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Business Models

Business Models. Designing and value mapping successful business models for commercializing an innovation. Paxil Commercialization of an Old Invention. Commercialization – Opportunity Register Analysis. Paxil (paroxetine) antidepressant Feature Set. Anti-depressant

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Business Models

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  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. Doctor’s Visit • Managing Doctor’s 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 brain’s 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 SmithKline’s ‘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 don’t work • It’s because the fail either • The ‘Narrative’ test • Or the ‘Story’ test

  15. A business model is not strategy • It doesn’t 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. Taxonomy of Network Business Models Mad Catz is an example of A 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 Innovation:The Disk Drive Industry Disruptive Innovation, The Innovator’s 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 firm’s 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 Innovationthe Excavator Industry • Incumbents fail to innovate • Because they spend too much time listening to their existing customers

  38. Caterpillarand the Mechanical Excavator Industry

  39. Cable-driven Steam Shovel • Mnfd by Osgood General

  40. 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 The first upheaval

  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 • Didn’t 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. Caterpillar’s 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 you’ve 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 • Cable’s 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 • Komatsu’s product literature emphasized • That Komatsu equipment needed far less service • Making them less dependent on their local dealer • Since Caterpillar’s strength was its dealer network • Komatsu’s new and distinctive strategy • Disrupted their customer reach • Kept customers out of Cat’s showrooms • And convinced customers that this was good • Caterpillar didn’t perceive Komatsu as a major competitor • Because they spoke a different language • To different customers

  50. Mad Catz Game ControllersCommercialization with Rapid Innovation

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