1114 Chapter 12 Business models CH Considerations in designing a business model Switching costs Service provider to another is called switching costs. The higher the switch The time, effort or money a customer has to spend to switch from me the likelier a customer is to stick to one provider rather than to leave lot the you ucts or services of a competitor. Apple's introduction of the iPod in 2001 alded his new product with the catchphrase 'thousand songs in a pocket. Wel on great example of designing switching costs into a business model. Steve Job was more than a product innovation focusing on storage. It was a business would make it more difficult for them to switch to competing digital me players strategy to get customers to copy all their music into iTunes and their own switching from one player to another, this was a smart move and laid the In a time when little more than brand preferences were preventing people from tion for Apple's subsequent stronghold on music and later innovations. Scalability Scalability describes how easy it is to expand a business model without equally increasing its cost base. Consultancy is a well-understood business model and can be attractive and lucrative for techno start-ups, but it suffers from limits on scalability Of course, software- and web-based business models are naturally more scalable than those based on bricks and mortar but, even amongst digital business models there are large differences. An impressive example of scalability is Facebook delen only a few thousand engineers, it creates value for hundreds of millions of the Only ly a few other companies in the world have such a ratio of users per employee . A company that has pushed the limits even further is the social gaming company Zynga. By building games like FarmVille or CityVille on the back of Facebook, the world's largest social network, they could benefit from Facebook's reach (and scale) without having to build it themselves. A company that quickly learned its lessons regarding scalability was peer-to-peer communication company Skype. Its customer relationship collapsed under the weight of large numbers, when it was signing up ten thousands of users per day. It had to adapt its business model quickly to become more scalable. Recurring revenues Recurring revenues are best explained through a simple example. When a newspar per earns revenues from the sales at a news stand, they are transactional , whilst revenues from a subscription are recurring. Recurring revenues have two major advantages. First, the costs of sales incur only once for repetitive revenues. Second, with recurring revenues the business will have a better idea of how much it will earn in the future. A nice example of recurring revenues is Red Hat, which provides open source software and support to enterprises based on a continuous subscription basis. In this 428 Considerations in designing a business model of licences for every major release. model, clients do not pay for new software versions, because it is continuously updated. In the world of software as a service, these types of subscriptions are now the norm. This contrasts with Microsoft, which sells most of its software in the form enues generated from initial sales. This is the "bait and hook' revenue model. For example, when you buy a printer, you continue to spend on cartridges or, when you However, there is another aspect to recurring revenues, which are additional rev- buy a game console, you will continue to spend on games. This revenue model has not gone unnoticed by large corporations such as Apple; whilst Apple still earns most of its revenues from hardware sales, the recurring revenues from content and producto hing costs the prod 1 is also a Jobs her Well, than ess model apps is steadily growing Cashflow od, which - players ple from Specifically, the more the business can earn before spending, the better. Dell pio- neered this model in the computer hardware manufacturing industry. By assembling on order after selling directly they managed to escape the terrible inventory depre- ciation costs of the hardware industry. Its impressive results showed how powerful founda it is to earn before spending. equally can be lability calable Getting others to do the work This is probably one of the least publicised weapons of mass destruction in business model design. What could be more powerful than getting others to do the work whilst you earn the money? For example, IKEA gets us to assemble the furniture we buy from them. We do the work. They save money in transportation costs and stor- age costs. Similarly, eBay gets us to do the work of posting details of the items we want to sell and then they get paid for any sale. Another more obvious example is open source software, where firms generate cash from a community of users devel- nodels , With users, yee. A npany k, the scale) oping the software. -peer the ay. It Protecting the business from competitors A great business model can provide a longer-term protection from competition than just a great product. An elaborate supply chain network, such as those developed by Toyota, offers it additional protection from competitors. Furthermore, Apple's main competitive advantage arises more from its powerful business model than purely from its innovative products. It is easier for Samsung, for instance, to copy the iPhone than to build an ecosystem like Apple's App Store, which caters to develop- ers and users alike and hosts hundreds of thousands of applications. Spa- hilst jor nd, arn Changing the cost structure Cutting costs is a long practised sport in business. Some business models, however, go beyond cost cutting by creating value based on a totally different cost structure. This is what Ryanair did with its no frills airline. The newspaper industry has also rce his 429 Continual Chapter 12 Business models Deine's communication making people pay for access via a subscription charge. In addition, changed the cost structure of its industry by making content available newspapers are now given away free, with advertising paying for that you costs. Another example is Skype. It provides calls a because its business model has a very different cost structure. In fact, Sk a conventional