Business Model Archetypes

In the work done at the Sloan School of Management at MIT, four basic business model archetypes were defined. These were the Creator, Distributor, Landlord, and Broker. From each of these basic archetypes, 16 specific models were developed depending upon what type of asset was involved in the transaction. These are shown in the “Business Model Archetypes” figure.

Looking at this particular matrix and thinking about new product and service development one can see opportunity for new business strategies in each matrix element. This is in contrast to the view before the 1990’s. Prior to this time one might say that when you are talking about innovation you are talking about the column related to physical assets. These were of the type that had been protected by patents, and around which most R&D laboratories have been built. Financial instruments were starting to come into their own for many years but certainly became prevalent in the late 1900’s. Likewise in the late 1990’s intangible assets started to have more importance with the advent of IP brokers and patent trolls. These changes expanded the business models available for utilization.

Industry versus Technological Maturity

Other organizations have also studied business segmentation as it applies to technology strategic planning. The first example of this comes from Philip Roussell who with Arthur D. Little published in PRISM in the summer of 1989 the matrix shown in the “Industry versus Technological Maturity” figure. This matrix relates industry maturity to technological maturity. The scale on both axis is associated with the maturity of either the industry or technology. The scale ranges from embryonic to growth to mature to aging. This corresponds to the typical technology or business maturity curve which is the S-curve from the Boston Consulting Group discussed earlier. In the example shown, the circles represent different technological investments. There is a cluster of business strategies for this particular company, with industry maturity more dispersed than technological maturity.

Such a distribution of maturity corresponds to typical Incremental innovation. What we’re looking for now however is both breakthrough innovation and next-generation innovation. Projects that would fall under this category would be in the upper right quadrants of this matrix. Here embryonic technology would be taken into a mature or aging business to create a new business S-curve (a new growth potential and profitability for an existing business). On the other hand there are not many cases of good businesses in the lower left-hand quadrant of this matrix. However when one looks at the opportunities for geographic expansion, many mature and even aging technologies can be advantageously taken to today’s embryonic industries in Third World in developing countries. The skill to do this has more to do with technology transfer and innovation management however. The reason for showing this graph is that when one starts to look at planning technology strategies that are integrated well with business strategies, a matrix like this often shows a business team what it is that they are starting from and what stage of development their industry and technologies should be moving to in order to line-up with one another. It also can highlight the opportunity for new growth driven by technological innovation.

Relationship Between Technology and Product Market Portfolios

Another useful look between technology and product and market portfolios is shown in the “Relationship Between Technology and Product Market Portfolios” figure. This viewpoint, originally constructed by Bain & Co., is actually two major risks stacked one on top of the other. The top matrix shows the relative technology position between a leader and follower from a technology standpoint, and whether it is a research or development initiative. The bottom matrix shows the relationship between high and low relative market share positions, and high and low growth business areas. By stacking the two matrices one on top of the other, one can then see which research or development initiatives are supporting which market in area.

Typical Market Entry Strategies

The need for such a visualization tool is it that the typical market entry strategies vary by type of industry and companies capabilities. These are shown in the “Typical Market Entry Strategies” figure.

Pathway (1) is that of a technological leader is going to be first to market. Pathway (2) is that of a technological acquirer who also wants to be first to market. Pathway (3) shows a pathway of a research follower that has the capabilities to be a strong developer who is looking to be first to market. Pathway (4) is that of a technological follower with a strong marketing thrust. Pathway (5) is also a technological follower but with a weak marketing thrust. Pathway (6) shows how a company with minimal technology capability can acquire leadership positions early. Pathway (7) shows a minimal technology company acquiring a follower position early by picking up the appropriate technology from others. Last strategy (8) is that of a company having minimal technology but acquiring a follower position late.

The importance of using such matrixes is to test whether the pathways proposed by technology and marketing groups match with the capabilities of the company. Clearly the CEO and chief technology officer need to staff the R&D organization, the business development organizations, and the intellectual property licensing groups differently depending upon what the needs and capabilities are. Marketing must also be taken into account because marketing groups need to have the ability to build new brands into high-growth leadership positions. This is very different from traditional product managers and marketing managers that do not have this capability, where they can simply follow the lead of others in capturing low share positions. Making sure that these pictures are self-consistent early in the strategic planning process can save many millions of dollars of wasted effort when the capabilities really don’t match what a company has.

Posture for Product Lines

A similar matrix, but shown in a different form, is shown in the “Posture for Product Lines” figure. This matrix relates the marketing group strategy, to the product line needs, to type of technology needed. Again this is a test for consistency.

Product Line Strategies

The contour lines shown on the matrix show the technology posture for each of the general areas. It is a particularly useful in large companies as its products are going through their life cycle and maturity curves. Again this matrix allows one to look both inside and outside the company to test for consistency. The “Product Line Strategies” figure is a way to look at the traditional functional responsibility for typical strategies for each section of the graph.

Technological Strategy

These strategies can be put in a tabular form tied to the eight R&D games (discussed below). Again these matrices tie product line strategies to R&D strategies and RD postures. Double-checking ensures that alignment is consistent throughout the different functions of an organization. It first glance this may seem like wasted effort to conduct and tabulate this information but through the Industrial Research Institute benchmarking work it was found that many companies have problems in this area despite their best efforts over many years. An example technical strategy summary is shown in the “Technological Strategy” figure.

