Are Vertical Integration and Coopetition based business model related?

Coopetition (Cooperation + Competition) has been an aggressively researched topic in the recent past. I was introduced to this term only during my studies at HEC Paris and while I read this interesting article – ‘Coopetition based business models‘ it brought a few more thoughts to my mind.

This piece on puts forth various perspectives about Coopetition based business models. It raises valid points about organizational resistance and subsequent benefits of pulling through the strategy – not only to the firm but also possibly to the industry as a whole. It presents the potential impact of effecting an increase in the size of the whole pie, thereby dramatically increasing the firm’s own share.  In Amazon’s case, my interpretation is that while Amazon entered the e-commerce space as a consumer-goods-provider, it soon transformed itself primarily into a platform-provider – cleverly shifting its position within the industry value chain.

While reading this article, I couldn’t help but think of two more examples. One – from my not-so-distant past and the other from my current day experience.

In the Smartphone industry, Samsung & Apple are fierce competitors. Despite this fact, Samsung still makes the 64-bit A7 processor for the Apple iPhones (See here). Their partnership extended to more areas than just the processor.

In the Flat TV Industry, Samsung is a clear global leader in market share. Yet, notably Samsung is a major supplier of flat panel displays to several other TV makers in the industry. (See here)

In the consumer electronics industry, known for its rapid pace of innovation, is this a conscious strategic decision? Do vertically integrated corporations have an inherent competitive advantage over others in the industry value chain?

On the one hand, evolving customer specifications are a definite source of competitive intelligence for the firm – gaining insights on industry trend evolution. On the other hand, being suppliers of ‘critical components’ of a product gives the firm a higher bargaining power – allowing some control on the supply chain within the industry and also impacting product portfolio planning.

Read the original research ‘Coopetition based business models‘ via

The Fit for Growth℠ approach & Business Model Innovation

This post is based on my reading of “Fit for GrowthSM Framework for Telecom Operators: Aligning Capabilities, Costs, and Structure” by Martin Reitenspiess, Christine Rupp, Hannes Gmelin, and Chady Smayra, via Booz & Co.

It is an attempt to reconstruct the proposal made in the publication by drawing analogies to other pieces of work. This publication (from April 2013) from Booz & Co proposes a “Fit for Growth” framework to transition from price-based competition strategy to differentiation strategy. Not surprisingly the industry in question, Telecom, is industry characterized by the following observations:

  • Stagnating market due to saturation of primary revenue sources
  • Declining margins accompanied by price competition
  • Substitute OTT (over-the-top) technologies hurting the basic product offerings
  • Shift in consumer behavior demanding higher capital investments in technology upgrades

The figure below depicts the three tier approach proposed by the framework (the process above) and my simplistic interpretation of each step (the process below)

Fit for Growth Approach (by Booz & Co)
Fit for Growth Approach (by Booz & Co)

I couldn’t help but relate this approach to Business model innovation and its representation using the Business Model Canvas. One possible business model representation as described in Business Model Generation is the decoupling of Operations, Customer Relationship Management & Product Innovation.

Business Model Canvas (Source: Business Model Generation)
Business Model Canvas (Source: Business Model Generation)

An organization keen on business model innovation could use the Fit for Growth Framework and communicate the same using the business model canvas representation.

Once the leadership team decides to assess the ground realities of its business and charts out the current business model, it needs to take a call on which of the three aspects it will focus on. It naturally follows that leveraging current competencies is essential & management commitment to additional investments nurturing the key capabilities is imperative.

While additional funding may be secured from external sources, internal cost cutting is a long preferred approach. However this time, as the article suggests there are two ways of doing this. Firstly make ‘cost effective operations’ a way of life, not a one-time business exercise and more importantly identify rightly the good costs vs. bad costs. Secondly, the desired strategic focus area in tandem with the assessment of the current business model will bring out non-core area expenditures – seeking ways to cut costs dramatically in these avenues will go a long way in making a lean cost structure. My analogy between the proposed framework and business model innovation is depicted below:

Fit For Growth (& BMI)
Fit For Growth (& BMI)

The article has extremely interesting insights for this approach to seeking growth. However, I am in a fix about one specific observation. Exhibit 2 in the original article quotes “Experience Players” to be least profitable.

I would rather argue that experience players focus on the “customer experience” & hence should succeed in driving demand and raising the ‘willingness to pay’ among customers, while lowering non-core costs. Having said that, wouldn’t such a player also have a larger share of the industry profit pool?

Your thoughts?

A case for new market entry – is this the right diversification?

I choose again to write this post about DxOLabs! My passion for photography keeps bringing me back here. DxOLabs – a company with interesting products (B2B and B2C)! They have three existing lines of businesses with good synergy. I had tried once before to visualize their business model & suggest two possible opportunities in this previous post (Business Model Canvas – validating a reading –

I write again about DxOLabs (hereon referred to as DxO) as I noticed a job post on their website – which particularly drew my attention – “Product Manager – Consumer Devices”. A snapshot of the job post is here below

Product Manager - Consumer Devices
Product Manager – Consumer Devices

Although it looked an interesting opportunity to venture into, I decided– for my own sake – to analyze this move towards ‘Consumer Devices’!

