September 2010

The significant problems we face cannot be solved at the same level of thinking we were at when we created them.”

Albert Einstein

Traditional development and commercialization models take too long, cost too much, and expose founders to excessive risk. A new approach for small technology companies to generate revenue has been proposed (Bailetti, 2010). In the new approach, the top management team of a small technology company uses a a platform to co-create value by collaborating with all the stakeholders of its development and commercialization decisions and builds trust on its work practices and market offers.

The purpose of this article is to provide the lessons learned from working with a top management team of a profitable business that uses a traditional approach to development and commercialization and wishes to migrate to the new approach. The article will be useful to managers and owners of existing small companies and vendor-neutral, non-profit organizations that wish to grow their businesses.

The article is organized as follows. First, a hypothetical situation of a musical band illustrates the options available to a company that wishes to increase its revenue. This example is based on our work with a local technology. Next, we describe the lessons we learned while preparing the plan to migrate the existing company to the new approach to generate revenue. The hypothetical situation is used to illustrate the lessons learned. Finally, conclusions are provided.

A Hypothetical Example

Consider an existing, small musical band that would like to increase its revenue. At present, the band generates revenue selling recorded music through its website and local music stores, as well as performing concerts. Feedback from customers is limited. To grow revenue, the band can use one of three models:

A. Continue to operate in the traditional, standalone mode. The band can invest more time and money pushing sales through its website and local music stores and perform more concerts. This is akin to attempting to increase revenue by doing more of the same.

B. Become a player in a multi-sided platform operated by another company. Band members can become active platform players in somebody else’s platform. They can use the platform to interact with music agents, their fans, and the fans of other musicians.

C. Become a platform owner. The band can operate and evolve a multi-sided platform on its own or with others. Using this model the band has control over the structure of the platform that provides the best-long term benefits for them.

For Model A and Model B, the band's revenue is directly related to their effort's level. If the band stops recording new albums or performing concerts, their revenue will decrease. Model C provides the band with revenue from (i) charging for recordings and performing concerts; (ii) charging an access fee to the platform; and (iii) charging transaction fees to platform participants.

In the next section, we summarize the lessons learned while helping a top management team of a local company decide whether or not to migrate their existing technology business from the traditional approach (Model A) to the new approach (Model C). We use the band example outlined above to illustrate the lessons we learned.

Lessons Learned

Lesson 1: The top management team of an existing company will need good answers to the following questions before considering migrating their Model A company to a Model C company:

  • What changes do I need to make to my existing Model A company to become a Model C company?

  • What are the benefits and costs of migrating to a Model C company?

  • Why and how will the Model C company generate more revenue than the Model A company?

  • What parts of my existing Model A company can we migrate “as is” to a Model C company? What do we need to throw away?

  • What should the platform of the Model C company look like?

  • Can we concurrently operate both a Model A business and a Model C business?

Lesson 2: All stakeholder types must be identified. A stakeholder is a group that affects or is affected by how the band develops and commercializes its products and services. Using Model A, the band will perceive fans that pay for the band’s recordings and concerts as their customers and the only relevant stakeholder group. Using Model C, the band’s stakeholder groups include agents, other bands’ fans, service providers, suppliers, venue owners, and so on.

Lesson 3: Top management teams operating Model A companies will incorrectly perceive the platform of the Company C model as a mere second channel to market. The platform of a Model C company enables co-creation between the company and: (i) its stakeholder groups; (ii) other platform participants, and (iii) stakeholders of other platform participants. Using Model C, the band will be able to use the platform to create value with other bands and their stakeholders.

Lesson 4: The platform of a Model C company is not the product or service of the Model A company. The platform of a Model A company is designed to meet the needs of only one stakeholder group: customers. The platform of Model C company is designed to meet the needs of multiple stakeholder groups. Early in the process of migrating from Model A to Model C, the top management team of a Model A company sees its own product or service platform as the platform to use as a Model C company. This is akin to wanting to design a product without understanding the problem the customer wants the product to solve. In the band example, the products in the Model A company were the songs produced by the band and sold to the fans. For the Model C company, the band's music is part of the platform, but is not the focal point.

Lesson 5: Define what value the various stakeholder groups will derive before designing the platform. Avoid defining platform features early in the migration process. At the start, it is important to identify the stakeholder groups that will pay to become platform participants and the reasons why they will pay. To define platform features and the architecture of participation you need to know what value each stakeholder group will derive from the Model C company.

