Day 1 Afternoon - Lever Business Ecosystems Carbone Muegge

Lead to WinMade available under Creative Commons License

New Competitive GameHow to Develop Strong Business Models & Lever Business Ecosystems to Gain

Advantage

Peter CarboneSteven MueggeJuly 2009

Lead to WinSlide July 28, 2009 Made available under Creative Commons License

Agenda

As senior leaders and founders - you are responsible for the strategy of your business - to design the business to compete:

• product vision• customer segments• go-to-market strategy• business model

This section covers some of these:• business ecosystem model for commercialization• open source and API’s as strategic assets• some new go-to-market tools• ways and means to gain advantage?

2


Introduction

Upon Completion of this segment you will know:• why business model decision is strategically important• about business models, market offers & customer value• assess business model strength• what a business ecosystem is/how to leverage• what you need to invest to get what you want• what you need to invest to make the ecosystem healthier

You will be able to:• select and articulate an appropriate business model at an

early stage• strengthen your company’s business model• lever ecosystems for competitive advantage• address larger opportunities than you could address alone

3


Why A Discussion on Choosing Business Models?

• As or more important than product– may undermine your value proposition (e.g. Google/

Microsoft)– may change industry structure (e.g. eMail)– may be the basis for competition (e.g. Google vs

infrastructure)• Often default to familiar product model

– only known way to commercialize– easy to understand

4


What Business Models Exist?

Product

5

Services

Applications/Solutions

• supply chain• IPR control• standards/volume• simplification

• leverage key people• scope of offer• standards/volume• normalization

• customization• componentization• speed to deliver functionality• innovation - sophisticationDomestic

Value Creation

Supply Chain Management

Control

Innovation

Global

Appropriate Value

Business ecosystems

Value Delivery

Commercialization


Business Models Compete

6

Service Portals

S/W Platforms

Network Platforms

Devices

Customer

• Commoditize Competition• Change strategic alliances• Disruptive value

propositions• Change value focus

Turnkey Solutions


Market offers and business models are two sides of same coin

• Market offer (offer) defines: – What is purchased – Rights over what is

purchased– How buyers purchase

• Offers:– Get jobs done for

customers– Solve problems– Satisfy needs that

customers have

• Business model is a clear concise narrative of “how the business works”:– Importance of getting a job

done, solving a problem or satisfying a need

– Value delivered to customers and other key stakeholders

– Explanation of attractive profits

– Control over or access to key resources and processes required to deliver value

Companies need to come up with great market offers which have great business models; great offers are not enough

7


Business model is key part of business plan, but does not replace it

Business plan A. Executive summaryB. Business profileC. Business environment analysisD. Market offersE. Market planF. Business modelG. OperationsH. Financial statement forecastsI. Financing requirementsJ. Financial statementsK. Appendices

8


A useful starting point

Is your company mainly about:• Products?• Services?• Applications?

In other words, what do your customers pay for, and what do they get for free?

But great business models go deeper than theproduct / service / application distinction.

9


3 interlocking elements of a business model

Starting from a job to be done, a problem, or an unmet need that matters to stakeholders

1. Stakeholder value propositions (SVPs)2. Profit formula3. Key resources and processes

10


Great business models

• Both create and capture value• Can change the basis for competition in a space

– What we used to compete over is now taken as given

– What was once lucrative becomes a commodity

• Evolve over time• Are able to take advantage of opportunities

11


Element 1: Stakeholder value propositions

Customer value proposition (CVP) addressesa) a target customerb) …with a job needing to be donec) …that can be satisfied by an offerBarriers for customers: insufficient wealth, access, skill, time…

Value = benefits from what is purchased, emotional benefits, rights over what is purchased, and how buyers purchase,– financial and non-financial burdens

Other key stakeholders also need value propositions:• Complementers, critical suppliers, channel and distribution partners,

investors, ...

12


Element 2: Profit formula (an explanation, not a spreadsheet)

Do the numbers work to produce attractive profits?

• Revenue– What is the offer? How are you paid? Prices? Volumes?

• Cost structure– What does it cost to produce and deliver the offer?

• Margin model– High or low margins? Volumes? Position relative to competition?

• Resource velocity to achieve operations targets– Lead times, throughput, inventory turn-over, asset utilization…

Tip 1: To get started, it may be effective to work backwards from target profits, then iterate through cost, price and volume.

