Business Model selection for innovative company on the seed stage

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Business model selection is one of the most challenging tasks for any company. The enterprise' future is strictly dependent on that choice and a wrong decision might cause smaller profits or even total failure for the business.

This research stresses attention on the business model selection for an innovative company. Bringing an invention, a new product or service is always not so easy to choose a proper model of operating. The clearest and the easiest decision might be wrong and wouldn't fit the start-up best. Innovation is always something new, from products to processes and here, the decision to copy the existing business model is not a 100% success. The difference and the interest in this situation here is that nobody have done that before. The paper describes possible decisions of business model selection on the seed stage and also provides a theoretical framework for that. The seed stage is a very early stage of the innovative company, which is also pre-launch and even pre-prototype stage. There stage has a maximum uncertainty index during the whole project's life-cycle. From one side - it gives a framework for oeuvre, creation but from the other - it may put an inventor into a wrong, long, and a hard process.

The master thesis is created in order to systematize the knowledge of how to choose the best model for transferring the innovation or "know-how" technology to the successful business and how to do it "as soon as possible", on the seed stage. In addition to that the paper takes into consideration the real-life case of "InTech" company. This is a small IT company, based in St. Petersburg, Russia, which has developed an innovative technology of in-door navigation for mobile devices' users. The case of "InTech" would be an example to demonstrate the practical aspect of the chosen topic and will illustrate how the theoretical outcomes fit the real-world situation.

Research setting: research questions and sub questions

As we might see the final topic states "Business model selection for innovative company on the seed stage" I assume the main research questions are:

Question 1: What is the "user-guide" for a start-up to select a best-fit business model to operate during the seed stage of the ongoing project?

The related sub-question, which have to be taken into account while processing the research are:

Sub-question 1.1: What's the difference of choosing a business model on the seed stage in comparison to that process on the other stages of start-up development?

Sub-question 1.2: What are the risks of failure during that process?

Sub-question 1.3: What are the metrics to evaluate the decision?

Sub-question 1.4: The difference in business model selection when using venture capital or the investor's money?

Sub-question 1.5: What's the role of "innovation" in that process?

Sub-question 1.6: Are there any "points of no return" during the business model selection process for an innovative company on the seed stage?

In addition to that the final topic has "InTech" Co. Ltd. case. That part would add some practical issues for the research in order to give an example of implementation for the developed theoretical "user-guide".

Question 2: What is the best business model would fit the "InTech Co. Ltd." in-door navigation project?

And the related sub-questions to this main one would be the following:

Sub-question 2.1: How does the "InTech" innovative technology affect the process of business model selection?

Sub-question 2.2: What are the possibilities for the investment?

Sub-question 2.3: What are the best models, according to the "user-guide" developed in the theoretical part?

Sub-question 2.4: What are the risks for the company?

Sub-question 2.5: What is the result of company's management review of the developed solution?

LITERATURE REVIEW

This section provides the draft of master thesis literature review. It will be edited several times. Also some information would be added here, for sure. The first part would give the key concepts definition according to the well-known academic literature. The second part would be more stressed on the exact thesis topic and would give relevant information of the concepts to be used and what is already done according to the connected topics.

2.1 Key concepts definition

2.1.1 Business model

2.1.1.1 Business model definition

During the last decade, the growth of the publications according to the business models topic was exponential (A. Osterwalder, 2005). That could be described as an increasing interest in management, economics and business planning.

When processing one of the relevant surveys, 62 respondents gave 54 different definitions of what is "business model" (A. J. Sooljattje, 2009, finexpert.ru). Mr. Sooljattje divides all the given answers into two main categories:

Value / Client oriented (external type)

Processes / Roles oriented (internal type)

There are two examples provided by Sooljattje:

E.g. 1: According to A. Slywotzky (2006) The model of business is the way the company is choosing the customer, formulates and diferentiates its supply, operates it's resources, defines which tasks it can proceed itself and which tasks need specialists to be hired, goes to the market, creates the value for the customer and gets profit from that. Companies might produce products, services or technologies, but the supply is based on a complex system of actions and relationships, which is basically represented by a business model of a company.

E.g. 2: Business model of a company is the way the company utilizes in order to create value and generate profit. (H. Chesbrough, 2006).

In addition to given examples, it would be relevant to mention business model is not a strategy. Sometimes strategy is assumed as a part of business model, but the reason of that kind of mistakes is that the business model and strategy are very closely related. M. Levy presented an "equation of value", which states V=MS. Here V means value, M - model and S - strategy. The outcome is that the company has to assume the best business models for realization its strategy and based on those models, the company has to deploy and implement its strategy for creating value to customers and other stakeholders.

2.1.1.2 Business model classification

According to the reviewed literature, I will provide a review of business model classification made in MIT Sloan School of Management - a so-called Business Model Archetypes.

Figure 1. The four Basic Business Model Archetypes

(c. http://ccs.mit.edu/papers/pdf/wp226.pdf)

Figure 2. The sixteen detailed Business Model Archetypes.

(c. http://ccs.mit.edu/papers/pdf/wp226.pdf)

The BMA is based on the two fundamental metrics of the business. The first one is - types of licenses for assets, which are sold by the company. These dimensions give us four basic business models: Creator, Distributor, Landlord and Broker. The second dimension - which assets are integrated into business. This dimension gives four main types of assets: Financial, Physical, Intangible and Human. As we might see on the Figure 2, we get sixteen business types of business models. The MIT research by P. Weill, T. Malone, etc. states there are only seven of presented business models are spread within large companies in the US. (Figure 3.)

