The following content is provided under a Creative Commons license your support will help MIT OpenCourseWare continue to offer high quality educational resources for free to make a donation or to view additional materials from hundreds of MIT courses visit MIT opencourseware at ocw.mit.edu I was working in this consulting firm I got bored I wanted to go start a business I said it’s not like I’m in my dorm room it’s not like I haven’t done this before so I need to be sensible about it this time because I’ve had startups that succeeded in startups that failed and I like the successes more than I like the failures so I interviewed a bunch of people scientists marketing types etc and came up with about 15 ideas and said that’s too many I need some filters the first filter was I need to solve the right problem because I’m good enough at operations that I’m gonna hit the target but it’s embarrassing if you pick the wrong target so my definition of the right problem is that you would cheerfully pay for the solution and you will tell your friends so I can lower your cholesterol with the nutritional intervention it’s not the right target because you don’t care you’ll forget to take it your medication most of the time and you’re never going to talk about it with your friends and I can’t afford to educate you because I’m a start-up if your back hurts ooh that’s a whole different matter right because if I can help you with something that makes your back stop hurting you will cheerfully pay for it you will tell your friends and if furthermore I can set it up so that when you stop taking my stuff your back starts hurting that’s the right target second filter I have to be able to solve the problem so if I had an enzyme that metabolized gluten I would be speaking to you today from my yacht so that one’s off the table that killed all but about five of the ideas the remaining filter was somebody besides me thinks this company is a cool idea and will buy it if I don’t screw it up so the last thing I did was took the remaining ideas and called some senior execs that I was friendly with had companies that could well one day buy the business Procter & Gamble Johnson & Johnson Pepsi etc and said I’m having some ideas I’d like to hear your thoughts on him not selling anything well I knew you were up to something what are you doing and when I would offer an idea if I would hear crickets and okay on to the next idea that’s how we arrived at sleep there’s somewhere between 50 and 70 million people in the US that have trouble sleeping and they complain about it and nobody has to tell them the benefits of a good night’s sleep everybody just feels better and there are nutritional interventions that will solve the problem and the companies I talked to said if you don’t screw this up we’d like to be first in line to talk to you in about two years so with that as background I had had several businesses in the past where we made nutrition bars and sold them through clinicians so my business model was let’s make a nutrition bar and let’s sell it through clinicians but I talked to a number of consumers and said how do you feel about eating something at or at night that’ll have your sleep a half-hour later and most of them say no I don’t feel so good about that I don’t like the idea of eating something okay what would you like well you know this little like five-hour energy drink thinks make me one of those except with the opposite effect oops looks like I’m in the beverage business okay well so maybe what I can do here is find the clinicians that you are seeing about the fact that you’re having trouble sleeping and I can do what I did before my business model will be I will call on the clinicians the clinicians will say this is fabulous I will tell my patients the patients will want to buy it one day I will call Walgreens we’ll stock it there we’ve done this before you may remember a little while ago I said I had a really bad five or six weeks where everybody told me no I called doctors nurses physical therapists dieticians I went to assisted living facilities and retirement communities and talked to resident care directors and without exception I was told no people don’t talk to their doctor about sleep they talked to their doctor about their earache if they do talk to their doctor about sleep the doctor runs for cover because he doesn’t know how to solve the problem and he’s been trained that this is a symptom of something else you are depressed and you need a therapist or you’re you have sleep apnea and you need one of those Darth Vader devices that blows positive air pressure and it keeps you from having apnea so let’s refer you to somebody else next so nobody was willing to talk about our intervention this was the point at this point we had made our Minimum Viable Product and we were offering free samples and they didn’t want it even if it was free so clearly the business model was flawed we weren’t going to be able to get it into Walgreens or places like that if we couldn’t find any customers and the route I had chosen to get to the customers was not working nevertheless there were people who were calling us back and buying our Minimum Viable Product the one that looks bad tastes bad and because the manufacturer spilled a little solution on the threads and it dried into something like superglue you need a vise grips to get the cap off people were buying it anyway clearly we had something there so it was time to address the business model of what is it we have and to whom should we be marketing it and how along the way I ended up in a conversation with Whole Foods because I when I was running a soy foods company I sold a lot of tofu to him and I knew him okay we’ll put this together we’ll sell it through Whole Foods but who is our customer we did a lot of work a lot of interviews got told know some more and concluded that there are a number of niche markets here that we could work with but the one where we were going to start was working moms and not working moms who have infants or toddlers at home they expect to be tired and they want to be able to wake up if the baby’s not sleeping through the night so forget it but once their kids are a preschool kindergarten or older they’ve got the hardest job on earth most of them have husbands who don’t shop don’t cook don’t pick up their socks so they’re hard-working there are daytime professionals they’re fussy about what they buy and what they bring in the house they do shop at Whole Foods it looks like the right market for us so my conversation with Whole Foods I was pretty direct with them and said look I can live a long and happy life and never put my products on your shelf the more the point I don’t want to be on yourself if it doesn’t make sense so really the purpose of this meeting in my view is to figure out will it ever make sense and if so what’s the trigger point and the answer to that was when we see enough reorders through Amazon to show that there’s a there there come back and see them keep them posted they remain interested we are after all friends and it’s a provocative idea so the revised business model now having gone through this postulate the idea develop a Minimum Viable Product shake it down in the marketplace identify the target is we are reaching working moms by mommy bloggers we’ve identified a hundred of them some of whom have as many as a hundred thousand followers there’s also all manner of social media ways to reach working moms so working moms we’re reaching them we’re selling the product through our website which will be a miniscule percentage and through Amazon until such point as we have enough of a reorder stream to make a justifiable approach to Whole Foods and other retailers shortly after that