Tip 2: It may help to compare against the best alternative.

13


Element 3: Key resources and processes

What capabilities are needed to deliver the stakeholder value propositions according to the profit formula?

• Resources– People, technology, equipment, information, relationships,

brand…– Investment– Channel to the customer (How will you sell “it”?)

• Processes– Design, product development, manufacturing, marketing,

training, IT– Rules and metrics

• Commercialization strategy– How will you capture the value created by innovation?– How will you collaborate with others?

14


Who profits from innovation?Classic model, adapted from Teece (1986), Pisano (2006)

De jure control(entrenched in law): patents, copyrights, standards, etc.

De facto control (in practice): technology characteristics, secrecy, tacit knowledge, etc.

Intellectual Property

AppropriabilityRegime

(IPR)

Difficult to capture value

from innovation

Complementary asset holders

capture most value

Innovator captures most

value

Value capture determined by power alliances

Tightly controlled

Complementary Assets

Freely available

Weak

Strong

Low-cost imitators soon enter

Other considerations: • Stage of product/industry lifecycle (is there a dominant design?)• Asset specificity (generic, specialized, or co-specialized?)• Mode of access to complementary assets (internalize, partial ownership,

contracting, partnerships, business ecosystems)

15


Complementary Assets (incomplete)

• Brand name and company image• Supply chain logistics• Distribution and sales channels• Customer service and support• Specialized manufacturing capabilities• Deep financial pockets• Peripheral products• Switching costs• Political, regulatory and customer knowledge• Critical real estate or institutional associations• Control over raw materials or key components• …

16


Commercialization strategy for start-upsAdapted from Gans & Stern (2003); refinement and extension of Teece (1986)

Attacker’s advantage

Reputation-based ideas trading

Greenfield competition

Ideas factory

Do incumbent complementary assets contribute to the value proposition (VP) of the innovation?

Contributes to VP

Non-Excludable

Excludable

Excludability Environment

Complementary Asset Environment

• Invest in complementary assets• Compete with incumbents in niche markets

Does not contribute to VP

Can start-up innovation preclude effective development by an incumbent?

• Start-up viability depends on the “market for ideas”

• Value will be distributed based on technology leadership

• Contract with incumbents• Depends on bargaining power

Innovation overturns the incumbent’s asset value

Innovation reinforces the incumbent’s asset value

17


Strength of business model (Strength)Strength = W1 x Significance + W2 x Customer value + W3 x Partner value + W4 x Profit

+ W5 x Leverage + W6 x Intellectual property

Significance = How important job to be done, problem to be solved, or need to be filled is to target customers

Customer value = How much better BU’s offer is at delivering value on the elements that matter most to target customers compared with the next best alternative offer

Partner value = How much better company’s go to market model is at delivering value on the elements that matter most to channel partners and complementors compared with the next best alternative go to market model

Profit = How likely it is that market offer will achieve the desired revenue growth and profits over the next three years

Leverage = How much better company is at leveraging key resources, processes and norms required to deliver value to customers and partners compared with the strongest competitor

Intellectual property =

How well company can protect its intellectual property for which customers or other licensees are willing to pay

W1, W2 , … W6 = Weights that reflect relative importance and range from 0 to 9

18


Calculate business model strength then act to improve it

Factor Target statement Weight(0 to 9)

Score1=strongly disagree,

7=strongly agree

Strength(Weight x Score)

Significance Target customers are convinced that it is very important to solve the problem, fill the unsatisfied need, or get the job done 8 5 40

Customer value Our offer delivers more value on the three elements that matter most to our customers when compared to the best alternative offer 6 3 18

Partnervalue

Our go-to-market model delivers more value on the three elements that matter most to our channel partners and complementors when compared to the best alternative go-to-market model

6 4 24

Profit The company is likely to achieve its desired revenue growth and profits over the next three years 7 5 35

Leverage Our company can lever the key resources and processes required to deliver value to customers and partners much better than our strongest competitor

3 2 6

IP Our company can protect its IP for which customers are willing to pay much better than our strongest competitor 3 3 9

