Business Model Innovation. technology isn't Enough - Professor Henry Chesbrough

Copyright © 2014 Oracle and/or its affiliates. All rights reserved. | Oracle Confidential – Internal/Restricted/Highly Restricted 1

Copyright © 2014 Oracle and/or its affiliates. All rights reserved. |

Why Technological Innovation is Not Enough: Open Innovation and the Company’s Business Model

Henry Chesbrough Berkeley Haas School of Business Esade Business School


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Which Would You Rather Have?

Better Technology Better Business Model

4

OR

Copyright © 2014 Oracle and/or its affiliates. All rights reserved. | 5

Go with the Business Model

Business Model > Technology

Ability to profit from technology

Ability to scale technology

Ability to continue innovating technology

Ability to acquire technology


Generic Airline Business Model

6

Passengers Airline

Food Aircraft, Fuel

Cleaning

Airport:

• Runway

• Check-In

• Jetway


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.


Ryan Air Business Model

Passengers

Ryan Air Aircraft,

Fuel Airport:

• Car Hire

• Parking

• Hotels

• Shopping and Food

Food

8

Jetway,

Check-In,

Cleaning


The Business Model

• Identifies market segment

• Articulates value of proposed offering

• Focuses on key attributes of offering

• Defines value chain to deliver offering

• Creates way for getting paid

• Establishes value network needed to sustain model


Sample Business Model Revenue Mechanisms

10

Per item and “all you can eat” Razor and Razor Blade

Free trial, follow on subscription

Free, with paid advertising

http://www.istockphoto.com/istock_login.php


Sample Business Model Revenue Mechanisms

11

Recruit your friends,

and save money

Market maker/

aggregator/switchboard

Turn cost centers into profit centers:

Airport landing fees (Ryanair) Hotel room

http://images.google.com/imgres?imgurl=http://www.costpernews.com/wp-content/uploads/2008/03/ebay.png&imgrefurl=http://www.costpernews.com/archives/category/affiliate-networks/commission-junction/&usg=__dvKzotJlH3i7hQ1lc-poVvNH1Jk=&h=333&w=800&sz=23&hl=en&start=1&um=1&tbnid=5fKqyPgMVSXjEM:&tbnh=60&tbnw=143&prev=/images?q=ebay&um=1&hl=en&client=firefox-a&rls=org.mozilla:en-US:official&sa=G

Copyright © 2014 Oracle and/or its affiliates. All rights reserved. | © 2007 Henry Chesbrough 12

Why Business Models are Hard to Manage: Mapping Across Domains

Technical

Inputs:

e.g.,

feasibility,

performance

Economic

Outputs:

e.g.,

value,

price,

profit

Business

Model

• target market

• value prop.

• key attributes

• value chain

• how paid

• Value network

Measured in technical domain Measured in social domain


Business Model Innovation vs. Technology Innovation

• Most companies have processes to advance technologies, and spend millions to do it

• Few, if any, of these same companies have processes and budget to explore business model innovation

• As technologies commoditize, business model innovation needed to sustain differentiation and profitability


Implications for You

• Where do your business models come from?

• Is there a process to discover new business models?

• Is there a process to improve existing models?


Where do business models come from?

• Entrepreneurs

• Intrepreneurs

• Risk takers

• Failures

• Experimentation


A Classic Example: the Xerox 914 copier

• Chester Carlson develops electrostatic method to place toner on paper, a “dry” process for copying documents

• In 1955, existing processes (wet or thermal) used to make 15-20 copies per day. Machines cost ~ $300.

• Joe Wilson estimates cost of building dry process copiers at ~$2000

• Wilson seeks manufacturing and distribution partners

– IBM, Kodak, GE

• IBM engages ADL to study: “Although it may be admirably suited for a few specialized copying applications, the Model 914 has no future in the office-copying-equipment market.”


