These slides introduce a course on business models. The slides for subsequent sessions can also be found on this slideshare account.

1. BUSINESS MODELS FOR HI-
TECH PRODUCTS (MT 5016):
WHAT IS A BUSINESS MODEL?
A/Prof Jeffrey Funk
Division of Engineering and Technology
Management
National University of Singapore

2. New Products Continually Emerge

3. Lots of Questions
 Which ones will succeed?
 Which ones will fail?
 How can we increase the chances of
success?
 How can we increase the chances of OUR
success?
 How can OUR firm succeed to the extent that
OUR firm is in the top 100 market
capitalization
 Google, Facebook, Tencent were founded in the
last 15 years

4. New Product Success is not about
Following Rules
 It is about SETTING the rules in the new industry!
 Setting the rules means BREAKING the existing
rules
 What should the new rules be for the new
industry?
 How should new rules be different from old rules?
 This is completely different from science and
engineering modules!
 Science and engineering modules tell you about the
rules of science

5. The Concept of a Business
Model
 Can Help Us
 Position Our Products Against
 other products and other firms
 other technologies including the old one
 for which customers?
 Find and obtain revenues
 Position our product in overall value chains
 Think about future entrants and long-term
profitability

6. Module Objectives
 To understand
 business models
 their impact on competition between firms
 how different business models are needed for
different situations
 what drives need for change in business models
 Similarities/differences between business models and
strategies
 To develop a business model for a firm and
technology in a group project

7. Outline: Elements of a Business Model
 Customer selection: whom to serve and not serve
 Value proposition: what to offer and how to
differentiate
 Value capture: what are dominant sources of revenues
 Scope of activities: what activities to carry out and
what relationships to have
 Strategic control: how to sustain profitability, create
barrier to entry
Source: Stephen Bradley’s “Capturing the Value,” HBS Video

8. Breaking the Rules
 Customer selection: find new customers who are
unsatisfied or find new needs that are unfilled
 Value proposition: offer new forms of value
 Value capture: find new sources of revenues that
are different from ones in the past
 Scope of activities: participate in a different set
of activities than firms have done in the past
 Strategic control: create a new barrier to entry
that is different from the ones in the past

9. Outline: Elements of a Business Model
 Customer selection: whom to serve and not serve
 Value proposition: what to offer and how to
differentiate
 Value capture: what are dominant sources of revenues
 Scope of activities: what activities to carry out and
what relationships to have
 Strategic control: how to sustain profitability, create
barrier to entry

10. Customer Selection
 Who are the potential customers?
 What are the customer needs and wants?
 Do different customers want different things?
 How can we use this information to segment the
market (see following slides)?
 Are there collaborators who can also be thought of
as customers (see following slides)?
 Which customers will probably be the first
adopters of a new technology?

11. What is a
Need?
 Understand needs from
perspective of:
 Economic – what are
the costs and benefits?
 Functional – what does
a product do?
 Psychological value –
how do I feel and what
makes me feel better?

12. What is a Need?
Today’s
Business
Customer Needs
Unarticulated
Articulated
Customer Types
Served Unserved

13. Segmentation and Targeting
 Categorize customers in groups with distinct
needs
 Understand the differences between product and
market segments
 Select segment (s) that have the best short
and long-term prospects for the firm
 If a new technology,
they must be early
adopters of new technology
 Many ways to
segment markets

14. What About Collaborators?
 Many products have multiple customers or
collaborators who might be considered
customers
 Who are they?
 They might be
 retail outlets
 providers of complementary
products or complementary
services
 How does the business model fit with these
collaborators?

15. Outline: Elements of a Business Model
 Customer selection: whom to serve and not serve
 Value proposition: what to offer and how to
differentiate
 Value capture: what are dominant sources of revenues
 Scope of activities: what activities to carry out and
what relationships to have
 Strategic control: how to sustain profitability
Source: Stephen Bradley’s “Capturing the Value,” HBS Video

16. Value Proposition
Value to
the
target
market
Benefits to
the
target
market
Price to
the
target
market
= Relative
to
A simple and clear statement of the intended target market, the
benefits of the offering, and the price
New technologies/products diffuse because they offer a
superior value proposition to users
But you must provide more details than just a simple and clear
statement!!

17. Value Proposition
 What constitutes a good value proposition?
 Speed, resolution, efficiency, energy usage?
 Features, aesthetics, convenience, happiness, humor?
 Usability, compatibility, reliability, durability?
 Easier said than done! Don’t follow the old rules!
Rethink your assumptions and market assumptions!
 Value Proposition closely related to customer selection
 Different value propositions are appropriate for different
customers
 In a search for a good value proposition, one must consider
different value propositions along with different customers

18. For Your Group Presentation (1)
 Choose a new technology that has recently been
introduced or will soon be introduced
 Don’t look too far into the future
 Choose an existing firm that might or should introduce
the technology because the technology is consistent
with the firm’s core competencies