Sum = 33 132

Business model strength = 57.1%132

(33)(7)[ ]19


Notes• Assign weights to reflect the importance of each factor for your

opportunity– Weights can range from 0 to 9 (0 = not important at all, 9 = very

important)– Rule of thumb: start with equal weights of 5 for all factors, then

increase or decrease as appropriate for each factor• Assign scores according to agreement with target statements

– Scores can range from 1 to 7 (1 = strongly disagree, 7 = strongly agree)

• Compute strength for each factor (weight x score); sum the columns• Compute business strength as the sum of the strength column divided

by the maximum possible value (sum of weights x 7 maximum score) • Rule of thumb for a strong business model:

– Each score 6 or better– Business model strength > 85%

• Objective is to strengthen business model, not argue about absolute score

20


Strengthen a business modelby increasing:

1. Significance Importance of getting job done, solving problem or satisfying need

2. Customer value3. Partner value

Value delivered to stakeholders

4. Profit Likely to deliver attractive profits

5. Leverage6. Intellectual property

Control over or access to key resources and processes required to deliver value

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References and further readingThe three-factor framework: value propositions, profit formula, resources and

processes Johnson, M.W., Christensen, C.M. & Kagermann, H. 2008. Reinventing your

business model. Harvard Business Review, December: 50-56. Anderson, J.C., Narus, J.A. & Van Rossum, W. 2006. Customer value

propositions in business markets. Harvard Business Review. March: 90-99.Other useful business model frameworks Chesbrough, H. 2006. Open Innovation, Boston, MA: Harvard Business School

Press. Cusumano, M.A. 2004. The Business of Software, New York: Free Press. Magretta, J. 2002. Why business models matter. Harvard Business Review, May:

86-92. Profiting from innovation; commercialization strategy Gans, J.S., & Stern, S. 2003. The product market and the market for "ideas":

commercialization strategies for technology entrepreneurs. Research Policy, 32: 333-350.

Pisano, G.P. 2006. Profiting from innovation and the intellectual property revolution. Research Policy, 35: 1122-1130.

Teece, D.J. 1986. Profiting from technological innovation: implications for integration, collaboration, licensing, and public policy. Research Policy, 15: 285-305.

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Why Must We Choose A Business ModelNew Value …. Experience

Rapid, Disruptive InnovationScale - Knowledge economy Superpowers

Need: Agility + Innovation + Scale + Cost effectiveness


Why Talk About Ecosystems

Reduce/Share Risk • lower market entry barriers• facilitates customers engagement• diversity provides resilience & early

indication of changesReduce Cost• share infrastructure (increase

variable over fixed)• shared market development• harness innovation & capabilities

globally

24

Makes you More Competitive

1. Willingness to pay - opportunity cost = Value2. Appropriate value vs. create the value

Increase Capability• reduces barriers to entry• access to specialized skills• move faster (both response

time & adaptation)• fills gaps in capability• reduces regional impacts -

global access & intelligence• offsets small size


Need to Co-Create with Customers

• Leveraging ecosystems to engage customers– co-discover new concepts– customization or extensions– access to specialized resources – co-develop solutions– all of the above– all but customization

• create pull for value proposition• bring new opportunities to table• provide context for solutions

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What is An Ecosystem?

NOAA Technical Memorandum

26


Characteristics of Strong Ecosystem

27

Focus• vision and ideas• volunteering/sharing• trading & transacting• co-evolution

Ecosystem Anchor

Apple personal computing

Unix interoperability

Java portability

Web 2.0 modularity

Auto transportation

Not about efficiency but rather diverse, dispersed modular clusters


What is a Business Ecosystem?

Resilience

Res

ista

nce

Dominator• Blocks change• Absorbs innovation

• Agile• Innovative• Independent

NicheUnstable

Stable

Keystone

• Productivity• Stability• Creates niches

• Slow• Static

Low

High

Environmental

Condition

Requires alignment around vision and development to perform


Role of a Keystone

Productivity of the ecosystem– vision & focus– relationships– engagement to solve problems

Stability– prevent/fill gaps– provide ‘air cover’

Create ‘niches’ (innovation)– sustain value

29

Architectural Control• Dominant design

External Operations• Attract members• Sustain value• Attract customers

Drive innovation• Create new value• Connect to

adjacent systems


Role of Niche Players

Drive sustained innovation– focus on value creation– contribute to variety

Provide complementary assets• collaborate vs compete• value-add

Invest in interactions • collaborate

30

Select sustainable niche & focus (e.g Quicken)

