannot sell to
anyone else• One party “captured”
by the other
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Business Model Maturity Stages
6 stages
1. Undifferentiated business model
2. Differentiated business model
3. Segmented business model
4. Externally aware business model
5. Integrated business model
6. Platform leadership business model
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Business Model Maturity Stages
6 stages
1. Undifferentiated business model
2. Differentiated business model
3. Segmented business model
4. Externally aware business model
5. Integrated business model
6. Platform leadership business model
clos
ed
ope
n
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