CAUTION HOT! Business Model Generation and the Unique Properties of Digital Business Models

Transcription

1 CAUTION HOT! Business Model Generation and the Unique Properties of Digital Business Models Barbara Hoisl Product Management Festival, Sept 2013, Zurich #pmf13 Pitopia, Wolfgang Demmel, 2010

2 Even if you are in a traditional industry BMW Group

3 a digital business model may be (part of) your future

4 Source: Crunchbase, August 2013 Welcome to the new family circle - Part location, part communication, all awesome. Life360 keeps millions of families connected, no matter what chaos life throws their way. ChargePoint is the largest network of electric vehicle charging spots worldwide. Empowering the future one charge at a time. ParkatmyHouse is an innovative online marketplace founded to connect home and business owners who would like to earn money from renting their space with drivers in need of a convenient, safe and cost- effective place to park. MyCityWay produces self- learning, highly personalized mobile interfaces and apps that guide residents and visitors through their daily experiences in cities across the world.

5 Modern product strategy frameworks recognize this

6 You re holding a handbook for visionaries, game changers, and challengers striving to defy outmoded business models and design tomorrow s enterprises. It s a book for the written by Alexander Osterwalder & Yves Pigneur co-created by An amazing crowd of 470 practitioners from 45 countries designed by Alan Smith, The Movement

7 (Re)- invent product strategy

8 embracing traditional and digital business models

9 Patterns include Long Tail Multi- Sided Platforms FREE & Freemium

10 some of them work best with a digital business model

11 Evolution of Business Models

12 Software is Eating the World Marc Andreessen, August 2011 Marc Andreessen Joi / Wikimedia Commons / CC- BY- 2.0

13 Sometimes it s obvious

14 Vinyl - > CD - > mp3 Gramofon Tomasz Sienicki - tsca / Wikimedia Commons / CC- BY- 2.5

15 ... sometimes it s harder to see

16 Sometimes it s harder to see as software creates new markets or blurs current market boundaries

17 Urbanization Car is nuisance Public transport available Software- Enabled Mobility Sharing Multi- modal Example: Mobility Market

18 Mobility Market Urbanization Cars ownership is a nuisance: parking, high cost & maintenance effort, traffic jams Public transport is available Software- enabled, next generation mobility concepts Sharing: car sharing, ride sharing Multi- modal mobility services: flexibly combining different modes of transportation

19 Urbanization Software- Enabled Mobility

20 Evolution of business models

21 It started here product physical Food Household goods Cars physical channel

22 digital/ virtual Enterprise SW: SAP, Oracle Shrink wrap SW: video games product physical Food Household goods Cars physical channel

23 digital/ virtual product physical Enterprise SW: SAP, Oracle Shrink wrap SW: video games Food Household goods Cars physical channel Shoes & clothing CDs, DVDs, hardcopy books Consumer electronics virtual: Internet

24 digital/ virtual product physical Enterprise SW: SAP, Oracle Shrink wrap SW: video games Food Household goods Cars physical channel Google, Twitter, Zynga, Facebook Music, Books, Movies SaaS, Cloud SW, Apps Shoes & clothing CDs, DVDs, hardcopy books Consumer electronics virtual: Internet Based on Blank, Dorf: The Startup Owner s Manual Vol. 1

25 What s the impact?

26 digital/ virtual product physical Enterprise SW: SAP, Oracle Shrink wrap SW: video games Food Household goods Cars physical channel Google, Twitter, Zynga, Facebook Music, Books, Movies SaaS, Cloud SW, Apps Shoes & clothing CDs, DVDs, hardcopy books Consumer electronics virtual: Internet Based on Blank, Dorf: The Startup Owner s Manual Vol. 1

27 Physical Product - Internet Channel Who Customer Value Market Impact Profitability Long Tail Location- independent Price Disrupt traditional retail Strengthen niche vendors: on- /offline Similar to physical channel before disruption