we hope to sell the business so rich that’s sort of an impromptu summary of how our business model morphed and pivoted and it’s a work in process so you don’t have anything else to do wish us luck thank you so so the reason I wanted Bob to tell you about that is that is to reemphasize this is not just an academic exercise he he told you about how he succeeded before he told you how he failed the first time he did something different the second he took the second model into the third market which turned out not to be the right thing for that market and he’s reinventing it and it’s been an interesting thing so you know what we say appears it’s we’re not giving you a formula on how to do it we’re trying to get you to think about these kind of issues and this is an example of an in process thing it’s been an interesting route Bob any other comments or people from the audience it’s practically a reality TV show which is your Michael okay riches question for those of you who may not have heard it from the back of the room was what were some of my learnings so far and if I were to relaunch the business today what would I do differently and I think that most entrepreneurs are stubborn I’m no exception to that well you almost never tackle something that’s going to be easy and I have a guy on my business advisory board who will give me ten reasons why every idea I have will fail and why every suggestion I make is dumb and it’s quite useful because eight of the 10 things he’ll rattle off I’ve thought about an ad rest and two of them I think I better think about that but you have to kind of be willing to walk through walls because it’s hard and most of you will fail I did you’ll just need to decide that as a jockey you need a different horse but I found something that worked and I went out and proudly talked about it to the investment community and then I tried it and I tried it and I tried it and it didn’t work so one of the things I would have done differently were right to do it again would have been to test the idea right from the get-go rather than just assuming that because it had worked in the past that this market and this group of people was like the last market and the last group of people yes sir I don’t really know how to do that what I like is translating science which is somewhere near to the leading edge into something that consumers can buy and I don’t want to get metaphysical with you here but I think there’s some really fundamental things wrong with our healthcare system and we don’t often enough provide consumers with stuff they can buy which works without a prescription and I like being in that arena and I like being able to understand what consumers want and translating some fairly serious science I mean it’s pretty sophisticated biochemistry and our little beverage for sleep into something that we can describe without going into all the science so I actually don’t know don’t really have any experience selling the one-off stuff so with that as background I’m going to duck your question I don’t know and there was maybe one more yes sir we had three ingredients in the product and there were published papers on the action of each of the three so sucrose gets metabolized here protein gets metabolized here and gluconeogenesis runs through the liver blah blah blah and uncooked corn starch with its complex double bonds takes a far longer period of time to metabolize and so and we would show the papers to the clinicians and they’d say well this is a no-brainer first of all it’s just a food so it won’t hurt you cost a dollar might help go for that was all the resistance we found there were maybe three percent of the doctors out there that we called on who said when you got a clinical trial on it call us back and we did in fact you eventually do a clinical trial with the Joslin Diabetes Institute it did what it was supposed to do but as an entrepreneur I was unwilling to wait let’s get in the market my my measure of whether or not it works is do they reorder it hey thank you Bob okay so now sick waiting from from what Bob told you about he’s doing to find customers and everything the question again is business bottles and tonight we have rich kibble who’s I’ve known for many years originally a internet IT technology entrepreneur who moved into medical the medical area and bio and more recently into the financial technology area so rich kibble his bio is on the website and his topic is business models take it away rich thank you very much great everybody hear me okay all right it’s made me back here I’ve had the privilege of doing this class with Joe for he’s invited me back for many years they won’t say how many but many many years so it’s also great to be here being the 25th year of it has anybody here actually attended this class before alright that’s good so I can tell some of the same jokes and I will actually get laughs out of them so first of all I want to start off because I love social media and I’m gonna include you in my social media life a little bit so everybody here uses Twitter yes or word most of you that’s our hashtag so on the count of three I want you guys all to cheer and yell in a congratulatory way for Joe celebrating the 25th year of this class all right one two three I love it Joe that is live that was outstanding so what I get to talk about today is actually kind of fun it’s uh its business models and unlike a lot of aspects of business business models themselves they change all the time and as a matter of fact they become an incredibly intricate and important part of how a business succeeds or fails which is something new as I’ve worked around MIT for the past 15 or more years so often the researchers scientists engineers that I speak with are so focused on their product their technology the intricacies of a particular design that they actually don’t think about the customer and they don’t think about how its ever gonna get to the market they’re more interested in you know can they actually get that new particular you know engineering you know physics you know combined technology to do something they never did before no can they get that particular molecule to operate in a certain way or can they get that thin film polymer too you know elude a particular drug and that’s fantastic but very often we forget about how do we actually impact the world with our technologies whether it be internet technologies applications hardware software biotechnology so business models are really the foundation of that and very often that’s left to business students and one of the wonderful things about MIT is that there’s this great convergence where business students actually have discussions with engineers and scientists and researchers and vice versa and that does happen everywhere so we sort of take it for granted here so I’m very privileged to to come and talk to you about business models my background as joe said is you know I started really my career in technology and then moved very much into bioscience biotechnology bioinformatics Diagnostics spent about the past 10 years doing that took two years off and was focused specifically on the financial services industry so worked for a very large fund in Westport Connecticut now back in the Boston area and now focused again more on not only funding and financing of early-stage development companies but also in identifying great intellectual property and Technology all around science and research so today’s talk is going to be about business models and I’m hoping to share some insights with you essentially this is how I think of these things you know we start off with a whole bunch of disparate data points we call that information hopefully we begin to connect those dots you know it’s it’s