Business Model Analysis and Open Innovation

Lecture SeriesWeb: Liberty Fraternity Equality

Anirudh AgrawalPhD Fellow IKL

Anirudh Agrawal [email protected]

Lecture 5

Online ActivismOnline rating and reviewsCo-creationCrowdsourcing


Lecture 6

Business model AnalysisBusiness Model CanvasCase Kiva vs MYC4Open Innovation


Business Model

How organizations creates, delivers and captures value

What is the value proposition?What are the target markets? Who are the critical members of the team?Where does competitive advantage exist?Why is there a competitive advantage? When will development, launch and cash flow breakeven occur?

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Types of Business Model

Brick-and-mortarCompanies that operate solely offline with traditional business practices

Click-and-mortarCompanies operating with both an online and offline presence

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PhysicalAssets

People

Money

Business Model

Market Opportunity

Revenues

Customer Base

Profits

Cash Flow

Intellectual Property

Value Creation

via

Inputs Recipe Target OutputsHow Output

Valued

Intellectual Capital

LicenseRevenues

•IPO

•Merger/ Acquisition

•Dividend Stream

Business Model Analysis


Business Model Analysis

RevenuesCash flows and their timingRevenue driversExpensesCash flows and their timingInvestment required through cash flow breakevenWorking capitalMaximum financing required and cash flow breakeven timingSensitivity analysisKey success factors

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Anirudh Agrawal [email protected]: Linking Strategy to Operations: Process Models and Innovation by David P. Norton and Randall H. Russell

Courtesy : Mark von RosingMobile: +45 2888 8901E-Mail: [email protected]

B/W Strategy and Operationalization


Business Model P2P Social Lending


Cost structure Revenue streams

Key resources

Key activities

Key partners

Value proposition

Costumer relationships

Costumer segments

Channels

Text

Text


KIVA and MYC4

http://www.youtube.com/user/kivahttp://www.youtube.com/watch?v=_5r8emxTj7w

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Kiva Background Founded by Matt Flannery and Jessica Jackley in 2005 “Unity” in Swahili Based in San Francisco, CA Mission: “To connect people through lending to alleviate poverty” Non-profit Notable sponsors: Paypal, Linked in, Chevron, Visa 35 employees


Kiva Business Model

Crowdsourced microloans for entrepreneurs in developing countries

How it works? Borrowers / Entrepreneurs Field Partner KIVA Lender (KIVA users)


Kiva Business Model

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KIVA Process

Field partner post Entrepreneur profile KIVA user selects entrepreneur and makes donation Minimum of $25 KIVA sends money to field partner Field Partner gives money to entrepreneur (interest) Entrepreneur → Field Partner => Kiva → Lender


Kiva Business Model

Kiva

Facebook

eBayeBay


MyC4.com

MyC4 is an online platform which facilitates capital exchange for those with the least access to it in the form of loans

African business (Uganda, Kenia, Cote D’ivoire, more to come)in the micro to meso-segment (250 to 25.000 euro)Loan duration 4 to 36 months (average of 12 months)

Fully web2.0 enabled with open APIs in the pipelineStrong community driven approachBid against other investors using the Dutch auction method


MyC4.com

Investors upload money to MyC4 and start to bidTwo types of users:

Ordinary people like you & me (98% of the users – 50% of the capital)High capital users (private equity, 2% of the users – 50% of the capital)

Investors bid against each other based on interest rateLower interest bids push out high interest bidsMarket decides the best interest rateCharity-like bids are possible (min. 2% p.a.)


MyC4.com

All sorts of African business are availableFishing and farmingManufacturing/constructionRaw material processing/tradingRetailServices

The investment has to conform to the U.N. Millennium Development GoalsDue diligence of each investment is performed locally


MyC4 Business Model

Investors

MyC4

Provider/Lender

Business

Investments & repayments

Due diligenceDisbursements

Collecting repayments

Local

Online


MyC4 – key differentiators

Over 88% to 94% of each Euro reaches the African businessNon-comparable to traditional charity

Highly competitive interest ratesNot just 2% p.a. difference, but more over 20% p.a. difference

People directly see where they invest intoConnects people, creates intimacy

Stimulates local economyMyC4 development center located in Kampala, UgandaPrimary provider (FED) grown to 42 employees out of 3


MyC4 – benefits and risks

Benefits:High interest rates (over 7% p.a. easily achievable)Solid alternative to charityIt’s fun!