Lever services from keystone • concentrate on enhancing

the niche value• align to dominant design

Position product as extension of system vs standalone

Tradeoff risk & negotiation power against productivity


What Makes a Good Niche Player

• Attributes– agility– speed & breadth of innovation– contribution to health– partnering ability

• Getting deployed– easy of interaction – fit to solution

• Staying deployed– deliver– stay ahead

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IBM• context = vertical solutions• challenge = cost structure &

volume• customization of vertical

solutions• breakthrough ideas

Nortel• context = vertical solutions• challenge = cost & capability • platforms for vertical solutions• diversity - number and breadth of

partner products


Dominant Players

• Innovators dilemma attributes– large size and market power

• can’t change very fast• culture of ownership & control• fear open source/meritocracy

– don’t encourage diversity - the Borg• block changes (market power)• Absorbs change (acquisition)

– some examples (Microsoft, SAP, Nortel)

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Grow at the expense of ecosystem players


Applying Ecosystem to your Business

33

Choose ecosystemChoose roleIdentify players

C. L

inks

to o

ther

env

ironm

ents

B. Rules

D. Outcomes

E. C

hang

es

• Added value• Tactics

A. Players

Customers

Business Unit

Suppliers

Users and beneficiaries

ComplementersCompetitors

Orchestrators

Customers

Keystone

Problem makersBy standers


Ecosystem Health MetricsThe dimensions used to measure business ecosystem health are:

• Diversity measured as heterogeneity of members; • heterogeneity of products and services; and• heterogeneity of interactions (internal and external) • value creation

• Productivity measured as economic productivity of individual members and rate of product and service releases • sustained translation effort to productive work• improvement over time• innovation & lower cost (new products, shared assets)

34


Ecosystem Health Metrics(cont’d)

Robustness measured as change in membership numbers and diversity during times of stress and change in productivity during times of stress

• survival rate• persistence of structure• predictability of structure• limited obsolescence• continuity of user experience

• Commitment measured as income of the keystone; number of members whose main purpose is to enhance ecosystem; and number of products and services introduced to enhance community

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Co-Evolution vs Collaboration?

36

Traditional Collaboration CoEvolution

Form of Collaboration

Fixed links among static business

Shifting webs among evolving businesses

Objective Efficiency & economy of scope Growth, agility, and economies of scope

Internal Dynamics Collaborate Collaborate & compete

Focus Content of collaboration Content & number of collaborative links

Corporate Role Drive collaboration Set collaborative context

Business role Execute collaboration Drive & execute collaboration

Incentive Varied Self interest

Business metrics Performance against budget, preceding year, sister BU

Performance against competitors in growth, share, profits

adapted from K Eisenhardt


Difference between an Ecosystem & Developer community

37

Attribute Ecosystem Developer Community

Focus Partner Community (members, customers)

Supply Chain

Power Collaboration, speed, innovation

Meritocracy

Ownership, controlMarket power

Leadership(values)

Keystone(health of community)

Dominant Player(health of itself)

Scale Proportional to members

(pull marketing)

Proportional to size of dominant company (push

marketing)

Responsiveness Pace of members Pace of dominant player

Value independent, distributed Self contained

Examples Eclipse (open source)Apple

MicrosoftSAP


Ecosystem Uniqueness

• focus on monetization vs creation/innovation• relationships more important than technology• rewards performance not collaboration

38


Ecosystem Design• There are eight core aspects to ecosystem design:

– Vision, leadership and governance – Platform foundation – Niche architecture – Intellectual property regime – Global reach mechanism – Deal flow orchestration mechanism – Health improvement mechanism – Outreach

• Innovation leads to contribution– companies need innovation for themselves– innovate around common, shared building blocks/platforms not value

added• Keystone role is critical

– must evolve the platform - maintain value proposition to members - look after them

– must sell the value - promote membership

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Global Ecosystems In Action

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Ecosystem Anchor Keystone Type

