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Business Models, Business Strategy and Innovation

Business Models, Business Strategy and Innovation. David J. Teece Institute for Business Innovation Haas School of Business University of California, Berkeley September 12, 2010. *Presentation based on paper with same title in Long Range Planning , June 2010. Essence of a business model.

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Business Models, Business Strategy and Innovation

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  1. Business Models, Business Strategy and Innovation David J. Teece Institute for Business Innovation Haas School of Business University of California, Berkeley September 12, 2010 *Presentation based on paper with same title in Long Range Planning, June 2010.

  2. Essence of a business model • Defines how a firm delivers value to customers, entices customers to make payments, and converts customers payments to profits (p. 172). • Are most likely to be viable longer term when differentiated, successful, and hard to imitate. • more generic than a business strategy…i.e. a business model can be associated with several strategies. A business model reflects management’s hypothesis about what customers want, how they want it, and how the enterprise can organize to best meet those needs, get paid for doing so, and make a profit. (p.173, Teece, 2010)

  3. The architecture of business model design Teece, 2010

  4. Economic theory usually assumes away the business model problem • In economic theory, customers will buy if the price is less than the utility yielded; producers will supply if price is at or above all costs including a return on capital. • Implied revenue “model” in economics is sale of a commodity, product, or service – revenue capture is almost never a problem – except for “public goods” situations (e.g. lighthouse). Assumptions employed by economic theorists assume away the problems that – in the real world – business models are created to solve!

  5. Business models - examples • Traditional sectors • Airlines: no frills, low cost, direct flights, and on time (e.g. Southwest) • Safety razor: low (no) margin on razor; high margin on blades (e.g. Gillette) • Sports Apparel: Sponsorship to build brand and drive sales of replica products (e.g. Nike) • Knowledge sectors • Information/internet industries “Freemium” service search: ‘Give your service away for free, acquire a lot of customers very efficiently • Then offer premium priced value added services or an enhanced version of your service to your customer base.’ –Fred Wilson, Web 2.0 (e.g. Google)

  6. Business models and strategy • Strategy involves coherent and consistent decisions and theories of action (outcome and response) • Coupling competitive strategy analysis to business model design and implementation is necessary for sustaining competitive advantage and requires a coherent and consistent approach to: • segmenting the market • creating a value proposition for each segment • setting up the apparatus to deliver that value • discovery/establishing a viable cost model • Identifying barriers ‘isolating mechanisms’ to slow imitation

  7. Capturing value from an invention/innovation is an important piece of business model design. In the high tech context:* One must: • Take into account the ‘appropriability regime’ and the innovator’s existing asset position. • Be explicit about how to organize the value chain to profit from innovation • Choose from among three structural types: *D Teece “Profiting from Technical Innovation”, Research Policy, December 1986.

  8. Business model choices have predictable consequences in the “Profiting from Innovation” framework Figure 2 in David Teece, “Reflections on ‘Profiting from Innovation’”, Research Policy, 35:8 (December 2006), 1131-1146.

  9. Discovery, learning, and adaptation to business model evolution • A new business model requires creativity, insight, and customer, competitor, and supplier information and intelligence (p.186) • Start with a provisional business model: validate; then revalidate and revise. The “right” business model is rarely apparent early on…entrepreneurs/managers who are well positioned and can learn and adjust are more likely to succeed.

  10. Sample questions for a (provisional) business model Figure 3 in D. Teece, “Business Models, Business Strategy and Innovation”, Long Range Planning, 2010

  11. Conclusions • Designing a business is a creative act – not everyone is good at it! • To be a source of competitive advantage, a business model must be more than just a ‘logical’ way of doing business. • A model must be honed to meet particular customer needs and requires deep understanding of the customer/consumer and underlying cost structures. • It must also be non-imitable in key respects. • Research on business models can help our understanding of a variety of subjects including market behavior, competition, innovation, strategy and competitive advantage.

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