Thursday, April 19, 2012

Trading items of unequal value

In my recent post The value of non-moneterized transactions, I wanted to illustrate that value can be created but also captured without money changing hands. Most often of course it is a combination; your first paying customer may also be your best reference customer, your proof of concept towards investors, your valuable partner in understanding the market and so on. The cost for your customer to agree to being a reference customer or provide you with data, may be close to zero, while the value for you may be substantial. When designing business models, it is important to understand what you have that may be valuable for others, and what others have that may be valuable to you.

In his excellent book on negotiation Getting More: How to Negotiate to Achieve Your Goals in the Real World, Stuart Diamond presents twelve major strategies, tools that support them, and specific applications and examples. One of the twelve strategies is the concept of trading things of unequal value, something that I also see as an important concept in designing value propositions and business models.

"All parties value things differently, and often unequally. Once you find out what they are, you can trade them."

"Find out what each party cares and doesn't care about, big and small, tangible and intangible, in the deal or outside the deal, rational and emotional. Then trade off items that one party values but the other party doesn't."

"One of the more remarkable business success stories of expanding the pie involves Brad Oberwager, the founder and CEO of Sundia Corporation of Oakland, California, producer of high-quality fruit cups… …several years ago he approached ten of the twenty largest watermelon growers in North America. He offered them part of his planned fruit cup business if they would simply let him put "Sundia" stickers on the watermelons they sold in stores. It cost the growers nothing. For two years store owners saw the stickers. Then, one day, Brad, with the growers' support, started making calls to the stores. He offered a fruit cup with higher value added with the brand they had come to know: Overnight we represented thirty-two percent of the market."

Think broadly about value creation
So when designing business models, think broadly about value creation and value capture. Think broadly about which actors exists around your company, around your customers, or even around your physical office space. And when you have decided to go for a partner, supplier, or customer think broadly about what you can provide them with besides your direct products, services, or payments, and what they could provide you with, to get the best return on your assets by trading items of unequal value.

Saturday, April 14, 2012

Is there a need for customer value creation models?

All business model frameworks have the customer and the value proposition, or offer, as key elements. The value proposition is described as the products or services offered to different customers segments, and is a function of key resources and key processes (or activities) given to the input from suppliers (or partners). In some of the frameworks, partners are also included as an element to provide external resources and activities to enable the company to provide its value propositions. One of the things I'm missing in these frameworks is the perspective of co-creation of value. Value creation from the customers' perspective is not necessarily sequential, all captured in one company's value propositions, but in many cases parallel, offered simultaneously by different actors.

The business model concept takes its starting point in how an organization creates and captures value. Since the 1960s, different frameworks have been presented to capture the building blocks of value creation. Almost all frameworks take their starting point in the organization, or the firm, and what is being provided as output from within the organizational boundaries. This made sense when competition was based on one company's dominance of some asset or mastery of production, but I don't know if it is sufficient to innovate business models today. To clearly describe or analyze Google's business model for Android, without including what other companies such as handset manufacturers or app developers provide the same customers, is impossible. (Great guest post: Is Android Evil?)

When designing business models, do not limit your thinking to the value you are creating or potentially could create combining external resources and activities, but include complementary values that others could provide, in the business model equation. Perhaps there should be business model frameworks taking the starting point in customer value creation, not limited to what one business can provide?

Is there a need for customer value creation models? Are there any good ones out there?

Friday, April 13, 2012

The value of non-moneterized transactions

Would you be willing to continuously provide services to Ferrari for free, just to be able to tell other potential clients you have Ferrari as a reference customer? Would you be willing to provide your technology and IP to one company, free of charge for exclusive use in their industry, just to get rights to the improvements they plan to make on your technology through investments in R&D? How much would the brand awareness be worth if the logotype of your new technology was seen on some customers' products - enough to get the technology for free? If access to one of your customers' customer data would help you improve your products and services towards all your customers, should you really charge for your products towards that customer? If a company provides you with substantial market data in exchange for your anonymized customer data, who is creating most value for whom? If you help develop other companies' key resources do you think they could reduce the price for you or provide you with more support? If you grow the market for other companies could you get something in return? If you provide tons of non-monetary value to your employees would they be happy with lower or even no salaries?