almost like a pointillist painting where you have thousands of dots and as slowly as they come together they start to connect and then ultimately out of that you have wisdom you have an image that is created out of that what I hope to do today is provide you each of those three information knowledge and wisdom so let’s start off with a simple foundation the foundation is to say this many definitions of a business model exist the one that I like the most is simply this a method by which a firm uses its resources cash technology its people to offer its customers better value than its competitors and make money doing so it tells who pays how much and how often do they pay for those of you that are looking to start companies or even begin to work for companies especially early-stage companies the question that the board the investors the new employee coming in the door are going to ask is what do you do who do you sell to and how do you make money it’s pretty simple now how do you make money part is often the challenge for many startups they have very cool technology they think they know who’s gonna buy it but they have no idea how they’re gonna get it in the hands of those individuals are they gonna create a website they’re gonna join you know sign onto the app store are they gonna go retail are they gonna use a distribution channel a partner that’s the big crux of it so that’s the question you have to continue to think about is how do we ultimately make money from what we are developing so what’s changed a lot in the way we operate in this world is the way that companies operate the way the companies have formed and developed and this chart is not really meant you know in great detail to be read but overall what you have here is an example of how over time you have points of history where as industries developed changed they went away what you had is different ways of communicating with the world different ways of actually connecting with consumers if you think about back in the days of merchants and mechanics and industrial businesses the way they operated and communicated was much different retail stores existed but in a very very very different way they were family-run stores most of the products and services we bought from we’re from a few large retailers like Sears whether that be your washer and dryer or your tools or other things as technology continued to mature what you saw is the financial service industry becoming very very sophisticated and the financial service industry began to allow us to see business in a global way out of that came complex advertising campaigns global marketing and distribution mechanisms and what you saw is entirely new ways to spy and reach the end user the products what really changed is at this end of the world where you had technology was then introduced in such a way that distribution of goods ultimately the ability to connect an individual who wants a product or service to that product or service the barriers of distance the barriers of manufacturing suddenly went away the United States has probably done this better than almost any place in the world we can get something delivered tomorrow that we or this afternoon at 11 a.m.

Or 1 o’clock in the afternoon whether it be a product or service because of financial support and backing for those type of organizations whether it be the manufacturers the UPS the FedEx and others the distribution channels have shrunk greatly when I travel to different parts of the world they find an amazing selection of products and services that we have in the United States and when you go elsewhere you notice how limited it is if you’re living in parts of Europe if you’re living in parts of Africa parts of Asia if you’re living in most of Russia the ability to actually order something today and see it arrive in the next month is very very unlikely and the more remote you are the less like it is is ever going to reach you on time or without being lost in some part of the distribution channel so I encourage you to think about as technology has changed and distribution channels have changed it has impacted the way that we operate and build companies so at MIT when we think about how do you bring a company from the idea to the market or what is so often called a lab to the market the way you think about that has to integrate the business model so for those of you here that are scientists or researchers or engineers as you’re thinking about your new products your service your technology you have to continually test who is gonna buy this how am I gonna get it to the consumer how will this ultimately impact the people that I care about the people that are going to benefit from my product or my service just as bob was sharing with us before some of the learnings he had as he was developing his new company were those bumps in the road as they realized that various ideas they had about lay we’ll give it away for free or perhaps we’ll go through this particular distribution channel those things did not work you learn from those you incorporate you speak to more consumers you speak to more investors that are expert in the space and you modify your approach so as all of you think about building companies products and technology think about how are you getting it to the consumer I think the mistake that a lot of people have is they think that as they read The Wall Street Journal or Berg or MSNBC is they hear about these stories of these companies and a stratospheric growth of these companies but they think success is this linear process when when it’s really not success is really messy it’s noisy there’s lots of bumps lots of failures and challenges whether it be because of market acceptance technology failures or it happens to just simply because the market was not ready for what that you were for what you were doing the goal is for you to figure out throughout those bumps and those curves how to identify opportunity and also how to modify your products and services so that brings us to business models in general there’s lots of different ways to think about a business model complexity was famous three years I remember when I was in graduate school they would talk about business models sales and marketing and distribution and it was mind boggling if they pass it out on an eight-and-a-half by eleven sheet you would need a magnifying glass to figure out what was happening because the distribution channels were not as sophisticated the technology was not as sophisticated so you had complex models and within these complex models there were lots of points of failure lots of points where your reseller or your OEM channel your original equipment manufacturer or your distributor was failing lots of points where the manufacturing was not succeeding or the retail environment was struggling so what’s happened is you’ve seen simplification of business models these ideas that become simplified in such a way where you say to yourself I’m building this and I want it to be in the hands of these people whether that be a consumer a doctor a lawyer it happens to be a large corporation what’s the easiest way to get there and leveraging technology leveraging all of those things that are out there including the good advice of experienced people will help simplify this an example might be Zipcar a company we’re all very familiar with this is a relatively simple business model it almost seems so simple that you’d be amazed if you presented this to an investor and said this is our model this is it and we’re gonna build basically a company worth a publicly traded company I don’t even know what their market cap is right now fantastic successful organization operating globally in many cities around the world they kept