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
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)
1.
2.
3.
4.

1.
2.
3.
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
Paxil
The ‘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"



unfolded like this
Paxil worked on a different brain chemical system than did older drugs.



a new-age parable, often illustrated with brightly colored diagrams and cartoon
characters,
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.
Attribute Map
Basic
Discriminator
Anti-depressant
Nonnegotiable
Anti- 'social phobia disorder'
Anti- ‘obsessive-compulsive disorder’
Anti- 'panic disorder' SSRI
‘Software’
Differentiator
Negative
Tolerable
Price?
Dissatisfier
Neutral
So What?
Parallel
Positive
Energizer
No chance of overdose
Exciter
(Hey, it’s an
antidepressant)
Enrager
Consumption Chain
Awareness
Doctor's visit
Three
customer groups:
(1) Anxiety;
(2) Magazine Ad (DTC);
(3) Articles suggesting off-label use
Purchase
Use
Psychological /
physical addiction
Awareness


Three customer groups: (1) Anxiety; (2) Magazine Ad (DTC); (3) Articles suggesting
off-label use
Managing Awareness
a)
b)
c)
d)
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
Basic
Discriminator
Energizer
Nonnegotiable
2.Magazine Ad
Differentiator
Off-label use
Exciter
Negative
Tolerable
1.Anxiety
2. Clutter from Ad
Dissatisfier
1.Anxiety
Enrager
Neutral
So What?
Parallel
Positive
Doctor’s Visit

Managing Doctor’s Visit
a)
b)
c)
d)
e)
f)
g)
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
Positive
Basic
Discriminator
Energizer
Nonnegotiable
Free Samples
Differentiator
Exciter
Waiting, cost for Dr.
Enrager
Negative
Tolerable
Dissatisfier
Neutral
So What?
Parallel
Purchase
Managing Purchase
a)
b)
Purchase at pharmacy with prescription; assure in-stock
Make sure price is covered by most health care
Basic
Discriminator
Energizer
Nonnegotiable
Covered by health card
Differentiator
Exciter
Negative
Tolerable
Can’t buy OTC
Dissatisfier
Enrager
Neutral
So What?
Parallel
Positive
Use

Managing Usage
a)
b)
c)
d)
Assure dose large enough for effect
Refills easy
Off-label application easy
Available through mail without prescription
Basic
Refills easy
Available through
mail w.o.
Prescription
Positive
Discriminator
Energizer
Off-label apps easy
Differentiator
High dose
Exciter
1.Anxiety
Enrager
Negative
Tolerable
Dissatisfier
Neutral
So What?
Parallel
Addiction

Managing Addiction
a)
Dose should be adequate for psychological addiction

b)
Key to repeat purchase
Promote this as ‘lifestyle’ drug that assures healthy brain
software
Basic
Discriminator
Energizer
Positive
Nonnegotiable
Differentiator
Addiction
Exciter
Negative
Tolerable
Dissatisfier
Enrager
Neutral
So What?
Parallel
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


The first step involved the hiring of a public relations agency to produce a free
video on the disease



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 smallscale studies off-label


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,


one that set the pattern for many to follow both at SmithKline and in the industry
(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)
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
Why Business Models Matter

Telling a good story


Tying Narrative to Numbers




Part of selling your strategy / investment
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
A business model is not strategy

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
Customers
ing
rket
a
M
eds
Ne

It doesn’t describe external forces:
Labor
Work
R&D
 Competition
 Environment
 Scaling
It only depicts the systems that will be put into
place to achieve a strategic objective
Production

Des
igns
Factory
Customer
Relationship
Management
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
E n v ir o n m e n t
S tr a te g y - O w n e r
V
al
ue
Fl
ow
(c
o
t
,e
e
u
en
v
e
,r
st
c.
)
Mad Catz is an example of
A Network Business Models

