Business models turning products into platforms

Most products can be subdivided into smaller parts (modules) that can be independently created and then used in different systems for multiple uses. Classical examples of modular systems are complex products such as airplanes, cars and computers, comprising of many different subsystems. Technology and IP based business models take further steps breaking down each invention, algorithm or other valuable asset into the smallest possible components consisting of isolated, self-contained functional elements, to be used in different technology, products and systems for multiple uses.

What is a platform product?

A platform product can be seen as a product that enables one or more additional products or services to expand the platform product's capabilities and features such as functionality, performance or design. Digital examples are Microsoft's Windows, Google's Android platform, Facebook and Twitter, where application developers are able to develop software for users to chose, adding functionality not included in the original platform product. Some physical examples are cars, bicycles, SLR cameras or computers, with their spare parts, tuning kits, peripherals and other accessories. Increasingly physical components becomes connected and integrated with digital ones with fundamentally physical products such as houses or trucks becoming platforms for numerous of digital services for its owners, users, and other stakeholders.

Enabling flexibility and customization

Customers or users seldom want the same thing and have different price sensitivity and prioritizations for different features such as performance, design, portability or functionality of a product. At the same time few are those who are willing to pay for more things or functions than they need, unless they have to. Providing a product as a platform, it can be made more simple and flexible, often to a lower cost, enabling alternations and extensions into many different directions based on customer preferences. It might also enable upgrades and new features not yet discovered when the platform is being sold. Different components or modules can also be sold with different rights or license terms tied to them.

Platform compatibility

Different control mechanisms, such as trademarks, product design, design protection, patents and contracts are often used in combination to control the compatibility of a product platform from other companies' additional products. Depending on the competitive setting, the developed control position and chosen business strategy, the company offering both the product platform and extensions can either compete or be a monopolist in the market for platform products and/or additional products. Companies may for various reasons, such as decreasing the time of development or to provide bigger variety of additional products, chose to allow competition and allow customers to choose additional products offered by competing or complementary firms.

Closed, semi-open and open platforms

The product platform can be totally closed or totally open in many different ways such as "open for everyone to develop and sell additional products", "open for licensees signing away certain rights to develop and sell additional products", "additional products must be sold through the platform owner" or as with news platforms "open for everyone to comment", "open for registered users to comment" "open for adding of links" etc.

Ten years ago mobile phone operators wanted to provide all services to their subscribers themselves and the place to download games and ringtones was theirs. After only 8 months of operations the number of iPhone applications surpassed Windows mobile applications that had been developed for 9 years. Before the year end the iPhone app store is believed to have more than 100 000 applications, still the iPhone app store has only been semi-open and perhaps we will see an even faster development for the Google Android platform.

Actors playing multiple roles

Subdividing the value creation into smaller parts that can be independently created enables companies to focus on their core activities based on their core assets and capabilities, and use external actors to develop and provide the rest that is needed. In many cases this creates complex relationships where actors together build platforms or ecosystems of products and services, at the same time competing with their products and services. One example is Microsoft that provides the Windows platform for others to develop applications on, at the same time it competes in several application areas such as browsers and media players. Together Microsoft and external developers might compete against Apple's or Google's platforms and software applications. In technology and licensing intensive industries such as telecom each actor can any day be a supplier, buyer, competitor, partner and licensee.

Designing the value network

A key challenge for companies providing products as platforms is to design the value network surrounding the company and its value propositions. What role should the platform provider have in relation to external actors? With whom should you cooperate, how and under what terms? What are the external actors' incentives or disincentives to get a successful product platform to emerge? How do they look at your role in their business model? What are your value propositions towards the different actors that you need in your value network? How do your value propositions support customers' customers, suppliers' suppliers and partners' partners? What about your long term position in the value network?

Need for business model innovation

Think of all products that can be seen as platforms still controlled by one company where the speed of development could increase dramatically together with the available options for customers to customize and personalize the final product. This is not as much an engineering challenge as it is a business model challenge.

What products and services can be built and provided by others as add-ons to your platform product? What companies or other organizations make money or get benefits today based on your products and services? How could this be taken one step further...?

Further reading:

• The business model of APIs (guest post)
• Value proposition versioning
• The Razor-and-Blade business model
• What is core in your business model?