Risks:Currency exchange lossesPolitical/ethnic instability (e.g. Kenia)Loans can be defaulted


An example of a typical investment on MyC4

Description

Business can specify the wanted interest rate

Insight in total costs


The Borrowers/Entrepreneurs

Majority: Retail and Agriculture Others: Services, Clothing, Housing,

Transportation, Education, Arts Geographical Distribution:

Africa: Rwanda, Uganda and Kenya Asia: Cambodia and Philippines South America: Ecuador and Peru

Majority of Entrepreneurs are female


Statistics of Kiva and MyC4

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Activity 1

What are the various points in business model where Kiva and MyC4 can have cost overruns?How does IT platforms enhaces the productivity and reach of Kiva and MyC4?How can Kiva and MyC4 leverage Social Media platforms?Discuss in groups of 4 or 5…10 minutes

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Open Innovation


What is Innovation?

• Change/ Creativity/ Ideation/invention normally towards more

pleasant/efficient than the present

• Methods/Innovations/Inventions/Creativity that reduces the

transaction costs of doing that business…R Coarse

• Better, efficient, productive products, processes, services,

technologies or ideas that are readily available to the markets,

governments and society…Wikipedia


What is Innovation?

Institutional Innovation

Product-Service Innovation

Organizational Innovation

Organizational EnvironmentOrganizational Boundary

Organizational Structure

Organizational actors


Types of Innovation?

Structural level innovation (process, systems)Actor level innovation (HR, work methods, team, function-skill level)Organizational boundary level innovationEnvironmental level innovation (region, culture, taste, macro-political-economical)


Types of Innovation?

Incremental innovationIOS 5.1 to IOS 6.0Windows 7 to Windows 8

Radical InnovationWindows 95Iphone first generation, Ipad1, Ipod 1Inductive charging


What is closed Innovation?

Schumperters’ viewSystems or architects of Production houses hold the keys of Innovation


Closed Innovation : OrganizationsHire bright people : Mostly Top ranked university graduates/ PhDs with publications/Post-docs

Put them in special conditions (Well funded Labs, Good Wages Packages)

Research and Develop a range of Ideas

Funnel some of those ideas to product/service stage towards the end-users/ waiting customers

Copied with Pride from the presentation on Open Innovation models by Charles Leadbeater


Los Alomos Laboratory

25 Sept 2012

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Closed Innovation : Assumptions

Knowledge is sticky (only creators of knowledge know everything about the knowledge)Only inventors knows the best use of their inventionsIntellectual Property provides competitive edge , hence it should be protectedInnovation comes from within, self-reflective process ; Users are passive – cannot provide information to the firm on innovation

Copied with Pride from the presentation on Open Innovation models by Charles Leadbeater


Question the obvious?

25 Sept 2012

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Examples of Closed Innovations

Elite Education : Harvard University (best comes from

best universities)

• Investment gets innovation (you put in resources, you

will get innovation) …sort of a black box model of the

innovation

• Assumption Only NASA can make a Space-Craft to

Mars


Why only NASA can create space-craft?

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Challenges to Closed Innovation

• Innovation can arise from anywhere : Ex: Google still don’t have a challenge for Facebook or LinkedIn or Twitter

• User can innovate, add value to final product ..empowering end user? Hmmm..

• In a highly networked world, closed innovation can

always have threats (stealing of secrets)


Anyone among us can be the next Einstein or Edison or Zuckerberg

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Close Innovation : Need for reforms

• Should Innovation be a closed , blackboxed department, isolated from the environment of the firm

• Should consumer to part of developing the product/ service for the firm..if so how?

• Should there be cross –functional teams?

Marketing + R and D …is it ok?


Innovation Funnel

25 Sept 2012

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From the Presentation of Prof Henry Chesbrough UC Berkeley, Open Innovation: Renewing Growth from Industrial R&D, 10th Annual Innovation Convergence, Minneapolis Sept 27, 2004


Activity 2

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What is OPEN Innovation?