It would be a great mistake to believe that the revenue streams are the only measure of potential or existing value creation. It merely records the netting after barter has taken place.

When designing business models, do not limit your thinking to customer value creation and revenue streams.

Friday, April 6, 2012

Neil Harris on Game Design & Business Models

Neil Harris, with more than 20 years in online games, explores the topic of business models, trade-offs such as time vs money and revenue vs fairness. He illustrates gamer market segmentation, and value proposition versioning, to maximize value from gamers.

"Never fall in love with your business model... they are fickle and will leave you broke and broken hearted" Neil Harris

Tuesday, December 6, 2011

Saturday, December 3, 2011

Adding a dimension to existing business model frameworks

In one of my early blog posts in February 2009, I explained what I called the Value Proposition Explorer. The basic idea was to provide a concept to see value propositions on different hierarchical levels.
To give an example, say that you have developed software that can efficiently manage energy in electrical vehicles. Should you then try to sell the software? Combine it with hardware to provide energy management solutions? Or provide components of the software, such as the core algorithms for energy management, in a more narrow value proposition?

Applying the same concept broader
To choose which hierarchical level to position your value propositions is of course a function of many variables, in the end where you can create and capture the most value, and maintain a competitive advantage for the future. This is not just a question of value propositions, but a question involving all components of the business model.

There are many business model frameworks, with Alex Osterwalder’s Business Model Canvas being the most popular one. We can ask ourselves questions in relation to each of his business model framework elements and each hierarchical level.

Customer Segments –Who are our different potential customers in different levels? How will they use what we provide? What are their different hierarchical levels and on what level can we provide value for them? Where do they have their own resources and capabilities? What are their plans for the future, if they are moving up in hierarchy where are they going?

Would someone be interested in the algorithms alone? Are the companies providing energy management solutions developing their own software? What companies could be interested in a larger energy management solution? What if we combined our energy management solution with an energy storage solution – what customer segments could we then target?

Value Propositions – What should we provide based on what we have? Based on what we can get access to? Based on what we can provide together with partners? Should we have value propositions on more than one level, providing products, components, technologies, and intellectual property? How should we package our value propositions to hinder non-intended use of our technology?

Should we provide energy management solutions, software or algorithms? Can we combine our energy management solution with energy storage solutions? Should we provide exclusivity on some levels to one customer/partner? Should we include rights for the customer to further develop our technology within certain levels?

Channels – What will be the objects for transactions and delivery? What channels could we use depending on customer segment and value proposition? What channels exists for each level and what channels could be created?

What would be the objects for transactions the software code? Physical components? Integrated energy management systems? Energy management solutions would have physical components, software and algorithms could be delivered in physical or digital format.

Customer Relationships – What different customer relationships are possible given the customer segment and channel? What different customer relationships should we have in relation to the different value propositions we provide?

Should we keep close collaborations with customers on some levels such as optimizing some sub parts of the core algorithms? Other components in our software? Should we provide some software components online for customer download? Do we need to establish trust through personal relationships to enable access to the customer’s system to optimize the energy storage algorithms?

Revenue Streams – Can we generate revenues from more than one level? Can we provide components or generate license revenues from others including competitors? Can we generate indirect revenues through partnerships on some levels?

What revenue models are possible for algorithms? Software? Energy management solutions? What kind of revenue streams would it generate? Would it be one-time transactions of code or recurring revenues resulting from continuous improvements and support? How much more can we charge for a license where the customer gets the rights to do further development of the code? Should we provide something for free on some levels to build the markets on higher levels?

Key Resources –In what levels will it be an advantage to have internal resources? Where do we have our current assets and capabilities? Where do we need to have internal resources? Where do we have intellectual property rights?

How will the area of energy management solutions for electrical vehicles develop? What resources do we have to keep up with the big players? Should we acquire or create a joint-venture with a hardware company to get access to complementary resources? Where should we develop brand assets? Should we brand the algorithms? Technology? Software? On what level should we develop intellectual property rights? For the system? Software? Specific algorithm?