SelfOrganizing
Alliance
Agora
Distributive
Network
Control
Aggregation
Value Chain
Hierarchical
Low
value integration
High
Taxonomy of
Network Business
Models
Some Network Business Models
SelfOrganizing
Alliance
Agora
Distributive
Network
Control
Aggregation
Value Chain
Hierarchical
Low
value integration
High
The Value Chain Integrator for Electronic and
Logistic Networks
SelfOrganizing
Alliance
Agora
Distributive
Network
Control
Aggregation
Value Chain
Hierarchical
Low
value integration
High
C
om
ponent
Sources
C
om
ponent
Sources
C
om
ponent
Sources
C
om
ponent
Sources
C
ustom
ers
V
alue
C
hain
Integrator
C
ustom
ers
C
om
ponent
Sources
C
ustom
ers
Other Network Business Models
Aggregator (e-Tailor)
SelfOrganizing
Alliance
Agora
Sources
Distributive
Network
Control
Aggregation
Customers
Value Chain
Hierarchical
Low
value integration
High
Sources
Aggregator
Customers
Customers
Sources
SelfOrganizing
Alliance
Agora
Distributive
Network
Control
Distributive Net
Aggregation
Low
Sources
Customers
Sources
Customers
Distributive
Network
Customers
Sources
Value Chain
Hierarchical
value integration
High
SelfOrganizing
Alliance
Agora
Agora
Distributive
Network
Control
Price and Other Information Discovery
Aggregation
Low
Customers
Sources
tion
a
m
r
Info
Inform
ation
Sources
Information
tion
a
m
r
Info
Sources
gora
A
arket)
(M
Information Customers
Infor
mati
on
Customers
Value Chain
Hierarchical
value integration
High
SelfOrganizing
Alliance
Agora
Alliance
Distributive
Network
Control
Basis for the ‘Contribution Economy’
Aggregation
Low

Concept:


people from
around the world
can contribute
energy, ideas, and
knowledge to joint
projects.
Examples:

blogs, opensource software,
podcasts, and
online
encyclopedia
Value Chain
Hierarchical
value integration
Value Space
(Industry Standard or Virtual Network)
Prosumers
Prosumers
Prosumers
Prosumers
High
Disruptive Innovation:
The Disk Drive Industry
Disruptive Innovation, The Innovator’s Dilemma &
Forced Reconfigurations of Markets
Change in the Data Storage Industry
Storage Pre-1950: IBM M80 Sorter and M77 Collator
Storage
5 MB in 1952
5-10 Megabytes in 1973 (14”)
Shrink …shrink …
shrink

20MB Seagate (5.25”)
c. 1986

100MB Conner (3.5”)
c. 1990

1000MB IBM (1”) c.
2000
Darwin Rules

Between 1976 and 1995



1970s (after DL/1)





Conner, etc.
1989+ (2.5” Winchester)


Seagate, Miniscribe, Computer Memories, Intl. Memories
1987+ (3.5” Winchester)


Shugart Assoc., Micropolis, Priam, Quantum
1985+ (5.25” Winchester)


Plug Compatible and OEM
IBM,Diablo, CDC, DEC, Storage Tech, Ampex
2/3rds never introduced 8” drives
1980s (8” Winchester)


129 Disk drive manufacturers entered the market
109 Disk drive manufacturers existed
Prarietek, etc.
1992+ (1.8” Winchester)
… and so forth
Tech Trajectories
Disk Capacity Demanded vs. Capacity Supplied
The Industry Dynamics of
‘Attack from Below’
1.
Technology Cost-to-Performance accelerates
1.
2.
2.
Substitute products accelerate on new
performance parameters
1.
2.
3.
At an exponential rate
With a constant year-on-year growth
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
1.
Driving previously successful firms out of business
Technologies that ‘Shrink’?
Cost-to-performance acceleration
Successful Strategy?
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
Successful Transition through
Creative Disruption

Control Data




Conner for 5.25”



60% of 14” market from 1965-82
Missed the 8” market
Set up 8” production in Oklahoma city, for successful entry
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
Disruptive Innovation
the Excavator Industry

Incumbents fail to innovate

Because they spend too much time listening to
their existing customers
Caterpillar
and the Mechanical Excavator Industry

Cable-driven Steam Shovel

Mnfd by Osgood General
The first upheaval


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 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?
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
Stealthy Cat

Entrants like Cat developed new metrics to advertise
their products

Rather than measuring the quantity of earth that could be
moved


Their product literature emphasized



as the cable-driven manufacturers advertised
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
Hydraulics and Performance Trajectories in the
Mechanical Excavator Market
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
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
New Entrants went Hydraulic
Major companies never introduced a successful hydraulic excavator
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



Both were good enough, and cable vs. hydraulic became irrelevant
Contractors found that hydraulic machines

were much less prone to breakdowns



on which had longer reach and greater bucket capacity
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
How Japanese Manufacturers
Sneaked up on Cat

Entrants like Komatsu developed new metrics to advertise their products

Caterpillar measured




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





Amount of earth moved
Shovel width (narrow being better for contractors)
Speed and maneuverability of the tractor
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
Mad Catz Game Controllers
Commercialization with Rapid Innovation
Mad Catz’s Products

Controllers, Joysticks, memory chips,
cables, power supplies, etc.


