Overview

1. Overview • Build a framework to analyze: • How to develop a “business model” that takes advantage of IT to add value • Define what we mean by a business model • How to use IT to enable the business model

2. What is a business model? • What is your value proposition? • What is your value configuration? • How will you measure performance?

3. What is a business model? Key Drivers of Value?Who are Customers/ Suppliers/Competitors?What Activities Needed to Deliver Value?Distinctiveness? Value Proposition FinancialCustomer SatisfactionInternal ProcessesGrowth & Learning Performance ValueConfiguration What Profit Site?How Add Value?Which Customers?How Price Value?Who to Charge for Value?How Provide Value?How Sustain Value?

4. What is a business model? Key Drivers of Value?Who are Customers/ Suppliers/Competitors?What Activities Needed to Deliver Value?Distinctiveness? Value Proposition FinancialCustomer SatisfactionInternal ProcessesGrowth & Learning Performance ValueConfiguration What Profit Site?How Add Value?Which Customers?How Price Value?Who to Charge for Value?How Provide Value?How Sustain Value?

5. Value Proposition • Key Drivers of Value? • Who are Customers/Suppliers/Competitors? • Sounds like competitive forces analysis

6. Things to Remember in the “New Economy” • “Best beats first, even if it takes a long time” (Jim Collins, Built to Last) • VisiCalc  Lotus 1-2-3  Excel • Apple’s Newton Message Pad  PalmPilot • Knowledge products defy law of scarcity • Information is costly to produce, easy to replicate • Also have “network” effect – value increases as base of users increase • Time to market is key factor

7. M A R G I N Find Solve Choose Evaluate Execute M A R G I N Value PropositionWhat Activities Needed to Deliver Value?Three different value models Shop Network Chain

8. Firm Infrastructure Human Resources Management M A R G I N Technology Development Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales After-sales Service M A R G I N Value Chain • What is basic premise of value chain? • Value created by transforming inputs into products

9. M A R G I N M A R G I N Value Chain Structure • Critical Activities • Transform inputs into products • Also identify activities that provide infrastructure support • Critical Linkages • Internal linkage: Information shared across activities within firm • Tend to be sequential flows between activities • External linkage: Information shared across activities between different firms • Extended value chain

10. Competitive Forces Analysis M A R G I N M A R G I N Value Chain Analysis • Understand • Industry • Strategy • Activities of the organization • Identify the activities and linkages along value chain that are critical • Add value by focusing on those critical activities and linkages • Lower cost by increasing efficiency, scale or capacity • IT very effective at enabling lower cost

11. M A R G I N M A R G I N Value Chain Use • Directly applicable to manufacturing activities • Mass vs customized • Less applicable when intangible products • R&D • Key question – where are you positioned in the extended value chain?

12. Value Shop Firm Infrastructure Human Resources Management InfrastructureSupport Technology Development Procurement Problem Finding & Acquisition Problem Solving Choice Simon’s Problem Solving Model Control/ Evaluation Execution • What is basic premise of value shop? • Value created by providing solutions to customer problems

13. Find Solve Choose Evaluate Execute Value Shop (cont’d) • Value creation based on: • Information asymmetry between firm and client • Firm has information client needs • Rely on intensive information to solve a customer problem • Firm has standardized information acquisition process • Cyclical, iterative solution process • Can be resolved by non-experts • Need experts to recognize unique cases

14. Find Solve Choose Evaluate Execute Value Shop (cont’d) • Key driver is value, not cost • “Value” depends on quality of professionals assigned to client projects • Learning across projects is critical • Need for “knowledge base” • Examples of Value Shops?

15. Value Network Firm Infrastructure Network promotion and contract management • Invite and select customers tojoin network • Initialize, manage andterminate contracts Human Resources Management Technology Development Procurement Service provisioning • Establish, maintain andterminate links • Billing forvalue received Infrastructure operation • Maintain andrun physical and information network • What is basic premise of value Network? • Value created by providing intermediary services

16. Value Network (cont’d) • Value derived from scale and capacity • Each additional participant adds value • Metcalfe’s law – value = N2 • Value of new service dependent on who else adopts it • What was value of first fax machine? • Some examples of value networks?

