YR1TJ19I

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YR1/TJ19/IE module course NEW BUSINESS MODELS
Jussi Puhakainen, Professor (FT) TSE Pasi
Malinen, Professor (FT) TSE
"Teach me to be obedient to the rules of the
game." from "Customs and Traditions of the Royal
Navy, Manners Ashore and Afloat. "I don't give
a damn about your bloody rules, this is how it is
going to be done." Task Force Commander
Rear-Admiral Sandy Woodward during
Falkland-campaign 1982
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Aims for the course

• Background
• Business models are one of the most prominent,
  yet least understood issues in business research
  and management. Classical strategic approach
  relies upon rigid business models, which define
  the way the actors operate in relation to each
  other and associated revenue logics.
• Technological and organisational innovations
  together with turbulent business environment set,
  however, new requirements for business model
  planning

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Aims for the course

• In this course, we pay special attention to these
  new business models.
• Consequently, we ask questions such as What is
  the role of a business model?
• What kinds of business models are suited for
  various situations?
• How do we formulate and plan our business model?
  How does our business model affect strategy and
  management and vice versa.
• The course pays attention to potential
  high-growth niche markets and innovative revenue
  models/logics.

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This is important

• Check regularly the following web-site
• http//www.nordicict.eu/courses/newbusinessmodels.
  html
• Book
• Open innovation the new imperative for creating
  and profiting from technology, Chesbrough, Henry
  W. (2003), 1-57851-837-7.

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The actors

• Prof Jussi Puhakainen. ISS, business models,
  bus.dev. Former e-business background
• Prof Pasi Malinen. Entrepreneurship, business
  planning, science to business
• Petteri Sinervo. IPR-management. Former venture
  capital background
• Timo E. Toivonen. Business analysis

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Strategic planning

• "Good-morning good-morning!" the General said
• When we met him last week on our way to the Line.
• Now the soldiers he smiled at are most of 'em
  dead,
• And we are cursing his staff for incompetent
  swine.
• "He's a cheery old card," grunted Harry to Jack
• As they slogged up to Arras with rifle and pack
• But he did for them both by his plan of attack.
• Siegfried Sassoon, "The General", 1917.

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Aim of this lecture

• Case examples (mostly disruptive)
• Semantics what these concepts mean. Multiple
  meanings
• To understand what strategic analysis is all
  about
• Introduction to business models and revenue logics

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So we move forward and expect

• "It is a tale.
• Told by an idiot, full of sound and fury,
• Signifying nothing."
• from "Macbeth", William Shakespeare.

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Good disruptive examples

• Examples of disruptive business models (and
  strategic innovations)
• Dell vs. IBM
• Amazon vs. Barnes Noble
• Ebookers vs. traditional travel agents
• RyanAir vs. KLM
• Apple vs. mp3 player industry

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In brief

• Strategy is
• scheme an elaborate and systematic plan of
  action
• the branch of military science dealing with
  military command and the planning and conduct of
  a war
• strategy is a long term plan of action designed
  to achieve a particular goal
• a broad non-specific statement of an approach to
  accomplishing desired goals and objectives
• The general plan or direction selected to
  accomplish incident objectives
• A strategy is a long term plan for success, to
  achieve an advantage. In force terms this is the
  key milestones and targets for the coming year.

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And it can be

• Defensive
• Lets stay in this business
• Maginot line or the great China Wall
• Or offensive
• Blitzkrieg
• Nelson
• Hostile takeovers, move to other business
• Or both, or something in between, or something
  completely different
• Very easy to just imitate others

"Remarkable", said the Old Man. from "The Boat
(Das Boot)", Lothar-Gunther Buchheim.
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Crossing the T

• http//www.abovetopsecret.com/forum/thread341397/p
  g1

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Multiple strategies

• An organisation usually has several
  sub-strategies (such as marketing, customers
  etc.)
• These should be complementary and support each
  other

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Example ICT

• Information technology strategy defines and
  decides the technical infrastructure of the
  organisation and its future development
  (computers, networks etc.)
• Information systems strategy defines applications
  (software and usage)
• Information management strategy takes into
  account also
• Organisational factors (who does, whom affects?)
• Financial factors (who pays, how to measure)
• Leadership (who manages and what?)

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The linkage between strategies, example
Organisational strategy
Human Resources Strategy
Information Management Strategy
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Strategy lives and changes with the organisation

• Strategy must live with the org., i.e. it is a
  living and updating process. Result of the
  process is a plan, which when put into action
  takes into account
• Changes in the business environment
• New technological possibilities
• Learning processes in the organisation and
  stakeholders
• So let us not lock ourselves to fixed strategy

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The result is a plan

• Which contains
• Desired results with the business
• How to-style of plan
• Money and timetables
• Whos responsible for what

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Problems

• Strategy planning process seen as too rational,
  black and white. Mr. Spock syndrome
• Part is deduction, but one must understand that
  an organisation has multiple, even conflicting
  goals.
• If we cannot reach a consensus strategy
  (everybody is happy), we will have problems in
  managing the strategy. On the other hand, when
  everybody is happy, the strategy may be timid,
  nothing really happens
• The worst is a closet strategy, that has nobody
  really behind it.