• http://www.youtube.com/watch?v=_GAferFgSF8

• http://www.youtube.com/watch?v=xBEv7ukmz2U


What is Open Innovation?

• Maximizing return on investment through actively exploiting external ideas and knowledge and internal ideas and knowledge.. Henry Chesbourgh

• Economically important innovations are developed by users and other agents who divide up the tasks and costs of innovation development and then freely reveal their results to the public ..Eric Von Hippel


Open Innovation

Ref: chesbourgh


External Open Innovation• Purchasing : Buying technologies – IP rights, trademarks, copyrights,

trademarks from external players instead of developing inhouse• Licensing –In : Obtaining the right to exploit technologies by paying

royalties to external partners• Joint Venture : Establishing a JV with other partners to

commercialize technologies• Joint Development : Developing capabilities, products, services and

technologies by outside collaboration such as Firms, Universities, Labs

• Contract R & D : Buying R and D services from Universities, Industries

• Venture Capital : Investing in promising products/services/capabilities through external funding..

• Mergers and Acquisition for capability enhancement• Customer involvement : User driven innovation• External networking : Outsourcing, consultants, experts

Ref: Open innovation management and challenges : Abdul Hadi G, Junbae Lee . Procedia Social and behavioral sciences


Purchasing• Purchasing : Buying technologies – IP rights, trademarks,

copyrights, trademarks from external players instead of developing in-house

Firms strategy towards make or buy? ROI, Investment, Risks associated, Dominant Logic

Examples : Patent war between Samsumg and Apple or Google maps vs Apple Maps

Example form Social Enterprise perspective : Using first world technologies through special arrangements to solve third world problems of energy, food, water, housing, education, health-care, finance


Licensing-In• Licensing –In : Obtaining the right to exploit

technologies by paying royalties to external partners

• Examples : Facebook integration in Iphone 5 , Google maps in Iphone 4S

• Example from Social Entrepreneurship Perspective : Royalty on AIDS medicine patent for every medicine sold in third world / royalty to paypal for every donation made to a charity organization


Joint Venture• Joint Venture : Establishing a JV(a new company) with

other partners to commercialize technologies

• Example : Starting a JV company in a new country to develop market expertise of that country

• Examples : Social entrepreneur can contact a designing firm in Denmark and co-create products for developing world markets or social problems

Anirudh Agrawal [email protected] Sept 2012

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Joint Development

• Joint Development : Developing capabilities, products, services and technologies by outside collaboration such as Firms, Universities, Labs

• Example : Smart phone development Nokia/Microsoft ; Fundamental science related development : Development of Micro-chip

• Example from social entrepreneurship perspective : Development of base of the pyramid solution at MIT media labs; WRI report .. The next billion


Why will I learn from you?

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Contract R and D• Contract R & D : Buying R and D services from

Universities, Industries

• Example: Completing outsourcing capability development , knowledge creation, product innovation aspects of the company to a third party player ; Firms hiring designing firms like IDEO to develop products and capabilities

• Example From social entrepreneurship perspective : UNICEF developed cheap /special energy food packets for the humanitarian disaster areas


What can you do for me?

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Venture Capital

• Venture Capital : Investing in promising products/services/capabilities through external funding

• Example : Ihubs in Nairobi, VC funded By Google to raise new technologies and dot.coms in Nairobi

• Examples from Social Entrepreneurship Perspective : Gates-Melinda foundation


Customer Involvement

• Customer involvement : User driven

innovation

• Examples : Apps for Android and IOS

• Examples from Social Entrepreneurship

perspective : www.NIF.org


Can customers innovate?

25 Sept 2012

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Can customers innovate?