17. M A R G I N Find Solve Choose Evaluate Execute M A R G I N Combinations of Value Models

18. Value PropositionDistinctiveness • Complementary Assets Model • Imitability: extent to which an innovation can be copied, substituted, or leapfrogged by competitors • Complementary assets: all other capabilities needed to exploit the innovation • Brand name, manufacturing, marketing, distribution channels, service, reputation, installed base of products, relationships (with customers or suppliers), etc.

19. Complementary Assets Model IDifficult to make money IIHolder of complementaryassets makesmoney High Imitability IVInventormakes money IIIParty with bothtechnology and assets or with bargaining powermakes money Low Freely Availableor Unimportant Tightly Heldand Important Complementary Assets

20. Complementary Assets ModelResulting Strategies Run Develop CA: Internally Or Team-up • Run: continue to innovate • Block: create entry barrier with Intellectual Property or threats of retaliation • Team-up: • Strategic alliance • Joint venture • Acquisition High Block Block Or Team-up Imitability Low Freely Availableor Unimportant Tightly Heldand Important Complementary Assets

21. Run Strategy: • Companies must continue to innovate • Create new ways of doing things • Two types of innovation • Sustaining innovation: Make product or service better based on metrics in mainstream market • Example? • Disruptive innovation: New product or service is actually worse based on mainstream metrics • Do not achieve full value until accepted by mass-market • Typically cheaper, smaller, simpler, more convenient … • Examples? • PCs were disruptive relative to mainframes • Internet?

22. Innovation • Christensen cites numerous instances where companies failed to react to disruptive changes • Seeing the disruption coming was not the problem • Organizations did not have capability to react in a way that enabled them to keep pace with the required changes

23. What is needed to perform activities that underpin customer value? • Resources: things and assets that can be acquired. • Flexible: asset acquired for one task may be used on another • Processes: procedures developed to accomplish a task. • Designed to be inflexible to ensure consistency and promote efficiency • Process developed to accomplish one task may not be used to accomplish another • Values: criteria by which employees make decisions about priorities • Organizational structure & culture? Leading for Innovation by Clayton M. Christensen

24. What limits a firms ability to react? • Established companies develop RPV (resource/ process/value) models focused on sustaining innovations • Processes and values focused on introducing improved products to gain competitive edge. • Disruptive innovations: • Could not be handled by routine processes • Had lower profit margins (did not fit the values of the organization) • Were not suited for existing “best” customers • Evolved in emerging markets that were surrendered by established companies • PC market initially ignored by IBM

25. Three options to create new capabilities • Acquisition • Create new capabilities internally • Spin-out ventures

26. Acquisitions • If acquired companies processes and values are basis for success, cannot easily integrate into parent organization. • HP and Compac merger? • If acquired companies resources are basis for success, then can integrate • Cisco • Banks

27. Create new capabilities • If acquire new resources, should not use same processes and values • GM invested $60 billion in resources. Ended up with state-of-the-art resources supporting antiquated processes • Processes and values define how resources are combined to create value • Toyota innovated development, manufacturing and supply-chain processes with little additional resource investment • Processes are hard to change!!!

28. Spin-out ventures • “A separate organization is required when the mainstream organization's values would render it incapable of focusing resources on the innovation project” • A threatening disruptive technology requires a different cost structure to be profitable and competitive • The current size of the opportunity is insignificant relative to the growth needs of the mainstream organization

29. Complementary Assets Model • IT-based strategies typically in cell II • Imitation or obsolescence moves firm from cell III to cell II • Require Intellectual Property protection to be in cells III or IV IDifficult to make money IIHolder of complementaryassets makesmoney High Imitability IVInventormakes money IIIParty with bothtechnology and assets or with bargaining powermakes money Low Freely Availableor Unimportant Tightly Heldand Important Complementary Assets

30. Complementary Assets ModelResulting Strategies Run Develop CA: Internally Or Team-up • Run: continue to innovate • Block: create entry barrier with Intellectual Property or threats of retaliation • Team-up: • Strategic alliance • Joint venture • Acquisition High Block Block Or Team-up Imitability Low Freely Availableor Unimportant Tightly Heldand Important Complementary Assets

31. Future Disruptive Technologies? • Nanotechnology • Wireless • Web-enabled hand-held devices

32. Innovation as a Value Proposition • Three components of value proposition • Value Shop (VS) • Value Chain (VC) • Value Network (VN) • Total Value Proposition (TVP) is the product • ∆TVP = ∆VS * ∆VC * ∆VN • Disruptive innovation requires a new business model • Efficiency is incomplete sustaining innovation • VC is the focus

33. Value Added Strategies

34. What is a business model? Key Drivers of Value?Who are Customers/ Suppliers/Competitors?What Activities Needed to Deliver Value?Distinctiveness? Value Proposition FinancialCustomer SatisfactionInternal ProcessesGrowth & Learning Performance ValueConfiguration What Profit Site?How Add Value?Which Customers?How Price Value?Who to Charge for Value?How Provide Value?How Sustain Value?