it very simple very organized business model how many people here use Dropbox you got two-thirds of the group here they use Dropbox when’s the last time you saw a Dropbox advertisement on TV it doesn’t exist 20 years ago if you were looking to build a company you’d have to have an advertising budget you have to think about how we’re going to wind up getting this into the hands of the right people who are the right people are we gonna sell the businesses we’re gonna sell the individuals what’s Dropbox is business model how come you guys know so much about Dropbox how is that word of mouth other people told you it’s viral so somebody tells you about this incredible thing called Dropbox you can sign up for free you can get a certain amount of megabits of space for free and all the sudden you start uploading photos or you’re sharing PowerPoint presentations and documents and your friend signs on then all the sudden you tell three other friends and they sign on and then all of a sudden when that is shown as viable before you know it they’ve got an entire model here that is making them a fortune because they have now have businesses and large what they call pro subscribers large users paying large dollars in order to access that data it’s fantastic does that look like a complicated business model no not really here’s another example of simplicity rules we have the luxury of leveraging technology and we also have different types of mechanisms in order for us to educate consumers viral marketing is certainly one of those we’ll talk about today so simply put your business model is not your business please remember that the business model and business model innovation is critical in developing a quality business attacking new markets and driving profitability just as Bob had shared earlier the ability to modify changing and dwarf your your business model is critical because just one small change can make all of the difference we’re going to talk about some companies and small changes and has made all of the difference in their success so I’ll do sort of the academic part of this presentation and give you sort of components of the business model and then we’re gonna talk about some good examples and then I’m gonna leave plenty of time for for Q&A and on time as I promised Joe so from a business model perspective there’s lots of components there’s aspects of a business model that just should exist overall they’re pretty simple what is the value proposition what are the market segments that you’re targeting what are the value chain and what is the structure of that value chain is involved in it what is your position within that value network are you at the early early stage from the standpoint of manufacturing are you at the end stage from the standpoint of actually delivering the product or service to the consumer is somewhere in the middle how do you generate revenue and how do you generate margins and those are two very different things there are companies out there we all know that generate tremendous amounts of revenue and their margins are very tiny you 1% half a percent or less what they make it up because the revenue is so extreme you have other companies out there that have exceptionally high margins tremendously high margins not very large revenue think about luxury goods resellers take a look at an average you know consumer that goes out and buys a luxury bag or a nice suit or an expensive watch well I can go buy a watch from Movado or I can go a while watch from swatch these are beautiful watches they’re made by large manufacturing groups they’re going to a very very sophisticated distribution channel and they’re made in the tens of thousands those watches are sold anywhere between you know 39 $49 up to probably $1,000 and they’re sold in the thousands through retailers that you see in the mall through retailers that are online and also to big-box sellers like Walmart or Costco or others you think wow that’s interesting someone likes watch and also Movado which is much higher end they both sell through similar distribution channels they do tremendous volume so they have very very high revenues but their margins are incredibly small the goal is saturate the market get as many people to buy as possible take a look at other types of products that are similar that are called watches very often they’re then called timepieces well you have watches that are handmade or they’re made in a very very subtle way where it’s a lot of on hand or craftsman work and craftsman design very low on the manufacturing side it might take months to make a particular watch if not longer and the watches sell for tens of thousands or hundreds of thousands of dollars you think about IWC potato Phillip many of these watches will sell for $100,000 of fifty thousand dollars for a watch totally different business model their margins are very large but their overall revenues are relatively small they don’t sell a lot of pieces right think about mercedes-benz and think about Ford if you based success on the total number of vehicles sold Ford tells them you’re in and you’re out if you base it on margins oh it’s a slightly different story Ford has some products that are incredibly high margins like their SUVs they have other products like their low end cars that are very low margins but they’re looking to get adoption within a particular marketplace Mercedes much different story very high margins on virtually every vehicle they sell much lower volume so all of these things have to be taken into consideration you cannot choose your business model because it seemed like it made sense because you saw a competitor doing it you have to figure out where are you within that particular value network the competitive strategy plays into that and what stage of development is the company so I’m gonna flip through a couple of these slides and we’ll dive into some examples in it and I’m hoping you guys have lots of questions at that point so the value proposition which is really number one here it’s really a description of the customer problem the solution that addresses that problem and the value of this solution from the customers perspective the customers perspective is very important here right if I am buying let’s say an Apple product which I see a lot of here well there’s a lot of things there that I as a consumer might be attracted to I love the design of it the size of it the feel of it the way it operates right if for example you’re buying a desktop computer and you chose to pick out a Dell where you chose to pick out another type of manufacturer not like Apple maybe you’re buying it for entirely different reasons than that Apple user so think about what is it that the customer perceives as value is the customer looking for low cost or are they looking for you know speed are they looking for something and you need to make sure that your value proposition offers that from a market segmentation perspective it’s choosing your audience and we could talk about this entirely throughout this class but I’m gonna keep it short you have to know who that ultimate end user is who is that person that’s gonna write that check recognizing that different market segments have different needs if you’re selling we’ll use the example I did a moment ago if you’re selling to that high-end watch buyer who’s buying essentially a timepiece that’s gonna be passed down for generations that’s a different type of buyer a different type of a marketing approach then if you’re selling a swatch watch which borders on a disposable watch in the last five years it’s fantastic by then you probably have bought three or four more watches same thing for computers and cars and many other things additionally value chain structure