Wilson’s Business Model

• ADL’s study (and the other companies) viewed the dry process technology through a traditional business model

– charge for the equipment (dry technology very high cost)

– charge for the supplies as needed (no savings vs. wet)

• Joe Wilson ignored these rejections, and took the technology to market through a new Business Model

– $95/ month for first 2000 copies, 4 cents each for additional

– Low barrier for customer trial, Haloid/Xerox bore the risk

– Enormous usage: 2000 copies per day

– Revenues grow 41% compounded for next 20 years


Successful Business Models are a Double-Edged Sword

• They deliver tremendous value

• But they create a cognitive bias against any value proposition that doesn’t align with its dominant logic

18


3Com

• Metcalfe left PARC in Jan. 1979

• Did consulting work until Feb. of 1981

– DEC, GE, Exxon

• Brokered alliance between Xerox, DEC, and Intel for IEEE 802 (aka Ethernet)

• Initial plan: sell to Unix workstations, via direct sales force


Then….

• As part of consulting, created directory of LAN dealers and VARs across US

– first of its kind

– sold many hundreds of copies at $125 each

– did this for 5 years

• IBM PC took the world by storm

• 3Com formed, Krause joined from HP

– VCs financed:

• New plan: add-on boards for IBM PCs, sold through IBM retailers and VARs


0

5000

10000

15000

20000

25000

30000

35000

40000

US

Dol

lars

(mill

ions

)

Year

Xerox 3Com

Adobe Doc Sci

Documentum FileNet

Komag Objectshare

SynOptics SDLI

VLSI Sum (10)

Xerox: The Value of Business Model Innovation


Example: Apple’s “app economy”

• “We define everything that is on the phone. You don’t want your phone to be like a PC. The last thing you want is to have loaded three apps on your phone and then you go to make a call and it doesn’t work anymore. These are more like iPods than they are like computers.”

– Steve Jobs, NYT, January 2007


Apple’s “app economy” - Part 2

• “We define everything that is on the phone. You don’t want your phone to be like a PC. The last thing you want is to have loaded three apps on your phone and then you go to make a call and it doesn’t work anymore. These are more like iPods than they are like computers.”

– Steve Jobs, NYT, January 2007

• By 2008, 120,000 apps available on iTunes App Store

–Even visionaries have to let customers co-create!


A Second Co-Creation Example

• “…Amazon’s performance was essentially flat between mid-2003 and early 2007… Then Amazon took off afresh, as investors realized that Bezos had been quietly building a multitude of new growth engines inside his company. All were rooted in the same theory: If Amazon lets the customer set the specs, it could conquer any number of consumer products and services.” (emphasis added)


Today’s Movie Industry

• $30 billion in revenue from box office receipts in 2010

• $87 billion in revenues reported by the movie studios in 2010

• Where did the other $57 billion come from?

– Pay-per view TV, cable and satellite channels, video rentals, DVD sales, online subscriptions and digital downloads.

• Each of these innovations was violently opposed by the movie industry at the time!!

25


Meet Alex Osterwalder


The Business Model Canvas

Key

Partnerships

Key Activities

Key

Resources

Value

Proposition Customer

Relationships

Channels

Customer

Segments

Revenue Streams Cost Structures


What are the barriers stopping business model innovation inside established companies?

• Resource conflicts

• Disruption of current business model

• Cognition


Differing context for business model innovation

Startup

• High risk, high reward

• External focus

• Governance by owners

• Clean sheet of paper

• No initial assets to leverage

Corporate

• Lower upside, lower downside

• Internal and external focus

• Governed by managers as one of many corporate priorities

• Must not disrupt core business

• Try to leverage corporate assets

Source: H. Chesbrough, Designing Corporate Ventures in the Shadow of Private VC


Role of CEO

Startup

• Founder(s) is the creator of the business model

• CEO owns the business model

– Pivots until a viable model is discovered

– Then focuses on scaling it

Corporation

• Initial founder may be long gone

• Chief Execution Officer

– Optimizes established business model

– Drives away the misfits who challenge it

Who owns business model innovation in a company? Which

corporations are skilled at creating new business models?

How do they do it?


Role of Board

Startup

• Engaged Owners

• High powered incentives

• Know the space

• Bring their own information to complement company info

• Meet every 4-6 weeks

Corporations

• Occasional Monitors

– Often running their own company

– Or sitting on many boards

• Rely on company info

• Modest incentives

• D&O insurance required

• Meet 4x/ year

How do Boards deal with corporate ventures?