telecom company, but for free or for a very low cost. It can model is based on the economics of a software company, whilst at er's model is based on the economics of a network company. The are mainly people; whilst the latter's cost include huge capital expenditures extended ro fuel suc and one o is very dif identify tor infrastructure. . an ori nities: . a bal . cohe Intellectual property is an asset The licensing b A lic thing the Intellectual property (IP) is a company asset and should be treated and managed such. Owning and acquiring IP will not overcome poor business Strategy and wake that failed to profit from it. Classic cases, such as the EMI scanner (MRI), are told a company successful. There are many examples of firms with exciting technology to business students. This technology was developed by EMI, but it failed to develop a business model to exploit it. The licensing business model is well understood and the variety of ways the licensing arrangement is organised is almost IP is a broad concept and includes many different intangibles, such as parents (inventions), copyright (works of authorship, software, drawings, etc.) know- how something works), trade secrets (a protected formula or method), trade how (e.g. expertise, skilled craftsmanship, training capability, understanding of ance) and semiconductor mask works (the physical design of semiconductor circuits). well-known, limitless. wh Th th LI li marks (logos, distinctive names), industrial design (the unique external appear F The technology licence and business relationships Although not immediately apparent when reading an impressive looking licence agreement, it is quickly realised and understood by all businesses that, with a licence, must come other very practical agreements that will help both parties succeed. Let us take an example. Red Software Company decides to collaborate with Blue Software Company to develop a new computer game provisionally labelled Galaxywars. This will involve collaborating R&D activities. So, they sign a technol In addition , they need to negotiate an R&D agreement to specify the terms of the ogy licence that gives each company rights to use each other's technology (software) collaboration. That is , length of time, level of investment required, resources that each company will have to make available, etc. Furthermore, what happens to all some of the outputs in its own range of computer games whereas Blue Software the outputs from the collaboration? Red Software Company may be able to utilise Company may be unable to use any of the outputs. Also, who is going to manufac- ture, market and distribute Galaxywars? An IP licence is interrelated to many other agreements. 430 The licensing mode toe my day act do this Skype Continual adaptation of the business model Developing a business model is all well and good, but sustained success comes from changing it and continually adapting it. Companies that manage to create value OVET extended periods of time successfully shape, adapt and renew their business models to fuel such value creation. One only has to consider General Electric, IBM or Apple and one quickly realises that the business model of these firms that is in place today is very different from the one in place 10 or 20 years ago. Achtenhagen et al. (2013) identity three critical capabilities to achieve this: . an orientation towards experimenting with and exploiting new business opportu CO esin nities a balanced use of resources . coherence between leadership, culture and employee commitment das wake old The licensing business model end Ost A licence is a consent by the owner to the use of IP in exchange for money or some the purchaser and user of the licence is known as the licensee. thing else of value (May, 2006). The owner of a licence is known as the licensor and Technology-based start-up ventures inevitably involve scientists and inventors ts product. ing in who are interested in seeing their research or inventions commercialised for use. They are, usually, however, equally also interested in the intellectual challenge of The research. In such cases, licensing a technology id ea might make good sense. Licensing allows technology producers to generate cash from their innovations by licensing them to other companies so that they may be integrated into an end Licensing is most commonly applied to innovations that involve sophisticated technology protected by intellectual property (IP) agreements. The innovation itself may not be a complete product and may need to be integrated into a broader offer- 1 order to create value for the end user. For example, the Blu-ray case study at the end of Chapter 8 illustrates how licensing can be used to secure dominance in an industry. It is worthy of note and consideration for the start-up that technology-based licensing agreements rely on relatively intimate and long-term relationships with customers. This is because all parties must exchange certain (confidential) informa- tion and because the fundamental economics of a licensing arrangement are long- term in nature. The idea that business negotiations over licensing deals are won and lost through good and bad negotiations is overstated. There is a mutual interest in both parties surviving and thriving, hence most technology-based licensing deals are beneficial for both parties. Bear in mind, however, it is possible that a potentially attractive licensing agree- ment can result in very poor results for a start-up. Such a situation could occur, for example, if a start-up signs an exclusive licence with a partner in order to secure a royalty stream. But then actions do not live up to the promises because, for example, the partner does not invest sufficiently in marketing or developing the technology. In 431 Assignment #7 Remember the Shipping Container case in Chapter 3. Reread it. 1. On page 428-431, discuss the 4Fold Containers business model considerations in terms of each of the issues listed on those pages. Use one bullet point of 2- 3 sentences for each of the 10 issues listed 2. Sketch out five different possible business models for 4Fold from those described as archetypes in the text. Of these, which would be the most profitable and most likely to succeed? Why? 