and position and the value network are critical to this and they’re part of that initial slide I shared so what is the firm’s position in the value chain what are the activities within the value chain and how the firm will capture part of the value that it creates within that chain because where you fit within that chain and how much of it you own is really really important to know if your Netflix think about where are you in the value chain excellent so you asked if I could describe the value chain so think about the entire cycle and I’ll use Netflix as an example because I mentioned it so what does Netflix do essentially their distribution too-hoo the end user they are at the far end whichever end you want to call the far end they’re at the far end of the cycle right there’s not much after that right they’re distributing a movie something entertaining to us if you think about that entire value chain in an entire cycle it goes all the way back way way way way back to somebody maybe a year ago or 20 years ago that had an idea for a picture an idea for a movie or a film who then as they move through that value chain maybe they found a screenwriter they ultimately perhaps found a studio that studio ultimately made a decision whether they were gonna fund it or not just like a venture capitalist movies are just like starting companies idea all the way through to the business plan to the funding that venture capitalist or in the case of a movie it’s the studio that says we love it we want it the story’s outstanding we want to buy this story we’re gonna put this much against it they then build the team right so they find who’s gonna be the lead who’s gonna be the second who’s gonna be the third who’s gonna be the action character who’s gonna be the romantic where is it going to be filmed all of these aspects are just like a business they got to find the CEO the CFO of the CTO there to fear where are we gonna locate the company where’s the best place for it to be and then at that point they start working on it and toiling away and filming it and filming could take weeks months or even years then ultimately it’s distributed now it might be distributed directly into theaters or if it doesn’t get great reviews in the early early days of distribution it might actually go directly to DVD and that’s when Netflix jumps in so if you think about that’s a long cycle I probably skipped 30 parts so where do you fit within that distribution channel is absolutely critical for you to understand how you think about that and where you actually will capitalize and make money Netflix will also have the big challenge where they were facing a major competitor at that time when they first came to market did anybody even remember who that competitor was right blockbuster got their butt kicked by Netflix what happened but what happened was two major things number one technology changed DVDs came out VCRs were going away right so videotapes made perfect sense when you went in a blockbuster there’s kind of big kind of bulky thing didn’t even think about shipping it easy to break its crush doesn’t work so well tape gets pulled out whatever blockbuster had a great model they were at the end of the cycle to us the consumer they put little stores everywhere and they made it easy but all the sudden the DVD world came out were you were able to get super high definition quality picture motion pictures on a DVD that is as flat as an envelope Netflix said hey why are we building stores for these things people already know the movie they want or they could use this new technology called the Internet and figure out what movie they want what does mail it to them the other big challenge that blockbuster had was the whole process of limited supply and demand on that supply so they penalized you if you didn’t return the video on time because they were losing revenue if you didn’t get it put it in that little tiny box by a.m.

Or a.m. the next morning you got charged a fee why because somebody else wanted there one of three copies of that movie they couldn’t have an unlimited supply whereas the ability to reproduce and print DVDs virtually unlimited everybody in this room could order a DVD today of a hot movie that just came out it could be at your house tomorrow there’s no distribution issue the ability to reproduce that DVD drop it in an envelope and mail it to you is effortless completely automated so what you have here is this convergence where there was an opportunity there was technological change whether it be DVDs or internet or a combination of both that allowed Netflix to completely crush Blockbuster and then Netflix then changed themselves didn’t they they recognized that our ability to capture more bandwidth the ability for us to actually download a movie was increasing in many parts of the United State it’s not everywhere not everywhere but as our ability especially in large cities increase to download movies now all the sudden it changed you we don’t have to ship it to you anymore all you have to do is download it it streams to you and then they created a whole series of other distribution channels now you can get Netflix on your Roku you can get Netflix in all of these other areas so if you think about it when the guy that started Netflix started off it was very simple model people liked movies they’re willing to pay for them so they could watch them at home DVDs are the new thing and we’ve developed a complex shipping method and mechanism and a model of warehousing DVDs that we can get it to people overnight they can keep it for a day a week we don’t really care because we’re just gonna keep shipping more it was so simple like the business model could not have been easier but what they did is they continued to change and morph their business model as the technology changed and they’ve continued to stay far ahead of the curve what is the latest latest thing that Netflix is now doing they’re producing movies how crazy is that like can you imagine if you were the CEO of Netflix and you said to the VCS when you went in to talk to them a decade ago well here’s the thing I got a business idea what we’re gonna do is we’re gonna basically kick blockbusters ass right we’re gonna distribute these things on DVDs and then we’re gonna start to do downloadable them by the way we’re gonna become a movie production studio their head would explode and they would just say listen you have no idea what you’re doing and you don’t understand how complex the market is that’s why earlier I said simplicity when you launch your business keep it simple show that that model is easy to understand and then from there you continue to expand who would have thought Netflix is now producing some of the best shows out there orange is the new black is one of the top shows out there produced by Netflix what are some of the other ones house of cards it so you think about like at mind-boggling what is the difference between Netflix and blockbuster leadership the ability to change the ability to see around the next curve and actually change the business model of the company and/or to adapt so I’ll finish up this area of revenue generation margins we talked a little about that earlier competitive strategy how will the company attempt to develop and sustain their competitive advantage and I’ve shared a little bit about that and it flits is a great example and then one other component of this is where are you on the field understanding where your business is and the Netflix example is one that’s pretty clear you know when you’re over in this area here we are pilot testing and you’re in the gestation area or you’re doing the rollout or you’re in slow growth that may not be the time to take on two or three new business