Eclipse Product Non-Profit Open Source

Apple Service Commercial Proprietary

Microsoft Product Commercial Proprietary

Coral CEA Process Non-Profit Open


What Is Eclipse*Member Based Open Source Ecosystem

41

Shared Platform• Technologies• Architectures, designs

and assets used to build market offers

• Components, products and services

• Legal and licensing framework

• Processes

Your Value

• Licensing model for sharing co-evolved innovation

• Project model for coordinating investments & activities

• Governance model to ensure a level playing field for all participants

• Technical architecture for the platform

* from Eclipse Foundation


Considered a Successful Ecosystem• >200 members• 175 members deliver solutions

based on offerings• >1595 enhancements from

members• 7 well established niches• basis for 3rd party training &

consulting services• 10 global distributors• market leadership• 18M LoC from 23 open source

projects in Jun 08• 800,000 downloads a month42


Eclipse: What Makes it Successful?• disruptions create significant opportunity

– e.g. 2.27M developers now on Eclipse & competitive field reduced to 2 (Microsoft)

• coordinate and co-evolves innovation• drives alignment of vision• focus on business value, participation, open, modularity• build healthy, profitable ecosystem

– drives innovation via projects, attracts committers– vendor neutral, fosters adoption, large, diverse membership– finds growth opportunities, increases niches & connects

them• strong trust relationship from vendor neutral • standards based interfaces and components• 10 employees in Ottawa drive 917 committers; 100k dev in

Ontario alone; 180+ companies43


Apple Ecosystem Relationships

44

iPhone

iTunes

Music

Education

Accessories

Applications

Apple Customers

Distribution

Platform

Customers

Games


Apple Applications Store

• 10,000 Applications• 1,000,000,000 downloads in 9 months• huge development community• spread global very rapidly

45

Shows growth, ability to harness, win for all


Microsoft and Ecosystems

46

IBM

Then Now

OpenFlexibleCollaborative

ProprietaryControlAcquisitive

Both models• developer community• partner ecosystem

Niche

Dominator + Keystone

Har

dwar

e

OS

Offi

ce

Inte

rnet

Tele

com

...

• developer productivity, help from community• H/W & Driver developer community • Office developer community - get help you need

Nurture ecosystemPublic interfacesResistance -> Resilience

+


And Therefore ....?

• participation in ecosystem is a strategic decision• motivated by business performance • behaviour is different than developer community

- need to incent change • may be best way to be nurtured - new

technology, new species• successful relationships cannot be a force fit• powerful tool if used correctly• beware - the complexity defies management

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!"#$%&!'(

coral cea

Coral CEA

coral cea !"#$%&!'(

COR A L C E A


CustomersCustomers

Building a CEA Ecosystem ...

Keystone

Health Energy Finance

Educ

atio

n

Oil

& G

asMember companies

CustomersCustomers

CustomersCustomers

Investment

Results

Results

Value

1. Lower technology barriers (sandbox)

4. support implementation (commercialization)

2. Attract members & business (Business development)

5. Build capacity & talent (Knowledge & Dissemination)

3. Fill gaps process, technology, skills (entrepreneurial)

• Catalyst• Magnifier of investment

ICTCollaboration & co-creation

International members

• Companies• Skilled jobs• Talent• Products/services• Revenue growth• Leadership

Domestic

International

48


Customer Satisfaction

Quality Healthcare

Safety and

Security

Customer Service

Communications Enabled Application

• Integrated set of IT and Communications technology components

• Provides communications capability to an IT application

• Reliant upon communications technology to accomplish objectives

1849

Why Communications Enablement.....embedded Telecom as an Example


Capability Set

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Communications Building Blocks

IT ApplicationsBuilding Blocks

Billing

Location

Video

Presence

Voice

SubscriberProfile

Sharing WebComms

CallHistory

Click-to-Call

Conf-erencing Text-Chat

Purchasing E-Mail Fulfillment

OrderEntry SAPImaging

HealthcareEnergy Mgmt

AnyVertical

New Tools to create new value

* from Nortel public presentation


One Mode of Leverage

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!"#$%&!'(

coral cea

Coral CEA

coral cea !"#$%&!'(

COR A L C E A


Value PropositionValue Elements

• Reduce pre-sales, go-to-market and development costs

• Leverage members to deliver more comprehensive value propositions

• Decrease time-to-cash • Strengthen specialization• Increase credibility and brand value • Reduce risk of defining and exploiting

opportunities• Strengthen collaboration with other

ecosystem members• Harness global innovation into

profitable new market offers

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Assets

• Orchestrator, customer and large company opportunities and deal flows

• State of the art platform (architectures, software modules, and processes) to:

• build their own market offers using core services and products with a standard infrastructure environment

• co-evolve complementary components, products and solutions

• explore and advance technology• showcase their CEAs

• Lead projects, commercialization services, and training and educational programs that support a global leadership position in CEAs

• Research initiatives

!"#$%&!'(

coral cea

Coral CEA

coral cea !"#$%&!'(

COR A L C E A


How to Leverage an Ecosystem (Strategically Driven)

• Participate - active engagement / membership– meet & form strong relationships– discuss real issues

• Embrace the culture– reciprocal commitments - share – reward performance not collaboration– brainstorm for best ideas

• Focus– realistic analysis of cost/benefit– recognize that you learn as you go– cut stale links

• Get incentives right– self interest– business performance

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Your Investment

• provide visible support• align to vision & dominant design

– enhance the system– share intelligence

• contribute tools to enhance capability– reduction in overall cycle time– enable 3rd parties– open licensing of assets

• enhance overall richness of ecosystem– bring opportunities– bring friends

54


Investing in the Health

Strengthen – Diversity: Join, contribute, participate– Productivity: Contribute, collaborate, compete– Robustness: Persistence, scale

55


References

1.Moore, James F. (2006) Business Ecosystems and the View from the Firm, The Antitrust Bulletin, Vol 51, No. 1/Spring 2006. Draft of this paper is at: http://cyber.law.harvard.edu/blogs/gems/jim/MooreBusinessecosystemsandth.pdf

2. Iansiti, Marco and Roy Levien (2004) The Keystone Advantage: What the New Dynamics of Business Ecosystems Mean for Strategy, Innovation, and Sustainability: http://www.amazon.com/gp/product/1591393078/ref=pd_ecc_rvi_3/102-7940474-2044159?%5Fencoding=UTF8

3.James F. Moore (1996) The Death of Competition: Leadership and Strategy in the Age of Business Ecosystems. HarperCollins Publishers, Inc. New York. NY.

4.Peltoniemi, Mirva (2006) Preliminary theoretical framework for the study of business ecosystems, Complexity & Organization, issue 1, 10-19.

5.Eclipse Foundation : www.eclipse.org

6. Iansiti, Marco and Roy Levien (2004) Keystones and Dominators: Framing Operating and Technology Strategy in a Business Ecosystem: http://www.keystonestrategy.com/pdf/EcosystemStrategy.pfd

7.Bailetti, Tony (2009) Business Ecosystems: A new form of organizing creative individuals worldwide. Carleton University Speaker Series

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http://cyber.law.harvard.edu/blogs/gems/jim/MooreBusinessecosystemsandth.pdf




http://www.amazon.com/gp/product/1591393078/ref=pd_ecc_rvi_3/102-7940474-2044159?%5Fencoding=UTF8




http://www.eclipse.org

http://www.eclipse.org

http://www.keystonestrategy.com/pdf/EcosystemStrategy.pdf





Moment of truth• Select a market offer• Describe business model of market offer selected, i.e., provide

narrative that defines:– Importance of getting job done, solving problem or satisfying need– Value delivered to customers and other key stakeholders– Explanation of attractive profits– Control over or access to key resources and processes to deliver

value• Describe customer value in terms of:

– Benefits from what is purchased– Benefits from rights over assets purchased – Benefits from how buyers purchase – Emotional benefits – Financial and non-financial burdens

• Compute the strength of the business model and identify ways to improve it

57


Notes• Assign weights to reflect the importance of each factor for your

opportunity– Weights can range from 0 to 9 (0 = not important at all, 9 = very

important)– Rule of thumb: start with equal weights of 5 for all factors, then

increase or decrease as appropriate for each factor• Assign scores according to agreement with target statements

– Scores can range from 1 to 7 (1 = strongly disagree, 7 = strongly agree)

• Compute strength for each factor (weight x score); sum the columns• Compute business strength as the sum of the strength column divided

by the maximum possible value (sum of weights x 7 maximum score) • Rule of thumb for a strong business model:

– Each score 6 or better– Business model strength > 85%

• Objective is to strengthen business model, not argue about absolute score

58

Day 1 Afternoon - Lever Business Ecosystems Carbone Muegge

Education

Transcript of Day 1 Afternoon - Lever Business Ecosystems Carbone Muegge