19. For Your Group Presentation (2)
 Defining a value proposition should help you segment
and target markets
 Some segments will adopt a new technology faster
than will other segments
 You must identify and target those segments
 Ideally you will know the order in which segments/users
adopt the new technology
 Then you must contrast your firm’s product or service
with the competitors’ product or service for the target
segment(s)

20. Justification and Quantitative Data
 You must justify and/or quantify your data
 The justification is more important than the data
 Make sure you consider all the important dimensions
 Finding a new dimension is often a major source of
advantage in the market
 All dimensions aren’t created equally
 Quantifying each dimension of performance is useful,
albeit sometimes difficult

21. One Way
to Compare
Value
Propositions
But does this
comparison
tell us which
product
provides
users with
more value?

22. Outline: Elements of a Business Model
 Customer selection: whom to serve and not serve
 Value proposition: what to offer and how to
differentiate
 Value capture: what are dominant sources of revenues
 Scope of activities: what activities to carry out and
what relationships to have
 Strategic control: how to sustain profitability
Source: Stephen Bradley’s “Capturing the Value,” HBS Video

23. What
percent of
total value
can a firm
(i.e., seller)
collect?
and its
collaborators

24. Old Manufacturing Uber Apple
Microsoft’s Windows YouTube, Google
Facebook
IBM Linux Code Linux Kernel
Wikipedia
Blogs
In-house Community-Driven
Value Creation
ValueCapture
Eco-systemCompany
Collaborators Create an Increasingly Large % of
Value and Providers Expect Smaller % of Value
Source: Chesbrough
and Appleyard, 2007

25. Types of Value Capture in Business Models
Revenue Model Basic Idea
Commission Fees levied on transactions where fees are
based on level of transaction
Advertising End users subsidized by advertising
Markup Value added in sales
Production Value added in production
Referral Fees for referring customers to a business
Subscription Fees for unlimited use
Fee for Service Fee for metered service

26. Large Changes for Revenue Models
in Many Industries
 Sources of value capture are changing in many
industries including manufacturing industries
 As with other elements of business models, you can’t
just summarize the dominant source of revenues, you
need to
 Find and analyze other methods
 Justify your choice
 Creativity is an important part of a group presentation’s
grade! Propose and analyze a new method of value
capture

27. Outline: Elements of a Business Model
 Customer selection: whom to serve and not serve
 Value proposition: what to offer and how to
differentiate
 Value capture: what are dominant sources of revenues
 Scope of activities: what activities to carry out and
what relationships to have
 Strategic control: how to sustain profitability
Source: Stephen Bradley’s “Capturing the Value,” HBS Video

28. Scope of Activities
 What do you make or do versus what do you
buy or outsource?
 Partly a cost decision, partly a strategic decision
 Want to reduce costs
 But also
 want to develop capabilities
 don’t want to become dependent on a single firm for a
key component
 Thus, make versus buy decisions determine the
areas in which a firm intends to compete
 But more importantly……..

29. Vertical Disintegration in Value Chains
has been Emerging Over time
 Represents the extent to which work is shared
among different organizations in an industry value
chain
 Changes in vertical (dis)integration can come from
technological, institutional, or social changes that
impact on how organizations divide up work
 In particular, reductions in transaction cost can
reduce
 costs of having work done by multiple firms
 importance of integrative capabilities
 and thus facilitate the emergence of vertical disintegration

30. Source: Christensen & Raynor, 2003
Vertical Disintegration

31. Another Reason for Thinking About Scope of Activities:
Identify the flows of information,
money, and products in system

32. Outline: Elements of a Business Model
 Customer selection: whom to serve and not serve
 Value proposition: what to offer and how to
differentiate
 Value capture: what are dominant sources of revenues
 Scope of activities: what activities to carry out and
what relationships to have
 Strategic control: how to sustain profitability
Source: Stephen Bradley’s “Capturing the Value,” HBS Video

33. Strategic Control
 What enables a firm to be profitable with a new technology?
 First mover advantages? Good design? Good performance?
These are only important in the short run, In the long-run,
most things can be copied
 Why are Google, Facebook, Tencent, Microsoft and Apple so
profitable and for many years? This is what drives venture
capitalists!
 This is the most difficult part of a business model
 For your group presentations, you should think about this last,
after you have determined the other elements of the business
model

34. Barriers to Entry Determine Profitability
 As firms enter, prices typically fall to a level at which
“marginal prices equal marginal revenues” where
 Profits barely support business
 So creating barriers to entry is critical for achieving
having above average profits. How can this be done?
 Control key resource, Intellectual Property (IP), etc.
 Might control key resource or asset through economies of scale
 Control the way work is divided up among different
organizations (e.g., through control of interface standards)
 Network effects
 Venture capitalists look for potential barriers to entry,
not just good value propositions!

35. In Summary: For your group presentations
 Tell me about the business model
 Customer selection: whom to serve and not serve
 Value proposition: what to offer and how to differentiate
 Value capture: dominant source of revenues
 Scope of activities: what activities to carry out
 Strategic control: how to sustain profitability
 You must justify your choices!
 Start forming your groups (3 to 4 members) at the break (in
about 45 minutes)
 Consistency
 among elements is critical
 between business model and company capabilities