Anything you could add onto a game console
Question: How do you make money on this
market?
cycle: 2 weeks
Packaging Mtl
Package
Design,
Graphics
Mad Catz’ Value Map
10% of Costs, in house
50% of Demand Value
60% of Cost, outsourced
HW Vendors Specs
Electronics
Design
0%
co
st
(cycle:
Retailers
(Toys 'R Us;
Wal-Mart)
Electronics
Build
10
Electronic Parts
25% of Demand
Value
cycle: 4-6 months
Plastic Parts
%
25
10% of Costs
Plastic Design:
Main
component of
human interface
cycle: 3:months
e
alu
V
d
an
m
e
D
of
Plastics
Molding
20% of Costs, outsourced
Assembly,
Packaging and
Shipping
10% of costs, in
house for quality
control
cycle: 1 week
Points to Note
about Mad Catz’s Business Model



Sources of costs and revenues are different
Cycle time influences revenue
The product is 100% ‘human interface’




Their market is driven by other vendors


Visual
Mental
Tactile
What does this imply about market and growth strategies
Many components of this case are typical of Pearl River Delta
companies
Product Feature Map
Basic
Differentiator Exciter
+
Electronics
Case
Packaging,
Case
-
Electronics
Case
Packaging,
Case
0
Electronics
Controller Economics
Value Added
Cost Added
Lead Time
Electronics
0 - 20%
60%
4-6 months
Case
30-40%
20%
3 months
Packaging
40-70%
10%
2 weeks
MadCatz Controller Consumption Chain
Game
Console
Ownership
Purchase
Use
Game Ownership



Managing: Game ownership is a given; MC’s problem is to find where the
owners are located, and how to reach them
Two customer groups: (1) OEM (2) Aftermarket
OEM must be reached through contract with game manufacturer
Basic
+
0
Differentiator
Aftermarket
Exciter
Purchase
Managing: Controllers are inexpensive and thus aftermarket controllers may
have a hard time differentiating through advertising
Location of sale is the main way of differentiating in the purchase decision.
Stocks should be located close to places that sell the consoles, as well as
game software and other consumer electronics to which players would be
attracted
Packaging is a second way of differentiating
Custom logos are a third way
Basic
+
0
Differentiator
Exciter
Location
Packaging
Logos
Use
Managing Use
Reliability is essential for repeat purchases
Ergonomics are a differentiator
+
0
Basic
Differentiator
Reliability
Ergonomics
Exciter
Updates to the Case Statistics
Worldwide video game industry
Mad Catz’s Future Market Potential

Revenues of $25 billion last year

overtook movie box-office receipts

Sales are expected to climb to $55 billion by 2008

While broadcast TV audiences dwindle and moviegoing
stagnates,

gaming is emerging as the newest and perhaps strongest pillar
of the media world.
Videogame Economics


Costs for developing games are going sky-high.
Microsoft spent $40 million to create and market Halo 2;


around $160 million for Halo 3
Vs. $80 million average cost of a Hollywood movie,


but it prices most small and midsize game makers out of the top of the market.
The top five game developers last year accounted for 56% of the industry's more
than $10.5 billion in U.S. sales (around $40 billion worldwide)

Only 5% of all games reaching the 1 million "hit" mark,

It's vital for game makers to build up a portfolio of winning franchises

EA has Madden and Sims, NASCAR, James Bond, and the Medal of
Honor shooter series

totaling 27 game titles last year that sold more than 1 million copies.
Controller Innovation
Outsourcing at Mad Catz

By outsourcing much of its production, and coordinating the
entire production process

Mad Catz Controlled its profitability by being a Value
Chain Integrator

It was looking for new opportunities to

Control costs

Speed up time to market

Improve quality

By innovations in both logistics and information networks
Mad Catz: Considerations
Because the product is 100% ‘human interface’

Consider the costs and benefits of professional industrial design

Look for cost – revenue spreads in the Business Model

Cut costs where revenues are small
Spend more if you can influence revenues with small additional cost


Cycle time influences revenue

Look for possibilities for ‘Geographical Scaling’
Through improvements in Information and Logistics networks


Market is driven by other vendors (not by your decisions)

Bet that Sony, Nintendo and Microsoft will be leaders, and pander to
them
Consider game specific software for powerful software companies like EA



E.g., branded controllers
Innovation Workout
Use Morphological boxes to study
the Commercialization of Video
Game Consoles