models or enter a different part of the distribution channel but as you start to get that terminal velocity that’s the time when you start to really look back and say hey now let’s take a look at our market in a different way we’ve got the velocity whether it be the funding the adoption within the marketplace and then at that point based on the maturity you can start to think of expanding so where are you on the field it’s always important to know that a lot of companies blockbuster is clearly one of them that took their eye off the ball and they just focused on what they were doing and what they did is just stuff that we look at now we go gosh not you I mean you thought maybe eliminating the leaf bees is gonna solve your problem you thought reducing price you thought more stores is gonna sigh I mean you look at that now you say wow like that’s the best that management team could come up with they were not stepping back and saying where are we on the field guys what’s happening in the entire space that we’re playing in and where do we play great example is Google this is a snapshot of the Google website launched September 4th 1998 has it changed very much think about it how cool is that that is elegant I mean how simple look at that what is it their index contains 25 million pages soon to be much bigger how many trillions of pages does you will have currently indexed think about that but what’s also important to think about is this Google could have stayed just like this they could have stayed a simple what that’s it search engine it could have been a great search engine they could have been a better search ender than anyone right that was sort of what they were promoting we will find you what you’re looking for faster better we prioritize we have complex algorithms we have a whole bunch of smart people probably from MIT that are helping you find that weird you’re looking for right seriously right you’re you’re looking for you know you need a pink doily that will be eight inches that is under a lamp for your grandmother’s house or you’re looking for a new handheld device for something else they’re gonna find it for you right I’m looking to book a trip to Paris they’re gonna help prioritize best hotels Paris luxury put those in bone right boolean search we all remember you know putting all the complex you know the word plus this or in quotes they have better algorithms in Yahoo they’re better algorithms and Alta Vista better algorithms and now the site the list goes on they could have stopped there and just continue to be the best search engine in the world and you know what they’re still killing everybody in search Killian people that like Bing or others probably disagree but I think they kill it but what did they do as a business I should say what didn’t they do since 1998 as a business I mean look at what Google is today give me a few ideas one word from a bunch you just what is Google today besides search it’s a brand to what Google Maps most of us live on Google Maps what else mobile thing about Google is is the mobile app in so many wins right what else I missed that email browser what I haven’t heard maybe somebody did say is Google is data well Google is is Google is data they have figured out ways cancer store analyze everything we do Google knows more about us than our families do and because of that they’re able to impact the world do you realize that Google health as an example actually provides data completely anonymous data to groups like the CDC if there is an increase in the number of people in the northeast specifically Maine New Hampshire Vermont that are in the increase in searches around a particular series of symptoms at a particular time of year that data is actually given to groups like the CDC to help think about positioning cures positioning vaccines and positioning hospitals and support think about how powerful it is if there’s all the sudden thousands of searches because a bunch of moms in New Hampshire Vermont and Maine start googling you know high temperature you know all of these symptoms that might be relevant or regular COFF or these you know these types of rashes and that’s regularly googled all of the sudden google has a dataset where they can see trends before anyone else can see them they know everything that’s happening on a very very global scale both micro and macro and it really helps make the world better now people will get scared and say you know it’s about privacy and all these other things and I absolutely believe that but there is good that can be created this is a data company that is changing the world they know more about you because of what you search how long you hover over a particular part of a website what you do on a regular basis the time of day that you do it the type of things that you like whether it be the type of music the type of concerts the type of places you vacation the type of hotels that you shop all of those things are very powerful so Google is a data company different than what their original business model was or at least appeared to be and part of it is because of this this is I think you’re right yeah I think it may have been accidental it might have been the Gees of Eric Schmidt when he was put in there by the venture capitalists it might have been a lot of very smart board people it might have been a lot of factors but they harnessed that opportunity that everyone else had any of the other search groups could have done this no matter how good the Google algorithms are they’re not that much different I’m sure than some of the best search out there right I mean are they much different than Bing are they much different than the other ones I don’t know are those companies gonna ever become as important on a global basis as Google we’re thinking about Google Maps is great what about Google Earth I mean how many people here know use Google Earth well both of you stand up I mean everybody’s used Google Earth right it’s the coolest thing if I’m booking a hotel and I’m booking a hotel in the north of Spain we go every year on vacation if I’m booking a hotel I’ve never stayed at hotel before I will look at it on Google Earth because I don’t believe the website that says across the street from the beach it might mean across the street from the beach and by the way the street is also referred to as an eight line huh eight-lane highway I’m not gonna be super happy with that when I show up for vacation so I’ll Google Earth it I’ll see where it is and I’ll be able to see what’s happening it’s incredibly powerful these little things and they know I’m searching that so it goes back to the data piece and a lot of it is driven around this the fact that the change in price is storage has dropped so dramatically has transformed every bit of technology whether it be the ability for Netflix to download movies or store them the ability for you to get on an airplane right now and while you’re on that airplane instead of watching one terribly chosen movie coming out of a ceiling projector you have a see in front of you that has a screen in it and you can pick from 30 movies that’s just storage right that plane has enough storage that we can pick from 30 different movies at each seat if you’re on JetBlue you can actually watch streaming TV as well so because of this everything’s changed the rules of the game have changed so the question always is what business model and why and as you think about each of these different businesses on the surface if you didn’t know any better you would think they were in the same business Apple sells computers so does Dell Bentley sells cars so does Cadillac revert to cell cell phones and so does Nokia but their distribution channel and models are dramatically