The starting point: ‘what exactly are they trying to make’? With little public information available about DxO, the best starting point is the company itself – the job-description (JD) to start with.

“Consumer devices leveraging the connectivity of a mobile phone to create a stunning camera fitting in your pocket” – that helps me draw a mental picture about this consumer device.

  • Is a camera for sure
  • Will have an integrated connectivity-module
    • Like WiFi, to communicate with PCs/Laptops/Phones
    • Like (mobile-telephony) radio capabilities
  • Has to be compact – either that or there is a trend of increasing size of the pocket!
  • Will be sourced from white-label ODMs in China (given that Chinese language skills will help)
  • Might be sold in French(& English) speaking regions (say Europe to start with) or US & Canada (unlikely given the large geographic spread)  – as the JD necessitates exceptional French/English speaking abilities

In short, my hypothesis: It is a fantastic “point & shoot camera” with advanced capabilities, to be sold in the European market! I might be wildly off-target – but I believe it’s my best guess.

Starting with evaluating the target market – is this an interesting market to venture into?

The growth rate in this segment has not been encouraging. A measure I thought of using was the trend of possession of camera in households. I could pull this figure out for various regions, at various units of aggregation – country level or region level – using two examples, say Western Europe to depict region-level trend and Germany to depict a country level trend. (See two figures below. Source: Euromonitor)

Western Europe - Possession of Camera (% of households)
Western Europe – Possession of Camera (% of households)
Germany - Possession of Camera (% of households)
Germany – Possession of Camera (% of households)

Germany for instance shows a rather alarming trend of the forecast-ed growth rate being less than half of that in the recent past (0.4% vs 0.9%). While the absolute numbers may be less relevant directly, the relative figures are not encouraging. On a larger scale, even the Western European region shows minor slowdown in adoption (0.3% forecast vs 0.4% past CAGR). I believe this figure would be cumulative of ‘point & shoot’ and higher segment cameras like DSLR (which are witnessing higher growth). That is ascertained by some disheartening statistics about the point & shoot segment. Research here suggests that back in 2011 sales in this segment dropped by 30% in a year! That’s a sharp drop indicative of tough times ahead.

That leads me to talk about the most probable cause of this drop – pervasiveness of Smartphones & Tablets. The increasing computing power available in handheld devices and the fall in size & price of camera parts are added reasons for consumers to rely more on their phones than on yet another camera. The emergence of Compact Digital SLRs might be a good sign, but it remains to be seen how long before this segment reaches its maturity level? It also raises questions on my first hypothesis – is this ‘consumer device’ a Compact DLSR?

The most obvious substitute to a Camera is a Camera-phone. The threat from this substitute is extremely high – especially because Smartphones/Tablets allow instant social-media connectivity! I have personally on several occasions within Europe seen people holding up the Tablet to click a snap where I am fumbling with a bulky DSLR (albeit I love my DSLR for reasons of my own beyond the scope of this postJ ). There also is ample evidence to suggest that Smartphone vendors are upping the ante w.r.t photography capabilities.

The large variety of consumer devices at various price points from these several vendors raises questions about price-competition. An already crowded market with several established players is a tough one to crack into – and stay in profitably.

There is also a need for an appropriate distribution channel to market consumer devices. Retailers are a major sales channel for camera manufacturers, complementing their own direct & online sales channels. Each country (or region) has a set of dominant distributors & retailers.

Camera makers are thus facing competition not only from their industry peers, but also from Smartphone makers. For instance while Nikon & Canon might be players in camera industry, Samsung also leverages its camera capabilities into its Smartphone offerings. Others like Apple and HTC are the unexpected competition these camera makers now face.

Where does DxO Labs fit in this scheme of things?

  • Brand recognition! This is the most important challenge to overcome – while DxO’s software products are used by a set of professional photographers – this device is targeted at a different segment.
  • The increasing consumer inclination to use Smartphones as their compact photography companion is a trend that should keep DxO on its toes during this market entry
  • Increased investments by Smartphone vendors in camera technology embedded in the phones will be a challenge to match – a case of asymmetric resources
  • Multi-point competition is an aspect to be managed cleverly, particularly because DxO is a technology supplier to some of the consumer electronics vendors; introducing its own device will pitch DxO as a direct competitor to their current partners
  • DxO will have to build its B2C and distribution-channel capabilities; it is quite different licensing hardware ISP to businesses vs. selling a consumer device to an end consumer
  • DxO will have to deal with margin pressures when dealing with consumer electronics retailers – else focus majorly on going the online-sales channel

Why would DxO want to enter this space?

A few reasons I can think of are below:

  • With its imaging-hardware capabilities, perhaps DxO believes it can market their own consumer device and grab a piece of the current pie
  • DxO’s online presence through and its photography software could help build some brand recognition – but addressing the right segment is crucial! Scaling down their imaging software capability and plugging it onto this device can help it mimic Instagram or Vine… but there are miles to go before DxO can leverage social media to gain traction.

That makes me wonder – how about tying up with its regional brethren and provide some interesting effects to the vast pool of images, or maybe explore options with Flickr to gain traction in Europe.