25 Sept 2012

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External Networking : How can an outsider know more than us?• External networking : Outsourcing, consultants,

experts

• Example : Hiring consultants, experts to bring in new capabilities, insights into the firm without actually creating a ful-time position for it


Internal Open Innovation

• Selling : Selling inside capabilities

• Licensing Out : Servitization of inside capabilities

• Spin Off : Creating a new organization based on internal capabilities with the parent organizer as the major funder, organizer and mentor

• Open Source : Revealing internal technologies/capabilities to the market without any immediate selfish incentive

Ref: Open innovation management and challenges : Abdul Hadi G, Junbae Lee . Procedia Social and behavioral sciences


Selling Inside Capabilities

• Selling : Selling inside capabilities

• Example : Selling patents, copyrights, trademarks

Anirudh Agrawal [email protected] Sept 2012

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Licensing Out

• Licensing Out : Servitization of inside capabilities

• Example : Google Maps


Cloud Based Applications

25 Sept 2012

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Spin Off

• Spin Off : Creating a new organization based on internal capabilities with the parent organization as the major funder , mentor and chief architect

• Example : Intel• Example :

Anirudh Agrawal [email protected] 68


• Open Source : Revealing internal technologies/capabilities to the market without any immediate selfish incentive

• Example : Opening up Android platform for third party aap development

Anirudh Agrawal [email protected] 70


Organizations for Open Innovation• Able to set up systematic procedures for

problem solving• Motivation for new knowledge acquisition• Risk Taking, entrepreneurial • Developing capabilities to create knowledge

and capabilities• Team Management


Factors that Promote Open Innovation

• Organizational Factors– Flexible Organizations– Hierarchy (Flat vs Pyramidal)– Information hoarding vs Information sharing– Service based vs Product based vs Project based

• Market Factors– Lead User innovation– User education and Sensiblization– Price, method of Promotion , place of promotion– Competition


Open Innovation video..geeky

• http://fora.tv/2008/04/08/MITs_Eric_von_Hippel_Open_Innovation


Innovators DNA• Associating : technology association, industry association

• Curiosity, Questioning : Why, what, if, But, why not, how, does that, really?

• Observation : Marketing, your customers, your suppliers, your value chain, your employees, your competitors

• Experimenting, Risk, Entrepreneurial MindSet, Never Give Up

• Networking : Individual / Skill based resource management


Innovators DNA


Tools for analyzing Innovation

• 4 P analysis• PEST Analysis• Financial or Economic Feasibility Analysis

Profit –loss ROI EBITDA(Earnings before interest taxe depreciation and amortization) IRR NPV

• Porters 5 forces analysis


4 P Analysis

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Porters 5 Forces

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Value Chain Analysis

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Financial and Economic Feasibility Analysis

Profit – Loss

ROI > Return on Investment/ Impact on investment

SROI > Social Return on Investment

NPV > Net Present value

IRR > Internal rate of return/ Discounted Cash Flow

EBITDA

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Activity 3

• Use of Open Innovation in your bachelors/Masters project

• 10 minutes


Open Innovation vs Closed InnovationClosed Innovation Principles Open Innovation PrinciplesSmart People get hired, work for Large companies, are PhDs or Ivey League Universities, give them money

Smart People are everywhere, they can work from anywhere for anyone, their motivations are not just money

To profit from Innovation orientation, we must discover it ourselves, develop it ourselves, and get it to market

Firms must be receptive to Innovation surrounding us, innovation can come from both inside and outside firm boundaries

Patents, IP rights, copyrights give us undisputed monopoly in the market

We don’t really have to create innovation in order to profit from it

We must protect our capabilities from others, must not let anyone see or use our capabilities

We can create competitive advantage by letting outsiders use our capabilities and generate revenue as well

http://www.openinnovation.eu/open-innovation/

Anirudh Agrawal [email protected] C 2002 Henry Chesbrough EIRMA SIG III, 2005-10-20

Our current market

Our new market

Other firm´s market

External technology insourcing

Internal technology base

External technology base

From the Presentation of Prof Henry Chesbrough UC Berkeley, Open Innovation: Renewing Growth from Industrial R&D, 10th Annual Innovation Convergence, Minneapolis Sept 27, 2004

Internal/external venture handling

Licence, spin out, divest


• http://www.youtube.com/watch?v=2UDBaDtwXfI&feature=related


What have we covered

• Human Rights/Shared Values• Internet – Changing paradigm• Social Movement and Civil Society organizations• Online Activism• Online Rating and Reviews• Co-creation• Crowd sourcing• Business Model Analysis• Kiva vs MyC4• Open Innovation

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