Lecture 7: Digital Business Models

Question 1

Define the power of platform

Answer 1

A new business model that uses technology to connect people, organizations, and resources in an interactive ecosystem in which amazing amounts of value can be created and exchanged

E.g. Airbnb, Uber, Alibaba and Facebook

Parker et al.,

Question 2

Define a platform

Answer 2

a business based on enabling value-creating interactions between external producers and consumers.

Question 3

Define pipeline/ a linear value chain

Answer 3

A pipeline is a business that employs a step-by-step arrangement for creating and transferring value, with producers at one end and consumers at the other.

E.g. a firm first designs a product or service > the product is manufactured and offered for sale > a customer shows up and purchases the product or service.

Question 4

Define network effects

Answer 4

Refers to the impact that the number of users of a platform has on the value created for each user

Question 5

Define positive network effects

Answer 5

The ability of a large, well-managed platform community to produce value for each user of the platform

Question 6

Define Negative network effects

Answer 6

The possibility that the growth in numbers of a poorly-managed platform community can reduce the value produced for each user

Question 7

Define same-sided effects

Answer 7

Network effects created by the impact of users form one side of the market on others users from the same size of the market. The effect that consumers have on other consumers and those that producers have on other producers.

Question 8

Define positive same-side effects

Answer 8

Includes the positive benefits received by users when the numbers of users of the same kind increases. E.g. The more of your friends and neighbours who were accessible on “Be real”, the greater the value you received from your Bereal app.

Question 9

Define negative same-side effect

Answer 9

Competing supplier growth, but too many suppliers –> hard to make matches

Question 10

Define Cross-side effects

Answer 10

Network effects created by the impact of users from one side of the market on users from the other side of the market. The effects that consumers have on producers and those that producers have on consumers.

Question 11

Define positive cross-side effects

Answer 11

Occur when users benefit from an increase in the number of participants on the other side of the market. Think about a payment mechanism like Visa: when more merchants (producers) agree to accept the Visa card, the flexibility and convenience of the shopping experience increases for shoppers (consumers), creating a positive cross-side effect.

Question 12

Define negative cross-side effects

Answer 12

Occur when users do not benefit from an increase in the number of participants on the other side of the market

Uber: Too many riders relative to drivers –> too long wait (no benefits)

Question 13

What is a business model’s definition, design, and implementation?

Answer 13

Business model:
a business model “articulates the logic … that demonstrates how a business creates and delivers value to customers [and] outlines the architecture of revenues, costs, and profits associated with … delivering that value”

Design
The process of designing a particular business model is typically engaged by sensing the existence of customers with an unmet (or poorly met) need who are willing and able to pay for a potential product or service.

A successful business model will provide a customer solution that can support a price high enough to cover all costs and yield profit that is at least sufficient to support the business and its growth.
Sensing takes place at all levels of the organization, with lower levels helping to provide information and insights about external developments to middle and top managers.

A firm’s seizing capabilities come into play for the crafting of a revenue mechanism and the planning of the organization’s value chain, including the designation of which activities will be internalized and which will be left to outside suppliers.

Implementation
When a new business model is implemented in a start-up or within an established firm, the organization’s transforming capabilities come into play to configure, or reconfigure, the necessary resources and maintain organizational coherence.

Business model implementation, like transformation more generally, involves closing capability gaps between the firm’s current activities and those required to enact the new business model - The closing of capability gaps requires leadership by managers. An organization will not embrace transformation unless its managers are clearly committed.

Teece & Linden

Question 14

What does a good business model explain?

Answer 14

How & why customers, suppliers, and complimentors interact with the company through digital interface

Question 15

What is the three business model components?

Answer 15

Value proposition
- product/service, customer needs

Revenue model
- Pricing logic, channels, customer interaction

Cost model
- Core assets & capabilities, core activities

Question 16

What are the four different models in the framework: Option for the next-generation enterprise?

Answer 16

The supplier model
The Omnichannel Model
The Ecosystem driver model
The Modular Producer Model

Weill et al. 2015

Question 17

What is the supplier model?

Answer 17

Suppliers have, at best, a partial knowledge of their end consumer, and typically operate in the value chain of another powerful company.

As enterprises continue to digitize and search becomes easier, suppliers are likely to lose power and be pressured to continually reduce prices.

Question 18

What is the Omnichannel Model?

Answer 18

Omnichannel businesses provide customers access to their products across multiple channels, including physical and digital channels, giving them greater choice and a seamless experience.

The challenge is to gain more and more knowledge of the end consumer and his or her goals and to reduce the amount of customer churn.

Question 19

What is the Ecosystem driver model?

Answer 19

Some companies, such as Amazon, Fidelity, Aetna, Apple and Microsoft, establish an ecosystem by creating relationships with other providers that offer complementary (or sometimes competing) services.

Ecosystem drivers provide a platform for the participants to conduct business; the platform can be more or less open.

Like omnichannel businesses, ecosystem drivers use their brand strength to attract participants, ensure a great customer experience and offer one-stop shopping.

They aspire to “own” the customer relationship in one domain like financial services by increasing their knowledge of their end consumers. They extract rents from participants in their ecosystem — both consumers and service providers — and rely on brand strength and feedback from consumer ratings and reviews to build their reputation and revenues.

Question 20

What is the Modular Producer Model?

Answer 20

Modular producers such as PayPal provide plug-and-play products or services that can adapt to a variety of ecosystems.

To survive, modular producers must be among the best in their category. To thrive, they need to continue rolling out new products and services to demonstrate that they are among the best options available and also well priced.

After all, they operate in a hypercompetitive environment in which it’s often very easy for customers to search for alternative solutions and switch.

Also, in contrast to ecosystem drivers, most modular producers don’t get to see all the customer data; they are limited to the data from the transactions they process.

Question 21

Which capabilities does a company need to develop in order to prepare for the future?

Answer 21

1. Learn more about their customers
   - Customer satisfaction metrics
   - Stick to data (evidence-based decision-making)
2. Become more of an ecosystem
   - Become first choice
   - Become great at building relationships