Nevertheless, the choice of target market is extremely tricky – unless DxO has a bag of tricks in place already that is deeply concealed from the public domain, it will be tough ride in the long run!

Yahoo acquires Tumblr – a move towards competitive parity?

Much has been written about the recent announcement of Yahoo’s decision to acquire Tumblr. Here are my two cents in a more than two lines.

As with any acquisition, the key question has always been – will it add value? One of the best ways to look at value addition in an M&A is synergies among the merging firms in the value-chain.

The Internet Value Chain

For the value chain, I decided to refer to a different perspective – The Internet Value Chain (from the ‘Internet value chain economics‘ proposed by Mark Page & Christophe Firth from ATKearney back in 2010). I did this more so because Yahoo and Tumblr are primarily internet-companies – with lots of online-properties and services!

The Internet-Value-Chain talks about the path travelled by “data” and the value added to it at various junctures – from origination to consumption!

The figure below indicates that Yahoo (depicted by “Y”) is present in multiple stages of the value-chain – content generation, online services and enabling technology services – a common occurrence in this value-chain and in this industry.

Yahoo & Tumblr - A place on the Internet value Chain
Yahoo & Tumblr – A place on the Internet value Chain

Tumblr, on the other hand, is primarily a part of the “User Generated Content” box of Content Rights and the User Interface-Applications! It goes to show that Yahoo’s interest in Tumblr is primarily in the user-base and audience of Tumblr and in reusing its mobile-app development capabilities. In the recent past, Tumblr has added advertising to monetize its content base – this is still in a nascent phase.

Tumblr’s revenue sources pre-acquisition are the advertising clicks, premium blog themes and premium blogger accounts (say those hosted by companies looking for greater visibility). Yahoo also relies heavily on advertising revenues – driven by display ads on its online properties and those driven by its search collaboration with Microsoft (an alliance reportedly not doing too well).

What is Yahoo’s strategic interest in Tumblr?

Why is Yahoo interested in Tumblr? Yahoo is faced with two issues with respect to its service (online properties and ad-revenues):

Firstly, insufficient traction on handheld devices – creating difficulty in reaching Gen X and Gen Y users

Yahoo’s latest acquisitions indicate an attempt to bridge the gap in the ‘App Store’ eco-system.  Can Tumblr assist here? 
Tumblr’s mobile app is rated higher than any of Yahoo’s apps on the iPhone (An almost similar situation in the Android platform). Yahoo itself has been revamping several of its mobile apps to gain traction here.

Secondly, its user demographics – An aging client base alienating advertisers

Yahoo’s current demographics suggest about 50% of its traffic comes from audience < 35 yrs. In case of Tumblr the same segment comprises 72% of the total traffic. If time was to freeze and users were to remain completely loyal to the platforms, Yahoo can pull up the 50% figure up to 58%!  (Referred from here & here).

Looking to bridge these gaps, Yahoo will have to work around several challenges with this acquisition.

The integration challenges ahead!

While Yahoo will hope to exploit these synergies steam through; there are more challenges ahead with respect to the strategy, product integration and economic value extraction.

Although Tumblr’s mobile app is an advantage, it is ranked much lower than that of the likes of Facebook, Instagram & Twitter. On handheld devices – the merger will help improve the situation – raise it closer to competitive parity – but will not win it the game!

On the demographic front too, the hope to raise share of the young audience to 58% – rests on a big assumption of user loyalty. I have attempted to plot the relationship between the percentage of young users (< 35 years of age) leaving Tumblr’s platform and the resulting impact on Yahoo’s users resultant demographic mix (depicted below)

Impact of Tumblr users leaving...
Impact of Tumblr users leaving. What’s the threshold?

While Yahoo deals with the user base and mobile traction challenges, yet another front to address is the quality of content on Tumblr. Reportedly, much of Tumblr’s content has been said to be ‘objectionable’. 22% of the referrals to Tumblr come from porn sites which puts in doubt its attractiveness as an advertising platform.

In light of the recent introduction of advertising to monetize Tumblr’s platform, it is noteworthy that users have been happy with non-intrusive advertising. Integrating with Yahoo and starting a display-advertisement model like on other online Yahoo properties could potentially see users rushing out of the door – bringing Yahoo back to the demographics problem.

Tumblr’s themes will bring insignificant share of revenues and advertising revenues will meet a steep curve (ads prices on mobiles are cheaper than on desktops). Are the ad-revenues from premium bloggers enough to sustain valuations?

Coming down to the moolah! Tumblr reportedly spent $13 million in operations in 2012 while its ad-revenues were about $25 million. This is an unfavorable ratio accompanied by an unknown source of confidence in the projected $100 million revenues for 2013.

From Yahoo’s perspective, where’s the money coming from? Financial reports suggest a free cash flow reserve of $150 million – and reports say that Yahoo will mostly pay in cash for this $1.1 billion acquisition. There are indications of cash infusion from a stake sale of Alibaba which may be used to fund the Tumblr acquisition.

The question remains – in light of the strategic challenges involved and the best-possible value extraction toward competitive parity – is it the best use of this cash?