35. Value Configuration • Profit Site • Location in a value model vis-à-vis customers, suppliers, rivals, potential new entrants, complementors and substitutes • Look at value model, competitive forces, complementary assets model • Commerce Strategy • B2C • B2B • C2B • C2C or P2P

36. Value Configuration • Pricing Strategy • Menu/Fixed • 1v1 Bargaining • 1vM Auction • Mv1 Reverse Auction • Barter – exchange good and services • Source of Revenue • Markup • Commission • Advertising • Production (direct to consumer) • Software • Referral • Subscription • Fee-for-Service

37. What is a business model? Key Drivers of Value?Who are Customers/ Suppliers/Competitors?What Activities Needed to Deliver Value?Distinctiveness? Value Proposition FinancialCustomer SatisfactionInternal ProcessesGrowth & Learning Performance ValueConfiguration What Profit Site?How Add Value?Which Customers?How Price Value?Who to Charge for Value?How Provide Value?How Sustain Value?

38. Performance • Typical measures of IT Investments • Profitability • Cost-benefit analysis • ROI • Productivity • Efficiency • Quality • Customer Value

39. PerformanceCost-Benefit Analysis • Total Cost of Ownership (TCO) • Direct Costs • Only 15% of average total IT costs are for servers and client computers, and only 18% for purchased software • Indirect Costs • Hidden Costs

40. TCO Direct Costs • Hardware and Software • Purchase price of hardware and license fees • Maintenance contracts • Annual costs of supplies and materials • Customization • Must consider all add-on packages, including data warehouse, etc. • Operations • Technical operations and support personnel • Facilities costs • Network costs • Administration • Allocation of HR, Finance, etc. • Training costs for IT and end-users

41. TCO – Indirect Costs • End-user support – especially when end-users form own support groups • Downtime

42. TCO – Hidden Costs • Integration and testing • Need for using “live” data • Conversion cost to new hardware/software • Especially data migration – “global data” • Pulling best and brightest from departments to work on implementation • Drop in performance until new business processes adopted • Cost for technical experts • Impact of security issues or poor service levels

43. TCO – Summary • Efficiency metric that provides good framework for assessing and controlling IT spending • Estimated TCO for the typical Windows computer system is $7,000 per year

44. PerformanceCost-Benefit Analysis • Benefits? • Tangible returns generated back to organization • How measure productivity and customer value gains?

45. PerformanceCost-Benefit Analysis • Summary • Works well when focused on efficiency improvements where costs are easily identified and benefits easily quantified • Does not assess risk or account for time-value of costs

46. Performance • Typical measures of IT Investments • Profitability • Cost-benefit analysis • ROI • Productivity • Efficiency • Quality • Customer Value

47. Performance MeasuresReturn on Investment (ROI) • ROI examines the cash flows of a project over a specified analysis period • Typically between 3 and 5 years for an IT investment • Cash flow • Costs -- the total incremental investment in the project • Benefits -- the cost savings, productivity improvements and revenue gains for the project • ROI = cumulative net benefit/total costs * 100%

48. ROI – Shortcomings • No time to return • Does not incorporate time value of money • Does not incorporate risk or loss of investment capital

49. PerformanceEconomic Value Added • Operating profit minus capital charges • Factor in all investments • including initial cash outlays, maintenance, and internal and external training costs • Take those as a charge against anticipated benefits • Increased revenue or reduced costs • Determine cost of equity capital using future rate of return an investor would require

50. EVA - Example • $50,000 software and hardware investment will return $8,000 in net benefits after costs are deducted. • The ROI is 6 percent. • If the cost of capital to the company is 12 percent: • EVA would be $2,000. • EVA = $8,000 - ($50,000 x 12 percent) = $2,000