’Business Model Evolution’

1. Sales and marketing under different business modelsPetri ParvinenSales ManagementHSE+TKK, 23.4.2009

2. ’Business Model Evolution’ Projects Products • Commodization and price erosion • Mass tailoring • Product life cycles • Economies of scale • Resource building • Economization • Specialization Services

3. Three Basic Business models • Project business (Cash flow only when agreed) • Relationship management and marketing skills, Selecting the right customers, Setting limits to what is done, Understanding customer value creation processes, Reliability of sales and distribution • Product business (I’d like one in exchange for €) • Quality and completeneness of productization, Understanding buyer behaviors, Capacity of sales and distribution, Active, aggressive and driven sales people, Partnering and alliances to satisfy customer needs • Service business (Cash flow unless otherwise agreed) • Process engineering and process management, Modularisation, Customer intimacy, Installed customer base

4. Why is productization such an issue? • Scale benefits • R&D • Production • Sales • Marketing • Distribution • Concentrating on deep but narrow competences • Finnish (or other lousy) marketing culture • Lack of planning, systematic processes and analytical judgment in marketing

5. What are the key issues in project marketing? Project marketing success factors (Cova & Holstius 1993, Huerner 2004) • Structural efficiency and ability to invest • Ability to create local presence • Entrepreneurial attitude towards risk • Referencing • Demand co-creation with customers

6. Project marketing vs. product marketing PROJECT MARKETING PRODUCT MARKETING • After the chasm, everything changes • Customers • Competition • Channels Main Street The Tornado Tulovirta ja liikevoitto The Chasm End of Life Early market The Bowling Alley

7. PROJECT BUSINESS PROJECT VS. PRODUCT BUSINESS PRODUCT BUSINESS NUMEROUS IT START-UPS

8. Case: SAS Institute - ABC Tech • Activity based costing systems and projects • Both initally in project business • SAS new strategy  productization • SAS buys ABC in 2001 • Attempts to convert ABC into product business • Separation of product and project based businesses as a result

9. Project Marketing vs. Product Marketing

10. Critical success factors in project marketing Competence in relationship marketing Picking the right clients Clearly demarcated concepts Knowledge of clients’ business processes Reliability of distribution channels Critical success factors in product marketing Productization capability Knowledge of buyer behavior Distribution channel capacity Active and aggressive marketing people Partnerships and alliances Project Marketing vs. Product Marketing

11. Critical success factors in project marketing Competence in relationship marketing Picking the right clients Clearly demarcated concepts Knowledge of clients’ business processes Reliability of distribution channels Critical success factors in product marketing Productization capability Knowledge of buyer behavior Distribution channel capacity Active and aggressive marketing people Partnerships and alliances Project Marketing vs. Product Marketing

12. Service business models • Continuum: • Special features of industrial services • Legal and contracting issues • Operative liability • Project financing Strategic outsourcing OMRU O&M (operate and maintain) Long-term exclusive contracting Monthly fee contracts Emergency & support contracts Spot services

13. Ekokem • Customer lenses determine business model in waste business • Politician  Service • Corporation  Service • Infrastructure department  Product • Government  Project

14. Case: ABB • Corporation-wide transformation process since 1992 • Aim to increase service content in all businesses • Driving force behind business model transformation = lowering hardware prices schematically • Aim to increase share of services surrounding own hardware from 20%  80%

15. Case: ABB • ABB : Typical office building cost structure in 40 years: • Use 50 % • Renovation 25% • Financing 15 % • Building 10 % • Services adhering to this: • Follow-ups and monitoring • Tech maintenance • Modernization and updating • Lighting and ventilation • Life cycle costing and assessment services

16. Case: Wärtsilä • Industries: power plants, ship engines ja propulsion engines • Service business area only profitable on a continuous basis • Service offering: • Extensive O&M-contracts • Field services • Updates and modernizations • Tech support and professional expert services • Spare parts • Training services (Wärtsilä Land and Sea Academy)

17. Case: MyLab • ”Service business is also an opportunity for smaller businesses, but requires: • Letting go • Investing • Creativity • Technological anchor

18. Profit and margins • Operating margins in product business up to 90% • Project business usually 30-50%, some modularized mature projects 70% • Industrial services, e.g. after sales 40-50% of revenue, margin 50% • Service business is very good from an investment appraisal point of view (ROI, ROCE)

19. CHANGING BUSINESS MODELS

20. TWO INFLUENTIAL LIFECYCLES Commoditization of matured offerings needs business model innovation Winning over ”the majority” of customers needs business model innovation

21. Effort #2 Effort #4 Effort #1 How does a business model change? Material components Of biz mod = back yard Beliefs and cognitions Customer lenses = front yard Effort #3 Strategy Network Reputations Industry recipes Actions and outcomes Product meanings Constraints Operations Accounting & Finance Tikkanen, Lamberg, Parvinen & Kallunki (2005)

22. Crafting the offering = no. 1 priority • What is the competitive advantage / value added? 2. What does the offering include/not include? 3. Execution quality, particularly: • Pricing • Distribution • Marketing channels

23. Case: Kone (& Partek) • Central synergy motivation behind merger = moving service business understanding to Partek • Partek mining, tractors, fertilizers nothing to do with service  sold off • Kone hardware business growth (excluding acquisitions) same as Partek 1960-2000 • Kone de facto growth fourfold, cumulative profitability tenfold

24. Case: GE-Instrumentarium • Buyer’s lenses can be fundamental to business-making logic • Instrumentarium ultimately sold to GE due to buyer GE’s ability to understand and serve clients and its service business model • Olli Riikkala has stated that the ability to present Datex Ohmeda equipment the way that customers worldwide want to is the primary reason for accepting the acquisition

25. Project marketing Direct sales VARs (Representation) Internet as support Product marketing Bundling to OEM Professional distributors Retailers Direct mail and giveaways Internet both directly and as support Business models determine distribution channel

26. Project business Personal sales Trade fairs Seminars PR Relationship marketing Product business Advertising Direct marketing Articles and review in magazines and newspapares Marketing channels

27. Summary • Buyers’ lenses determine business model • Productization has ”economics” reasons • Service business models maximize value from customerships