28 digital/ virtual product physical Enterprise SW: SAP, Oracle Shrink wrap SW: video games Food Household goods Cars physical channel Google, Twitter, Zynga, Facebook Music, Books, Movies SaaS, Cloud SW, Apps Shoes & clothing CDs, DVDs, hardcopy books Consumer electronics virtual: Internet Based on Blank, Dorf: The Startup Owner s Manual Vol. 1

29 Digital Product - Software, Internet, Social Media Who Customer Value Market Impact Profitability Automation, global collaboration Communication, entertainment, winner- take- all >> physical products

30 Digital Product Content Who Customer Value Market Structure Profitability Instant gratification: shopping 24/7 Access everywhere: small, mobile devices Disrupt analog content eco- system New distribution of profit pool

31 Digital Business Models Are HOT! Why? Unique Cost Structure

32 Income Statement Cost Structure Revenue Cost of Revenue = Gross Profit Other OPEX = Operating Profit Non- Operating Expenses = Net profit

33 Income Statement Cost Structure Revenue Cost of Revenue The top line Revenue- related costs: parts, labor, e. g. support engineers = Gross Profit Other Operating Expenses e. g. R&D, sales & marketing = Operating Profit Profit from ongoing operations Non- Operating Expenses Interest, taxes,. = Net profit The bottom line

34 Typical Cost Structure Mature Business 25% 50% 75% 25% 25% Software, Internet 15% 10% Physical Product Operating Profit Other OPEX Cost of Revenue

35 100,0% 75,0% 50,0% 25,0% 0,0% Adobe Microsoft SAP GE Siemens BMW Walmart

36 Cost Structures of Mature, Successful Businesses Digital business model Physical business model Adobe Microsoft SAP GE Siemens BMW Walmart Mio $ Mio $ Mio $ Mio $ Mio Mio Mio $ Total Revenue Cost of Revenue Gross Profit Margin % 89,0% 74,0% 68,8% 47,6% 28,4% 20,2% 24,9% Cost of Revenue % 11,0% 26,0% 31,2% 52,4% 71,6% 79,8% 75,1% Other OPEX % 62,2% 39,6% 43,7% 27,3% 19,4% 9,4% 18,9% Operating Profit Margin % 26,8% 34,4% 25,1% 20,3% 9,0% 10,8% 5,9% Net Profit Margin (%) 18,9% 28,1% 17,4% 9,3% 5,9% 6,7% 3,6% FY2012, ending # Nov 30, 2012 FY2013, # ending# June 30, # 2013 FY2012, ending Dec 31, 2012 FY2012, ending Dec 31, 2012 FY2012, ending Sept 30, 2012 FY2012, ending Dec 31, 2012 FY2013, ending# Jan 31, 2013

37 Digital Biz Model in Growth Phase 100,0% 75,0% 50,0% 25,0% 0,0% - 25,0% Facebook LinkedIn salesforce

38 Special Cases 100,0% 75,0% 50,0% 25,0% 0,0% Google Apple Cisco w/o Motorola Digital Biz Model high Cost of Revenue Physical Biz Model very low Cost of Revenue

39 125,0% Special Cases Side- by- Side Comparison 100,0% 75,0% 50,0% 25,0% 0,0% - 25,0% Google excl. Motorola w/o Motorola Digital Biz Model high Cost of Revenue Apple Cisco Facebook LinkedIn salesforce Physical Biz Model very low Cost of Revenue Digital Biz Model still in growth phase

40 Cost Structures Special Situations Digital Business Model high Cost of Revenue Physical business model very low Cost of Revenue Digital business model still in growth phase Google excl. Motorola Apple Cisco Facebook LinkedIn salesforce in Mio $ in Mio $ in Mio $ in Mio $ in Mio $ in Mio $ Total Revenue Cost of Revenue Gross Profit Margin % 62,7% 43,9% 61,2% 73,2% 87,1% 77,6% Cost of Revenue % 37,3% 56,1% 38,8% 26,8% 12,9% 22,4% Other OPEX % 32,6% 8,6% 39,4% 62,6% 81,2% 81,2% Operating Profit Margin % 30,0% 35,3% 21,9% 10,6% 5,8% -3,6% Net Profit Margin (%) n.a. 26,7% 17,5% 1,0% 2,2% -8,9% FY2012, ending# Dec 31,# 2012 FY2012, ending# Sept 29,# 2012 FY2012, ending# July 28, 2012 FY2012, ending# Dec 31,# 2012 FY2012, ending# Dec 31,# 2012 FY2013, ending# Jan 31,# 2013

