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Business model defined

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Written by Noric Dilanchian

Thursday, 20 December 2007

chesbrough_book Intellectual property does not make money on its own. It needs a suitable business model.

To illustrate that truism, flash back to the 1970s and the ever-fascinating PARC riddle. The riddle is: Why was so much invented and created at PARC, yet so little gained in financial terms by the owner of PARC?

The owner of PARC was Xerox. PARC stands for the Palo Alto Research Centre, founded in 1970. In all senses, Palo Alto is in the center of Silicon Valley. At PARC the Xerox photocopier fortune helped establish and feed extraordinary creativity and invention.

The PARC team created the core of much of what we consider to be basic IT today.

The inventions or technologies include the first WYSIWYG word processing software, the first hand-held mouse, object oriented programming, the first PC local area network, the Ethernet technology, the wide area network, the first laser printer and several other works of brilliance.

parc Yet Xerox gained very little financially or even in terms of kudos. Instead, the gains went to others, separate companies like Apple Computer, Inc. and Sun Microsystems, Inc. as well as PARC spin-off companies like Adobe, 3Com and Documentum. With IPOs those last three went on to bigger things.

The PARC riddle fascinates many writers.

My colleagues and I have referred to it several times, including here in 1994 here [PDF], then here [PDF], here and here. I'm writing on it again having read a book on the inside dope on the PARC riddle.

The book advances a convincing view on what went wrong at PARC and with Xerox. In a sentence, it says the PARC riddle is explained by Xerox's failure to focus on and think through the need for business models for the inventions and technologies.

The book is Open Innovation by Prof. Henry Chesbrough. I've written about this book previously in IP strategy for R&D: people first. The book's Foreward is written by John Seely Brown, Director Emeritus of PARC.

One of the most bandied about terms in business literature today is "business model". I've been searching for years to evolve a useful definition, as in our firm we maintain a Commercialisation Glossary to guide our thinking, writing and advice.

At page 64, Prof. Chesbrough provides a definition of business model which is not only the best I've read, it is the only one of substance I've ever come across. I've reproduced the short form definition below. Read it and apply it to your context.

Chesbrough and Rosenbloom definition of business model

"The term business model is often used, but not often clearly defined. My colleague Richard Rosenbloom and I have developed a specific and useful working definition.

The functions of a business model are as follows.

	1.	To articulate the value proposition, that is, the value created for users by the offering based on the technology.
	2.	To identify a market segment, that is, the users to whom the technology is useful and the purpose for which it will be used.
	3.	To define the structure of the firm's value chain, which is required to create and distribute the offering, and to determine the complementary assets needed to support the firm's position in this chain.
	4.	To specify the revenue generation mechanism(s) for the firm, and estimate the cost structure and target margins of producing the offering, given the value proposition and value chain structure chosen.
	5.	To describe the position of the firm within the value network linking suppliers and customers, including identification of potential complementary firms and competitors.
	6.	To formulate the competitive strategy by which the innovating firm will gain and hold advantage over rivals."

Brilliant! Prof. Chesbrough's career began with the management consultancy, Bain & Company, then he spent a decade in the computer disk-drive industry in the United States, and is now an academic at Harvard Business School in both the technology and entrepreneurship departments.

If you are unfamiliar with the above bolded management concepts search them on the Net. Otherwise you can buy the book and read discussion of them from pages 65 to 69 onwards. From page 71 Chesbrough illustrates the concepts by reference to the Xerox Model 914 Copier, as also done by us in "The most successful product ever marketed in America".

What we do for clients

If you have a business idea and can explain your business model to me, preferably in writing, I'm always confident I can then express a legal opinion a regards what the law may contribute to help you derive a financial return from your creativity.

Tell me how you'll add value with your innovation, eg make money, and I'll apply the law to your advantage. We can also help select and develop your business model, it involves more time, and hence money.

This month we've had a run of opportunities to engage with clients seeking to further their business models for their intellectual property. They include an organisational change training company, a data input device inventor, a software developer with a technology to reduce the generation of soot in coal-burning furnaces, and several online business ventures. I have drawn their attention to the above definition of "business model".

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Chesbrough and Rosenbloom definition of business model

What we do for clients

Further reading - other terms defined