How can Boards add value to corporate ventures?


Role of Finance

Startup

• Entrepreneurs must shop around

• Often takes 10 or more pitches to get initial financing

– One Yes is enough to start

• Subsequent financing driven by performance vs. milestones

Corporate

• Entrepreneurs must go to a single place – Many must say Yes, only one No can stop

the project

• Subsequent financing driven by performance vs. budget – May go up or down, depending on

whether company is having a good or bad year

Is Finance enabling innovation, or killing it?


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

op

en

closed


Lessons for Innovators

• Business model innovation is hard

– But potentially very valuable

• New business models need processes for experimentation, not planning

– Get out of the building!

– Lean Startup is a good methodology to use

• New business models create disruptions with existing businesses and their models

– Need top management protection to sustain

34


Why Business Models are Hard to Manage: Mapping Across Domains

Technical

Inputs:

e.g.,

feasibility,

performance

Economic

Outputs:

e.g.,

value,

price,

profit

Business

Model

• target market

• value prop.

• key attributes

• value chain

• how paid

• Value network

Measured in technical domain Measured in social domain


Adobe

• Warnock and Geschke at PARC

– creating fonts for Star Workstation

– wanted to make into a standard

– Xerox said no: “how can we make money if we give it away?”

• They leave, and form Adobe

• Initial plan: turnkey publishing system, complete with own hardware, software, and fonts


“We were originally going to supply a turnkey systems solution including hardware, printers, software, etc.

“Steve Jobs and Gordon Bell were key ingredients in getting things going…

Gordon said, “don’t do the whole system”

Steve said, “just sell us the software”.

That’s how the business plan formed. It wasn’t there in the beginning.”

- Charles Geschke

Today, Adobe’s market value exceeds that of Xerox


Different Financial Processes

Chess: Type I errors

• Plan several moves ahead

• No new information needed

• You know what you’ve got, what opponent has

• NPV

Poker: Type II errors

• Pay to play

• Pay for new information

• You discover what

you’ve got, what other

players have

• Options


9 Building Blocks

1. Customer Segments

2. Value Propositions

3. Channels

4. Customer Relationships

5. Revenue Streams

6. Key Resources

7. Key Activities

8. Key Partnerships

9. Cost Structure


Customer Segments

• For whom are we creating value?

• Who are our most important customers?

• (Who are NOT our customers?)


Value Propositions

• What value do we deliver to the customer?

• What customer problem are we helping to solve?

• Which customer needs are we satisfying?

• What is the customer “job” to be done?


Channels

• Which channels will we use to reach our customers?

• How are customers reached now?

• Which channels are most cost-efficient?

• Which alternative channels might be used?

• Will there be Channel conflict? How to manage?


Customer Relationships

• What type of relationship do we want to have with our customers?

– Personal assistance

– Dedicated personal assistance

– Self-service

– Automated services

– Communities

– Co-creation

• Customer acquisition, retention, upselling


Revenue Streams

• For what value will customers really pay?

• For what value are they paying today?

• How would customers prefer to pay?

• Are there new revenue streams not currently being used?

• Fixed menu pricing, vs. dynamic pricing


Key Resources

• What key resources are necessary to deliver the value proposition to our customers?

– To our distribution channels?

– To build the customer relationships?

– To realize the desired revenue streams?

• Types of resources: physical, intellectual, human, financial


Key Activities

• What key activities are required by our value proposition?

– By our distribution channels?

– By our customer relationships?

– To realize our revenue streams?

• Examples: production, problem solving, platform and/or network


Key Partnerships

• Who are our key partners and suppliers?

• Which resources do we provide ourselves, and which do we rely on others to provide?

• Economies of scale

• Economies of scope

• Risk and uncertainty management


Cost Structure

• What costs are most important in our business model?

• Which key resources and activities are most expensive?

• Fixed costs, variable costs, contingent costs, options


Thanks!

Henry Chesbrough Berkeley Haas School of Business Esade Business School