Strategic Alliances - an important part of most business models

A strategic alliance is an agreement between two or more players to share resources or knowledge, to be beneficial to all parties involved. It is as way to supplement internal assets, capabilities and activities, with access to needed resources or processes from outside players such as suppliers, customers, competitors, companies in different industries, brand owners, universities, institutes or divisions of government.

Different forms of Strategic Alliances

Strategic Alliances can take different forms, occur within an industry or between actors in different industries, and can range from simple agreements to mergers or equity joint ventures. There are basically three types of generic strategic alliances: Non-Equity Strategic Alliances, Equity Strategic Alliances, and Joint Venture Strategic Alliances.

Non-Equity Strategic Alliances

Non-Equity Strategic Alliances can range from close working relations with suppliers, outsourcing of activities or licensing of technology and IPRs, to large R&D consortia, industry clusters and innovation networks. Informal alliances without any agreements, or based on "Gentlemen’s agreement", are common among smaller companies and within university research groups. Another form of informal non-equity alliances are geographic clusters where concentrations of interconnected players, industries, universities and government agencies co-exists, increasing local competition and productivity.

Equity Strategic Alliances

In Equity Strategic Alliances agreements are supplemented by equity investments, making the parties shareholders as well as stakeholders in each other. The investments are passive so each firm retains fully its decision power. The cross-shareholding of companies may result in a complex network where company A owns equity in company B that owns equity in C, creating direct and indirect ownership. Intuitively, when firms share profits the incentives for competing are reduced and are often done to enhance control and make takeovers more difficult.

Joint Venture Strategic Alliances

Joint ventures are distinguished from Equity Strategic Alliances in that the participating companies usually form a new and separate legal entity in which they contribute equity and other resources such as brands, technology or intellectual property. The parties agree to share revenues, expenses and control of the created company for one specific project only or a continuing business relationship.

Reasons for entering a Strategic Alliance

Firms entering strategic alliances often have multiple objectives, some of them listed below:

• Access to intellectual property rights
• Access to knowledge
• Access to new technology
• Access to new markets
• Access to distribution skills
• Access to manufacturing capabilities
• Access to marketing skills
• Access to management skills
• Access to capital
• Create critical mass
• Create common standards
• Create new businesses
• Create synergies
• Diversification
• Improve agility
• Improve quality
• Improve R&D
• Improve material flow
• Improve speed to market
• Influence structural evolution the industry
• Inhibit competitors
• Reduce administrative costs
• Reduce R&D costs
• Reduce risk and liability
• Reduce cycle time
• Utilize by-products

Main risks identified in the literature

There are several risks and limitations using strategic alliances. Failures are often attributed to unrealistic expectations, lack of commitment, cultural differences, strategic goal divergence and insufficient trust. Some of the risks are listed below:

• Activities outside scope of original agreement
• Hidden costs
• Inefficient management
• Information leakage
• Loss of competencies
• Loss of operational control
• Partner lock-in
• Partner product or service failure
• Partner unable or unwilling to supply key resources
• Partner's quality performance
• Partner take advantage of its position
• Partner experiences financial difficulties

Using the Business Model concept

When using the business model concept, listing or visualizing the different parts of the business model, and analyzing what is really core in the business model you often find opportunities for business model innovation using strategic alliances. What if you combine your value proposition with another company? What if you use their brand or they use yours? What if someone else delivers your products or services? What if you use external assets and capabilities to improve or create new value propositions? Could you lower your business model cost structure by using a strategic alliance? Could you create stronger control mechanisms through strategic alliances to protect profit streams from being reduced by competitors, partners or strong customers?

What is an Open Business Model?

The term Open Business Model was coined by Professor Henry Chesbrough, author of Open Business Models: How to Thrive in the New Innovation Landscape.Chesbrough, who coined the term Open Innovation a couple of years earlier, almost rewrote the same book replacing "Innovation" with "Business Models" thus roughly defining Open Business Models as Business Models using external sources for innovation or external vehicles for commercialization of non-core innovations.

What does Open mean? In relation to what?

What makes the concept of Open Business Models tricky is not only that the term Business Model is ill defined, but the term Open has gained many different meanings in relation to businesses and their business models. Concepts such as Open Source, Open Data, Open Cloud, Open Standards, Open Business, Open in relation to democratization, Open in relation to public accessibility, Open in relation to the lack of lock-ins, Open in relation to transparency in businesses and government, and so on.