Figure 3.5.13. Product Portfolio Imperatives

Another way to look at R&D project portfolios as they relate to market factors is shown in the “Product Portfolio Imperatives” figure. This matrix plots the relative market share that a company has vis-a-vis other competitors versus the market growth rate of the business.

The reason this matrix is so powerful is it really speaks to the type of clout that a company has in the marketplace and points out in very specific terms to R&D the type of project that they have to invest in. If there are multiple competitors in a market, a company typically has a relative market share of maybe 10 to 30%, and if the market growth rate is very high what it says is that the company must invest in maverick research to win or get out. This means investing in breakthrough technology. Incremental or lightly funded next-generation research is not going to get the job done. Looking critically at R&D projects on this type of a graph clearly shows were mistakes are being made in matching R&D projects to business needs. The “Examples of Type of R&D on a Product Portfolio 2×2 Matrix” and “Enhanced Examples Of Type In R&D On A Product Portfolio 3×3 Matrix” figures show this in R&D terms.

These graphs have been used by many companies to critically assess R&D portfolios. It also helps General Managers who are running existing businesses think whether it’s appropriate to fund R&D organization’s incremental work. If they truly need to penetrate a new market the work must be breakthrough. Likewise when companies enjoy large market shares versus other competitors in high growth markets there is sometimes a tendency to shift to incremental R&D. This is inappropriate. What’s really required is solid offensive next-generation work.

Situations also exist in the bottom left corner of the quadrant where a company has a dominant position in the market compared to competition, but the market has become mature. Here general managers tend to over fund R&D. Again this is inappropriate behavior. What they should be doing is funding only defensive incremental R&D, just as it’s needed, to hold market share.

We also need to remember that “Entrepreneurs” who starting their own companies, almost by definition need to have specialized business model, business and technology strategies. In such cases the examples shown in books like “Toward Entrepreneurship” provide good guidance. They tend to focus upon a solid integrated business plan whose main focus is a clearly worded Differentiation Strategy.

A corollary to this type of individual is the “Independent Contractor”. They utilize the strategies of “Entrepreneurs” along with those of a “Professional Services Firm”. To have an advantaged sustainable Independent Contracting business, a clear, thoughtful business and differentiation strategy is critical.

Another special class of companies with specialized business model, business and technology (know how) strategies are Professional Services Firms. The required make-up of the organization (the relative mix of juniors, managers, and seniors) is primarily determined by the skill requirements of its work; the mix of senior level, middle level, and junior level tasks involved in the projects that the firm undertakes. Consider three types of client work: Brains, Grey-Hair, and Procedure projects.

In the first type of Brains projects, the client’s problem is at the forefront of the profession or technical knowledge, or at least is of extreme complexity. The key elements of this type of professional service are creativity, innovation, and the pioneering of new approaches, concepts or techniques: in effect, new solutions to new problems. The firm that targets this market will be attempting to sell its services on the basis of the high professional craft of its staff. In essence, their appeal to the market is, “Hire us because we are smart.” The second type of Grey-Hair projects, while they may require a highly customized output in meeting the client’s needs, involve a lesser degree of innovation and creativity in the actual performance of the work than would a Brains project. The general nature of the problem to be addressed is not unfamiliar, and the activities necessary to complete the project may be similar to those performed on other projects. Clients with Grey-Hair problems seek out firms with experience in their particular type of problem. In turn, the firm sells its knowledge, its experience, and its judgment. In effect, they are saying, (hire us because we have been through this before; we have practice at solving this type of problem.)” The strategy here is to employ more juniors to accomplish the background work.

The third type of project, the Procedure project usually involves a well-recognized and familiar type of problem. While there is still a need to customize to some degree, the steps necessary to accomplish this are somewhat programmatic. The client may have the ability and resources to perform the work itself, but turns to the professional firm because that firm can perform the service more efficiently, because the firm is an outsider, or because the client’s own staff capabilities to perform the activity are somewhat constrained and are better used elsewhere. In essence, the professional firm is selling its procedures, its efficiency and its availability: (hire us because we know how to do this and can deliver it effectively.)” Companies whose strategy is to undertake Procedure projects usually have the highest proportion of junior to senior individuals.

The strategic challenge for professional service firms is to carefully monitor the type of work it undertakes and make sure that it has the right mix of Smart Brains, Gray Hair, and Junior staff for the workload. Since people’s knowledge and experience vary over their careers, the strategic challenge for professional services firms is also (1) clarity on the work they do, and (2) extraordinary human capital management.

The final special types of business needing specialized business models are the Professional Societies or Non-Profit Organizations. Professional societies are perhaps the business model that is being most challenged by Internet and social networking technology changes. Continued on-the-job education and mentoring needs were, in the past, fed by professional society in-person meetings. With the advent of online blogs, webinars, and courses as well as professional networks on Facebook and LinkedIn, the needs once served by professional societies are being addressed at a much lower cost and more conveniently than in the past. The current generation of workers is demanding a return on investment unlike any other generation that has come before them. In order to have a solid membership business model an association must have a very specific niche that it serves. This is not a one size fits all world anymore. The second major strategic element is for associations to have positive, engaging, inclusive, service oriented cultures. Finally the dues element of the business model has to be commensurate with the income level and value members get from the Association. A robust member benefit package, quality and quantity, has to be present and meet members workplace problems in a positive emotion building way.