Business Model Analysis and Open Innovation

Lecture Series
Web: Liberty Fraternity
Equality
Anirudh Agrawal
PhD Fellow IKL

Lecture 5

Online Activism
Online rating and reviews
Co-creation
Crowdsourcing

Anirudh Agrawal aag.ikl@cbs.dk

Lecture 6

Business model Analysis
Business Model Canvas
Case Kiva vs MYC4
Open 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?

Anirudh Agrawal aag.ikl@cbs.dk 4

Types of Business Model

Brick-and-mortar
Companies that operate solely offline with
traditional business practices
Click-and-mortar
Companies operating with both an online and
offline presence


Business Model Analysis
How Output
Inputs Recipe Target Outputs Valued

People

Revenues Value
Creation
via
Money Customer Base

•IPO
Profits
Business Market
Model •Merger/
Opportunity License
Acquisition
Revenues
Intellectual •Dividend
Cash Flow
Capital Stream

Intellectual
Property
Physical
Assets


Business Model Analysis
Revenues
Cash flows and their timing
Revenue drivers
Expenses
Cash flows and their timing
Investment required through cash flow breakeven
Working capital
Maximum financing required and cash flow breakeven timing
Sensitivity analysis
Key success factors


B/W Strategy and
Operationalization

Courtesy :
Source: Linking Strategy to Operations: Process Models and Innovation by David P. Norton and Randall H. Russell Mark von Rosing
Anirudh Agrawal aag.ikl@cbs.dk Mobile: +45 2888 8901
E-Mail: mark@vonrosing.dk

Business Model P2P Social
Lending


Key Key Value Costumer Costumer
partners activities proposition relationships segments

Text

Key resources Text Channels

Cost structure Revenue streams

www.businessmodelgeneration.com

KIVA and MYC4

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


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


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

eBay

Kiva
Facebook


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 pipeline
Strong community driven approach
Bid against other investors using the Dutch auction method


MyC4.com
Investors upload money to MyC4 and start to bid
Two 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 rate
Lower interest bids push out high interest bids
Market decides the best interest rate
Charity-like bids are possible (min. 2% p.a.)


MyC4.com
All sorts of African business are available
Fishing and farming
Manufacturing/construction
Raw material processing/trading
Retail
Services
The investment has to conform to the U.N. Millennium
Development Goals
Due diligence of each investment is performed locally


MyC4 Business Model

Investors Investments & repayments

MyC4
Online

Local
Provider/Lender
Due diligence
Disbursements
Collecting repayments

Business


MyC4 – key differentiators
Over 88% to 94% of each Euro reaches the African business
Non-comparable to traditional charity
Highly competitive interest rates
Not just 2% p.a. difference, but more over 20% p.a. difference
People directly see where they invest into
Connects people, creates intimacy
Stimulates local economy
MyC4 development center located in Kampala, Uganda
Primary 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 charity
It’s fun!
Risks:
Currency exchange losses
Political/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


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


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 actors
Organizational Innovation

Organizational Structure

Organizational Environment
Organizational Boundary


Types of Innovation?

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


Types of Innovation?

Incremental innovation
IOS 5.1 to IOS 6.0
Windows 7 to Windows 8

Radical Innovation
Windows 95
Iphone first generation, Ipad1, Ipod 1
Inductive charging


What is closed Innovation?

Schumperters’ view
Systems or architects of Production houses hold
the keys of Innovation


Closed Innovation : Organizations
Hire 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

Closed Innovation : Assumptions

Knowledge is sticky (only creators of knowledge know
everything about the knowledge)

Only inventors knows the best use of their inventions

Intellectual Property provides competitive edge , hence it
should be protected

Innovation 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

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?


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


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

From the Presentation of Prof Henry Chesbrough UC Berkeley, Open Innovation: Renewing Growth from
25 Sept 2012
Industrial R&D, 10th Annual Innovationaag.ikl@cbs.dk Minneapolis Sept 27, 2004
Anirudh Agrawal Convergence, 42

Activity 2


What is OPEN Innovation?


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

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


25 Sept 2012

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?


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?


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

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


25 Sept 2012

Licensing Out

• Licensing Out : Servitization of inside
capabilities

• Example : Google Maps


Cloud Based Applications

25 Sept 2012

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 :


• Open Source : Revealing internal
technologies/capabilities to the market
without any immediate selfish incentive
• Example : Opening up Android platform for
third party aap development


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_Hip
pel_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


Porters 5 Forces


Value Chain Analysis


Financial and Economic Feasibility
Analysis

Profit – Loss
Profit – Loss

ROI > Return on Investment/ Impact on investment
ROI > Return on Investment/ Impact on investment

SROI > Social Return on Investment
SROI > Social Return on Investment

NPV > Net Present value
NPV > Net Present value

IRR > Internal rate of return/ Discounted Cash Flow
IRR > Internal rate of return/ Discounted Cash Flow

EBITDA
EBITDA


Activity 3

• Use of Open Innovation in your
bachelors/Masters project

• 10 minutes


Open Innovation vs Closed Innovation
Closed Innovation Principles Open Innovation Principles
Smart People get hired, work for Smart People are everywhere,
Large companies, are PhDs or they can work from anywhere
Ivey League Universities, give for anyone, their motivations are
them money not just money
To profit from Innovation Firms must be receptive to
orientation, we must discover it Innovation surrounding us,
ourselves, develop it ourselves, innovation can come from both
and get it to market inside and outside firm
boundaries
Patents, IP rights, copyrights We don’t really have to create
give us undisputed monopoly in innovation in order to profit from
the market it
We must protect our capabilities We can create competitive
from others, must not let anyone advantage by letting outsiders
see or use our capabilities use our capabilities and
generate revenue as well

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

Other firm´s
market

Licence, spin Our new
out, divest market

Internal
technology base

Internal/external Our current
venture handling market
External technology
insourcing
External technology base

From the Presentation of Prof Henry Chesbrough UC Berkeley, Open Innovation: Renewing Growth from
83 C 2002 Henry Chesbrough EIRMAInnovation Convergence, Minneapolis Sept 27, 2004
Industrial R&D, 10th Annual SIG III, 2005-10-20

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


Business Model Analysis and Open Innovation

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