I see most of the concepts above as different value propositions towards users, partners, developers or other value recipients such as society. In relation to business models I separate between Open (or Collaborative) Business Models and Transparent Business Models and will write a separate blog post about the latter one in the near future.

My definition of Open Business Models

I agree with Chesbrough that Open in relation to Business Models should relate to the boundaries of an organization and its transactions with external actors. However, I would not limit it to transactions of innovations from research, but include all transactions between actors in the value network. Also, I would include transactions with own customers and users (or actors at the end of Chesbrough's innovation funnel) to include customers as a source of ideas, as co-developers, testers or distributors. Transactions can be with or without restrictions, with or without the exchange of money, with outside researchers, developers, competitors, distributors, users, customers or other stakeholders.

Thus according to my definition all business models are to some extent open, and there is a scale from fully integrated companies only having transactions with its customers, to companies extensively using external assets and capabilities to create and capture value. Basically I see Open Business Models as complementing internal ownership of assets, capabilities and activities, with access to needed resources and processes from outside actors, to create or capture value.

What is then new with Open Business Models?

Businesses have for a long time used outside resources, expertise and information for research, development and commercialization. However, with increasing competition, reduction of technology and product life-cycles, increasing technology and product complexity and high level of uncertainty, increasingly companies realize the potential of outside resources for value creation and value capturing. A frequently used example is Procter & Gamble, sourcing 50% or its ideas and innovations from outside, and capturing value through own products, technology and IP licensing, joint ventures with competitors and so on. Another interesting fact is what can be seen in the picture below: companies increasingly relying on external sources of technology.

Potential Benefits with Open Business Models

Common arguments for open or collaborative business models are:

• Lowering cost of development or commercialization
• Speed up development or commercialization
• Sharing of risks with other actors
• Learn from experts or users
• Create stronger value propositions
• Build a community of loyal testers and early users
• Be associated with values such as collaborative and open

Potential Risks with Open Business Models

Although substantial benefits can be gained from harnessing Open Business Models, pitfalls exist. Some of them being:

• Misreading the potential contribution from external actors
• Asymmetric benefits resulting in conflicts over priorities
• Negative leverage due to extensive compromizing
• High transaction costs in managing the collaboration
• Leak of valuable assets and capabilities
• Loss of control over assets, capabilities or position in value network.

What is your Collaborative Advantage?

So why should other companies collaborate with you and not with your competitors? Why shouldn't you pay for access to certain external assets or capabilities as everyone else? Why should anyone provide you with exclusivity to technology or markets?

When realizing that value creation or capturing can be made more profitable using external actors, one quickly understands that the design of value propositions and incentives are important pieces of the puzzle. What are your value propositions towards partners? Is it access to unique assets or capabilities? Is it access to certain market segments through established relationships or brands? Strong distribution channels? Access to capital or infrastructure? etc.

Not limited to new ideas

In a business environment characterized by increasing competition, reduction of technology and product life-cycles, increasing technology and product complexity and high level of uncertainty, companies realize they must identify and decide on where the core of their competitive advantage lies, and identify external actors to complement their own assets and capabilities, to stay competitive. This is not limited to new ideas or innovations as in the concept of Open Innovation, but applicable to all parts of the business model.

I will follow up this post with tips on how to approach and apply Open Business Models.

Further Reading:

What is core in your Business Model?

Open Source Licensing and Business Models

Pharma 2020: Challenging New Business Models

Pharma 2020: Challenging New Business Models

In a new report Pharma 2020: Challenging New Business Models PwC examines the future of the pharmaceutical industry. It describes some of the key trends now emerging and its implications for the industry. The focus of the report is on open business models and the authors concludes like many others that the traditional fully integrated business model, often referred to as the blockbuster business model, is under huge pressure and, will not work.

Collaborative networks
The report has an interesting discussion on emerging collaborative networks and the authors envision not only collaborative R&D models, but various other permutations, including networks focusing on different therapeutic areas and covering everything from R&D through to sales and marketing, networks focusing on different enabling technologies and networks focusing on the management of outcomes in specific patient segments. To summarize the discussion "the key social, economic and technological changes currently taking place in the pharmaceutical and healthcare arena will all necessitate the development of multinational, multidisciplinary networks drawing on a much wider range of skills than Pharma alone can provide".