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HR issues and integration

• In managing change, one must have a realistic
  picture of the possibility of change
• Employees know-how/skills and
• General flexibility of the org.
• Resistance of change is rather strong even in
  good projects
• Being overly optimistic that people will
  understand what this is all about is naive

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Strategic planning

• It is very hard to formulate a lasting strategy
  in a turbulent environment
• For example Internet, mobile business etc.
  develop with tremendous speed, if these affect
  your business, then
• More important to have a constant cycle of
  experimenting and learning
• Commitment
• Case examples

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Competitive strategy 101

• Comp. strategies
• Porters generic strategies
• cost leadership,
• differentiation and
• focus
• ICT can support strategy
• ? Porters strategies are mutually exclusive
• ? ICT may make it possible to combine strategies

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On the sources of comp. advantage
Resource-based view (Kangas Barneyn
(1994) Pohjalta
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Basic strategies and sources...!!!

• Barney core competencies
• Dyer and Singh (1998) maintain that a company's
  critical resources may span firm boundaries and
  be embedded in interfirm resources and routines

Eisenhardt and Sull
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Summa summarum

• Porter (1996) describes competitive strategy as
  being different.
• Strategy means deliberately choosing a different
  set of activities to deliver a unique mix of
  value.
• The key element in Porters strategic thinking is
  positioning and the three general strategies
  cost leadership, differentiation and focus
  represent the alternative strategic positions in
  one industry.

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Summa summarum

• Barney however, regards the resources of a firm
  as the basis of its sustainable competitive
  advantage (Barney, Wright Ketchen 2001.), and
  thus its strategic approach.
• The resources that are valuable, rare,
  imperfectly imitable and not substitutable
  whether tangible or intangible are to key to a
  firms success.

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Summa summarum

• In stable markets, managers can rely on
  complicated strategies built on detailed
  predications of the futures, but in complicated
  and fast-moving markets where significant growth
  and wealth creation can occur, unpredictability
  reigns. According to (Eisenhardt Sull 2001.)
• The most profound strategic implication of the
  new economy is that companies must capture
  unanticipated opportunities in order to succeed.
• Rather than picking a position or leveraging a
  competence, managers should select a few key
  strategic processes and craft a few simple rules
  to guide them.

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Before bus.models

• In order to be able to design a business model,
  one must understand value chains and networks

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Leaving value chains behind

• VC works best in industrial settings
• The quality of the product and good logistics are
  almost given, do not generate comp. Advantage
• VC is not well-suited to a service or networked
  environment
• And more and more of the revenue comes from
  after-sales operations

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Typical valuechain

• Cost- and functionally driven

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Extended Value Chain(Added value search by
outsourcing and/or co-operation)
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Knowledge-based networks

• The future BM is based upon one customer
  management layer, which binds the participants of
  the network together
• e-commerce-gte-business-gtk-business
• Technology and its management reign supreme

I much prefer to have the clientele come to me
than go after them. Manfred von Richthofen.
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Topography

• Relationship and learning generation

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Why networks and alliances?

• From http//www.firstmonday.org/issues/issue6_11/
  dafermos/

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From value chain to networkSource
http//www.firstmonday.org/issues/issue6_11/daferm
os
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Towards Business Models

• "There is seldom any lack of attractive-looking
  schemes in war. The difficulty is to give effect
  to them".
• Field Marshal Sir William Robertson.
• However beautiful the strategy, you should
  occasionally look at the results.
• Sir Winston Churchill

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Triangle (Osterwalder Pigneur 2002)
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What BM means

• (Timmers 1998) defines a business model as
• an architecture for the product, service and
  information flows, including a description of the
  various business actors and their roles and
• a description of the potential benefits for the
  various business actors and
• a description of the sources of revenues.
• (Morris et al. 2004) distinguishes three
  categories of business models economic,
  operational, and strategic level where the
  perspective becomes more comprehensive as one
  progressively moves from economic to the
  operational and from operational to strategic
  levels.
• (Magretta 2002) claims that terms business model
  and strategy are among the most sloppily used
  terms in business, and that they are often
  stretched to mean everything and end up meaning
  nothing.

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Business model

• A business model (also called a business design)
  is the instrument by which a business intends to
  generate revenue and profits. It is a summary of
  how a company means to serve its customers, and
  involves both strategy (what an business intends
  to do) as well as a implementation (how the
  business will carry out its plans).
• A business model describes how a business
• Selects its customers,
• Defines and differentiates its product offerings,
  
• Creates utility for its customers,
• Acquires and keeps customers,
• Goes to the market (promotion strategy and
  distribution strategy),
• Defines the tasks to be performed,
• Configures its resources, and
• Captures profit.

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Business models

• A business model is the method of doing business
  by which a company can sustain itself (generate
  revenue). The business model spells-out how a
  company makes money by specifying where it is
  positioned in the value chain.
• Business models are perhaps the most discussed
  and least understood aspect of the web. There is
  much talk about how the web changes traditional
  business models (death of the middle-men etc.).