41 Why this Unique Cost Structure? It s all about marginal cost

42 Why can (successful) digital business models be so profitable?

43 Root Cause: Low Cost of Revenue

44 No huge expenses for manufacturing: labor, parts, inventory, labor- intensive services

45 Implication: Low Marginal Cost

46 Marginal cost is the change in total cost that arises when the quantity produced changes by one unit. Wikipedia

47 Marginal cost = cost to serve an additional customer

48 Low marginal cost taking on additional customers comes at close to no cost

49 What are implications for product managers?

50 Software product management is special 1. No parts and inventory 2. Freedom in pricing & business model design 3. Margin build- up after break- even

51 No manufacturing, parts & inventory Pitopia, Harald Richter, 2008

52 No manufacturing, parts & inventory NO manufacturing cost NO supply chain management NO inventory cost

53 means Freedom in pricing Flexible supply can support faster growth

54 Unprecedented freedom - pricing & business model Free trials Adobe Creative Cloud" Discounts for home/student use FREE/ Freemium business models

55 Margin build- up after break- even: Every additional dollar of revenue drops straight to the bottom line (mostly)

56 So, let s go digital! But wait: there are huge challenges

57 Digital markets are different

58 Market Challenge winner- take- all revenue leader can invest more: R&D, sales & marketing Can spend more there than followers have revenue!

59 Winner- take- all 1 gorilla & a couple chimpanzees Pitopia, Heinrich Fuchs, 2012

60 Winner- take- all Virtuous cycle for the leader Gorilla Sustainable for a couple followers Chimpanzees Hard life for the rest See: Inside the Tornado by Geoffrey A. Moore, 1995/2004

61 Winner- take- all gets worse with Vendor lock- in Network effects

62 Everything moves very fast

63 Going digital accelerates processes Eliminate delays in delivery Eliminate manufacturing

64 requiring speed and agility Different processes Different values / trade- offs

65 Traditional Biz Models Cannot easily fix problems after shipment Fewer products, infrequent releases

66 Digital Biz Models Can fix problems after shipment Frequent releases, e.g. several per day

67 and there s a war for talent

68 Few tangible assets, value creation depends entirely on employees

69 Our most valuable assets drive home every day. Bill Gates

70 Talent shortage Technical roles Lack of Software Product Managers addressed by ISPMA: training & certification

71 Top talent has choice of employer Bar set high by leaders & startup culture Cost structure: labor cost less of an issue

72 Not your standard corporate environment Growth opportunities / 20% time Clusters in metropolitan areas Meritocracy Express personality

73 Typical Employee expectations Growth opportunities Remember: fast- moving markets! Challenging work assignments Opportunity to keep up with latest developments Pursue professional interests(e.g. 20% time) Preferred location: cluster of tech companies in metropolitan areas Experience exchange Ability to switch employers Easing dual career challenge

74 Typical Employee expectations Leadership style Meritocracy Rewarding performance Office environment Latest IT & productivity tools Tolerance for individuality/ personal quirks Casual dress code No clocking in/out Free (gourmet) food

75 Culture Code

76 That s why many large corporations establish incubators and separate venture capital units

77 Conclusion

78 As Software eats the world

79 even if your heritage is in traditional business models,

80 there may be attractive digital business opportunities available to you.

81 However, do not underestimate the amount of change this requires!

82 Q&A Does this resonate with your experience? Stories or observations you d like to share?

83 Thank you Barbara Hoisl