The authors see two pharmaceutical business models emerging; both based on that companies are becoming more collaborative with other industry players:

The Federated Model is based on a network of separate entities that share a mutual overall goal such as the management of outcomes in a given patient population. It can also share funding, data, access to patients and back-office services. The model enables each player to build a specific area of expertise and might encourage greater cross-fertilization and deliver bigger improvements in performance without forfeiting any flexibility. How the cake should be sliced between the different participants in these networks is essentially more complex than the co-development and co-distribution agreements that are being used today.

The Fully Diversified Model is based on that the pharmaceutical company expands from its core business into related products and services through collaborations, in-licensing or mergers and acquisitions. For me this model is very similar to what pharmaceutical companies have been doing for years.

The authors believe that the federated model will ultimately dominate, primarily because it is quicker and more economical to implement. They also conclude that "The transition will not be easy, for collaborative business models are far more complex than the integrated model that has previously prevailed".

Download the full report here.

Further reading:
What is core in your business model?
The Blockbuster Business Model
Open business models

Tim O'Reilly on Open Publishing

The video was produced by the Open Publishing Lab at RIT. The OPL is a cross disciplinary open-source publishing research center. To learn more about the OPL and its open-source publishing projects, visit opl.rit.edu

Further reading:
The Freemium Business Model
Open Source Licensing and Business Models

Relating videos:
Making $1.6 Million in a week for music given away for free
Tim O'Reilly on news as a platform and web2.0 opportunities

Open Source Licensing and Business Models (Onetti, Verma, 2008)

In this study, written at Insubria University in Italy, the authors aim to shed light on licensing issues for open source companies and its implications for the choice of business model.

Licensing and Business Models (Onetti, Verma, 2008)

Software licenses
The Open Source Initiative (OSI) currently has a set of 72 licenses as open source "OSI-Approved" and the authors provide a clear picture of the basic open source approaches. They differ between GPL-like and BSD-like licenses and some of the different available variants with different trade-offs between advantages and disadvantages.

GPL-like licenses are the most popular and well-known examples of licenses that require copies and derivatives of the source code to be made available on terms no more restrictive than those of the original license. Any user (licensee) is given the permission to modify the work, as well as to copy and redistribute the work or any derivative version.

BSD-like licenses are permissive free software licenses that allow users to use the code in proprietary software, with or without modifications without obligation to propagate the license to derivative work. Any user (licensee) may create closed versions, re-brand the software and commercialize it. A BSD license can easily create competitors that can launch products based on the same source code.

Business Models
The authors consider three main business models and present examples of companies moving from one business model to another and the complications involved. The business models are:

Reciprocal - based on GPL-like licenses generating revenues from professional services such as maintenance, support, customization, consulting and training.

Academic - typically built around a BSD-like license with revenues generated from both license fees on software reselling and from professional services.

Dual - based on two different licensing models, one at no charge with GPL-like license and one license for which the customer pays a license fee.

As the authors write it is not easy to assign open source companies to the business model categories as they typically adopt hybrid schemes.

Conclusions
The choice of OSS license is typically made by the creator of a project, usually a software developer, without the business or legal skills needed to understand how the choice of license affects the choice of business model. Since the terms of a license determine what companies can do with their software, companies are implicitly narrowing the choice of business models when they select a license type. Business models are often defined around the license and not the other way around.

The authors show with examples an interesting trend in companies changing from one license type to another, trying to adjust the license to the business model at a later stage. Also, if the company does not find a suitable OSI-approved license, it seems to be a trend to create a custom/private license by adding terms to an OSI approved license scheme.

Obviously not all open source companies can change the license as they might have given away the rights needed. Only the ones who own the IPR or the ones who are able to get assignation of rights from all contributors to the software, are entitled to change the license. The authors believe that there are plenty of open source companies for whom modifications of the license to fit another business model is not available, forcing them to adopt suboptimal business models.

The conclusions are very similar to the ones I have experienced within R&D and patenting where the inventor, usually a researcher in a narrow technical field, rarely has the skills to understand how the invention and patent will be used, and how do strategically design the patent application or keep parts of the invention as trade secrets to enable different business models.

Further reading:
Open Business Models
David Rowe on Open Hardware business models

David Rowe on Open Hardware business models

An interesting presentation by David Rowe, on what works and what doesn't in open hardware busineess models, presented at LCA: The Business of Open Source, Australia, January 2009.
"...the money doesn't go away, it just move to another place in the model and generally the world gets a little bit better..."

Further reading:
Open Business Models
Open Source Licensing and Business Models