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Example of a failure in digitization

• CustomFoot Inc.
• selling customized made-on-order shoes through
  the Internet
• The customer would go into a (physical) shop and
  have his/her feet measured with an infrared
  scanner. The contours of each foot were
  translated into one of 670 shoe sizes. These
  results were then transferred electronically to
  the manufacturing plant. The strengths of the
  business model were obviously low inventory costs
  and ability to sell customized shoes for the
  price of normal shoes.
• What went wrong?

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Once more unto the breach and other Henry the V
citations

• A business model is a description of how an
  organization functions, a general template that
  describes its major activities. It identifies the
  firms customers and the products and services it
  offers. A model also provides information about
  how a firm is organized and how it generates
  revenues and profits. Business models combine
  with strategy to guide major decisions at a firm.
  The model also describes products and services,
  customer markets and business process.

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Examples.

• In the 1950s new business models came from
  McDonald's Restaurants and Toyota. In the 1960s
  the innovators were Wal-Mart and Hypermarkets.
  The 1970s saw new business models from Federal
  Express and Toys R Us the 1980s from
  Blockbuster, Home Depot, Intel, and Dell
  Computer the 1990s from Southwest Airlines,
  eBay, Amazon.com, and Starbucks. Poorly thought
  out business models were a problem with many
  dot-coms.
• Today Apple and iPOD, RyanAir etc.

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Business models (Rappa) on the Web

• Brokerage
• Advertising
• Infomediary
• Merchant
• Manufacturer
• Affiliate
• Community
• Subscription
• Utility

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Revenue Model

• A part of business model
• In short defines where the money comes from
• May be vastly different, think about
  manufacturing, performing songwriter, a niche
  group in the Internet (http//www.uboat.net)
• Surprisingly, describes the logic of revenue

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Success stories

• Iridium
• technically outstanding network
• WAP
• technically it works, who uses it(signs of life
  recently)
• Mobile services adaptation equation ? who knows
  of services, how to get them, who wants to make
  them
• although cost of copying and distributing is very
  low
• Sonera, Worldcom, Verizon

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The story so far

• ¾ trillions to telecom business in the end of
  90s
• 4 rough years, the bottom has been reached, the
  value of companies still low
• Price intensitive competition, looking for the
  philosophers stone of customer perceived value
• Small operators will rise (parasitic operations,
  no network business), strong focus on price and
  costs
• New media companies are regular SMEs now

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Strategic planning

• It is very hard to formulate a lasting strategy
  in a turbulent environment
• Internet, mobile business etc. develop with
  tremendous speed
• Which drives which? IT business or vice versa
• More important to have a constant cycle of
  experimenting and learning
• Commitment

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What we thought we knew about E-biz

• You cannot be small fish on the markets,
  economics of scale rule
• Market maker effect dominates, value chains as we
  know are history, especially middle-men will be
  killed
• "In existing markets, the Net has the capability
  to remove the need for an intermediary in most
  transactions. As buyers purchase directly from
  producers, the loss of wholesalers, retailers,
  and other intermediaries could lower transaction
  costs for the purchaser and enable producers to
  achieve higher profits be retaining some of the
  markup previously retained by the
  intermediaries." (Foley, 1998).
• Brands are irrelevant
• Prices will fall
• First mover advantage is cruzial

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And

• Bbq.com
• Was Barbeque supplies e-tailer
• Born April 10, 2000
• Died June 27, 2000
• Burn rate 68 million
• "With the launch of the e-commerce site, Bbq.com
  will be to barbecue what Amazon is to books." --
  Anthony Johndrow, Bbq.com CEO and co-founder
• eToys.comWas Toy e-tailerBorn Oct. 1,
  1997Died March 8, 2001Burn rate About 220
  million"We honestly think we're going to change
  the way people buy toys" -- Phil Polishook, vice
  president of marketing, in October 1997

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So

• The underlying reasons for high hopes were
  dropped and buried for good
• On company level, just as managers were learning
  about the phenomenon, it died
• Hard times for dot.coms and new media companies

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Back to basics, are these irrelevant

• You cannot be small fish on the markets,
  economics of scale rule will dot.coms rise as
  small fish
• Market maker effect dominates, value chains as we
  know are history, especially middle-men will be
  killed middle men can brings added-value, but
  room to replace box-movers
• Brands are irrelevant brand, even a niche one,
  is cruzial, Internet both raises and lowers
  search costs
• Prices will fall -- ?? depends on business and
  how you define price
• First mover advantage is cruzial Amazon did it,
  the rest not

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What can we learn from the pioneers

• The strengths of trad. company are mostly
  strengths in the net as well
• brand, creating brand awareness is very expensive
• general business know-how
• multi-channel management, especially managing
  customerships, (boo.com)
• Value chains have not changed radically, yet
• Multi-channel business is demanding but a must
• E-com as separate channel problematic
• Less emphasis on IT, more on people
• Dot.coms will rise again

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The End

• "Essentially, the great question remains Who
  will hold Constantinople?" Napoleon