Business Models

1
Business Models

• Designing and value mapping successful business
  models for commercializing an innovation

2
PaxilCommercialization of an Old Invention

• Commercialization Opportunity Register Analysis

3
Paxil (paroxetine) antidepressantFeature Set

• Anti-depressant
• No chance of overdose (a serious problem for
  tricyclics)
• Is a form of Software (Leschly's perspective on
  drugs offered by SmithKline)
• Selective serotonin reuptake inhibitor' i.e.,
  it is 'selective' connoting a sort of
  'cleanliness
• Off-label treatment features (prohibited by
  FDA)
• Anti- 'panic disorder' (treating panic attacks)
• Anti- obsessive-compulsive disorder (including
  sub-disorders like bulimia and anorexia)
• 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

4
PaxilThe 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.

5
Attribute Map
6
Consumption Chain

• Three customer groups
• (1) Anxiety
• (2) Magazine Ad (DTC)
• (3) Articles suggesting off-label use

7
Awareness

• Three customer groups (1) Anxiety (2) Magazine
  Ad (DTC) (3) Articles suggesting off-label use
• Managing Awareness
• Find ways to link discomfort of anxiety with the
  promise of relief through Paxil
• Magazine ads should emphasize (a)
• Minimize the dissatisfaction from Ad clutter in
  magazines by making ads attractive, fun and
  informative
• Commission independent research and articles to
  promote off-label use of Paxil

8
Doctors Visit

• Managing Doctors Visit
• Magazine Ad (DTC) links discomfort of anxiety
  with the promise of relief through Paxil
• Magazine Ad (DTC) emphasizes that the best
  solution is Paxil
• Best means safest (cite tricyclics)
• Best means clean and selective
• Best means cleaning your brains software
• Make sure Dr. has lots of free Paxil samples
• Suggest Dr. experiment with off-label
  prescription

9
Purchase

• Managing Purchase
• Purchase at pharmacy with prescription assure
  in-stock
• Make sure price is covered by most health care

10
Use

• Managing Usage
• Assure dose large enough for effect
• Refills easy
• Off-label application easy
• Available through mail without prescription

11
Addiction

• Managing Addiction
• Dose should be adequate for psychological
  addiction
• Key to repeat purchase
• Promote this as lifestyle drug that assures
  healthy brain software

12
Moving Off-label to On-Label SmithKlines
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)

13
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

14
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 dont work
• Its because the fail either
• The Narrative test
• Or the Story test

15
A business model is not strategy

• It doesnt 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

16
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

17
Mad Catz is an example of A Network Business
Models

• Taxonomy of Network Business Models

18
Some Network Business Models
19
The Value Chain Integrator for Electronic and
Logistic Networks
20
Other Network Business ModelsAggregator
(e-Tailor)
21
Distributive Net
22
AgoraPrice and Other Information Discovery
23
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.

24
Disruptive InnovationThe Disk Drive Industry

• Disruptive Innovation, The Innovators Dilemma
  Forced Reconfigurations of Markets

25
Change in the Data Storage Industry Storage
Pre-1950 IBM M80 Sorter and M77 Collator
26
Storage5 MB in 1952
27
5-10 Megabytes in 1973 (14)
28
Shrink shrink shrink

• 20MB Seagate (5.25) c. 1986
• 100MB Conner (3.5) c. 1990
• 1000MB IBM (1) c. 2000

29
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

30
Tech Trajectories Disk Capacity Demanded vs.
Capacity Supplied
31
The Industry Dynamics of Attack from Below

• Technology Cost-to-Performance accelerates
• At an exponential rate
• With a constant year-on-year growth
• Substitute products accelerate on new performance
  parameters
• Creating a sneak attack
• At the low profitability end of an established
  firms market
• As substitute technologies accelerate, they
  consume all of the market of established firms
• Driving previously successful firms out of
  business

32
Technologies that Shrink?
33
Cost-to-performance acceleration
34
Successful Strategy?
35
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

36
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

37
Disruptive Innovation the Excavator Industry

• Incumbents fail to innovate
• Because they spend too much time listening to
  their existing customers

38
Caterpillar and the Mechanical Excavator Industry
39

• Cable-driven Steam Shovel
• Mnfd by Osgood General

40
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

41
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?

42
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

43
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
• Didnt even perceive Caterpillar as a competitor
• Because they spoke a different language
• To different customers

44
Hydraulics and Performance Trajectories in the
Mechanical Excavator Market
45
Caterpillars 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

46
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 youve succeeded,
• How do you convince others that your success is
  sustainable
• and not just luck

47
New Entrants went HydraulicMajor companies never
introduced a successful hydraulic excavator
48
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
• Cables demise was not due to poor knowledge or
  strategy

49
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
• Komatsus product literature emphasized
• That Komatsu equipment needed far less service
• Making them less dependent on their local dealer
• Since Caterpillars strength was its dealer
  network
• Komatsus new and distinctive strategy
• Disrupted their customer reach
• Kept customers out of Cats showrooms
• And convinced customers that this was good
• Caterpillar didnt perceive Komatsu as a major
  competitor
• Because they spoke a different language
• To different customers

50
Mad Catz Game ControllersCommercialization with
Rapid Innovation
51
Mad Catzs 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?

52
Mad Catz Value Map
53
Points to Noteabout Mad Catzs 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

54
Product Feature Map
55
Controller Economics
56
MadCatz Controller Consumption Chain
57
Game Ownership

• Managing Game ownership is a given MCs
  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

58
Purchase

• Managing Controllers are inexpensive and thus
  aftermarket controllers may have a hard time
  differentiating through advertising
• Location 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 differentiating
• Custom logos are a third way

59
Use

• Managing Use
• Reliability is essential for repeat purchases
• Ergonomics are a differentiator

60
Updates to the Case StatisticsWorldwide video
game industryMad Catzs 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.

61
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.

62
Controller Innovation
63
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

64
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

65
Innovation Workout

• Use Morphological boxes to study the
  Commercialization of Video Game Consoles