different so I’m going to give you a few examples of what I consider really innovative business models some of these companies we’ve touched upon already today I’ll touch upon a few of them again and we can go into any more detail you want or ask questions but I think Amazon is probably one of the greatest companies out there Jeff Bezos is an absolute genius might be why he’s worth over 20 billion dollars he has figured out a company that he started based on the concept of selling books online and harnessing what was called user groups or essentially peer-to-peer communication in order to provide reviews that was the initial concept we’re gonna sell books online and we’re going to harness the power of the Internet where people provide feedback about the books they purchased were they happy with it was it good was it etc right we take all this for granted now because since then we have we can pick movies that way we can pick restaurants that way we can pick hotels that way that user experience is there but Amazon has gone far bigger than that so I look at the Amazon business model I say baby it’s a business model of leveraging assets that’s the business model how many of you been following what Amazon is doing lately a couple of big announcements at Amazon in the past I don’t know 30 days the 60 minutes special how cool is that if anything it could just be a project of Bezos but think about just the idea of the drone concept of delivering packages in a way that it actually reaches the consumer essentially the goal being the same day that they ordered right so they’ve got this drone concept that is going to allow these sort of robotic drones to provide people packages now we all know there’s lots of red tape there you’ve got access yeah you know you’ve got the approval of the FAA you’ve got all these other governmental issues but the fact that they are thinking that far out of the box think about this I’m gonna use that example before imagine if Jeff Bezos walk into his investors and said you’ll do – I need some money I got this idea we’re gonna sell books online and people are going to tell us whether they like the books or not which will then enforce whether we sell more books or not we’re weak Larry that author anymore and then so we’re gonna have drones delivering stuff it’s crazy well can’t you buy on Amazon right now it’s amazing I can buy active like tools I Amazon I can buy anything on Amazon the drones is one thing that the latest one that came out this week was fantastic what was it the other release that they were talking about today this week Amazon I’m sorry to say louder exactly did you hear the new word that came out for this is definitely gonna be one of those things that’s in the 2014 anticipatory so it’s the anticipatory sort of consumer something-or-other right I don’t remember what it is I just heard it this week I loved it this is gonna be one of those things that next at the end of this year it’ll be the new word that falls in you know to the dictionary the concept that they know so much about us that they can actually begin to anticipate what we might buy very similar to how Google is a data company they can anticipate what we’re gonna click on next Google could pretty much tell so much about you just on what you’re clicking on next and the speed at what you do it and how long you spend on a website Amazon does exactly the same thing we all go on to Amazon now and it’ll say are there people that purchase that product also bought these eight or here is your last purchases here’s some recommendations for you it’s gotten so good that it’s so much but I don’t even understand why people do junk mail anymore it blows my mind like who’s who I get stuff in junk mail for you no clearly not my demographic stuff that might be perfect if I was a 17 year old girl or or an 88 Europe or an 88 year old guy I’m like why are they advertising that to me it’s amazing it’s like even when it just shows up it gets in my mail I’m done my inbox right so this stuff comes in you think like what a wacky way to make money Amazon’s got it down they recommend things that make sense to me because they take a look I’ve been an Amazon member for years they can say listen these are the kind of books this guy’s order this is the kind of music he’s ordered this is a kind of other stuff hey we have some recommendations they’re not recommending to me silly things that just don’t make sense so now Amazon going to this next approach which is absolutely it’s so MIT ish I loved it it is is algorithm fairly driven it is anticipatory shopping that anticipatory experience where they actually believe that they are gonna reach a point where they have such familiarity with you that they have an idea what you are likely to buy next based on prior purchasing habits based on the time of day the time of year you name it that what they’re envisioning is that they will actually begin to ship those things to the closest warehouse to you and deliver to them to you that day or the following day it’s mind boggling all around data Amazon is incredible they’re leveraging assets Apple we could talk about them for years has anybody here seen the Steve Jobs movie I just watched that coming back from California last week I think what would a fantastic movie and Ashton Kutcher did a fantastic job as Steve Jobs but the genius of this guy really spoke about why Apple succeeded it was a great story about how he started and got his got kicked out and came back but it’s really providing convenient solutions Apple was about quality design and stuff better work the first time when you plug it in and cinq when you go to the App Store it better be there the better download if it doesn’t I mean it’s incredible how good they are it’s all about convenience that is a totally different model than virtually every other computer company out there right Dell is a great company has a different model right we’re gonna build it custom you tell us what you want in it we’re gonna modify it any which way you wish and we’re gonna ship it to you it’s not the Apple model who would have thought years ago I’m actually many of you may not even remember but years ago there was no such thing as Apple stores right how do you buy an Apple computer will you boy primarily online there are very few distributors of Apple computers Apple started off selling two large school systems and others and now the Apple store is as common in cities in the United States and towns as a Starbucks what a different model that is totally mind-boggling when most people were moving away from retail box stores those those expensive locations and moving to everything being Internet Apple said no no no no we want to be closer to the consumer we want the experience to be superb we want them to be part of this experience they’ve then opened stores and they’re making tremendous money doing that who knows Etsy these guys are cool aren’t they what a neat idea sort of doing good on a global basis I mean something that could never been done years ago a business model where they basically figured out ways to harness the power of creativity the power of different parts of the world people living in small villages building beautiful things that would never be seen outside of probably a 500-mile radius of their village if that are now part of this very special Network where they can build things you can go online and you can purchase them and a very small pieces kept by Etsy and most of it goes back to the artist to that individual it’s it’s phenomenal the thought that somebody sitting in Peru or Uganda or somebody sitting in a far part of Russia that builds beautiful things is actually selling them to people sitting in Japan or in Paris or in Boston it’s