1114 Chapter 12 Business models CH Considerations in designing a business model Switching costs Service provider to another is called switching costs. The higher the switch The time, effort or money a customer has to spend to switch from me the likelier a customer is to stick to one provider rather than to leave lot the you ucts or services of a competitor. Apple's introduction of the iPod in 2001 alded his new product with the catchphrase 'thousand songs in a pocket. Wel on great example of designing switching costs into a business model. Steve Job was more than a product innovation focusing on storage. It was a business would make it more difficult for them to switch to competing digital me players strategy to get customers to copy all their music into iTunes and their own switching from one player to another, this was a smart move and laid the In a time when little more than brand preferences were preventing people from tion for Apple's subsequent stronghold on music and later innovations. Scalability Scalability describes how easy it is to expand a business model without equally increasing its cost base. Consultancy is a well-understood business model and can be attractive and lucrative for techno start-ups, but it suffers from limits on scalability Of course, software- and web-based business models are naturally more scalable than those based on bricks and mortar but, even amongst digital business models there are large differences. An impressive example of scalability is Facebook delen only a few thousand engineers, it creates value for hundreds of millions of the Only ly a few other companies in the world have such a ratio of users per employee . A company that has pushed the limits even further is the social gaming company Zynga. By building games like FarmVille or CityVille on the back of Facebook, the world's largest social network, they could benefit from Facebook's reach (and scale) without having to build it themselves. A company that quickly learned its lessons regarding scalability was peer-to-peer communication company Skype. Its customer relationship collapsed under the weight of large numbers, when it was signing up ten thousands of users per day. It had to adapt its business model quickly to become more scalable. Recurring revenues Recurring revenues are best explained through a simple example. When a newspar per earns revenues from the sales at a news stand, they are transactional , whilst revenues from a subscription are recurring. Recurring revenues have two major advantages. First, the costs of sales incur only once for repetitive revenues. Second, with recurring revenues the business will have a better idea of how much it will earn in the future. A nice example of recurring revenues is Red Hat, which provides open source software and support to enterprises based on a continuous subscription basis. In this 428 Considerations in designing a business model of licences for every major release. model, clients do not pay for new software versions, because it is continuously updated. In the world of software as a service, these types of subscriptions are now the norm. This contrasts with Microsoft, which sells most of its software in the form enues generated from initial sales. This is the "bait and hook' revenue model. For example, when you buy a printer, you continue to spend on cartridges or, when you However, there is another aspect to recurring revenues, which are additional rev- buy a game console, you will continue to spend on games. This revenue model has not gone unnoticed by large corporations such as Apple; whilst Apple still earns most of its revenues from hardware sales, the recurring revenues from content and producto hing costs the prod 1 is also a Jobs her Well, than ess model apps is steadily growing Cashflow od, which - players ple from Specifically, the more the business can earn before spending, the better. Dell pio- neered this model in the computer hardware manufacturing industry. By assembling on order after selling directly they managed to escape the terrible inventory depre- ciation costs of the hardware industry. Its impressive results showed how powerful founda it is to earn before spending. equally can be lability calable Getting others to do the work This is probably one of the least publicised weapons of mass destruction in business model design. What could be more powerful than getting others to do the work whilst you earn the money? For example, IKEA gets us to assemble the furniture we buy from them. We do the work. They save money in transportation costs and stor- age costs. Similarly, eBay gets us to do the work of posting details of the items we want to sell and then they get paid for any sale. Another more obvious example is open source software, where firms generate cash from a community of users devel- nodels , With users, yee. A npany k, the scale) oping the software. -peer the ay. It Protecting the business from competitors A great business model can provide a longer-term protection from competition than just a great product. An elaborate supply chain network, such as those developed by Toyota, offers it additional protection from competitors. Furthermore, Apple's main competitive advantage arises more from its powerful business model than purely from its innovative products. It is easier for Samsung, for instance, to copy the iPhone than to build an ecosystem like Apple's App Store, which caters to develop- ers and users alike and hosts hundreds of thousands of applications. Spa- hilst jor nd, arn Changing the cost structure Cutting costs is a long practised sport in business. Some business models, however, go beyond cost cutting by creating value based on a totally different cost structure. This is what Ryanair did with its no frills airline. The newspaper industry has also rce his 429 Continual Chapter 12 Business models Deine's communication making people pay for access via a subscription charge. In addition, changed the cost structure of its industry by making content available newspapers are now given away free, with advertising paying for that you costs. Another example is Skype. It provides calls a because its business model has a very different cost structure. In fact, Sk a conventional