Key Activities – In what levels should we have strong positions? What activities should we have within the different levels? Where should we have product development? Where should we conduct more basic research? In-licensing? Out-licensing? Collaborations? What activities are needed?

Should we continue to develop the core algorithms, a larger software or an energy management solution including hardware? Should we create specifications for hardware manufacturers to further improve energy management? Or should we start to develop hardware? Should we try to gather data from the use of the energy management solution? From our software? Should we provide training for customers that wants closer collaboration and further develop our algorithms, software or management solution?

Key Partnerships – On which levels should we have collaborations and partnerships? Where do we need to strengthen our positions and where do we need to combine our assets and capabilities with the ones of a partner to provide something on a higher level?

On what levels should we use external organizations to provide assets and capabilities? What levels in their hierarchy are we strengthening? What assets and capabilities should we provide collaboration partners with and at what level? On what level should we share development plans? Technical details? Specifications? Should partnerships be exclusive in some levels but not in others?

Cost Structure – Which levels are more expensive to have in-house? What are the cost structure for the resources and activities needed? What will be needed in terms of investments to keep up with competition in each level? Can we share any of the costs with a supplier, partner or customer?

Is it possible to become a player also in hardware providing full energy management solutions in-house? Will we be able to fund software scale-up to meet the requirements of being a software provider? What will be the costs of closer collaborations on an algorithm level?

To be continued...
The Value Proposition Explorer is a great tool in developing value propositions on different hierarchical levels. The main idea with this post was to illustrate how the concept of hierarchical levels can be used for all parts of a business model. I plan to explore this further in posts to come.

Sunday, May 15, 2011

The Business Model of Intellectual Ventures

Perhaps one of the more controversial participants of CIP Forum 2011 is Intellectual Ventures, founded in 2000 by Nathan Myhrvold and Edward Jung of Microsoft, Peter Detkin of Intel and Grogory Gorder of Perkins Coie. The company has been referred to as a patent troll (see separate post on Non-Practicing Entities) and Nathan Myhrvold as the most feared man in Silicon Valley. The company and its founders claim to invest in “pure invention”.

The firm is the owner of one of the world’s largest and fastest-growing patent portfolios, and they have reportedly raised over $5 billion from companies including Microsoft, Intel, Sony, Nokia, Apple, Google, SAP, Nvidia and eBay plus investment firms. It generates revenues from licensing and technology and rights, and according to Joff Wild of the IAM Magazine, in the spring of 2010, Intellectual Ventures claimed its purchasing activity had sent $315 million to individual inventors and $848 million to small and medium size enterprises “to commercialize their inventions”. According to an article in The New York Times in 2010 the company says it has returned $1 billion to investors and collected more than $1 billion in license fees.

Since 2009 Intellectual Ventures also operates a prototyping and research laboratory where it employs scientists, engineers and patent attorneys, “to work on new inventions to help solve some of the world’s biggest problems”. To do this, the company has hired prominent scientists including Robert Langer of MIT, Leroy Hood of the Institute for Systems Biology, Ed Harlow of Harvard Medical School, Danny Hillis of Applied Minds, and Sir John Pendry of Imperial College. Intellectual Ventures claims the company files about 450 patents a year, in areas from vaccine research to optical computing.

Intellectual Ventures is constantly building its library of inventions and rights, analyzing industry trends and identifying market opportunities for the use of the inventions. Commercialization can be not only through patent licensing but through open source, joint-ventures, venture creation or sale of portfolios.

On December 8, 2010, Intellectual Ventures filed their first lawsuit, accusing Check Point, McAfee, Syamtec, Trend Micro, Elpida, Hynix, Altera, Lattice and Microsemi of patent infringement. The company has also been accused of hiding behind shell companies for earlier lawsuits.

Below is a few videos with Nathan Myhrvold and others at Intellectual Ventures presenting their business model and fascinating inventions from their research laboratory.