absolutely incredible other innovative models are is probably my favorite everybody here knows ARRA at this point I love Spain I love Zara they’re there they’re an absolute mind-boggling story who thought one company could innovate an industry that has been as stagnant and without innovation as the fashion industry the fashion industry has operated the same way for about a hundred years they have models they have designers they have magazines the only innovation the only innovation that’s actually hit the fashion industry is they sell some stuff online they outsource manufacturing they’ve been doing that for 75 years they have expensive high paid designers and they basically have a distribution channel through retail it’s been exactly the same way the challenge is that many people who want high fashion can’t afford high fashion these guys came in and revolutionized the market and their business model was harnessed and built around time to market that is the business model they put people at every fashion show that’s important they’re in New York Paris Milan everywhere and those people are there taking sketches taking digital photos and those things they believe the zara consumer would want those things are imaged sent back instantly to the factory 50% of all zara products are made in Spain they’re sent back they’re built and they’re sent to the stores virtually none of the products you find in a Zara last in the store more than four weeks and they will not continue to replenish them they’ve created this concept of scarcity this concept that what you’re buying is high-fashion and it’s in a limited supply that is fantastic compared to you go to Macy’s and there’s 800 of the same sweaters right and there’s 8,000 of the same ministers and if I go to a different Macy’s it’s exactly the same there’s no sense of scarcity they’re very low design very high volume right however I walk into I walk into the Armani shop on Newbury Street or you know the Fendi shop and look at the bags there’s a sense of scarcity high price limited resource this is this year’s bag this is this year’s jacket Zara basically turned it on its head and said no no no no we’re gonna have scarcity and volume and price and they nailed it on all of those you don’t ever see the Zara stuff at Marshall’s and t.j.maxx do you because they don’t have excess inventory the reason you can walk into Marshalls and TJ Maxx and pick up Burberry and Cartier and all these other brands is because blue you know Bloomingdale’s and Macy’s and all of them overstocked on them the season changed they don’t know what to do with the stuff so they slash price you know 60% off 70% off 80% off then boom it’s off to Marshalls and those companies have created entirely different business model of getting high quality goods to consumers Zara said no no no we’re not playing that game let me ask you this when’s the last time you saw Sarah advertisement on TV doesn’t exist when’s the last time you saw a Macy’s one day sale on TV once a day entirely different business model same industries are is amazing I’m gonna finish off these with a Gillette was absolutely just fantastic Gillette right here in Massachusetts you see him on your way to the airport this is a company that created the concept they created the first ever disposable razor which is a fantastic concept back in the 20s they then decide that they were gonna stay at the cutting edge of technology Gillette has over a thousand patents just around the mach3 razor they have thousands of patents within their entire portfolio and they will not start creating a new razor until almost a patent life has expired on the existing razors on the market they do not want to compete against themselves they’ve created this mechanism it’s absolutely mind-boggling we get the mach3 razor as a basic comes off the assembly line in the United States if you go to other countries especially developing countries they’re getting the razor that was hot here five years ago because they realize that they can sell it for a third of the price in large quantities those countries can’t afford the Mach 3 but they can’t afford the one that was five years ago eight years ago and they’re buying and by the millions and in addition to that they created that concept of the razor blade concept right it’s essentially you got the razor all you have to do is just keep buying the blades and buying the place and they can charge whatever they want for the blades or you have to start fresh with like Schick or somebody else so it’s a fantastic concept of high quality patents there in order to maintain their position within the marketplace and also customer stickiness we gave them this pretty razor it’s beautiful it’s got metal on it it’s got nice colors they’re just gonna keep buying the blades behind the blades and buying the blades so it’s fantastic series of different positions within one other ones we’re all familiar with or you know great groups like Kickstarter PayPal are really leveraging the whole p2p revolution it’s absolutely amazing what you see craig’s this is a fantastic example of that their website is about as sexy as the Google page there’s really nothing attractive about it but it’s an incredibly successful business we talked about Dell they built their entire success around the Justin time concept we’re gonna build a computer exactly the way you want it in addition to that you’ve got sort of the one-day one deal business model we’re all familiar with our inbox is full of living social and Groupon and all of these other groups in addition to that you’ve got other groups like Priceline which i think is a phenomenal model and really unique advertising to they’ve taken an approach unlike a lot of these groups here who you never see on TV Priceline has taken the approach of using some of they like Shatner or other people that basically get them excited about you set your price you’re in control and some of us love that right some of the love Priceline I have friends at use Priceline all of the time some of us just jump on it we just go to Expedia comm we booked our hotel or we go to the new one Hotel tonight which is my favorite app especially when I’m going to different cities you jump on a hotel tonight entirely different model they only list hotels after 12 o’clock in the afternoon they cut these special deals with the hotels for that night so you wind up staying at fantastic places because they new at they had availability they released the rooms to hotel tonight Hotel tonight kills hotels calm and other ones that day might not be the way to book a seven day vacation but if you’re looking for two nights in New York City it’s phenomenal it’s all on your app not on the website you can’t even do it on the website Hoover’s another fantastic example of that instant gratification car service quality not a taxi cab all web-based all app based so to summarize value proposition market segment value chain are really understandings that you have to have in this area of developing a business model where do you sit in the network exactly where are you on the field and revenue generation and margins those are two different things you have to think about what’s important to you are you gonna be a high margin business low volume you’re gonna be a high revenue business and low margin or you’re gonna try to do what Apple does which is a combination of both where do you fit within the competitive landscape and of course the stage of development of your company is critical or where are you within that particular growth cycle and always remember that success consists from going from failure to failure without a loss of enthusiasm and I’ll close there thank you all

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