telecom company, but for free or for a very low cost. It can model is based on the economics of a software company, whilst at er's model is based on the economics of a network company. The are mainly people; whilst the latter's cost include huge capital expenditures extended ro fuel suc and one o is very dif identify tor infrastructure. . an ori nities: . a bal . cohe Intellectual property is an asset The licensing b A lic thing the Intellectual property (IP) is a company asset and should be treated and managed such. Owning and acquiring IP will not overcome poor business Strategy and wake that failed to profit from it. Classic cases, such as the EMI scanner (MRI), are told a company successful. There are many examples of firms with exciting technology to business students. This technology was developed by EMI, but it failed to develop a business model to exploit it. The licensing business model is well understood and the variety of ways the licensing arrangement is organised is almost IP is a broad concept and includes many different intangibles, such as parents (inventions), copyright (works of authorship, software, drawings, etc.) know- how something works), trade secrets (a protected formula or method), trade how (e.g. expertise, skilled craftsmanship, training capability, understanding of ance) and semiconductor mask works (the physical design of semiconductor circuits). well-known, limitless. wh Th th LI li marks (logos, distinctive names), industrial design (the unique external appear F The technology licence and business relationships Although not immediately apparent when reading an impressive looking licence agreement, it is quickly realised and understood by all businesses that, with a licence, must come other very practical agreements that will help both parties succeed. Let us take an example. Red Software Company decides to collaborate with Blue Software Company to develop a new computer game provisionally labelled Galaxywars. This will involve collaborating R&D activities. So, they sign a technol In addition , they need to negotiate an R&D agreement to specify the terms of the ogy licence that gives each company rights to use each other's technology (software) collaboration. That is , length of time, level of investment required, resources that each company will have to make available, etc. Furthermore, what happens to all some of the outputs in its own range of computer games whereas Blue Software the outputs from the collaboration? Red Software Company may be able to utilise Company may be unable to use any of the outputs. Also, who is going to manufac- ture, market and distribute Galaxywars? An IP licence is interrelated to many other agreements. 430 The licensing mode toe my day act do this Skype Continual adaptation of the business model Developing a business model is all well and good, but sustained success comes from changing it and continually adapting it. Companies that manage to create value OVET extended periods of time successfully shape, adapt and renew their business models to fuel such value creation. One only has to consider General Electric, IBM or Apple and one quickly realises that the business model of these firms that is in place today is very different from the one in place 10 or 20 years ago. Achtenhagen et al. (2013) identity three critical capabilities to achieve this: . an orientation towards experimenting with and exploiting new business opportu CO esin nities a balanced use of resources . coherence between leadership, culture and employee commitment das wake old The licensing business model end Ost A licence is a consent by the owner to the use of IP in exchange for money or some the purchaser and user of the licence is known as the licensee. thing else of value (May, 2006). The owner of a licence is known as the licensor and Technology-based start-up ventures inevitably involve scientists and inventors ts product. ing in who are interested in seeing their research or inventions commercialised for use. They are, usually, however, equally also interested in the intellectual challenge of The research. In such cases, licensing a technology id ea might make good sense. Licensing allows technology producers to generate cash from their innovations by licensing them to other companies so that they may be integrated into an end Licensing is most commonly applied to innovations that involve sophisticated technology protected by intellectual property (IP) agreements. The innovation itself may not be a complete product and may need to be integrated into a broader offer- 1 order to create value for the end user. For example, the Blu-ray case study at the end of Chapter 8 illustrates how licensing can be used to secure dominance in an industry. It is worthy of note and consideration for the start-up that technology-based licensing agreements rely on relatively intimate and long-term relationships with customers. This is because all parties must exchange certain (confidential) informa- tion and because the fundamental economics of a licensing arrangement are long- term in nature. The idea that business negotiations over licensing deals are won and lost through good and bad negotiations is overstated. There is a mutual interest in both parties surviving and thriving, hence most technology-based licensing deals are beneficial for both parties. Bear in mind, however, it is possible that a potentially attractive licensing agree- ment can result in very poor results for a start-up. Such a situation could occur, for example, if a start-up signs an exclusive licence with a partner in order to secure a royalty stream. But then actions do not live up to the promises because, for example, the partner does not invest sufficiently in marketing or developing the technology. In 431 Assignment #7 Remember the Shipping Container case in Chapter 3. Reread it. 1. On page 428-431, discuss the 4Fold Containers business model considerations in terms of each of the issues listed on those pages. Use one bullet point of 2- 3 sentences for each of the 10 issues listed 2. Sketch out five different possible business models for 4Fold from those described as archetypes in the text. Of these, which would be the most profitable and most likely to succeed? Why