Lesson 6: To design a Model C company you need to consider seven dimensions (Bailetti, 2010). These dimensions are represented by the steps we followed:

  1. Define the community outcomes and the “bumper sticker” phrase that will represent them in five words or less.

  2. Identify the stakeholder groups and the value proposition for each group.

  3. Identify the number of participants for each stakeholder group.

  4. Define the price structure (i.e., platform access fees and transaction fees).

  5. Identify the platform type and key features.

  6. Define the governance structure.

  7. Identify the community health metrics that will be tracked.

Lesson 7: The design process is iterative. For example, the community outcomes, the bumper sticker, and the value propositions for stakeholder groups were revisited a number of times. Each time one component of the design was improved, all other components were re-evaluated.

Lesson 8: The bumper sticker is used to brand the community that is anchored around the platform of the Model C company, not the products and services that will be delivered by the Model C company.

Lesson 9: The selected stakeholder groups affect the nature of the desired community outcomes and the bumper sticker. To illustrate what happened in our case, assume that the first definition of the bumper sticker was: “Greater freedom for independent musicians” and the two stakeholder groups were Fans and Musicians. The Fans stakeholder group was defined as the fans of independent music that want to follow their favorite bands and find new music. The Musicians stakeholder group was defined as different independent bands that want to attract a larger audience.

Initially, the rationale was that musicians could gain exposure to a wider fan base and that the fans could gain an easy way to find out about other bands. However, it was discovered that there is little incentive for either stakeholder group to pay a fee. It was decided that this initial attempt was a simplistic view of the stakeholders of the Model C company. It was clear that other stakeholder groups could bring significant value to fans and musicians and would be willing to pay. As a result, we added two stakeholder groups and redefined the previous two, as shown using the band example:

  1. Fans: fans of the independent arts who seek new artists.

  2. Musicians: bands that want to make more money from their music.

  3. Licensees: groups, such as film makers, that would benefit from access to musicians and are interested in licensing the music instead of purchasing it.

  4. Venue owners: owners of bars, independent movie theaters, and other venues that want access to new and unique products.

The new stakeholder groups require a revision of the initial bumper sticker, such as: “Building a profitable independent arts community.”

Lesson 10: Those closest to the problem of migrating to Model C company benefit from outside perspectives. Moving from a Model A company to a Model C company requires a change in business model paradigm.

Lesson 11: Stakeholder groups should be defined in terms of the value they wish to extract from the platform instead of their attributes. The initial tendency is to define stakeholder groups in terms of their attributes, such as size, nature of their business, location, and occupation. A much better way is to identify stakeholder groups based on their needs. In our example, instead of having film makers, radio stations, restaurant owners, and advertisers as separate groups, they are all part of a larger group that has a need to license music.

Lesson 12: Each stakeholder groups needs a different customer value proposition. Each stakeholder group has a different reason for paying to become a platform participant. The Model C company must ensure that each value proposition is communicated effectively to the members of the stakeholder group and that the platform delivers the value promised.

Lesson 13: An “externality matrix” proved to be a valuable tool for describing and defining the features of the platform. A critical aspect of the platform is that a platform participant of a shareholder group must derive value from an increase in the number of participants in the other shareholder groups. These network effects, also known as network externalities, must exist for the Model C company to generate profitable revenue.

An externality matrix can be applied at any stage in the platform design phase. Table 1 shows an externality matrix using the band example. Each cell in the table relates the value of adding one more member of a stakeholder group (columns) to the other groups (rows). Using our example, adding more fans provides the fans with a stronger voice to get more and better music, adding more musicians gives the fans more choice, adding more licensees gives the musicians the opportunity to earn money from royalties. The matrix provides an indication of the strength of the proposed business model of Model C companies; the more items per cell and the greater the strength of each item, the higher the probability of success.

Table 1. Externality Matrix Showing the Value Derived Between Groups

Image:september10_rosenblumT1.png

Lesson 14: Creating a platform can provide ideas for new offerings. In the process of considering various scenarios for interactions among stakeholder groups, ideas for new products and services emerged. These ideas may affect the existing Model A business. For example, in the process of designing the company platform, we realized that a new process could be created from the existing products offered by the Model A company.

Conclusion

Using the new approach embodied by Model C companies requires a different thought process than the one used to create a Model A company. Traditional businesses are focused on finding customers, determining what is valuable to them, and delivering it in a form for which they are willing to pay. The new approach is about creating a balance between active participants, where everyone gains and provides value to everyone else. This business model has the potential to solve many of the problems small businesses are facing, but it requires thinking beyond the current buyer/seller relationships.

The process of migrating or complementing an existing business with this new approach is still in the exploratory stage. It is hoped that this article will generate greater interest and encourage others to search for opportunities to use the new approach.

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