Figure 3. (c. http://ccs.mit.edu/papers/pdf/wp226.pdf)

The second classification I would like to mention here was presented by H. Chesborough (2009).

Figure 4. Business Model Framework by H. Chesborough (2006)

(c. http://alexandria.tue.nl/extra1/afstversl/tm/leung2007.pdf)

H. Chesborough, while creating business model classification (Business Model Framework BMF) used two parameters, on which the difference of models is based. They are: the volume of investment produced to support the business model and the level of "openness" of business model.

The analysis of development and deployment of business models practices show, that business models may be created for:

A product or service (a group of products and services)

The company in general

The group of companies or holding

Also we might state business models are utilized on practice for:

to assess and analyze the efficiency of business in comparison to other similar companies

to asses the potential of investment attractiveness of company's business in future

to optimize the business of the company, from the point of strategy and the point of maximization and fixation of value, which is created by company for customers and other stakeholders.

2.1.2 Innovation

2.1.2.1 Innovation definition

There are several definitions of innovation, which could be found in literature and online sources. I would mention a number of them here in order to illustrate the main points of "innovativeness".

According to P. Drucker, Innovation is "change that creates a new dimension of performance". Also we assume "innovation is a new element introduced in the network which changes, even if momentarily, the costs of transactions between at least two actors, elements or nodes, in the network" (R. Cabral). J. Shcumpeter views the innovation as an introduction of new methods, goods and "conquest of new sources of supply". In addition to that, the author mentions that innovation carries the new organization of any industry.

Here are some additional definitions, which could be found from different sources:

"The act of introducing something new" (the American heritage dictionary)

"A new idea, method or device" (Webster online)

"The ability to deliver new value to a customer" (Jose Campos)

"Innovation does not relate just to a new product that would come into the marketplace. Innovation can occur in processes and approaches to the marketplace" (David Schmittlen)

"The three stages in the process of innovation: invention, translation and commercialization" (Bruce D. Merrifield)

"Innovation is the way of transforming the resources of an enterprise through the creativity of people into new resources and wealth" (Paul Schumann)

2.1.2.2 Types of innovation

(A broad Universe of Innovations type, Dealing with Darwin Stanford PDF cource) (http://scpd.stanford.edu/dtu/pdf_courses/Dealing%20With%20Darwin/CHAPTER4.pdf)

The picture is put here to show the variety and the scope of different innovation types. As we might see the all those types are connected, but might have different nature.

(probably to be deleted in the final version)

In addition to that I would like to add the classification of those pictured types:

(http://scpd.stanford.edu/dtu/pdf_courses/Dealing%20With%20Darwin/CHAPTER4.pdf)

One of the widely-spread innovation classifications was made by Marquis (1969) and presents three following types: practical (systems), radical and incremental. Further research by Gaynor (1996) proposed four types:

Radical component innovations

Incremental innovations to existing technologies

Radical system innovations

Next-generation technology innovations

2.1.2.3 Technological innovation

From the point of view of technology - innovation is new and original, not having analogue product (technology) on the market. This product suppose to have an improved quality in comparison to previous product (prototype) and / or suppose to have a higher technological level, new consumer product quality according to previous analogues.

Here, innovation within the enterprise is a process of creating something technologically new, which leads to commercial success on the market. At least that's the reason for launching the "innovative" product or service on the market. For sure there is a probability of failure.

In the observing context the technological innovation is related to invention and rationalization. Here the work on innovations is often connected to intellectual property, patents.

Also the technological innovation is classified on commercialization-able and non-commercialization-able. One of the goals of this paper is to produce a "user-guide" in order to minimize risks while choosing a business model for an enterprise, producing a technological invention. In other words it is created to be the guide to improve commercialization-ability.

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(Further literature review according to innovation has to be done)

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2.1.3 The start-up seed stage

2.1.3.1 The start-up stages review

The most often classification of start-up stages, which can be found in literature, has five levels according to the project life-cycle: the seed stage, the startup stage, the growth stage, the expansion stage and the exit stage.

The more detailed classification of start-up development stages:

Pre-startup stage

Pre-seed stage

Seed stage

Prototype

Working prototype

Alpha-version of the project and product

Private beta (closed beta-version)

Public beta (open beta-version)

The launch of the project

Launch or early-startup stage

Startup stage

First clients or late startup stage

Post startup stage

Growth stage

Expansion stage

Exit stage

Pre-IPO (Initial Public Offering)

IPO

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The source = Russian Wikipedia. The source has to be changed in further versions.

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2.1.3.1 The seed stage

Basically, there is no definition for the "seed-stage" but usually, when spoken or mentioned it is agreed that:

"1. It is entrepreneurial, as opposed to being a division of a larger company.

2. It has the theoretical potential for substantial growth. In many cases this means the business is focused on the development or application of cutting-edge technologies (the classic "tech" startup), but technology isn't a requirement. What this criterion excludes, though, are businesses such as non-chain shops and solitary crafts, where the proprietor may earn a good living but is not aiming to create the degree of value that would interest investors and policy-makers.

3. It has not yet taken meaningful steps toward turning its idea into a reality. This may mean it's nothing more than a small team that's still hashing out the basics over a pint, but it also covers businesses that are beginning to make progress on a prototype/minimum viable product and have even taken a little bit of initial funding.  Once the business is in a position to generate revenues or seek significant investment from the VC world, it is no longer at seed-stage and becomes instead a "later-stage startup." " ( The seed of thought blog - http://seedsofthought.net/)

(The key aspects have to be assumed. Further literature review has to be done).

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